As we speed towards the end of year, we find ourselves thinking, where next?
In January, I wrote my first blog of the year where I discussed 2024 as being the year the world goes to vote, and during the year I wrote about the blurring lines between regulations and politics, so as we speed towards the end of year, we find ourselves thinking, where next?
Many of those themes and ideas have played out in line with our expectations while others have delivered some surprises. When thinking about the geopolitical landscape we have, as expected, seen the world drift towards a more populist right-wing agenda but the decisive signal sent by the US electorate was without doubt a surprise. Closer to home the implications of developments in the US combined with political uncertainty at the heart of Europe can only make our job harder with outcomes less predictable.
The idea of regulatory and market convergence in the form of the Capital Markets Union continues to be plagued with political expediency and the Draghi report on EU competitiveness published earlier this year underlined some of the endemic structural challenges that Europe faces as it contemplates how to effectively compete with the other global trade blocs.
While these arcs will no doubt continue to play out in 2025, here are my thoughts on what else might be driving our industry during the coming year.
Trump 2.0
The dust has now settled on the U.S. presidential election results. While the President-Elect has rarely been far from the headlines, uncertainty remains about what his upcoming term will mean for financial markets. With much talk of tariffs, tax policy, and (de)-regulation, there is no doubt that his administration’s policies will have far-reaching effects.
Although financial regulation did not feature prominently in Trump’s campaign, there is a growing consensus that Trump 2.0 may usher in bolder deregulatory actions than seen during his first term. With the Basel III Endgame stalled, unresolved questions surrounding the implementation of 10c-1a, and potential shifts in SEC leadership and Congressional priorities on the horizon, the direction of travel appears evident even before the President-Elect assumes office.
For our markets, the critical question is not just what Trump’s policies will entail, but how global markets will respond. Will we witness greater regulatory alignment, or a reversal of the harmonisation efforts seen in recent years?
ISLA and ISLA Americas will be monitoring developments closely. We remain committed to ensuring our members on both sides of the Atlantic are well-positioned to navigate these potential changes and their implications.
CMU Take Two
Closer to home, but as equally intriguing will be following how the new EU legislative term sets out its path for success. With the CMU (recently integrated into the Savings and Investment Union (SIU)) being one of the most immediate issues on the commissioner’s agenda, we can expect a swathe of new commitments during this term. While progress over the last decade has been limited, the flagship policy issues remain to be solved including harmonised supervision and common rules (insolvency laws, tax treatment), more efficient infrastructures (consolidation of CSDs), diversifying funding streams and greater participation of citizens in EU capital markets.
Against a backdrop of increased political instability across many EU jurisdictions, coupled with the pace of change in the US, the EU legislative powers will need to find common ground and deliver clear and actionable measures to remain competitive instead of being left adrift. 2025 will see ISLA continue its EU advocacy efforts, as we build on the recommendations outlined in our Manifesto and highlight the important role of securities lending in addressing many of these flagship SIU objectives.
All Roads Lead East
While the European market still searches for growth, few markets have caused as much of a buzz in 2024 as the Middle East, particularly the Kingdom of Saudi Arabia (KSA), and for good reason.
With ambitious goals to develop a stronger market structure and diversified economy while also being home one of the fastest growing and most liquid stock exchanges in the world, 2025 is likely to be a pinnacle year for the Kingdom and broader region.
At ISLA we understand the importance of collaborating with local stakeholders to ensure that our industry prioritises the prosperity of the domestic market and domestic market participants. In that vein, working alongside our members, working groups and with strategic counsel from Latham & Watkins, we published the Securities Borrowing & Lending Guide: Kingdom of Saudi Arabia earlier this year.
Through 2025 we plan to publish several more country-specific guides to provide our members with leading market insights to help inform their own engagements with the Middle East but to also provide a common interpretation to form the basis of ISLA’s future regulatory engagement on behalf of its members in the region.
Tapping the Untapped
While the Middle East brings plenty of opportunity, 2025 has the potential to offer many different routes to future growth.
UCITS funds are poised to play a more prominent role, driving growth and diversification. However, regulatory hurdles, such as the ambiguity surrounding the use of pledge have hindered progress. ISLA has been actively advocating for the allowance of UCITS to accept collateral by way of pledge, increasing the attractiveness of UCITS as a vast liquidity source for borrowing, without reducing the levels of investor protection or introducing additional risk. ISLA have also been actively advocating in Spain, working with local stakeholders to push through legislation that would allow Spanish UCITS funds to lend their assets. 2025 could be the year that the market receives consistent interpretation and application of the UCITS Directive across the EU, as well as the ability to lend in a new market which would unlock deeper liquidity across the EU.
2024 has also seen retail aggregators emerge as a key player in the global securities lending market. By pooling small retail holdings into larger, tradeable blocks, they can inject significant liquidity to the market. However, as with any new market, robust risk management, resilient technological innovation, and regulatory compliance are essential. ISLA’s best practice has long contributed to the smooth operation of our markets and we would expect new participants entering the market to adopt best practice in their operations. ISLA will continue to closely monitor this space as we expect it to continue to grow over the coming years.
Emerging Operational Threats
With technology driving the retail landscape, it is also fundamental to the efficient operation of the ‘traditional’ securities lending space. With the increased use of technology comes the promise of greater efficiency, lower costs and faster development, however, with over-reliance comes increased risk especially when things don’t go to plan.
While the concept of operational resilience has always been something that exercised the minds of technologist and business continuity teams it delivered some unexpected surprises this year that caused many to pause and reflect on this critical area. From our perspective we recognise the importance of maintaining orderly and efficient markets and operational resilience is an important part of that process.
As we look back at the events of 2024 while looking ahead to 2025, there is no doubt in my view that whist presenting some short-term challenges, they also afforded the opportunity to look at new and novel ways to think about this space including the advancement of frameworks such as the CDM.
Closing
Each year I write an end of year blog and each year I reflect on the pace of change and my expectation that the upcoming year will bring a sense of stability to the market. This year however, I have no doubt that 2025 will be every bit as feverish as 2024. What will change is that it will be the industry in the driving seat as it continues to work together to identify new growth, new markets and new liquidity.
I’d like to take this opportunity to thank all our members for their continued support throughout the year and wish you all a relaxing festive period and prosperous start to 2025.
Andrew Dyson
CEO
