In 2025, investment banks and capital markets firms face a particularly demanding set of strategic decisions, operational challenges and resource intensive supervisory and regulatory implementation programmes.

The strategic decisions flow from the Capital Requirements Directive 6’s (CRD6) restrictions on third country branches, and the ratcheting up of expectations on booking models by the Prudential Regulation Authority (PRA) and European Central Bank (ECB). The move to T+1 settlement in the UK and the EU will require operational heavy-lifting, while supervisory and regulatory (remediation) programmes are omnipresent. The potential for market volatility, including from geopolitical tensions, will require vigilance. Navigating this successfully will require effective governance and board oversight, decision-making under uncertainty and rigorous planning and implementation.

Watch out for the devils in the detail
 

With significant capital markets reforms largely finalised last year (Markets in Financial Instruments Regulation (MiFIR) Refit, EMIR 3.0, Wholesale Markets Review reforms, CRD6) and further firm commitments (T+1 transition), in 2025 firms will need to focus on detailed Level 2 (L2) rules in the EU and implementation everywhere. The cumulative effect will, for some firms, challenge their existing business models and trigger a substantial transformation.

We expect the majority of L2 regulatory technical standards for CRD6 to be published in 2025. These standards will define and constrain how third country entities can provide “core banking services” to EU clients and provide more clarity in areas such as firms’ ability to rely on reverse solicitation or what constitutes an ancillary service to Market Infrastructure Directive (MIFID) business. However, the L2 measures are in our view unlikely to answer all the open questions. Firms will therefore have to make some difficult judgments and interpretations. Firms will need to broaden and deepen their impact assessments when they have the L2 details and determine whether they need to change their existing business model and European footprint.

The EU active account requirement, which comes into force in June 2025, will challenge the status quo in EU derivatives clearing. All financial and non-financial counterparties that are subject to the derivatives clearing obligation in the EU will have to invest to set-up or upgrade their existing active account to meet the operational, resiliency and reporting requirements on day one and to design a control framework to satisfy representativeness expectations whilst absorbing potentially higher clearing costs. We expect the EU’s current temporary equivalence for two UK central counterparty clearing houses (CCPs), which expires in June 2025 to be extended until there is a notable shift of strategically important CCPs.

Clearing is also in focus in the US where the deadline for clearing cash and repo United States Treasury (UST) is looming but many firms are yet to make critical business decisions around their clearing strategy.¹ The clearing obligation will capture all members of the US Fixed Income Clearing Corporation (FICC), including outside the US. These firms need to evaluate their current FICC memberships, current and target operating models and client relationships to decide if any restructuring or transfer of business activity is needed and, ultimately, whether the firm is willing and able to offer clearing services to clients. Firms must then ensure that they are operationally ready to clear all current and potential future in-scope trades, which may require a significant re-engineering of the existing infrastructure.

With the debate around Capital Markets Union – part of the broader Savings and Investments Union – reignited in the EU some further policy movement may occur in securitisation regulation, post-trade infrastructure efficiency and the regulatory and supervisory ecosystem. However, we do not envisage concrete impacts during 2025.

Prepare for T+1 transition
 

Regulators across the UK and the EU have now firmly endorsed settlement transition to T+1. The UK has committed to the transition by the end of 2027 and the EU is proposing a more precise date of 11 October 2027,³ which should allow for pan-European alignment with the UK and Switzerland. Successful transition within this timeline will require the majority of budgeting, planning, program set-up and gap analysis to happen in 2025 with implementation in 2026 and testing in 2027.

Figure 1: proposed timeline for T+1 transition in the EU

Source: European Securities and Markets Authority (ESMA)⁴

T+1 transition is a massive, multi-year effort. It will require industry participants to assess and address changes across front, middle and back-office functions and systems, revise agreements with counterparties, clearing houses and central securities depositories (CSDs), undertake significant process re-engineering exercises, re-design data and systems architectures, and ensure clients are engaged early enough to understand the changes required. Developing an effective governance structure to oversee the transition at the outset, conducting an impact analysis, agreeing budgets and allocating funding early will make for a smoother and more timely transition.

Firms that transitioned successfully to T+1 settlement in the US in May 2024 will still need to navigate the market infrastructure complexities and fragmentation in the EU, the challenges of illiquid currencies and EU and UK interconnectedness, as well as potentially higher failed settlement penalties.

Given a longer transition timeline compared to the US, firms in Europe have an opportunity to incorporate lessons learned from the US and approach the transition strategically to reduce their reliance on manual resourcing and tactical workarounds. A strategic approach will help firms to integrate the transition into other ongoing regulatory change programmes and identify adjacencies that may need re-calibrating, such as operational resilience impact tolerances or their risk appetite on critical third parties.

The T+1 transition and other post-trade reforms will require firms to improve the accuracy of their data that feeds into settlement systems, transaction reporting and, in future, consolidated tapes in the UK and EU and the European Single Access Point mechanism. Supervisors will continue to put pressure on firms to improve the availability and accuracy of data. We expect supervisors to increase their supervision of the quality of all reported data and consider deficiencies in transaction reporting holistically, expecting firms to extrapolate remediation across all transaction reporting requirements.

The quality of data and speed of data provision are also becoming more important for functioning of future consolidated tapes. In order to allow the consolidated tapes provider to comply with the requirement to disseminate data “as close to real time as technically possible”, supervisors are likely to require much faster transmission of sufficiently accurate data. Firms will have to step up their data quality controls and potentially leverage newer technology, necessitating further investment into post-trade processes.

Keep an eye on risk management
 

Firms with operations in both the UK and EU, particularly where their EU operations are supervised by the ECB, will have to meet increasing supervisory expectations on booking models and related controls. Simply maintaining the status quo is not sufficient. Whilst optimising their European footprint, firms need to keep a close eye on their risk management practices in financial and non-financial risk, ensuring that no change diminishes the effectiveness of their existing risk management arrangements.

Supervisors in the UK and the EU will continue pushing firms to improve their understanding of market risks and counterparty risk exposures. To be able to identify and aggregate risk exposures and assess properly the concentration risk firms have to overcome difficulties of often fragmented systems in different business lines and legal entities. Once they have identified exposures comprehensively, firms need to establish and document an effective control and risk appetite framework specifically tailored for instances of more complex non-linear risks and fragmented risk management (e.g. split desks).

In designing an effective control frameworks supervisors expect firms to focus on preventative and automated trading controls, booking model controls, management information (MI) and oversight. As a starting point firms must remediate existing weaknesses in controls to avoid supervisory intervention and be able to make any further changes to their booking models.

In responding to increasing supervisory expectations, firms have an opportunity to identify and remediate gaps holistically front to back, starting from due diligence and onboarding processes and front office controls. Strategic solutions can be even more valuable if extrapolated to all business areas and product types.

Risk management also remains in focus with the seemingly inexorable rise of non-bank financial institutions (NBFIs). Not only are investment banks expected to step up their monitoring and management of exposures to NBFIs, but some of the large, integrated non-banking firms may experience an increase in supervisory scrutiny themselves. For now, there is no visibility of any additional tailored regulatory regime for these firms but given their importance for the functioning of the global capital markets, supervisors may start applying higher scrutiny to their risk management and controls.

Conclusion
 

Investment banks and capital markets firms face a complex set of challenges in 2025, requiring them to address some strategic questions about their European businesses and footprint, strengthen aspects of their risk management, lay the groundwork for some transformative changes in settlement and clearing and grapple with the details of L2 implementation. In order to do all this well, firms will need to plan, budget and execute effectively, recognising that the demands on their regulatory and technology change resources will be particularly heavy.

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