In capital markets, volatility and notable deals kicked off the second quarter

The beginning of the second quarter has been marked by significant volatility, driven by U.S. tariffs on trading partners and forcing broker-dealers and exchanges to adapt to increased transaction volume and revise their risk management strategies. There have also been a few key mergers and acquisitions, along with advancements in cryptocurrency regulations.

Tariffs and volatility

This spring, the United States announced higher tariffs on numerous countries, and then in some cases pulled back. But even with the reductions, tariffs remain historically high. This new trade policy has led to declines in stock prices, increases in bond yields and a weakened U.S. dollar compared to other major currencies. Broker-dealers and exchanges, as a result, have had to be dynamic in their operations.

Not only did broker-dealers experience higher-than-normal transaction loads as investors adjusted their portfolios based on the news of tariffs, but they also revised their risk management techniques to mitigate the risks associated with the rapid market movements.

Notable mergers and acquisitions

Despite the ongoing volatility and uncertainty, a few key mergers and acquisitions in the capital markets space took place as the second quarter kicked off. On April 14, a leading futures exchange and global market index provider sold its stakes in an organization that provides post-trade solutions to the global over-the-counter market across various asset classes.

This acquisition aims to improve the post-trade organization’s existing technology and foster innovative solutions in order to meet the evolving needs of the global markets.

Additionally, Ripple Labs, a blockchain digital payment company, acquired a crypto-friendly prime broker, positioning Ripple as the world’s largest nonbank prime broker as it looks to expand into new asset classes and new customer bases.

Regulatory updates

The U.S. Securities and Exchange Commission in April hosted two roundtables on regulatory clarity for digital assets: one focused on trading infrastructure and a second devoted to custody.

During the first meeting, there was support for practical regulatory adjustments, such as allowing crypto-specific custody methods and a flexible alternative trading system framework. However, participants disagreed over whether trading platforms should be allowed to handle custody, trading, execution, settlement and clearing entirely in-house.

In the second roundtable, participants discussed broadening the definition of a qualified custodian to include state-chartered trust banks and other technology providers.

Such an expansion would provide funds and venture capitalists more access to qualified custodians and thus make compliance with the SEC rules easier.

In addition, there was broad agreement that any entity meeting the expanded custody threshold should adhere to minimum information technology governance and insurance requirements for wallet security.

Also in April, the Federal Reserve rescinded four guidance statements previously issued jointly with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., removing requirements that banks seek prior approval before engaging in crypto-related activities.

But the Federal Reserve retained its January 2023 policy statement, which generally prohibits state member banks from holding crypto assets or issuing stablecoins unless they demonstrate that they meet safety and compliance standards.

This selective rollback likely reflects external pressure for the Federal Reserve to align with the softened positions of the OCC and FDIC, but it underscores the Fed’s continued skepticism regarding banks’ involvement with digital assets.

Looking ahead

By the end of April, the financial markets remained moderately volatile, forcing broker-dealers and exchanges to navigate the fluctuating conditions. We will continue to watch how key markets, broker-dealers and exchanges adapt as tariffs shift and other news shapes the sector.

Chris Forst, a manager on RSM’s blockchain and digital assets team, contributed to this article.