extendedcapital

CapitalMarketsInfrastructure:AnIndustryReinventingItselfGlobalCorporate&InvestmentBankingPracticeCapitalMarketsInfrastructure:AnIndustryReinventingItselfIntroductionFasterGrowthandIncreasingMarginsAcceleratingChangeCMIPsMustTakeActionNow2510212IntroductionCapitalmarketsinfrastructureproviders(CMIPs)havebeenconspicuoushighachieversinrecentyears,posting3percentaverageannualrevenuegrowthdespitemixedfortunesinthewiderfinancialservicessector.
Thestageissetforabrightfuture,butinatimeofdisruptivetechnologicalchange,bigopportunitiesandevolvingregulation,individualprovidersmustmaketherightchoicesnowtostayaheadofthegame.
CMIPs(includingtradingvenues,interdealerbrokers,clearinghouses,informationservicesandtechnologyproviders,securitiesdepositoriesandservicingfirms)postedaverageoperatingmarginsof38percentin2015,some5percentagepointshigherthanin2010,amidrisingdemandforservices,increasedscaleandmoreelectronictrading.
Revenuesalsogrew,withAsia-Pacificposting6percentaverageannualgains,whiletheU.
S.
recordeda3percentincreaseandEMEAsawjust1percentgrowth.
3Alongsidepositivemarketdynamics,thecompetitiveenvironmenthasswunginCMIPs'favor.
Asthesellsidehasbeenhitwithheaviercapitalandcostburdens,infrastructureprovidershavesteppedintooffernewservicesanddevelopfreshrelationships.
Asthoseinitiativesbearfruitanddemandcontinuestorise,theindustry'saveragerevenuegrowthissettoreach5percentthrough2020.
However,therearesignificantvariationsacrosssegmentsandactivities.
Infor-mationservicesrevenuesrose3percentannuallyoverthepastfiveyears,whilecustodyandsettlementmanagedjust1percentannuallyoverthesameperiod.
Exchangegroupmarginsheldsteadyataround50percent,whilemarginsatalternativevenuesrose10percentagepointsto45percent.
Asexecutivesdecidehowtoshapethebusinessmodelsofthefuture,McKinseyseesfivekeytrendsimpactingCMIPs:Diversificationacrossthevaluechain.
Firmshavealreadydiversifiedintoalternativecapitalmarketsinfra-structurebusinesses,helpingthetop15playerstakea41percentshareofindustryrevenuesin2015,comparedwith35percentin2010.
1Exchangegroupsareleadingthetrendandanelitegroupof"CMIPchampions"hasbeenemerging.
Buysidemovingintothespotlight.
CMIPsareexpandingservicestothebuyside(whererevenuesaregrowingstrongly),whilemaintainingastrongrelationshipwiththeirsellsideclientbase.
In2015,thebuysideaccountedfor38percentofglobalcapitalmarketsecosystemrevenues,comparedwith30percentfiveyearsago.
2Increasingdemandfordataandanalytics.
Newtechnologieshaveopenedthedoortoarevolutionindataandanalytics,leadingtonewproducts,moreefficiencyandhighermargins.
However,amidcreepingcommoditiz-ationincertaintraditionaldatabusi-nesses,astrategicapproachisrequired.
Theriseoffintechs.
Fintechsaregrowinginnumberandinfluence.
Whilesomearedisruptingthebusinessmodelorowningtheclientrelationship,othersaimtoboostefficiency.
CMIPscanlever-agepartnershipstodriveinnovationandgrowth,e.
g.
,byjointlyexploringdistrib-utedledgertechnology(blockchains).
Utilitiesascoreserviceofferings.
Financialservicesfirmsareincreasinglywillingtooutsourceprocessesthatlackauniquevalueproposition.
Iftheychoosetoestablishutilities,CMIPsmustbecometechnologyleadersandreachsufficientscaletoguaranteecostandservicequalityadvantages.
Asthesedominanttrendsplayout,McKinsey'sviewisthatCMIPsmustmakeadeterminedpursuitofgrowthstrategiesoverthenextfiveyears,findingthemodelstostepupservicesandtapnewrevenuestreams.
Thegoodnewsisthatfollowingseveralyearsofprofitablegrowthmostcom-paniesareinastrongfinancialpos-ition.
However,anorganicapproachtoexpansionisunlikelytobesufficient.
Instead,companiesmustproactivelyrepositionalongthevaluechain,basedonastrategyandroadmapthatreflectstheirexpertise.
Thereareeightkeyprinciplesthatcansup-portCMIPinitiatives.
1McKinseyCMIPRevenuePools,companyfilings.
2McKinseyAssetManagementGrowthCube;McKinseyCMIBandCMIPRevenuePools.
4Strengthenthecore.
Boostcustomer-centricityandcommercialityandredoubleeffortstoconstructivelyengagewithregulatorsandfintechs.
Worktoattracthigh-qualitytalentandensurepost-mergerintegrationcapabil-itiesarestrong.
Expandthelocalcapitalmarketsecosystem,broadeningfinan-cialliteracyandpromotingprimaryandsecondarymarketstoissuers,banksandinvestors.
Doubledownonnewandfast-growingassetclasses.
Prioritizebreak-outgrowth,embracenewassetclassesorsecurities,suchascommod-itiesorcorporatebonds,wherethesell-sideroleischanging.
Becomealeaderindataandana-lytics.
Withthehelpofanalytics,newintellectualpropertycanbecreatedfromproprietaryandexternaldata.
However,thereislikelytobeincreasedcompeti-tionfromfintechsandothers,andoper-atorsmustseizethedaytomaximizetheopportunitybylaunchingnewindi-cesanddataproducts.
Developintegratedcomplianceandriskmanagementsolutions.
Offerstandardizedandscalablesolutionstohelpmarketparticipantsmeettheirgrowingregulatoryobligations.
Scaleupandventureintoutilities.
Innon-differentiatingareas,suchaspartsofclientonboardingandregu-latoryreporting,setuputilitiesthatanchorcapabilitiesatthecenteroftheindustryiftherespectivemarketconditionsallowforconsolidation.
Expandserviceofferingsforcor-porations.
Domoretohelpcompaniesoperateincapitalmarkets,forexampleinpre-IPOadvisory,treasuryservicesandinvestorrelations.
Helpcompan-iesusedataandanalyticstoformandmanagerelationshipswithinvestorsandthemedia.
Enternewgeographiesanddevelopdistributionnetworks.
Soloventur-ingintonewmarketsoutsideafirm'straditionalcoregeographyhashistor-icallybeentough.
Considertargetedexpansionthroughpartnershipsornewdistributionnetworks.
Thisiswherede-velopedmarketexchangegroupshaveacceleratedactivitiesinrecentyears.
Setupane-commerceandtradingecosystem.
Rampupofferingsinpre-trade,executionorpost-trade,addingvaluewithfunctionalitythatincludestoolsforreporting,visualizationandcollaboration.
Aimtoservemultiplemar-kets,withplatformssupportedbystrongback-endandanalyticsfunctionality.
TheCMIPindustryhasexpandedanddiversified,generatingstrongfinancialreturns.
However,inafast-changingenvironment,thechoicesmadenowarelikelyto"sortthewheatfromthechaff"overthenextfiveyears.
Thebiggestsuccessesarelikelytobeinspiredbyvisionarystrategiesandafearlessdesiretogrowandreshapethebusinessmodel.
Newthinkingisimperative,becauseoneofthebiggestrisksindisruptivetimesisapplyingtheresponsesofthepast,orworse,doingnothingatall.
TheinsightsinthisreportarebasedonproprietaryresearchfromMcKinsey,in-cludingtheMcKinseyCMIPIndexandCapitalMarkets&InvestmentBankingRevenuePools.
5FasterGrowthandIncreasingMarginsCapitalmarketsinfrastructureproviders(CMIPs)havemadesteadyprogressinrecentyears,growingrevenuesandincreasingmarginsonthebackofstronggrowthincertainfast-expandingassetclassesandregionsandrisingdemandforriskandregulatoryservicesaswellasdataandanalytics.
Providershaveleveragedtheirstrongfinancialpositionstodiversifyalongthecapitalmarketsvaluechain,eitherthroughtargetedmergersandacquisitionsornewproductsandservices(Exhibit1,page7).
Diversificationhelpedliftindustryaverageoperatingmarginsto38percentin2015(Exhibit2,page7),accordingtoMcKinseyCMIPRevenuePoolsdata.
Bycontrast,thetop10investmentbankspostedoperatingmarginsof26percentin2015,according6toMcKinseyandCoalitiondata,com-paredwith39percentin2010,sug-gestingCMIPsaredecouplingfromthesellsideintermsofprofitability.
CMIPrevenuesgrewanaverage3percentayearbetween2010and2015,astheglobalrevenuepoolex-pandedby$22billionto$159billion,withAsia-Pacificthestandoutperformer.
Theregionposted6percentaveragean-nualrevenuegains,whileU.
S.
revenuesrose3percentannuallyandEMEArev-enuesgrew1percent(Exhibit3,page8).
TheU.
S.
sawthehighestabsolutelevelsofgrowth,withrevenuesreach-ing$66billionin2015,comparedwith$55billionin2010.
EMEArevenuesgrew$2billionto$48billion,andAsia-Pacificrevenuesrose$10billionto$39billionoverthesameperiod.
McKinseyexpectsCMIPswillpostaverageannualrevenuegrowthof5percentthrough2020,outperformingthebuysideandsellside,whichareexpectedtoexpandrevenues3percentand1percentannually,respectively.
Operatorshavetakendiversepathstogrowth.
Developedmarketsexchangegroupshavefoundorganicexpansionhardtocomebyandhaveinsteadgrownthroughacquisitionsanddivers-ificationintonewbusinesses.
Con-versely,Asia-Pacificexchangegroupshaveseenasharpincreaseincoretrad-ingandfacilitationactivity.
Interdealerbrokerrevenueshavedeclinedfollowinglowerdemandintheircorebusinesses,andsomeareconsolidatingtoscaleupandgenerateefficiencies.
Someindustrysegmentsarebetterpositionedthanothers;informationandanalyticsservices,technologyinfra-structureandsecuritiesservicessawacceleratingexpansionfrom2010to2015,whiletrading(excludingAsia)andcustodyandsettlementhavelagged.
ClearingsawbiggainsintheAmericas,followingtheintroductionofmandatoryclearingofover-the-counterderivativesin2013,butremainedflatinEMEA,evenasvolumesroseundertheEuro-peanMarketInfrastructureRegulation.
3DefiningCMIPsCapitalmarketsinfrastructureprovidersaretheplatformsaswellasthe"pipesandplumbing"ofglobalfinance,offeringarangeofservicesthatsupportfinancialinstitutions,companies,governmentsandinvestorsinbuildingbusinessesandcontributingtogrowthinthewidereconomy.
CMIPsrangefrominternationalexchangegroupswithbroadlydiversifiedbusinessestostart-uptechnologyvendorsthatcatertospecificpointsonthevaluechain.
Betweenthosepolessitanarrayoftradingplatforms,interdealerbrokers,clearinghouses,securitiesdepositories,securitiesservicesfirms,informationproviders,dataandanalyticscompanies,indexprovidersandtechnologyvendors,allofwhichcontributetotheoperationandgrowthofcapitalmarketsaroundtheworld.
3Exchange-tradedderivativenotionalvolumesremainedstablefrom2010to2015,buttheimpactofeurodepreciation(~-3%CAGRfrom2010to2015)meantthatvolumesappearedtodecline.
Intermsofthetotalrevenuepool,whichismeasuredindollars,theriseinover-the-counterclearingwasoffsetbythe"decline"inexchange-tradedclearing.
751510pp16142ppExchangegroupsandintegratedmarketinfrastructuregroups1Interdealerbrokers4453510ppAlternativevenues23833201020155ppCMIPaverage30255ppInformationservicesproviders3OperatingmarginsPercentAlternativevenuesandinformationservicesprovidersareexperiencingmargingrowth1ASX,BM&FBOVESPA,BME,BursaMalaysia,CME,DeutscheBrse,Euronext,ICE,JohannesburgStockExchange,JPX,HKEX,LondonStockExchange,NASDAQ,SingaporeExchange,TMX.
2360T,MarketAxess,TradewebEurope,Turquoise.
3Factset,FitchRatings,Markit,Moody's,Morningstar,MSCI,S&PGlobal,ThomsonReuters(Financial&Risk).
4BGCPartners,ICAP,Tradition,TullettPrebon.
Source:Bloomberg;companylings;McKinseyCMIPRevenuePoolsExhibit2TradingPost-tradingPre-tradingCustody&settlementData&informationSecuritiesservices2ClearingTradefacilitationandexecution1TechnologyinfrastructureCapitalmarketsinfrastructureindustryvaluechain1Includesclientservicingmarketing,structuring,quoteordermanagement,riskmanagement,pricediscovery,tradedocumentation,counter-partyriskassessment,ongoingportfoliomanagement,creationandlisting.
2Includesancillaryservices,traderegistration,portfolioreconciliation,accounting,proxyvotingandothers.
Source:McKinsey&CompanyExhibit18InvestorsinCMIPsearned16percenttotalreturnsbetweenthebeginningof2013andtheendof2016,accordingtoMcKinsey'sproprietaryCMIPIndex,comparedwitha7percentaverageacrosssectorsrangingfromhealthcaretoconsumerservicesandrealestate(Exhibits4,5).
Informationservicespro-vidersgenerated17percentreturnsovertheperiod,whileexchangegroupsmade15percent.
1593%Securitiesservices20152010Technologyinfrastructure137Data&informationTradefacilitationandexecutionCustody&settlementClearingEMEAU.
S.
RestofAmericasAPAC20153%15920101372%3%1%3%3%5%6%1%1%3%ByactivityByregionShareofrevenuepool$billionCAGRCAGR17%19%25%25%28%27%21%21%4%4%4%4%4%5%25%41%30%40%34%21%CMIPrevenueshavegrownfastestinAPACandtheU.
S.
Exhibit3Source:McKinseyCMIPRevenuePools9137-2-145679101416TechnologyHealthcareOilandgasFinancialinstitutionsBasicmaterialsConsumergoodsConsumerservicesTelecomUtilitiesIndustrials7RealestateMcKinseyCMIPIndex2Totalreturntoshareholders1last4yearsJanuary2013–December2016,PercentCMIPshaveperformedimpressivelycomparedtomanyothersectorsoverthepastfewyears1DatastreamdenedworldlevelsectorindexonUSdollar.
2CMIPindexisamarketcapitalization-weightedTRSindexonUSdollarbasisfor40companies,including28exchangegroups(ASX,Bats,BM&FBOVESPA,BVC,BolsadeValoresLima,BolsaMexicanadeValoresSABdeCV,BolsasyMercadosEspaoles,BucharestStockExchange,BursaMalaysia,CBOE,CME,DeutscheBrse,DFM,Euronext,GieldaPapierowWartosciowych,HellenicExchanges–Athens,HKExchanges&Clearing,ICE,JPX,JSE,LSE,MCX,NSX,NZX,SGX,Nasdaq,PhilippineStockExchange,TMX),4inter-dealerbrokers(BGCPartners,Tradition,ICAP,TullettPrebon),and8informationserviceproviders(FactSet,IHSMarkit,McGrawHill,Moody's,Morningstar,MSCI,ThomsonReuters,VeriskAnalytics).
Source:CapitalIQ;Datastream;companylings;McKinseyCMIPIndexExhibit416%16%15%17%InterdealerbrokersInformationservicesprovidersExchangegroupsMcKinseyCMIPIndex4%8%3%-1%34345x3x6x5xEstimates,January2013–December20161Exchangegroupshavedeliveredthehighestgrowthandinformationserviceprovidershaveshownmaximummarginexpansioninthelast4yearsChangeinnetincomemargins,4percentagepointsChangeinforwardPEmultiples5Revenue3CAGRTotalreturntoshareholders2CMIPrmshavedeliveredstrongreturnstoshareholders1Revenue(CAGR)andnetincomemarginscalculatedfortheperiodFY2012–2016E.
2MarketcapitalizationweightedindexonUS-dollarbasisoftherespectivecompaniesintheMcKinseyCMIPIndex.
3Totalrevenuesasreporteduptotheendof2015;analystestimatesfor2016.
4Calculatedaspost-taxprots,adjustedfornon-operatingandone-timeexpensesdividedbytotalrevenues;asreporteduptotheendof2015;analystestimatesfor2016.
5Calculatedasend-of-yearmarketcapitalizationdividedbythenextnancialyear'snetprotanalystestimates.
Source:CapitalIQ;Datastream;companylings;McKinseyCMIPIndexExhibit510AcceleratingChangeCMIPoutperformanceinrecentyearshascomeinthecontextofafast-changingcommercial,technologicalandregulatoryenvironment,alongsideincreasingcompetitionanddisruption.
Manyofthetrendsshapingtheindustryareconnected,creatingacriticalmassthatsuggeststherewillbeanextendedwindowofstrategicopportunityforCMIPsthattakedeterminedaction.
Still,opportunitiesareaccompaniedbyuncertaintiesandchallenges,arisingparticularlyfromtechnology,ongoingregulatorypressureandcontinuedchangeinthestructureoftheindustry.
Incumbentsmustrespondtocompetitivethreats,laystrongfoundationsforexpansionanddevelopagrowthstrategythatleadstopermanentdecouplingfromprofitcyclesonthesellside.
11McKinseyseesCMIPsimpactedbyfivekeytrendsintheyearsahead:DiversificationacrossthevaluechainBuysidemovingintothespotlightIncreasingdemandfordataandanalyticsTheriseoffintechsUtilitiesascoreserviceofferingsDiversificationacrossthevaluechainDiversificationintoadjacentbusinessareas,drivenbymarginpressureinsomecoreactivitiesandtheneedforfasterrevenuegrowth,islikelytobethepri-marydriverofCMIPperformanceoverthenextfiveyears.
Itwillcontinuetoblurboundariesbetweendifferentpartsofthevaluechainandofferastuteprovidersthechancetobuildglobalportfoliosacrossassetclassesandservices,reapingbothsignificantrevenueandcostsynergies.
Theindustry'sappetitefordiversifica-tioncanbeseeninawaveoflargelymid-sizedM&Aactivityinrecentyears,whichhasoftendeliveredgrowthwhereorganicexpansionhasfailed,inparticu-larforexchanges.
WhetherM&Aactivitywillcontinueatthispacewilldependtosomedegreeonthelevelofsupportfromgovernmentsandregulators.
Thecompaniesbestpositionedtobenefitfromthediversificationtrendarethelargestoperators,whichcantargetnewofferingsalongthevaluechain,andleadingregionalplayers,whichcanusetheirlocalmarketstrengthtodriveharmonizationandcon-solidation.
Nichebusinesses,orthosewithstatesponsorship,willlikelybesustainedbyincreasedlevelsofspecialization.
Ifthosepatternsbecomeestablished,theywouldreflecttherecentdynamic,whichhasseenlargerplayersexpand-ingintoservicesfromclearing,custodyandsettlementtodataandanalyticsandtechnologyinfrastructure(Exhibit6,page12).
Thepreferredstrategyhasbeenfocusedstrategicacquisitionsintargetbusinessareas.
Asbusinesseshavediversified,revenuestreamshavefollowedsuit.
Post-tradeaccountedfor24percentofexchangegrouprevenuesin2015(basedon10exchangegroups),comparedwith21percentin2010,whilerevenuesfromtradingandlistingfellto47percent,from59percentin2010.
Informationandtechnology-relatedservicesac-countedfor29percentofexchangegrouprevenuesin2015,comparedwith20percentfiveyearsearlier(Exhibit7,page13).
Asaresultofdiversification,largerplay-ersacrosstheCMIPindustrynowoffersolutionsthroughthetradelifecycleandincreasinglyininformationservicessuchasindices,marketdataandanalytics.
Informationservicesarebecomingakeybattleground,attractingagrowingcastofactors,includingexchangegroupsandinterdealerbrokers.
Someestab-lishedinformationservicesproviders,meanwhile,havemovedintheoppositedirection,venturingintotradingandtechnologyinfrastructures.
McKinseyexpectsCMIPswillcon-tinueandinsomecasesacceleratetheirdiversificationactivities,expand-ingtobecomemorefullyintegratedserviceproviders.
AsmallgroupofCMIP"champions"islikelytoemergeincomingyears,which12willleveragetheirintegratedbusinessportfoliosacrossthevaluechaintobuildecosystemsandtrulyownthecustomerrelationship,whilecreatingnetworksofstrategicandregionalpartnerships,simi-lartothefewremaininguniversalbanks.
Expansionwillcontinuetobedrivenbydiversification,oftenthroughmergersandacquisitionswithadjacentbusi-nesses.
Amongexchangegroups,theconsolidationseenamonglargeandregionaloperatorssincethestartofthemillenniumwilllikelycontinue,butatthemoderatepaceseeninthepastfewyearsasopposedtotheearlierfrenziedpace(Exhibit8).
However,thisislikelytohappenonlyifcross-bordermergersinareassuchastrading,clearingandcustodyarenotrestricted.
Transactionsinlessregulatedareassuchasinforma-tionservicesortechnologyinfrastructure,shouldbelessproblematic.
Partlyasaresultofdiversificationandconsolidation,thebiggestCMIPplay-ershaveincreasedtheirshareoftheglobalrevenuepool,withthetop15taking41percentin2015,comparedwith35percentin2010.
4Exchangegroupsaccountedformorethanhalftheincrease.
Thistrendcouldposeastrategiccon-undrumforsmallandmedium-sizedplayers.
Ifacompanybecomesatar-get,executivesmustbalancethescaleadvantagesofalargergroupagainstHistoricleadershipCustody1SettlementTradefacilitationandexecutionClearingInformationservicesTechnologyinfrastructureCapitalmarketsutilitiesExchangegroupsAlternativevenuesInterdealerbrokers(IDB)Stand-alonecentralcounterpartyclearinghouse(CCP)CustodianCentralsecuritiesdepository(CSD)Informationservicesproviders(ISP)InfrastructureITprovidersBuysideplayersExamplesofexpansionmovesExchangegroupsdiversifyingbeyondtraditionalbusinesstopost-trade,marketdata,technology,ancillaryservicesExchangegroupsenteringthealternativetradingspaceIDBsgraduallydiversifyingintoinformationservicesCustodiansenteringsettlementspacebysettingupCSDortyingupwithassociatedplayersISPsinvestingtoprovidetradingservicesEmergingpresence112734562345InfrastructureITprovidersstartingtobuildindustryutilities6Buysidermsenteringthemarketinfrastructurespace7CMIPshavediversiedacrossthevaluechainExhibit61Non-bankcustody.
Source:McKinsey&Company4Excludingsecuritiesservicesrevenues.
13Post-trade2Tradingandlisting1Information,technologyandothers20%29%21%24%59%47%262010201533Globalexchangegroupsrevenues4$billion3Leadingrmscontinuetodiversifyandbuildoutnon-tradingbusinessesExhibit71Excludestransaction-basedexpenses.
2Includesclearingandsettlementofsecurities.
3Exchangeratereferenceyear:2015.
4Distributionofrevenueisidentiedaccordingtothesamplesizeincluding:ASX,BME,BM&FBOVESPA,DeutscheBrse,Euronext,HKEX,JSX,LSE,MOEX,NASDAQ.
Source:McKinseyCMIPRevenuePools;companylingsEuronextIPOISEsoldtoNasdaqin2016ISEacquiredbyNasdaqin2016200020012002200320042005200620072008201120092010201219992013201420152016EuronextInternationalSecuritiesExchangeClearstreamEurex1DeutscheBrseLondonClearingHouseClearnetSALondonStockExchangeBorsaItaliaLIFFEBoursedeParisAmsterdamStockExchangeBrusselsStockExchangeNewYorkStockExchangeIntercontinentalExchangeInternationalPetroleumExchangeChicagoMercantileExchangeChicagoBoardofTradeNymexHongKongExchangesandClearingLondonMetalExchangeLCHClearnet2ExchangeEuronextNYSEEuronextICECMEGroupLSEIcelandSECopenhagenSEVilniusSEStockholmSEHelsinkiSENASDAQSENASDAQBVLPHongKongStockExchangeICESince1999,therehasbeensignicantconsolidationamongexchangegroupsExhibit8Note:NotallM&Adealsshown.
1EurexfoundedbyDeutscheBrseandSwissStockExchangein1998.
2LSEacquiredminoritystakeinLCH.
ClearnetGroupinDec2007.
Source:Press;companylings14remaininganicheplayerandaimingtoenhancetheircompetitivepositioninaparticularareaofexpertise.
BuysidemovingintothespotlightThebuysideaccountedfor38percentofglobalcapitalmarketsecosystemrev-enuesin2015,comparedwith30percentin2010.
Thisgrowthcanbeseenaspartofawidertrendinwhichfirmsin-cludingassetmanagers,pensionfundsandsovereignwealthfundshavepostedhigherrevenuesandlookedtoaccessabroaderrangeofliquidityprovidersandservices.
Inresponse,CMIPshavecon-tinuedtodevelopbuysiderelationships,offeringdirectaccessinexecutionandclearing,alongsidearangeofvalue-add-ingpre-andpost-tradeservices(Exhibit9).
Asdirectaccessbecomesstandard,agreatervarietyofclientinterfacesandroutestomarketislikelytoemerge.
Akeybuysidetrendhasbeenashiftawayfromactivemanagementandto-wardspassiveinvestment.
Theshareofpassiveinvestmentsinglobalfundassetsundermanagementroseto18percentin2015from14percentin2007,asinterestratesandinvestmentindustryreturnsremainedlow.
5CMIPsareinpolepositiontoleveragetherisingpopularityofexchange-tradedfunds,eitherthroughlistingsordataandindexservicesforthebuyside.
Asthebuysidehasmovedintothespotlight,thesellsideappearstohavesteppedback.
Sellsiderevenueswerealmostflatinthefiveyearsto2015,re-sultinginan8percentagepointdecreaseintheirshareofglobalcapitalmarketsecosystemrevenuesto40percent.
Still,fewinfrastructureproviderswishtodis-intermediatebanks,whichcontinuetobetheirmostimportantclientsandtheSellside2Buyside1CMIPindustry100%=61620102020E80320157083%1%5%8%-1%3%CAGR2010-15ExpectedCAGR2015-20Globalcapitalmarketsecosystemrevenues$billion22%48%30%37%25%38%22%40%38%Buy-sidermsandCMIPsaregrowinginimportanceExhibit91Revenuesofmajorassetmanagerscontributing95%toglobalassetsundermanagement.
2Includesinvestmentbankingandinstitutionalsalesandtradingrevenuesforbanksandbrokers.
Source:McKinseyAssetManagementGlobalGrowthCube;McKinseyCMIBandCMIPRevenuePools5McKinseyPerformanceLensGrowthCube15biggestcontributorstorevenues.
Thepreferredaccommodationhasbeenin-creasedengagementwiththebuysideaccompaniedbytoolsandinfrastructuresthatallowthesellsideandbuysidetocontinuetheirrelationship.
IncreasingdemandfordataandanalyticsDataisincreasinglyagoldenresourceforCMIPs,andanalyticaltoolsthatleveragedataaresettocreaterevenueopportunitiesacrossbusinessmodels,assetclasses,productsandservices(Exhibit10).
However,dataisahetero-geneousasset;sometraditionaldatasetsandserviceshaveseenincreasedcommoditizationandothershavebe-comemorevaluable.
Proprietaryandsmartlyre-aggregateddataareinthelattergroupandareincreasinglylikelytodriveinnovation.
Theracetoexploitdataisinitsin-fancy,butthecompetitivelandscapeisshapingupasfirmsuseincreasinglysophisticatedtoolstomarshalinternalandexternalresources(e.
g.
,contributeddata).
Improvedminingandaggrega-tiontechniquesandagreatervarietyofanalyticsareimprovingutilization,andwilllikelyleadtoacceleratedprod-uctdevelopment,moreefficiencyandsharpenedcompetitiveness.
Exchangegroupsandothershavelever-agedproprietarydatatooffersolutionsininformationandanalytics,ofteninrealtime,alongsidearangeoftoolsforriskandtradelifecyclemanagement.
Anumberofsellsidefirmshaveimple-mentedbigdata-enabledtransforma-tionprograms,andtherearelessonsinthoseexperiencesforCMIPsandthebuyside.
Onthebuysideitself,datamining,machinelearningandartificialAssetclassesEquitiesFixedincomeCommoditiesFXOther(e.
g.
,alternatives)BusinessmodelsProprietaryIPSmartre-aggregationRe-distributionProductsandservicesNewsandresearchMarketdataAnalyticsIndicesandbenchmarksRatingsRiskandcomplianceDataandanalyticstoolswillcreatenewrevenueopportunitiesExhibit10Source:McKinsey&Company16intelligencearehelpingimprovepricediscovery,tradecostanalysisandliquiditymanagement.
RegulationssuchastheEuropeanMar-ketsInfrastructureRegulationandtheU.
S.
Dodd-FrankActrequiremarketpar-ticipantstoreportdatainstandardizedformatsandhaveraisedthebarontradesurveillance.
Andthereareadditionalregulationscomingintoeffectthatwillraisethisbarevenhigher(e.
g.
,MiFIDIIinEurope).
Firmsthatdevelopenhancedcapabilitiestorespondtothesedemandsarelikelytocreatevalue.
Anotherpoten-tialgrowtharearelatestofinancialandoperationalrisk,withmachinelearningboostingcapabilitiesinapplicationssuchasfrauddetection.
Dataandanalyticsaresignificantpo-tentialsourcesofaddedvalue,butmanagementteamsshouldunderstandthepotentialchallenges,whichincludeidentifyingwinningsolutions,attractingtherighttalent,realizingtransformationprogramsandintegratingcapabilities.
Firmsthatwanttosucceedhereneedtothinkbig.
TheriseoffintechsAscapitalmarketsexpandandbanksretrenchfromsomeactivities,anarrayoffinancialtechnologyprovidersareof-feringinnovativeandlow-costsolutionsinpre-trade,executionandpost-tradeservices.
AccordingtoMcKinseyPan-oramaFintech,24percentofallfintechfirmsfocusonfinancialassetsandcapitalmarkets(Exhibit11).
Fintechsareadeptatleveragingagiledevelop-mentmethodstocreateefficienciesandboostreturns,andareoftenopentoworkalongsideCMIPsaspartof"openplatform"strategies.
5%RetailCustomersegmentsCommercial2Corporate315%4%7%Accountmanagement1%LendingandnancingPaymentsFinancialassetsandcapitalmarkets10%12%12%6%3%2%25%Products/capabilitiesFocusofntechcompanies#ofstartupsandinnovationsas%ordatabasetotal,2017124%ofallntechrmsfocusonnancialassetsandcapitalmarkets1Morethan650commerciallymostwell-knowncasesregisteredinthedatabase;maynotberepresentative.
2Includessmall-andmedium-sizeenterprises.
3Includeslargecorporates,publicentitiesandnon-bankingnancialinstitutions.
Source:McKinseyPanoramaFintechDatabaseExhibit1117Fintechsbringthreebasicapproachestoinnovation:disruptingthebusinessmodel,becominganintermediaryandowningtherelationshipandenablinghigherlevelsofefficiency.
Themostpopularapproachtodatehasbeenenablementratherthandisruption;inthecorporateandinvestmentbankingspaceenablementisthefocusof67percentoffintechinvestment,ac-cordingtoMcKinsey'sPanoramaFintechdatabase.
Withinthatgroup,cloud/software-as-a-serviceprovidershaveat-tractedjustunderathirdoffunding,whilebigdata/analyticsfirmshaveattractedjustoveraquarter.
Companiesofferingbiomet-rics/cybersecurity,automationanddis-tributedledgertechnologyhaveattractedrelativelylessinvestmentinterest(See"Ex-ploringdistributedledgers"onpage18).
Overallinvestmentinfintechsacrossindustrieshasgrownsharply,reaching$19.
1billionin2015comparedwith$2.
4billionin2011.
McKinseyseesfintechinitiativesacceler-atinginfivekeyareasincapitalmarketsinfrastructure(Exhibit12):Accesstocapital:Newfinancingoptionsthroughcrowd-funding,privateplacementsornewdatabasetechnolo-giessuchasdistributedledgers.
Tradeexecution:Newplatformsandliquiditypoolsenablingmultilateraltradingonarangeofprotocols.
Illiquidassetsareakeytargetareafornewentrants,andregulationisoneofthedrivers,forexamplefuellingdemandforcollateraltransformation.
Dataandanalytics:Increasedtrans-parency,moreaccuratepricing,bettermodellingandimprovedunderstandingofcustomerneeds.
Regulatorytechnologies(Regtech):Know-your-customer,frauddetectionandcollateralandriskmanagementInvestmentthemesBusinessmodelThreentechmodelsareemerging:Fundamentalbusinessmodeldisruptors(e.
g.
,peer-to-peerlending,applicationofblockchain)Intermediariesthatowntheend-customerrelationship(e.
g.
,FX,paymentsprocessing)Enablersofgreaterefciencyandeffectiveness(e.
g.
,workowmanagement,bigdata,analytics)RegtechData&analyticsAccesstocapitalPrivateplacement,securitizationandsmartcontractsCrowdfundingTradeexecutionThird-partye-platforms,e.
g.
,forilliquidassets,FX,BitcoinPost-tradePost-trade(back-ofce)processing,e.
g.
,cloud-basedconrmationFrauddetectionCompliancemanagementCollateralandriskmanagementDataaggregatorsInsightproviders/machinelearningFivebroadinvestmentthemesinntechincapitalmarketsExhibit12Source:FintechPanoramabyMcKinsey&Company18ExploringdistributedledgersExperimentationwithdistributedledgertechnologyhasproliferatedoflate,oftenthroughjointpartnershipsbetweenfintechsandfinancialinsti-tutionsorCMIPs.
Thetechnology,whichcomprisesacryptographicallyencodedledgeroftransactionsdistributedacrossapublicorprivatenetwork,offersconsiderablepotentialvalueinpost-trade.
Specifically,elementsofenhanceddatasecurity,integrity,permanenceandtranspar-encysharedbetweencounterpartiescoulddeliverbenefitssuchasfasterclearingandsettlement,ledgerconsolidation,uncompromisedaudittrailsandareductioninsystemriskandoperationalcosts.
Incapitalmarkets,someofthemostpromisingusecasesfordistributedledgersareintradingofover-the-counterderivatives,equitiesandtherepurchaseagreement(repo)market.
Inthoseapplications,distributedledgerscanmatchassets,managecollateralandsynchronizecashmove-ments(i.
e.
,moreeffectivenetting),especiallyifcombinedwithcentralclearingandsettlement.
Benefitsincludebothcostsavingsandreducedcapitalrequirementsandsystemicrisk,aswellaspotentialrevenueopportunities.
However,thesebenefitscouldtakethreetofiveyearstomaterialize,anditmaybeevenlongerbeforenewrevenuesbegintoflow.
Manychallengesremain,includingincreasedcapitalrequirementsaris-ingfrominstantcashsettlement,theneedfortradeableassetstoexistindigitalformanddifferentrulesacrossmultiplejurisdictions.
Probablythebiggestchallengeisthe"co-opetitionparadox,"requiringsustainablemethodsofcollaborationbetween(competitive)counterparties.
Ironicallyforatechnologydesignedtoeliminatetheneedforcounterpartytrust,participantsmustworktogethertoestablishnewstandards,protocolsandgovernance.
McKinseyexpectstheearlychallengeswillbeovercome,andthatnet-worksofparticipantsindistributedorsharedledgertechnologysolutionswillgrow,mostlikelyfocusingonspecificusecasesratherthansystemicdisruption.
Alreadyin2016,NASDAQopenedupitsblockchainservicestomorethan100ofitsfinancialinfrastructureclientsaroundtheworld.
However,developmentofapplicationsthatfunctionatscaleacrossnet-workswillrequirepatienceandalong-termstrategiccommitment.
Recentsuccessfulproofsofconceptbyfinancialtechnologyplayerssuggestthatthepotentialofdistributedledgersmightbeatleastpartiallyrealized,butsuccessfulpioneerswillneedtobeboldandinvestforthelong-term.
19areattractinganewgenerationoffintechproviders.
Post-trade:Fromclearingandsettle-ment,totradelifecyclemanagementandreporting,thereisdemandforfaster,moreconnectedandmoretailoredfunctionality.
Sharedtech-nologiessuchasdistributedledgersmayplayanincreasedroleinreducingdisputesandreconciliationprocessesandinprovidingreal-timeconnectivitywithregulators.
Financialservicesfirmsleveragearangeoforganizationalstructurestoengagewithfintechs,fromdigitalcapabilitycenterstobusinessideaincubationandventurecapital/privateequity.
Mostfirmstypicallyfocusontwoorthreeapproaches.
Asthesellsidewithdrawsfromsomecapital-intensiveactivitiesandlegacysystemsbecomeobsolete,CMIPsandfintechsaresteppinginandsometimescollaboratingtocreateefficienciesandimprovecustomerservices.
Atthecut-tingedgeofthefintechecosystem,ro-botics,machinelearningandsmartworkflowsofferthepotentialforimprovementsinindividualtasks,particularlyinthebackofficeandforend-to-endprocesses.
UtilitiesascoreserviceofferingsMarketparticipantshavebeenreluctantuntilrecentlytobuildutilitiesorindustrysolutions,amidconcernoversharingofintellectualpropertyandalackofcom-mongroundonplatformmodels.
Thatmindsetischangingascostpressureshighlightthebenefitsofsharingservicesthatlackauniquevaluepropositionortheabilitytoserveasastrategicdiffer-entiator.
CMIPexecutivesalsorecognizethepotentialofestablishingsignificantentitiesthatwouldsitthecenteroftheindustry.
NearlyhalfoftheparticipantsatMcKinsey'sSIBOSFutureofSecuritiesServicesroundtableinSeptember2016saidutilitieswouldbreakthroughinthatsectorinthenextfiveyears.
Utilitiesdelivercostandefficiencybene-fitsandcanhelpcatalyzetechnologyupgrades,resultinginfewerfailsandadditionalscale.
Potentialsavingsincludea21percentdropinEuropeancashsettlementandpaymentsexpenses,a26percentreductioninreconciliationssolutionsanda31percentreductioninspendonreferencedata,basedonMcKinsey'sCapitalMarketsTradePro-cessingSurvey.
Otherserviceareasthatstandtobenefitincludepost-tradeoperations,creditcontrol,complianceandinfrastructureinareassuchasdocu-mentmanagementandcloudapplica-tions.
Inthepost-tradespacethereareapplicationsacrosssettlement,assetservicingandsafe-keeping,includingcollateralmanagement,corporateactionsandcustodianservices.
Akeydriverofappetiteforsharedservicesisregulation,whichhasledtohighercostsandincreasedtransparencyrequirementsforcertainmarketsegments.
MiFIDII,settotakeeffectinEuropebyJanuary2018,willboosttransparencyandreportingthroughthetradelifecycle.
HeaviercapitalrequirementsunderCapitalRequirementsDirectiveIVmaybringpressureontradingincomestreams.
Partlybecauseoftheim-pactofregulation,returnonequityinthecapitalmarketsandinvestmentbankingsector(top10banks)wasadisappointing7percentin2015,whiletheaveragecost-to-incomeratioamongthatgroupwas76percent.
66CapitalMarketsandInvestmentBanking2016:TimeforToughChoicesAndBoldActions,McKinsey&Company,September2016.
20Intechnologyinfrastructureservices,costpressurehasboostedtheallureofscaledsolutionsthatcancreatevalueinhigh-volume,low-marginenvironments,andwilllikelybeconducivetoverticallyintegratedbusinessmodelsandutilities.
FIS's2015acquisitionofSunGardisanexampleoftherecenttendencyoftech-nologyvendorstoscale.
Appetiteforsharedservicesreflectsabroadertrendofplayersshiftingtoex-ternal,software-as-a-servicemodelsfortechnology,andawayfromthepreviousnormofheavilycustomizedbespokeof-ferings.
Inoneofmanyexamples,Gold-manSachs,J.
P.
MorganandMorganStanleyarepartneringwithasoftwareandmanagedservicesprovidertopro-videdatanormalizationandvalidation.
Thecostefficienciesandriskmutual-izationofferedbyutilitiesareantidotestotheincreasedcapitalandoperationalcostsarisingfromregulation,suggestingtheyaresettobecomeapermanentfeatureofthelandscape.
Still,thereisuncertaintyaroundoptimaloperationalandownershipstructures,andhowindi-vidualrolesshouldbedefined.
Andsomelocalorregionalmarketstructuresaresoatomizedthatanindustrysolutionseemsunrealistic,atleastinthenearterm.
Certainly,significantfinancialresources,greatexecutionandtheabilitytosetindustrystandardsareprerequisitesforthoseaspiringtotakealead.
21CMIPsMustTakeActionNowFollowingaperiodofpositiveearningsperformance,CMIPsareinapositionoffinancialstrengththatsupportsastrategicagendaforgrowth.
However,anorganicorgeography-focusedapproach,oranundifferentiatedbidforscalewithoutcapturingrealsynergies,isunlikelytobesufficientformosttorealizetheirambitions.
Instead,companiesmustprepareforexpansionacrossthevaluechain.
Giventheimportantdecisionsahead,executivesmusttakeastrategicapproachtocapturingnewopportunities.
Thenearfuturerequiresvisionandstrategy,ratherthanriskaversionandafocusonefficiencies.
22Akeyfocusmustbestrengtheningthecorebusiness,whichincludesembracingcustomer-centricityanddisruptivetech-nologies,andenhancingM&Acapabil-ities.
Atthesametime,growthstrategiesshouldreflectindividualobjectivesandcapabilities.
Forlargeprovidersthatmaymeanscalingupandbuildingaportfolioofhigh-marginfast-growingbusinesses.
Smallerplayersmaybebetterservedbyidentifyingwinningniches.
Thereisnoone-size-fits-allsolution,andnoCMIPshouldaimtosucceedintoomanyareas.
Asuccessfulstrategyalwaysrequiresclearprioritizationanddeliberatechoicesaboutwhatnottodo.
McKinseysuggeststhefollowingeightactionsforCMIPexecutivestoconsider(Exhibit13):StrengthenthecoreOrganicgrowthisunlikelytobesufficientforCMIPs.
Instead,theymustmaximizeacoreskillsettolaythefoundationsforperformanceacrossmultipleexpansionpaths.
StrongmarginsmeanmostCMIPsarewellplaced,butthosethatactdeci-sivelyaremostlikelytosucceedinthebidforgrowth.
Thefollowingelementsarekey:Becometrulycustomer-centricandboostcommercialexcellence.
Managementteamsshouldshifttheirfocusawayfrompureefficientproductdeliveryandtowardunderstandingcustomerneeds,customizingoffer-ings,providingtailoredportfoliosanddevelopingtruesolutions.
BuildingthefoundationforthisshiftstartsBealeaderindataandanalyticsDouble-downonnewandfast-growingassetclassesDevelopintegratedcomplianceandriskmanage-mentsolutionsScaleupandventureintoutilitiesExpandserviceofferingsforcorporationsEnternewgeographiesanddevelopdistributionnetworksSetupane-commerceandtradingecosystemBecometrulycustomer-centricandboostcommercialexcellenceBuildrelationshipswithregulatorsFosteracultureofinnovationandwinthewarfortalentEmbracenewanddisruptivetechnologiesEnhanceM&AandintegrationcapabilitiesExpandthecapitalmarketsecosystemStrategiesforbreakoutgrowthStrengthenthecoreCMIPgrowthmovesSource:McKinsey&CompanyExhibit1323withlisteningtocustomersanden-suringalignmentwiththeirprioritiesandtimelines.
Subsequentelementsincludesegmentation,walletsizing,targetsettingandprioritization,fol-lowedbyimprovementofsales-forceeffectiveness.
Pricingstrategymustbealignedwithvalueprovided,par-ticularlygiventheemergenceinrecentyearsofcut-pricealternatives.
Addi-tionalpracticalelementsmayincludeincentivesforcustomerstosubmitcorrectdata,whichmaycutfailurerates,andcross-selling.
Organizationsthatcompleteacomprehensivesalesandservicestransformationcanex-pecttoboostsaleseffectivenessbyabout20percent.
Buildrelationshipswithregula-tors.
Financialmarketregulations,suchastheDodd-FrankActintheU.
S.
andEurope'sMiFIDII,entailsignificantcost,capitalandreportingrequirementsforbanks,creatinganopportunityforCMIPstolaunchservi-cesthathelpbanksnavigatethenewregulatorylandscape.
Giventhechangingenvironment,CMIPfirmsshouldimplementamanagedcomplianceprocessandbuildrela-tionshipswithregulators,inordertounderstandtheirlong-termvisionandstrategy.
Keyelementsincludeadedi-catedengagementprogram,regulatorychangescreeningandprioritization,value-at-stakeanalysis,andstake-holderoutreachandcommunication.
BusinessareasthataremigratingfromthesellsidetoCMIPsincludedirectmarketaccesssolutions(inplaceofthebrokerrelationshipsofthepast),datamanagementandliquidityprovi-sion.
Anothergrowthareaiscollateralmanagement,whichisbecomingmoreimportantasmarketparticipantsincreasinglyfacestrictermarginregu-lationsonunclearedderivativesunderMiFIDandEMIR.
Additionalcollateralisalsorequiredforcentralclearing,andwithdemandrisingandsomesellsidefirmswithdrawingfromsecuritiesfinancing,competitionamongtechnol-ogyfirms,custodiansandsecuritiesdepositoriesisheatingup.
Still,whilesomeregulatory-relatedin-itiativesareimprovingcapitalandcostefficiencies,workisrequiredtoopti-mizetheoveralleffectivenessofthesemeasures.
Manyaresmallinscale,andnoproviderhascapturedasignifi-cantchunkofanysinglerevenuepool.
Fosteracultureofinnovationandwinthewarfortalent.
TheCMIPindustryisincreasinglysusceptibletodisruption.
Providerscanrespondbyfocusingoninnovationfundingandfunctionality,organizationalstruc-tureandgovernance,withtheaimofhardwiringinnovationintointernalpro-cesses.
Successfullargefinancialser-vicescompaniesinvestasubstantialproportionoftheiroperatingincomeininnovation-relatedactivities.
Astandardapproachtobuildinginnovationintointernalframeworkscomprisesfivesteps:mappingofindustrytrendsandchallenges,under-standingofcustomerneeds,analysisofthecompetitivelandscapeandrivalinnovations,identificationofkeyin-novationstreamsacrossthebusinessmodelandstrategicprioritizationofinnovationstreamsaccordingtolevelofdisruptionandprofitpool.
24Attractingandretaininghumancapitalisasignificantchallenge,particularlyinareassuchasbigandsmartdata,ana-lyticsandmachinelearning,whichfacesignificanttalentshortages.
Companiesrequirepeoplewhocancreatelinksbetweenadvancedapplicationsandpracticalbusinessproblems.
Largerorganizationsinparticularshouldworktoestablishthemselvesaspreferreddestinationsforyoungertechnologists,interaliabyprioritizingeffortstoreflectthevaluesofthatcohort.
Aventurecapitalfundingarmcanbeusedtodriveinnovationexternally,andshouldbebackedbyadedicatedor-ganizationalframework.
Itcanalsohelpscreenthemarketandidentifytargetsforpartnershiporacquisition.
Embracenewanddisruptivetech-nologies.
Low-costexecutionandprocessing,theriseoffintechsandincreasedcustomerappetitefornewtradingprotocolsandplatformshavegeneratedenoughmomentumtothreatencurrentbusinessmodels.
Tokeeppace,CMIPsmustensuretheirtechnologyplatformsaregearedforhigh-speedexecution,liquidityandstandoutefficiency.
AccordingtoMcKinseyestimates,some45percentofglobalfinanceiscapableofbeingautomatedbyexistingtechnologies,withafurther13percentsusceptibletonewtechnologies.
However,manycur-rentautomationeffortsarefocusedonclient-facingactivities,leavingmorethan50percentofback-officefull-timeequiva-lentactivitylargelyuntouched.
Back-officesavingsofupto30percentcanbeachievedthroughautomationoftasksandprocesses.
Automationcanbedividedintofourbroadcategories:roboticprocesses,deepinsightsandmachinelearning,smartwork-flowsandcognitiveagents.
Roboticsarehelpfulintaskswithre-petitiveandpredictablesteps,suchasdataentryandanalysis,whiledeepinsightsandmachinelearningenablecomplexpatternrecognition,whichcanbeusefulinfrauddetection.
Smartwork-flowautomationisusefulwheretherearemultiplehand-offsbetweenpeople,robotsandothersystems,forexampleinreconciliationorsettlement.
Finally,cognitiveagentscanhelpscalesimplebuttime-consumingtasks,suchastheoperationofahelpdesk.
Technologiesgenerateupticksinpro-ductivity,buttheyalsobringimprovedaccuracy,scalability,round-the-clockoperationandtraceability.
Distributedledgersandcloudsolutionshavealsoattractedsignificantatten-tion,thelatterreflectingthetrendawayfromlargeandexpensivedatabasesandprocessingcapabilitiesandtowardmorecollaborativeandagilewaysofworkingtogether.
Akeyprincipleinpreparingfortechno-logicalchangeisidentifyingtherightLow-costexecutionandprocessing,theriseoffintechsandincreasedcustomerappetitefornewtradingprotocolsandplatformshavegeneratedenoughmomentumtothreatencurrentbusinessmodels.
25organizationalframeworktoimplementroadmapsefficiently,andsuccessre-quiresadedicatedcultureofflexibilityandresponsiveness.
EnhanceM&Aandintegrationcapabilities.
Mergersandacquisitions,especiallyinadjacentbusinesses,havebeenaprimaryCMIPgrowthdriveroverthepastfiveyears,andthetrendshowslittlesignofslowing.
However,intherushtoaccumulateassets,firmsmustmitigatetheriskofmissteps.
Toolsincludingaprogrammaticagendaandroadmapcanhelp.
AprogrammaticM&Astrategyisde-finedasaunifiedseriesofmultiple,relatedtransactions,designedtosystematicallybuildabusiness.
Itisaproactiveapproachtodealflow,thepathofwhichshouldnotdeviatebasedonthesuccessorfailureofanysingledeal.
Otherkeyelementsincludeastrongvision,continuousandsystem-atictargetscreeningandadedicatedintegrationteam.
Anotherelementofasuccessfulstrat-egyisapipelineofpotentialacquisi-tionsaroundexplicitthemes,whichareeffectivelybusinessplansthatuseM&Aandorganicinvestmenttoreflectafirm'spriorities—asopposedtoanundifferentiatedM&Aagendathatisdecoupledfromstrategy.
PrioritythemesarethosewhereM&Aisre-quiredtodeliverstrategyandwherethecompanycanaddvalue.
Inallcasesthethemesshouldhavemeas-urablepotentialimpacts.
Keyprinciplesofconductingsuc-cessfulM&Atransactionsincapitalmarketsinclude:Dealsshouldbepredicatedonaclearvaluepropositionintermsofrevenueandcustomergrowthandoffersufficientscale.
Regulatoryapprovaliscritical,anditisimportanttoberealisticabouthowlikelyclearancewillbeandtoworkcloselywithregulatorsthroughouttheprocess.
Experi-enceindicatesthatclearanceismorelikelyinlessregulatedareasthaninheavilyregulatedtraditionalcorebusinesses,suchastradingandclearing.
Integrationcanbechallenging,par-ticularlyintrade-relatedfunctions,wherefailureisexpensive.
Frag-mentedplatformserodeefficien-ciesandincreasethelikelihoodofbreaksandfails.
Expandthecapitalmarketseco-system.
CMIPoperatorsshouldworkindividuallyandcollectivelytopromoteprimaryandsecondarymarketstoissuers,banksandinvestors,andpartnerwithpolicymakerstodevelopandstrengthenregulatoryframeworks.
Inemergingmarkets,developmentinitiativesmay,inlinewithWorldBankprinciples,aimtopromotetheabilityofcapitalmarketstofundgovern-mentsandcompaniesatscale,aswellasincreaseliquidityandsupportpricingtransparency.
Initiativesshouldbebackedbyreliablegovernmentbondprograms,andfollowinter-nationallyrecognizedtax,regulatoryandaccountingstandardsandpro-fessionalqualificationsforfinancialmarketemployees.
Exchangegroupsareinagoodpos-26itiontodrivedevelopmentandencour-agefinancialliteracy.
Inoneexample,theIndonesianStockExchange(IDX)introducedseveralprogramstoboostretailinvestment,includingeducationalinitiatives,informationcentersandIDXgalleriesatuniversities.
Asia-Pacifichasbeenatthecenterofcapitalmar-ketsexpansion,evidencedbyarecentsurgeinexchangelistings(Exhibit14).
Doubledownonnewandfast-growingassetclassesExchangesandothertradingfacilitiesmayachieverevenuegrowthbyboldlyventuringintonewandfast-growingassetclasses.
Reachingscalequicklywilllikelyentailinorganicmoves.
Thechoiceofproductshouldreflectacompany'sportfolioandgeographyorregulatoryandmarket-drivenshiftsindemand.
Fast-growingassetclassesthatvarybygeographyshouldbeafocus(Ex-hibit15).
TheAPACregioninparticular,isexpectedtoshowstronggrowthinindex,commoditiesandFXproducts.
Newproductlistingscanalsocontributetorevenuegrowth.
Thereisaconspicu-ousupsideinpursuingsynergieswithex-istingcontracts.
Inlistedderivatives,forexample,anewfutureismorelikelytobesuccessfulifitreferencesaliquidunder-lying,andthatlogicisreflectedinthemajorityofrecentofferings(Exhibit16,page28).
Asiawasthefastest-growingregionforfuturesandoptionstradingin2015.
TotalvolumeonAsia-Pacificex-changesjumped34percentto9.
7billioncontractsin2015,thehighestlevelforthatregionsince2011.
7Therearealsoopportunitiesforex-changegroupsandothertradingvenuesarisingoutofthe"futurization"trend,andseveralhavelaunchednewfuturescon-CAGR1ofnumberofcompanieslisted2007-2016Percent1.
2APAC2.
9-0.
9Americas-0.
9WesternEuropeEasternEurope,MiddleEastandAfricaGlobalaverage=1.
0CAGRofnumberofexchangelistedcompanies1CAGRofcompanieslistedbetweenJanuary2007andJanuary2016.
Source:WorldFederationofExchanges;McKinsey&CompanyExhibit147FuturesIndustryAssociation27tractsbasedonover-the-counterinstru-mentssuchasinterestrateswaps.
Thejuryisoutonwhetherthosecontractswillbeabletotakesignificantmarketsharefromthebilateralmarket.
ETFsandrelatedindicesmaybeanotherareaoffocus,amidexplosivegrowthinthesector(particularlyindevelopedmarkets)thatsawthenumberoflistedproductsrisetoaround4,500globallyattheendof2016,representingassetsundermanagementofaround$2.
8trillion,comparedwith$400billion10yearsearlier.
Inscopingdemandfornewproducts,operatorsmayalsoconsidermoreexoticalternatives,includingsyndi-catedlending,originate-to-distributedeals,realestateandinsurance-linkedsecuritiestrading.
Whilethereisriskinproductlaunches,thereisahigherchanceofsuccessifthecontractscomplementexistingof-ferings,forexamplecreatingnewtenorsorpayoffs,orofferingcollateralnettingopportunities.
Newproductsshouldalsobetargetedatspecificclientneeds,andaccessibilityandtechnicalproductsup-portshouldbeaprimaryconsideration.
Partnershipmaybeakeyenablerintheprocess.
Corporatebondtradinghasbeenanareaofintensefocus,withabout130newbondplatformscompetingwithmarketleadersBloomberg,MarketaxessandTradeweb.
Thelaunchofthesenewplatformsisduetoadeclineinprimarydealerinventoriesofcorporatebonds,asthesellsidereducesrisk-weightedassets.
Overall,outstandingcorporatebondvolumeshaveincreased,e.
g.
inCAGR>10%5%capitalapproach,comprisingscreeningandinvestmentinaportfolioofideasbasedondeepresearchanddiagnostics.
However,alignmentwiththegroup'sstrategicprioritiesiskey.
DevelopintegratedcomplianceandriskmanagementsolutionsAstheregulatoryprogramcontinuestorollout,providerscanofferstandard-ized,scalableandsoftware-enabledcomplianceandriskmanagementsolutionstohelpmarketparticipantsmeettheirobligations.
Focusareascanincludeknow-your-customer/on-boarding,regulatoryreporting,tradesurveillance,collateralmanagementandtaxsolutions.
Largebanksarealreadyspendingmorethan150millionayearonriskdataandtechnology,andmanysell-sidefirmsareacceleratingpreparationsforregulationthatwillcontinuetocomeintoforceforthemselvesandclientsoverthecomingperiod.
OnepieceoflegislationinfocusistheFundamentalReviewoftheTradingBook(FRTB).
TheFRTBissettotakeeffectforbanksthroughrequirementofreportingunderthenewstandardsbyJanuary2020.
Whilethisnewregulationisex-pectedtoimplyasubstantialincreaseinrisk-weightedassets,theuseofinternalmodelsislikelytoleadtoanincreaseofabout47percent,whilethestandardizedapproachmayincreaserisk-weightedassetsby84percent.
TheimplementationprocesscreatesopportunitiesforCMIPstoofferservicesthathelpbanksmitigatetheeffectsofthelegislation.
Anothergrowthareaistradesurveil-lance,withrequirementsunderMiFIDIIandotherregulationsrequiringmarketparticipantstokeeptrackofreal-timetraderactivityacrosschannels(voice,email,physicalmovement)by2018.
Theywillalsoneedtocorrelatetraderbehaviourwithexternalfactorssuchasmarketmovementsorrelatedcom-munitycommunications.
Othersolutionsthatreflectthenewregulatorylandscapeincludereportingservices(offeredbyseveralexchangegroupsinpartnershipwithtradere-positories)andreal-timepre-andpost-traderiskmanagementsolutions;forexampletheNewYorkStockEx-change'sRiskManagementGateway.
ScaleupandventureintoutilitiesCostpressureandregulationhaveboostedtheattractivenessofutilitiesfornon-differentiatingelementsofthevaluechain.
AccordingtoMcKinsey'sCapitalMarketsTradeProcessingSurvey,sin-gleutilitiesmayreducecost-per-tradebyasmuchas70percent,suggestingthereisanopportunityforplatformsthatofferscaleadvantages,reducedcostvolatilityandloweroperationalrisk.
Potentialareasforscaledupandsharedsolutionsincludepost-tradeoperations(clearing,tax,custody,collateralmanagement,transferandreconciliation),credit(processingandtrading),dataandinfrastructuresolu-tionssuchascybersecurityandcloudservices(Exhibit17).
Exchangegroups,clearinghousesandinformationserviceprovidersmaycon-siderbuildingandoperatingutilities/in-dustrysolutionstopositionthemselves31atthecenterofaparticularvalueprop-osition.
Indoingso,itmaybeinitiallypreferabletofocusoncoreareasofcompetenceandadoptanopensourceapproach,whichwillhelpcreatenet-workeffectsasfintechsandothersaddservices.
Othersuccessfactorsincludeaclearofferingofimmediatebenefitstoclients,platformneutralityandabroadpotentialcustomerbase.
Arelatedinitiativewouldbeservicespoolinginactivitiessuchastradesur-veillance,whereplayersmaysharetalent,analyticalcapabilitiesandregula-toryexpertise,creatingheadcounteffi-cienciesandreducinglicensingcosts.
Itisworthrememberingthatthestrategicchallengesinlaunchingautilityaresignificant,andtheremaybesignificantlegacychallen-gesandbarrierstomaximizingvaluefromthebusinesses'customernet-work.
Newpricingmodelswillalsoberequired,reflectingthemoveintomanagedservices.
Inaddition,large-scaleoutsourcingtoCMIPsisrelativelyuntested,suggestingtheremaybehard-to-quantifycontrolandmanagementrisks.
ExpandserviceofferingsforcorporationsCorporateservicesareapotentialsourceofdifferentiation,particularlyforcompanieswithastrongprimarymarketsbusiness.
OfferingsmaybeCashandliquiditymanagementTransmissionandvalidationCorporateactionsTaxservicesandreportingCustodianservicesCreditprocessingSec.
loanportfoliotradingplatformReferencedataMarketdataDataadministrationKYC/onboardingservicesFraudmonitoringTradesurveillanceReferencedocumenthubVendorriskmanagementservicesReportingengineRegulatoryintelligenceservicesPhysicaldocumentmanagementSecurityoperationscenter/cybersecurityCloudservicesCollateralmanagementTransferoflegalownershipManagementofpaymentsPost-tradeoperationsCreditservicesComplianceandregulationOtherinfrastructureservicesDatahubMessagingAnumberofserviceshavethepotentialtobeofferedasutilitiesExhibit17Note:Serviceslistedareexamples.
Source:McKinsey&Company32marketedacrosscustomersegments,butarelikelytobeespeciallyusefulforsmallandmedium-sizedenterprisesthatdonothaveinternalcapabilities.
Intheareaoftreasuryservices,CMIPscanalsoofferavaluepropositionforlargeenterprisesandmultinationalcor-porations.
Threebroadcategoriesofsolutionmeritconsideration:Investorrelationsandpre-IPOadvisory:Threebroadbusinesslinesincludedataandreporting(e.
g.
,detailingshareholderstruc-ture),analyticsandtargeting(al-gorithmicallydriven)andadvisoryandconsulting.
AheadofIPOs,abusiness-supportprogramcanhelpcompaniespositionforgrowth,increasevisibilityandboostbrand-ingwithpotentialinvestors.
Inoneexample,LondonStockExchange'sELITEprogrampreparescompan-iesforraisingequityfinance.
OtherEurope-basedplayers,includingEuronext,NASDAQ,OMXandDeutscheBrse,havebeenactiveinthisarea.
Communicationsolutions:Ser-vicesmayincludepressreleases,web-baseddisclosure,digitalmediadistribution,mediareportingandscorecoveragetotrackmarketsentiment.
NASDAQ,inoneex-ample,offersafullsuiteofmulti-mediaofferings.
Managementservices:CMIPscanhelpboardsandsupportgov-ernancewithmediaanalysis,riskmanagementandcompliance,internalreporting,collaborationtools,anddocumentmanage-mentsolutions.
TheseofferingscanstrengthenthetiesbetweenCMIPsandtheircorporateclientbaseandsupportthepositioningofCMIPsaspartofthecorporatefinancinguniverse.
Bringingcorporatesolutionsandtreasuryservicesbusinessestomar-ketrequirescollaborationwithclientsandserviceproviderstoamalgamateanalytics,news,dataandportalele-ments.
ThoserequirementsplaytothestrengthsofmanyCMIPs,whichal-readyhaverobustclientfranchisesandsignificantdataresources.
EnternewgeographiesanddevelopdistributionnetworksDevelopedmarketsexchangegroupshavestruggledintheirattemptstobuildrevenuesoutsidetheirhomemarkets,whichhaveremainedstuckataroundonethirdofthetotaloverthepastfiveyears,thevastmajorityofwhichisU.
S.
exchangeactivityinEurope.
Asia-Pacificaccountedforjusttwopercentofdevelopedmarketexchangerevenuesin2015,whichisactuallyadeclinefrom2010,despiteanumberofhigh-caliberefforts.
Thenumbershighlighthowdifficultitisfordevelopedmarketsexchangegroupstostructurallyincreaseexpos-uretohigh-growthgeographiesandearnsignificantrevenuesinemergingmarkets.
Still,thereisanopportunitytoleveragethegrowingroleofcapitalmarketsinfinancingcompaniesandgovernmentsglobally.
Forplayerslackingasubstantialfoot-print,aneffectivemethodofenteringorscalingupisthroughajointventure,whichreducesoperationalandother33risksandbringsbenefitsincludingaccesstoestablishedliquiditypoolsandcustomernetworks.
Between2014and2016,developedmarketsexchangegroupsrampeduppartner-shipsinemergingmarkets(Exhibit18).
Thealternativeroute—startingfromscratch—tendsnottobecosteffectiveandincreasestheregulatorychallenge.
Inaddition,manygovernmentsregardcapitalmarketsascriticaldomesticinfrastructuresthatareunsuitableforforeignmajorityinvolvement,reinfor-cingthecaseforpartnershipsratherthanacquisitions.
Localfirmsmayalsoleveragejointventures,whichcanhelpthemaccesstalentandknow-howandbuildstra-tegicrelationships.
ShanghaiStockExchange,ChinaFinancialFuturesExchangeandDeutscheBrseenteredintoajointventureandsetuptheChinaEuropeInternationalExchange(CEINEX)tomarketandtradefinancialinstrumentsbasedonrenminbi-de-nominatedunderlyings.
Anotherex-amplewastheestablishmentin2014ofShanghai-HongKongStockCon-nect,whichconnectedShanghaiStockExchangewithHongKongStockExchange,enablinginvestorsineachmarkettotradeontheotherusinglocalbrokersandclearinghouses.
Tradingnorthboundandsouthboundincreasedsubstantiallyaftertheincep-tionoftheprogram,andHongKongStockExchangehasseenmorelistingsandanincreaseintradingvolumes.
Thetie-upwasfollowedin2016byShenzhen-HongKongStockConnect,formedbysubsidiariesofHongKongStockExchange,ShenzhenStockEx-changeandChinaClear.
ForeignmarketsHomemarketAPACOtherregions36%35%64%65%2015201097%98%201020152014-162010-1329163%2%DevelopedmarketsexchangegrouprevenuedistributionPercent1NumberofdevelopedandemergingmarketsexchangegrouppartnershipsDevelopedmarketexchangegroups'exposuretoemergingmarketshasbeenlimited,butpartnershipsareontherise1ArithmeticaverageofDBG,ICE,LSE,NASDAQ;homemarketdenedasUSforICEandNASDAQandEurozoneforDBGandLSE.
2IncludespartnershipsofCME,DeutscheBrse,Euronext,HKEX,ICE,JPX,LSE,NASDAQ,SIX,TMX.
Source:Companylings;McKinsey&CompanyExhibit1834Internationaldistributionandpartnershipsarepotentialdriversof(some)growth.
Companiesshouldworktolaunchplat-formsthatbringtogetherunconnectedinvestorsandbusinesses,whilepartner-shipsareaneffectivewaytoincreaseexposureandreachnewaudiences,aswasthecasewhenKoreaExchangeandEurexExchangeenteredintoanagreementin2010toofferround-the-clocktradingofKOSPI200Options(theworld'smostliquidindexoption).
Elsewhere,MecadoIntegradoLatinam-ericano(MILA)hassince2011providedintegratedaccesstostockexchangesinChile,Colombia,MexicoandPeru,whichtogetherhadamarketcapitalizationofaround$700billioninNovember2016.
Alongsidebroadermarketaccess,theserviceofferstaxandconsolidatedlistingbenefitstoincreaseinterconnectedness.
CMIPsmustcarefullyweighthebene-fitsofpartnershipsagainsttherequiredinvestment.
Ifthetie-upislimitedtoorder-routingandcross-trading,orper-hapsaformofcross-membership,itisnotlikelytoleadtoastepchangeinvolumesorrevenues.
Otherchallengesincludediversetaxregimes,unmatchedclearingandsettlementprocessesanddifferingattitudestocapitalflowsandinvestment.
Inanycase,regionaldivers-ificationintodevelopingmarketsshouldinmostcasesnotbethefocusofstrat-egy,giventhedifficultyofachievingasignificantincreaseinrevenuesandtruebottom-lineimpact.
Setupane-commerceandtradingecosystemAsthetraditionalrelationshipbetweenmarketparticipantsevolvesitmaymakesenseforproviderstorampupofferingsofnewtradingplatformsandtradelife-cycleecosystems.
Optimally,theplat-formsshouldservemultiplemarketsandbesupportedbystrongback-endanddataandanalyticsfunctionality.
Informulatingaplatformstrategy,marketparticipantsshouldprioritizethecreationofaclearvaluepropositionfortargetendusers.
Forexample,anewtradingvenueaimedatretailcustomersmightbesupportedwitheducationtools,whilecorporateusersmayrequirespeed,effi-ciencyandcomprehensiveaccess.
Executionofplatforminitiativesrequiresskilledorchestrationofcorecompe-tencies,andawillingnesstoembracealternativesourcesofexpertise,whichmayforexampleresidewithfintechs.
Platformarchitecturesshouldbeopen,andsupportupgrades,newmodulesandmultiplegeographiesandassetclasses,ensuringtheyremainflexibleenoughtorespondtonewregulatoryframe-worksandthecontinuedexpansionofcapitalmarkets.
Inmanycases,platformscansupportacommunityofdeveloperswhowouldprovidetheirownservicesaspartofthepackage.
Asenablersandaggregatorsofservicesandusers,CMIPscanpositionthemselvesatthecenterofaparticularassetclassorservicelineandownaparticulardigitalecosystem.
Capitalmarketsinfrastructureprovidershavetakenadvantageofchangesinmar-ketstructuretoexpand,increaserevenuesandinnovate,andtheindustry'sperform-anceinrecentyearsputsitinastrongpositiontocontinueitssuccess.
However,thelandscapeischangingquickly,duetoregulation,theriseoffintechs,theincreas-35ingimportanceofthebuyside,andthestillemergingpotentialofdataandana-lytics.
IndividualCMIPsmustmakehastetoalignwiththesedynamics.
CMIPexecutivesshouldtaketheinitia-tiveandpositiontheirfirmstocapital-izeonthesetrends.
Thiswillincludebothstrengtheningtheircorebusinessandidentifyingthebestopportunitiesforgrowth.
SomeleadingCMIPshavealreadydefinedbreak-outgrowthstrat-egiesandstartedtofundamentallytransformandreinventtheircompanies.
Otherswillfollowquickly.
Giventhevarietyofroutestoexpan-sion,growthplansshouldbeguidedbyarobuststrategicagenda,strongdecision-makingandefficientexecution.
Thewrongapproachorlackoffocuscouldleadtomarginalizationandalossofcompetitiveness,whiletheriskiestre-sponseistodonothing.
Inatimeofreinvention,advantagewillshifttofirmswithstrongstrategicleadershipandthecommitmenttopur-suetheirgoals,whoarelikelytoreapsignificantrewards.
36ContactFormoreinformationaboutthisreport,pleasecontact:MatthiasVoelkelPartner,Frankfurtmatthias_voelkel@mckinsey.
comMarkusRhrigPartner,Munichmarkus_roehrig@mckinsey.
comRushabhKapashiPartner,NewYorkrushabh_kapashi@mckinsey.
comJonathanKleinPartner,NewYorkjonathan_klein@mckinsey.
comAndreasWaschtoAssociatePartner,Hamburgandreas_waschto@mckinsey.
comEmreAkgülConsultant,Istanbulemre_akgul@mckinsey.
comTheauthorswouldliketoacknowledgethecontributionsofthefollowingcolleaguestothisreport:KevinBuehler,DanieleChiarella,MatthieuLemerle,AkashLal,RogerRudisuli,PhilippHrle,JaredMoon,MattHigginson,JeffPenneyandVahanVardanian.
ThanksalsotoAllisonKellogg,DavidWiganandPaulFeldmanforeditorialsupport.
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