MAIN TRENDS IN THE DEVELOPMENT OF THE SECTOR

INDUSTRY OVERVIEW

Exchanges are organized platforms for trading financial instruments, including securities, currencies, commodities and derivatives. The bulk of the revenue of exchanges, as a rule, is made up of commissions charged from issuers for listing securities and from financial intermediaries directly involved in trading financial instruments, as well as fees for the sale of exchange information, 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.

Oversight of exchange activities is usually carried out by the government body responsible for regulating the financial sector of the economy. In some cases, exchanges have quasi-government powers, acting through self-regulatory organizations (SROs).

Global trends

In the reporting year the financial market was relatively resilient to geopolitical factors. However, it affected by systemic risks, mainly related to uncertainty in commodity markets and inflation expectations. Amid increased volatility, stock exchange infrastructure became increasingly attractive as a more stable and reliable one.

Previous years’ trends survived, including an influx of retail investors into the stock market, ESG developments and a growing interest in digital financial assets.

Amid growing retail investor activity in the stock market, it remains essential for regulators and stock exchanges to promote financial literacy, particularly in the context of market turbulence, and to take measures to protect retail investors. In the US, for example, the regulator works towards the equity market reform efforts to create a better environment for retail investors. These include setting government standards for the best execution of bids in place of current standards at the self-regulatory organisation level.

More and more investors are considering the environmental and social impact of a company when deciding whether to invest in it. ESG trends are setting a development vector for global stock exchanges not only from the perspective of an individual issuer, but also as a key financial market institution responsible for creating the necessary infrastructure to meet new sustainability interests and requirements. The year 2022 saw continued increase in the number of ESG instruments on exchanges, as well as the implementation of exchange projects aimed at intensifying sustainability processes, including:

• achieving carbon neutrality (LME, LSE, Nasdaq, SIX);
• launching ESG bonds (SGX, VSE), ESG indices (Euronext/Oslo Børs, Nasdaq, SZSE, TMX), ESG derivatives (CME, ICE), ESG-ETF (HKEx);
• trading in CO2 emission allowances (EEX), carbon offsets (Climate Impact X, Iberclear) and guarantees of origin (EPEX SPOT);
• creation of new venues and platforms (Deutsche Börse, JPX);
• inorganic growth towards ESG (Euroclear, HKEx, ICE, Nasdaq).

In parallel, traditional approaches to ESG continue to be redefined, particularly because of the so-called greenwashing problem – the misrepresentation by companies of their green credentials (environmental, climate and own efforts data). Some surveys found that investors invested into funds and companies declared to be ESG compliant, although in fact they were not. Fighting greenwashing practices remains the top priority for regulators. Proposals call for both improvements in the rules for ESG disclosures to investors by companies and funds, and more regulation of the green bond market.

The cryptocurrency market suffered several shocks in 2022, leaving market participants questioning the prospect of digital currencies as an asset in general. In the reporting year Bitcoin’s price dropped almost three times to its lowest since 2020, with the market’s capitalisation shrinking by USD 2 trillion. The cryptocurrency market crash proved that cryptocurrencies do not hedge against inflation, but rather follow the general trend – the expected slowdown, particularly in the wake of rising interest rates. On top of that, the market was rocked by the collapse of TerraLuna in May, which cost investors USD 60 billion according to analysts estimates, and the collapse of FTX cryptocurrency exchange in November, which caused clients to urgently withdraw several billion dollars from cryptocurrency exchanges. The 2022 events are expected to expedite regulators’ efforts towards tougher rules for the crypto market.

The largest classic exchange providers continued with digital asset projects. In particular, Clearstream of Deutsche Börse Group went live with first digital bond issuance pursuant to the German Electronic Securities Act (Gesetz über elektronische Wertpapiere), and HKEx launched Asia’s first crypto asset ETFs – Bitcoin Futures ETF and Ether Futures ETF.

Cloud technologies are becoming more and more central in the strategic projects of the largest stock exchanges. Nasdaq completed migration of the first U.S. options market – MRX – to AWS. The new cloud-enabled market infrastructure delivered a 10% performance improvement. LSE and Microsoft announced a ten-year strategic partnership to leverage Microsoft Azure cloud technology and AI to deliver better performance and next-generation data and analytics services. Microsoft gained up to a 4% stake in the LSE in return. Cloud-based technologies support new exchange products and market data dissemination projects as well. AI-powered clearing and settlement systems started to emerge (Vermiculus, Clearstream). Cloud alliances between big tech businesses and exchanges appear mutually beneficial from a short-term perspective, although the current cloud service providers may later turn from partners to competitors.

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 build cyber risk management.

MOSCOW EXCHANGE IN THE GLOBAL CONTEXT