“Where did the year go?” is a common refrain in early January. In the context of capital markets, maybe a more appropriate question is “where did we go last year?” Let’s take a look at some the major headlines of 2013.
- Broad-based strength of the markets. The S&P 500 is up more than 28% this year. Economic growth has been moderate (GDP ~2.3%), unemployment trending down – although still persistent – yet corporate profits have never been higher.
- Quantitative Easing (QE) continued. The Feds bought $85B in securities each month in order to keep interest rates at near zero, effectively infusing billions in liquidity to fuel economic growth. Is it working? Yes, but, economists warn that a new asset bubble is forming by these prolonged Fed market actions. Recently, the FED announced its taper will begin lowering purchases to $75 billion.
- Ounce of prevention. Market structure changes, like circuit breakers, implemented after the Flash Crash of 2010 have worked to prevent additional systemic market events from occurring. However, halts due to faulty or inadequate technical infrastructure at certain Security Information Processors (SIP) seem to be increasing.
- IPOs on fire. The IPO market had one of its best years in recent memory. Companies like Twitter, FireEye, and Hilton raised nearly $60 billion – a 28% increase over 2012.
- The Regulatory environment still aggressive but with better clarity. Basel III compliance dates were pushed out to 2019, the Volcker Rule was finalized by regulators, and key milestones for Dodd-Frank’s OTC derivative clearance and settlement requirements were met. Mary Jo White took over as chair at the SEC and quickly set a new tone – one of determination to enforce rules yet with a hint of cooperation in working with the industry on the more difficult topics like Fiduciary Standard and Dodd-Frank implementation.
So, what will be the headlines this time next year? If we look ahead to 2014, barring catastrophic events, we can make several projections.
- Steady economic growth. Most pundits put GDP growth at 3.0-3.2% for 2014. Sustained economic growth is creating jobs and most expect the unemployment rate to approach 6% by the end of 2014.
- Extreme fragmentation in the secondary markets cause for concern. As evidenced by the flash crash and other trading halts, the level of fragmentation in venues is starting to materially impact the ability of the infrastructure to keep pace. Pressure is building for regulators and market participants to determine how they’ll mitigate the effects of fragmentation.
- Implementation of the Volcker Rule. Bank entities must begin to comply with the ban on proprietary trading and underwriting cover funds in April 2014. They’ll also build the mandated compliance and reporting program – most of which are required by the end of Q2 2014.
- Major changes to the OTC derivatives market. The transformation in the OTC derivatives market will continue in full force with SEC rules, as well as global regulations that mirror Dodd-Frank requirements, being rolled out.
- Regulatory mandates at the forefront. In response to the Flash Crash and other glitches, Reg SCI (Systems Compliance and Integrity) – which is still in proposal stage – aims to make exchange technology standards and controls mandatory. The Consolidated Audit Trail (CAT) will continue to take shape and, when fully implemented in a few years, will provide SROs and other oversight agencies with a complete picture of trading activity in order to conduct timely market surveillance.
Our capital markets are amazing to see in action. Trillions of dollars flow through the system every day, connecting buyers and sellers in a myriad of venues and instruments. For certain, one trend will continue and even gain strength – the globalization of the capital markets. This raises the likelihood of additional exchange mergers, massive investments in infrastructure and the prospect of unified regulatory bodies with global reach. Exciting times, indeed!