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Greenwich: LIBOR replacements, data applications among market structure forecasts for 2019

Shifts in derivatives and fixed-income valuation benchmarks to replace LIBOR and new sources and applications of data are among the trends in market structure Greenwich Associates is forecasting for 2019.

The replacement of the London interbank offered rate, suggested by central banks to occur in 2021, "goes beyond the $350 trillion face value of financial products currently tied to LIBOR," according to Greenwich's report, "Top 9 Market Structure Trends for 2019."

The impact of replacing LIBOR with other benchmarks, like the Federal Reserve's secured overnight financing rate, or SOFR, and the Bank of England's sterling overnight index average, or SONIA, will create "a huge operational burden for the industry that will consume legal and operations teams for months to come. In the long run, the industry will adapt and move on, but the short-term fight to change will be intense and meaningful."

Also, the importance of data in trading will be top of mind in market structure discussions, Greenwich said. "The data obsession within financial services is not overhyped — not even close," the report said. "The amount of data will only get bigger, and it is fair to say we've only scratched the surface in terms of ways in which it can be applied to making money in the markets.

Greenwich said that data producers, distributors and consumers of data will "hyper-focus on gathering more of the right data, storing it in new ways, analyzing it via machine learning and artificial intelligence, and acting upon it more systematically than ever before."

Among the other trends affecting market structure in 2019, according to the report:

• The increase in market volatility and its impact on newer regulatory regimes like the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Markets in Financial Instruments Directives following years of low volatility.

• Data's growing importance, as well as the growth in exchange-traded products, as revenue generators for exchanges.

• The increase in money manager use of direct trading streams — two-sided quotes for on-the-run, or most recently issued, U.S. Treasuries — with longer-issued U.S. Treasuries and U.S. corporate bonds, which "suits (managers') fully automated style" much more than trading via traditional requests for quotes.

• Further integration of transaction cost analysis into equity trading workflow, as the Securities and Exchange Commission both implements order-handling disclosure requirements for broker-dealers and introduces its transaction fee pilot to measure the impact of maker-taker rebates on trade execution.

• The uncertainty of Brexit's impact on global markets, whether or not a deal is approved for the U.K.'s exit from the European Union.