S&P Global Ratings expects the outlooks for the global economy and the FMI sector to remain generally favorable in 2022. The buoyant market activity and strong asset prices that we saw in the sector in 2021 could continue, although IPO activity could cool off and market volatility spikes and asset-price falls are significant risks. We therefore expect cyclical trends to favor volume-based revenues, with flat or slightly lower cyclical revenues overall for most FMIs. This means that their organic and acquisitive structural growth initiatives will remain critical for earnings growth in 2022.

Sector leverage continues to creep up in support of market consolidation and acquisitive growth in data and analytics. However, the sector continues to generate strong cash flows and has good support from investors and generally low leverage. Combined with resilient earnings and high margins, this supports our typically high ratings in the sector (see chart 1). The continued predominance of stable outlooks reflects our view that the sector's credit quality will remain robust. Idiosyncratic events are more likely to drive rating actions than adverse sector-wide or geopolitical developments.

Chart 1

Supportive Economic And Market Conditions Could Sustain The Positive Trends Of 2021

After an unprecedented global recession and extraordinary market gyrations in 2020, 2021 was a year of economic recovery and buoyant market conditions across most asset classes. An improved outlook and copious liquidity supported asset prices and investor demand, spurring highs in equity and debt capital market activity not seen for many years. Daily trading volumes were generally down on 2020 levels as volatility reduced but remained robust, not least in the U.S., where the retail trading boom continued. The weak spot was in interest income, notably that accrued on clearing and settlement balances, as the quantum of interest-bearing assets typically fell and the full-year effect of 2020's rate cuts came through. Payment infrastructure providers saw a cyclical rebound in spending and continued to benefit from the multi-year structural growth in electronic, particularly online, payments. As a result of all this, we expect most FMIs' 2021 earnings to be at least in line with, or often even stronger than in 2020.

Our economists' macroeconomic base case for 2022 is one of sustained global recovery amid a very gradual tightening in interest rates and money supply (see tables 1 and 2). Nevertheless, we remain mindful that whereas 2021 was the year of the big rebound, with COVID-19 vaccines fueling a robust economic recovery and steadily improving credit markets, the recent emergence of the omicron variant is a stark reminder that we have not yet beaten the virus. Setbacks in the global economic recovery, persistently high inflation, and ongoing political tensions are just some of the factors that could yet lead the market into further bouts of high volatility and moderate asset-price falls in 2022, exacerbated by high global debt. These are some of the many topics covered in our "Global Credit Outlook: Aftershocks, Future Shocks, And Transitions," published Dec. 1, 2021.

Our FMI sector base case is that market activity will be similar to that in 2021, but that asset prices may have largely peaked, and some could see a modest decline. While equity issuance could cool off, we expect that cyclical trends will favor volume-based revenues, and that interest rate derivatives activity could pick up as expectations of tightening monetary policy develop worldwide. Depending on their asset class mix, this points to flat to slightly lower cyclical revenues for most FMIs, meaning that their organic and acquisitive structural growth initiatives will remain critical for earnings growth in 2022.

Table 1

Table 2

Mergers And Acquisitions (M&A) Will Remain Predominant As FMIs Continue Their Push For Consolidation And Data And Analytics Assets

After a spree of announcements in 2020, 2021 was predominantly a year of deal closures and bolt-on acquisitions. As we move into 2022, London Stock Exchange Group PLC (LSEG; acquiring Refinitiv), Euronext N.V. (acquiring Borsa Italiana), and SIX Group AG (acquiring BME) remain focused on delivering the operational integrations and investments that will allow them to realize promised cost and revenue synergies. LSEG, Euronext, Nasdaq, Inc., and Intercontinental Exchange, Inc. (ICE) are also in deleveraging mode as they seek to reduce net debt through 2022.

However, the sector remains hugely acquisitive, and fulsome equity and debt-financing capacity is likely to remain available to leading FMIs. While not yet part of our financial base case for any FMI, we anticipate further transactions in 2022 as players continue to accelerate growth, not least in data and analytics and technology. These business lines continue to offer some of the strongest structural growth prospects and an attractive base of annuity-like revenues (see ""Strategic Shifts Are Changing Both The FMI Industry And The Way We Analyze It,"," published Nov. 29, 2021.) For example, LSEG recently returned to the deal trail with the announced bolt-on acquisition of Quantile, which provides portfolio optimization services.

Digital Assets And Distributed Ledger Technology (DLT) Will Strengthen Their Foothold

Globally, and with few exceptions, FMI regulators find themselves in catch-up mode when it comes to the oversight and regulation of crypto assets. With the crypto genie now well and truly out of the bottle, and with increasing institutional demand for these assets, in 2022 regulators will need to determine conclusively how to mitigate concerns about financial stability and risks to consumers. This process is already well under way in the EU through the markets in crypto assets (MiCA) legislative proposal, and U.S. regulation will also undoubtedly evolve. While tightening regulation could disrupt aspects of crypto firms' businesses or operating models, it would also put the industry on a stronger legal footing and boost its expansion. We anticipate that this will favor firms like Coinbase Global Inc. that have diversified their client bases, offer a range of related services, from trading to custody and beyond, and have already anticipated regulatory oversight (see "Coinbase Global Inc.," published Dec. 22, 2021). Others set to benefit from tightening regulation in the crypto space are ICE, through its majority-owned subsidiary Bakkt, and PayPal Holdings Inc., with its recent acquisition of cryptocurrency startup Curv and its retail crypto trading offering.

Beyond the crypto specialists, we expect the incumbent FMIs' involvement in crypto to focus on offering linked futures and other derivatives contracts, listing crypto funds, and putting themselves forward as trusted custodians of crypto portfolios. However, whether aided by MiCA or similar regulations, we see the broader flourishing of digital assets, tokenization, and DLT-enabled infrastructure as the most relevant development for the broad FMI sector, and an essential feature of any FMI's strategic planning, even if the thinking is only exploratory at this stage.

While still nascent, SIX Group's new digital exchange and settlement infrastructure is one indication of how market infrastructure may develop (see ""SIX Group AG's Digital Bonds Break New Ground For Global Financial Market Infrastructures,"," published Nov. 18, 2021). Deutsche Börse AG's recent acquisition of a majority stake in Crypto Finance, a Swiss provider of digital asset infrastructure, and its creation of new post-trade platform D7 testify to its ambition to create a regulated and integrated ecosystem for investment, trading, and the post-trade of digital assets. Similarly, Cboe Global Markets' (Cboe's) pending acquisition of ErisX would give it a foothold in trade and post-trade digital assets.

Low latency and huge capacity are essential features of the trading environment, but are things that blockchain-enabled technology does not yet have. Thus other use cases are likely to center on the post-trade environment. ASX Ltd., operator of Australia's security exchange, was an early-adopter of DLT, and 2022 should see its blockchain-enabled replacement for its CHESS clearing and settlement system move to a full customer test environment before it goes live in 2023. In time, the result should be a more stable, resilient, and robust system that supports not only trade settlement but also efficiency in the wider investment ecosystem in Australia.

We see the emergence of the crypto asset class and related technologies primarily as an enabler and opportunity for incumbent FMIs. However, the technology is disruptive and the EU's planned pilot regime for DLT market infrastructure is evidence that policymakers are open-minded about the future shape of market infrastructure. In an era of decentralized finance, centralized institutions will need to demonstrate their value and importance to the market and be a source of financial stability.

Shifting Market Practices And Regulatory Changes Are Unlikely To Lead To Rating Actions

Regulatory tailwinds have generally supported the FMI sector's creditworthiness in recent years. However, regulation and policy remain a double-edged sword for the sector. Numerous initiatives, such as those below, remain in play, but individually are unlikely to change our view of any FMI's creditworthiness thanks to most players' good diversification.

Foreign company listings in the U.S.

The recent $40 billion Nasdaq listing of Grab Holdings Ltd. (Grab), a Singaporean fintech, is a reminder that U.S. equity markets remain by far the largest and deepest pool of capital globally and are likely to remain highly attractive to foreign companies that seek the best possible valuations. However, a series of frauds spurred toughened U.S. regulations on foreign companies, and strained U.S.-Chinese foreign relations and changing domestic policy in China have sparked a reversal in Chinese companies listing in the U.S. This was illustrated recently by the announced de-listing of Didi from the New York Stock Exchange and its plans to list instead on the Hong Kong exchange. This trend for Chinese issuers to turn to the Hong Kong market seems likely to persist in 2022. U.S. exchanges will look to increase their allure to foreign companies from other countries, but this is unlikely to bridge the gap. Still, since Chinese companies account for around 3%-4% of U.S. equity market capitalization, we see this as only a missed revenue opportunity for the U.S. exchanges, which are themselves part of diversified FMI groups.

Special purpose acquisition companies (SPACs)

The U.S. SPAC boom of 2020 carried through into a raft of deals in 2021 that, aside from Grab, ebbed in the second half of 2021. Through 2021, other global exchanges have sought to change their rules to make their markets more attractive to SPACs. In 2022, SPACs are likely to remain a key feature of IPO activity, not only in the U.S. but also globally.

The review of the second Markets in Financial Instruments Directive (MiFID II)

The EU's revision of MIFID II and the associated regulations are likely to be enacted in 2022. We anticipate that the changes will closely follow the European Commission's 2021 proposal. This would see a modest rollback of some provisions, including open access provisions for derivatives trading and clearing, and invoke a slightly tougher stance on systematic internalizers, namely, investment firms that routinely handle client orders outside regulated markets. This could marginally benefit regulated exchanges and multilateral trading facilities. That said, the EU and U.K.'s differing stances on market transparency and dark trading are notable areas of likely increasing regulatory divergence between the two markets. In time, this could fragment market liquidity in Europe.

European consolidated tape and U.S. SIP pilot

Under the EU's Capital Markets Union action plan, it will implement a single post-trade near-real-time consolidated tape for each individual asset class. In the U.S., the SEC has proposed to expand the content of low-cost consolidated market data feeds, so-called SIPs, to include data that exchanges today bundle into their costlier proprietary data products. This said, in October 2021, a U.S. court agreed to stay the implementation of the SEC's order requiring changes to the SIP governance structure. Although the decision is temporary, it might slow down--or entirely cancel out--the SEC's orders. Whether in Europe or the U.S., we see these plans as having the potential to erode exchanges' data revenues.

Payment for order flow (PFOF)

PFOF is the process by which retail brokers sell their clients' order flows to wholesale brokers. The early 2021 frenzy in the U.S. for meme stocks, which had garnered popularity through social media, has put renewed focus on the PFOF model of retail broker renumeration by liquidity providers and on whether it and the associated high volumes of off-exchange trading lead to detrimental outcomes for consumers and markets. As part of the MIFID II review, the EU has already announced plans to ban PFOF, which in any case is not common in Europe, and the SEC is considering a similar move. The impact on U.S exchanges of potentially banning PFOF is uncertain at this stage.

Retail brokers may channel retail orders directly to exchanges, improving lit exchanges' market share at the expense of dark pools. But PFOF revenues represent an important source of revenues for some retail brokers, and the loss of PFOF could force some players to reinstate transaction fees, which were cut to zero largely across the board in November 2019. This could harm retail trading volumes in general and exchanges' trading volumes. That said, the general upsurge in retail activity is unlikely to wane, and exchanges such as Cboe have launched nano derivatives contracts to meet retail investor demand.

Potential market microstructure reforms in the U.S.

Some of the reforms that the SEC's new chairman Gary Gensler envisages could benefit U.S. exchanges at the expense of wholesale market-makers and dark pools. Reducing the minimum tick size from the current one cent to half a cent, or mandating that odd-lot orders (orders of generally less than 100 shares) are included in the National Best Bid and Offer (NBBO) price, could make the NBBO more competitive and harder to beat for wholesale market-makers that buy the order flows of retail brokers and execute the majority of retail transactions in the U.S. An improvement in the price for the end customers from the NBBO price that they would obtain on exchanges could be harder to demonstrate. Consequently, wholesale market-makers may send more retail orders directly to the exchanges, as opposed to internalizing the transactions or executing them on dark pools, benefitting exchanges' trading volumes.

Transition away from LIBOR

Sterling and yen LIBOR have already lost recognition as interest rate benchmarks, and U.S. dollar LIBOR will end in June 2023. This year will reveal whether the secured overnight financing rate (SOFR) will achieve as widespread adoption as the preeminent U.S. dollar LIBOR alternative. While this transition opens the door to new entrants to pull interest rate futures liquidity away from the incumbent exchanges, notably ICE and CME Group Inc., we expect that they will retain market dominance.

Uncleared margin rules phase 6

The final wave of rules will come into force in September 2022 and require firms to start to post initial margins where they trade more than €8 billion in notional uncleared derivatives per year. This marks the end of a six-year tailwind that has incentivized firms to put more derivatives trades through clearing, of which LCH Ltd. has been a key beneficiary, and to switch from over-the-counter (OTC) to listed products. A lot of market activity will nevertheless remain OTC, providing a continued growth opportunity for technology solutions like LCH's SwapAgent product.

Euro swaps and futures clearing

In late 2021, the EU agreed to extend temporary permission for EU firms to clear with U.K. clearinghouses (CCPs) beyond June 2022, but the underlying EU regulatory and political discomfort about the reliance on U.K. CCPs for rates clearing has not gone away. Ahead of the soon-to-be-revised deadline, likely in 2023, the EU's eventual policy decision is likely to be informed by two potential developments in 2022. First, whether the European Securities and Markets Authority wins greater oversight of U.K. CCPs, and second, whether EU firms bow to soft regulatory pressure to meaningfully reduce their reliance on U.K. CCPs. We see the eventual outcome as important for LCH in particular, but note the breadth and depth of its global multicurrency SwapClear business and the growth in its foreign-exchange clearing proposition. These could support its business volumes, even if the EU derecognizes U.K. CCPs, which remains the worst-case scenario and outside our base case.

CCP Regulators Continue To Assess Recent Market Volatility

CCP risk management has strengthened markedly in recent years, which was one reason why CCPs managed to navigate periods of acute global market volatility in 2020, due to the pandemic, and in 2021, due to the meme stock frenzy in the U.S. However, margin procyclicality has been an issue, particularly outside Europe. CCP margin requirements rise when volumes rise, but some CCPs (notably National Securities Clearing Corp. and Options Clearing Corp.) tripled or quadrupled their margins in a matter of weeks. While in most circumstances they would have been able to absorb losses had one of their large clearing members defaulted during this period, the spike in margins also gave rise to significant procyclicality, which occurs when CCP margin calls withdraw liquidity from their members when liquidity is already scarce. Existing anti-procyclicality measures in European regulations were arguably successful in 2020, but in Europe, the U.S., and beyond regulators will soon announce whether they see a need to reinforce regulations in this area.

Sector Refinancing Risk Will Remain Low Even If Debt Markets Tighten

Buoyed by strong creditworthiness and supportive markets, FMI sector debt issuance was strong in 2021, albeit due principally to LSEG's refinancing of Refinitiv debt. This aside, activity was fairly muted relative to 2020. In 2022, financing conditions should remain supported by constructive economic forecasts, including global GDP growth of 4.2%; lower but continued central bank support; and the likely easing of default risk across many corporate sectors. However, as extraordinary accommodative measures recede, financing conditions are gradually tightening. It remains possible though that financing conditions could tighten sharply in 2022, for example, in the event of a central bank policy error, geopolitical risks, or reduced liquidity.

The FMI sector has around $8 billion of debt due in 2022. There is then a lull in 2023 and 2024 as issuers have taken advantage of favorable conditions to term out their debt structures (see table 2). Even if debt markets tighten dramatically, we see 2022 refinancings as highly manageable. FMIs are highly rated cash flow-generative companies, and Visa Inc. aside, each of them needs to do only one benchmark issuance in the year.

Table 3

As in other corporate sectors, the low cost of debt continues to depress debt-servicing costs for FMIs, meaning that leverage-based metrics are likely to remain the key determinant of our view of issuers' financial risk profiles. Between them, Visa, ICE, and Mastercard Inc. account for over half of the sector's $94 billion of outstanding debt, an amount that rose from $84 billion at end-2020, due mainly to LSEG's Refinitiv acquisition (see chart 2). Sector credit metrics remain healthy, with average S&P Global Ratings-adjusted debt to EBITDA likely to be close to 1.5x at end-2021. However, leverage appetite remains highly variable in the sector, with many players eschewing material leverage and others, such as ICE, Euronext, Nasdaq, and, to a lesser extent, LSEG, willing to take on materially higher leverage to pursue substantial acquisitions.

Chart 2

Table 4

Rating Changes Will Most Likely Arise From One-Off Events

With Asigna Compensacion y Liquidacion the only FMI not having a stable outlook due to sovereign rating pressures, upgrades and downgrades are unlikely in the FMI sector in 2022. As in previous years, debt-funded M&A remains the most likely cause of idiosyncratic rating actions, although LSEG and Euronext start the year in active deleveraging mode and deep in multi-year integration projects. Nor do we rule out rating actions in response to risky operational events, where rating actions would hinge on evidence of franchise damage or a material change in our view of an FMI's risk management. As such, a severe cyber attack or a series of outages would be more relevant to our ratings than the high-profile but sporadic events seen in previous years.

Looking beyond our relatively supportive base-case cyclical scenario for FMI revenues, a more negative macro scenario remains possible in which global economic growth is far slower and asset prices fall significantly and remain much lower. In the context of likely unchanged or even lower interest rates in this scenario, asset-price falls would signal an evaporation of investor confidence.

Overall, the effect on FMIs would not be severe--one reason why we see the FMI sector as having low industry risk is that sector earnings show quite high resilience even in a cyclical downturn. Sector resilience has further improved in recent years as the leading players have successfully diversified into data and analytics businesses, which generate annuity-like revenues. Nevertheless, the effect would not be felt evenly across the FMI sector. While trade volumes might briefly spike, as in March and April 2020, this environment could be distinctly unhelpful for the least diversified FMIs that continue to draw most of their income from securities listing, trading, and settlement activity and, because of their structure, have limited flexibility to cut costs.

We see very limited upside for FMI sector ratings for two reasons. If volumes and revenues outperform for cyclical reasons, it's likely that FMIs would reward shareholders with higher distributions, rather than reducing their leverage. Second, growth is likely to reinforce, rather than materially improve, our view of FMIs' already favorable business risk profiles.

Table 5

Related Research

• Global Credit Outlook 2022: Aftershocks, Future Shocks, And Transitions, Dec. 1, 2022
• Strategic Shifts Are Changing Both The FMI Industry And The Way We Analyze It, Nov. 29, 2021
• ESG Industry Report Card: Financial Market Infrastructure Companies, Dec. 3, 2020

Annex

Table 6

Table 7

Table 8

Table 9