MAIN TRENDS IN THE DEVELOPMENT OF THE SECTOR

INDUSTRY OVERVIEW

Exchanges are organized platforms for trading financial instruments, including securities, currencies, commodities and derivatives. Exchanges typically generate core revenue by collecting fees from issuers for listing securities and from financial intermediaries directly involved in trading financial instruments, and the sale of market data, technological solutions and services.

In many countries, depository, clearing and settlement services are provided by certain independent organizations, but recently there has been a growing trend towards unification of the largest exchange operators with vertical integration of most or all of these activities within a single group of companies.

Vertically integrated exchanges receive additional income for settlement, clearing and depository services, as well as net interest income from the placement of client funds on the balance sheet of the exchange.

The exchange industry is generally supervised by a government body responsible for the regulation of the financial sector of the economy. In some cases, exchanges have quasi-government powers, acting through self-regulatory organizations (SROs).

Global trends

In 2023, previous years’ trends in the financial market survived, including an influx of retail investors into the stock market and heightened financial volatility, ESG developments and a growing interest in tech innovations.

Amid growing retail investor activity in the stock market, it remains essential for regulators and stock exchanges to promote financial and investment literacy, and to take measures to protect retail investors. In 2023, the United States regulator was in discussions with market participants about equity market reform efforts it developed to provide a better environment for retail investors. ESMA issued guidelines for brokers requiring them to make retail clients aware of securities lending risks. LSE’s Turquoise Europe platform implemented price improvement auctions for retail bids within the periodic auctions. The Stock Exchange of Thailand (SET) launched a campaign to promote financial planning for retirement.

The year 2023 saw continued increase in the number of ESG instruments and services on stock exchanges, as well as the implementation of stock exchange projects aimed at intensifying sustainability processes, including:

• Achieving carbon neutrality (HKEx and SET);
• Launch of ESG indices: Euronext (EU) - index on shares of companies committed to limiting the average global temperature rise to 1.5°C; Shenzhen SE (China) - indices in the major areas, namely advanced manufacturing (energy-saving, biotechnology, advanced information technology, and other equipment) and the green economy; BME (Spain) - a family of ESG indices - and the launch of ESG derivatives (ICE’s carbon-neutral electricity futures).
• Trading in carbon credits and certificates: Climate Impact X exchange (Singapore), Bursa Carbon Exchange (Malaysia), IDX (Indonesia), CCTPA (Vietnam), TSE (Japan), JSE Ventures (South African Republic), ACX (Abu Dhabi).
• Creation of new services. Nasdaq (US) launched Nasdaq Metrio, a cloud-based (SaaS) platform for companies to collect, analyse and report relevant data; Nasdaq eVestment ESG Analytics, a tool that allows institutional investors to assess the impact of ESG on their portfolio performance; and Sustainable Lens, a cloud-based (SaaS) and AI-powered platform for analysing and interpreting ESG data from multiple sources. Further, Nasdaq brought to market technology allowing interested users to issue digital assets for carbon units, provide safekeeping, and settle transactions involving carbon units. JPX (Japan) launched JPX ESG Link, a portal featuring links to ESG-related information disclosed by companies listed on the Tokyo Stock Exchange (TSE).

However, the ESG investment market faces less inflows into ESG-funds and a lower volume of assets under management. The primary reasons include difficulty in quantifying the results for each pillar (E, S, G) and especially in integrating the assessments for the three pillars into one indicator, along with greenwashing problem – the misrepresentation by companies of their green credentials (environmental, climate and own efforts data). Investment managers’ greenwashing concerns have risen by 20% over the past three years.

Fighting greenwashing practices remains the key task for regulators. The European Parliament adopted the green bond regulation setting standards for such bonds to be issued. The US’s SEC adopted a rule requiring investment funds to hold assets appropriate to their name in an amount not less than 80% of the portfolio value. The European Union is also looking into requiring that companies declaring, for example, the greenness of their products, confirm it with the scientific research findings.

Measures to counter greenwashing have also been developed at other levels. The International Organisation of Securities Commissions (IOSCO) issued international standards for sustainability reporting for business. The member stock exchanges of the World Federation of Exchanges (WFE) agreed on principles for designating a stock as green: at least 50 per cent of the issuer’s revenues must come from activities that contribute to the green economy; the issuer must adhere to a transparent taxonomy; the issuer must comply with the listing’s corporate governance requirements; the issuer must undergo assessment by a stock exchange-appointed observer; and the issuer must make appropriate disclosures. Further, the WFE released guidelines for the application of these principles (WFE Green Equity Principles). Only the LSE and Nasdaq have so far green-labelled shares for ESG compliance, but other stock exchanges intend to follow their lead as investor and regulatory demand rises and the IPO market recovers.

Many world stock exchanges have intensified their efforts to attract new issuers to the market. Euronext offers tech companies six-month educational programmes to help them prepare for IPOs, and Dubai Financial Market (Dubai) launched a similar programme. HKEx launched a digital platform for IPOs, bringing the settlement time for deals down from five days to two days, and allowed the company’s existing shareholders and key investors in the company to purchase its shares during the IPO. Beyond listing and IPO services, stock exchanges are giving more thought to services for private capital markets and non-public companies (TISE (Guernsey), LSE).

In 2023, the cryptocurrency market received a notable influx of institutional investors. However, further expansion is hampered by regulation and missing tools that could link traditional finance to the digital asset ecosystem. Ultimately all assets are expected to become digital, which will blur the boundary between traditional and digital assets. At that, institutional investors’ turnovers in crypto-assets on OTC markets are nearly 20 times higher than their stock exchange turnovers. The European Union’s Markets in Crypto Assets Regulation (MiCA) of 2023 led to a three-fold increase in the turnover of the crypto market in Europe.

The capital market infrastructure steps into another round of tech modernisation, which should be approached by institutions as a continuous process rather than as a one-time major change. The ever-changing world of technology demands constant adaptation. However, the goal should not be technology, but rather using it to fuel business growth. Generative AI appears to be one such technology, with the market growing by over 30% per annum, according to various estimates. It is projected to surpass USD 50 billion by 2028. Capital markets can use generative AI in internal processes (software code generation, content creation, legal document evaluation, etc.), marketing (customer relations), key services (identification of unfair practices, risk management), among participants (generation of trading signals and investment solutions, new product creation), and in infrastructure (innovation matching [ICE, Nasdaq]).

Stock exchanges and capital market infrastructure providers keep implementing cloud technologies. Key services, such as trading (Aquis, Nasdaq) and post-trading (B3, Nodal Clear) migrate to the cloud, along with the addition of other services, such as marketplace for non-public companies (TISE), platform providing startups access to testing business ideas (NYSE LaunchPad), access to data on OTC derivatives trades (DTCC Direct Connect), personalisation of client work and marketing content, customer retention.

Stock exchanges continue to turn the spotlight on cybersecurity. Regulators and market participants keep identifying vulnerabilities and potential threats as new technologies emerge and improving guidance on how to design cyber risk management.

MOSCOW EXCHANGE IN THE GLOBAL CONTEXT

Sources: Moscow Exchange, WFE, Koyfin.