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The high tide of new regulation has passed, but a long implementation period is yet to come. M&A is on the horizon
Technology and tougher regulation are reshaping the infrastructure the financial services industry relies on to function. The four pillars of financial market infrastructure: payment systems; trading platforms; financial benchmarks; and custodians are all unique in the trends that are influencing their M&A activity.
Competition among payment systems intensifies
Competition in the payment systems space is increasing as technology opens the door for new entrants to challenge established operators. Regulators have been paying more attention to the space too, encouraging competition and thereby adding pressure on profitability.
Businesses in the sub-sector have had little option other than to scale up to mitigate the risk of regulation and competition eroding margins further.
M&A has been an obvious strategy, prompting deals like Vantiv's merger with Worldpay, Blackstone's and CVC's acquisition of Paysafe and Hellman & Friedman's takeover bid for Nets.
Our 2018 M&A forecast: Payment systems/e-money providers
A steady growth in M&A activity driven by factors such as uncertainty around the UK's regulatory equivalence post-Brexit, bullish Trump-era optimism, FX rates, and larger banks seeking to expand within newly selected core territories, while others continue with non- core disposal programmes.
Consolidation in trading platforms continues
New regulations like MiFID II, which will expand the types of trading venues that are regulated, will ensure that consolidation remains a theme in the trading platform space, as will ongoing efforts to promote co-operation and harmonisation between exchanges through joint ventures and strategic alliances. Although the proposed merger between LSE and Deutsche Börse was aborted earlier in 2017, both LSE and Deutsche Börse have subsequently reported active inorganic strategies.
Some trading platforms, however, are now curbing their global ambitions in favour of building themselves up as "home grown" champions, as evidenced by Euronext's acquisition of LSE's French clearing business.
Our 2018 M&A forecast: Stock exchanges/clearing houses
MiFID II expanding the types of regulated trading venues will result in an uptick in market consolidation.
Feeling cost pressures, financial benchmarks take cautious approach
Operating costs for the producers of financial benchmarks have increased substantially post-financial crisis, as new regulation bites and the risk of tougher enforcement action from EU and non-EU regulators intensifies. Regulators now expect benchmark administrators to police their data submitters and only a few have the infrastructure to fulfill this role.
Administration of financial benchmarks has consolidated in the hands of a few institutions, as the new EU Benchmark Regulation nears its effective date.
Our 2018 M&A forecast: Financial benchmarks
A lull in M&A as many benchmark administrators concentrate efforts on EU Benchmark Regulation compliance.
Custodians with stronger balance sheets seek consolidation
Global custodians like BNY Mellon, State Street and J.P. Morgan continue to dominate, but there are signs of entrants like BNP Paribas making inroads.
Custodians with stronger balance sheets, such as Bank of N.T. Butterfield and Northern Trust, continue to grow inorganically.
Our 2018 M&A forecast: Custodians
Some consolidation M&A as Central Securities Depositories (CSDs) continue to encroach on custodians.
Key deals and situations
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