Although S&P Global Ratings expects the global economic outlook to improve in 2018, we see this as only marginal cyclical support for global financial market infrastructure (FMI) sector ratings. This is because volatility is likely to remain near rock-bottom, leading to continued depressed trade volumes in many asset classes, notably equities and rates in several countries. Nevertheless, the continued dominance of stable outlooks on our ratings reflects our view that sector credit quality will remain generally robust.

FMIs have proven adept at maintaining solid profitability, despite a sustained period of lower activity and generally depressed interest margins for clearinghouses (CCPs) and international central securities depositories (ICSDs). High EBITDA margins and relatively high barriers to entry, regulatory change that has offered more tailwinds than headwinds, and cost efficiency initiatives have supported this stability. Furthermore, this already quite lightly-leveraged sector starts 2018 with a lower level of leverage than at any point in the past five years.

We think some key themes will play out in the sector in 2018. The past decade has been marked by a raft of acquisitions amid players' consolidation and revenue extension strategies, a trend we foresee continuing. While there are no mega-deals on the horizon, we anticipate a continued steady flow of bolt-on deals as FMIs use their earnings power, financial flexibility, and still attractive debt-financing environment to find secular growth opportunities. Regulatory change continues to support FMIs that operate trading venues and clearing services for over-the-counter (OTC) asset classes. While we generally believe that market shares of incumbent FMIs will remain robust, in some asset classes--such as U.S. equity options and OTC derivatives clearing--competition will likely remain fierce. And while the macroeconomic picture is generally lukewarm, we see the strongest growth opportunities for FMIs in Latin America and Asia as these markets continue to develop and mature.

Looking long-term, we continue to monitor whether the steady accumulation of deal-making is changing competitive dynamics in the industry--possibly improving the position of some fast-growing players, or weakening the position of others. But looking short-term, we expect some idiosyncratic stories to advance in 2018. We finished 2017 with a larger than usual number of companies on non-stable outlooks (see chart 1). Our negative outlooks on our ratings on SIX Group AG and Asigna Compensacion y Liquidacion (Asigna) reflect our view that the companies face competitive threats in some of their business lines, and would need to improve their profitability and demonstrate growth to maintain their current ratings. By contrast, Visa Inc. and Mastercard Inc. finished 2017 on positive outlooks as we see diminishing litigation risks and good growth prospects coming from a continued trend toward non-cash payments. In addition, while we do not currently see it as a pronounced rating factor, we anticipate a conclusion to the ongoing Brexit-related issue of a possible mandated location policy for euro-denominated derivatives clearing to affect some rated FMIs. Although it is not our base case expectation, a mandated location policy for euro interest rate swaps could be a boon for Deutsche Boerse AG (DBAG) and a setback for U.K.-based LCH Ltd.

These factors aside, we see limited upside for ratings in the sector. If volumes and revenues outperform for cyclical reasons, it's likely that FMIs would reward shareholders with heightened distributions, rather than further reduce their leverage. Downside risks could come from companies that allow leverage to move beyond our anticipated thresholds, for example in the pursuit of large acquisitions. While a number of market commentators see many asset classes as overvalued, we do not consider that a moderate readjustment, even if sudden, would necessarily undermine FMI profitability, particularly if it led to a sustained spike in trading activity.

Chart 1

Brighter Prospects For Global Economies In 2018

Global credit conditions are largely favorable going into 2018, supported by positive economic growth in all regions and continuing stimulative monetary policy. While volatility could yet pick up, for example if political and geopolitical risks rise, we currently expect that trading volumes are likely to be relatively soft and similar to 2017 levels, except for in Latin America. In our view, any increase in U.S. interest rates should benefit exchanges that list futures and options on benchmark interest rates. This is because traders aim to profit from price volatility, longer-term fixed-income investors try to hedge their bond portfolios, and CCPs and CSDs generate interest income from sizable U.S. dollar cash pools that they hold for clearing and settlement operations.

Share prices of some listed FMIs have risen sharply in the last year (examples include CBOE Holdings Inc., Australian Securities Exchange Ltd. [ASX], London Stock Exchange Group PLC (LSEG), and DBAG; see charts 2 to 5). This not only reflects exchanges' individual idiosyncratic factors, but also likely general market sentiment toward improving earnings (and stock prices) among their listed companies. Exchange stocks tend to be lifted when sentiment is up.

Chart 2

Chart 3

Chart 4

Chart 5

Broadly favorable credit conditions prevail in North America, where we forecast the economy to expand by 2.0%-2.5% annually in 2018-2019. We see the lowering of the corporate tax rate in the U.S. to 21% from 35% as supportive for FMIs' earnings. Credit spreads for North American borrowers remain near the lowest and least-volatile levels since the Great Recession. It remains to be seen if these levels are a prelude to a period of rising borrowing costs this year on the heels of the Federal Reserve's monetary-policy course. We forecast the Fed to raise interest rates three times (by 25 basis points each time) in 2018. Its Dec. 13 raising of short-term interest rates to the 1.25%-1.50% target range was the third time it had done so in 2017.

In our view, volatility and trading volumes in European and U.S. markets are at a cyclical low (see chart 6). We expect the U.S. market to become a bit more volatile in 2018, as the Fed increases its base rate and gradually reduces its balance sheet. The European economy (excluding the U.K.) appears in better shape than it has been for many years. With eurozone headline inflation remaining well below the European Central Bank's (ECB) 2% target and wage pressures subdued, we do not anticipate any change in the official 0% main refinancing rate before the end of 2018 at least. The ECB's monetary stimulus also remains in place, though the central bank did recently recalibrate its QE program as it intends to reduce the monthly pace of purchases to €30 billion from €60 billion as of January 2018.

Chart 6

Credit conditions in Asia-Pacific are also poised to further improve, in our view. Despite some tightening in China, steady macroeconomic conditions and abundant liquidity are lifting credit trends. That said, tail risks--high-impact but low-probability risks--are increasing. We view asset repricing, China's debt overhang, conflict, political and trade risks, and a liquidity pullback--in no particular order--as Asia-Pacific's top risks. At the same time, a significant correction in the pricing of bonds and equities would likely support FMIs' trading revenues. Amid the gradual opening of the Chinese capital markets, the Hong Kong Stock Exchange and the Shenzhen and Shanghai stock exchanges would benefit most from more foreign direct investment in Chinese stocks. Furthermore, last year's MSCI's decision to include mainland Chinese equities in its global benchmark equity index would presumably allow indirect investment through exchange-traded funds (ETFs), representing an opportunity for major global FMIs to facilitate capital flows to China.

In Latin America, credit conditions should remain favorable in 2018 thanks to an improvement in the region's largest economies, as well as external factors (continued global GDP growth, especially in developed economies and China; and only gradual monetary tightening in the U.S., Europe, and Japan). These factors should result in stable or improving commodity prices, given that global demand remains healthy. However, uncertainty looms as a heavy cycle of elections approaches: upcoming general elections in Colombia (May 2018), Mexico (July 2018), and Brazil (October 2018). In our view, market volatility will increase in 2018 due to elections and the remaining lack of clarity related to U.S. policies and the North American Free Trade Agreement (NAFTA) renegotiations.

Why Low Market Volatility Is Here To Stay

We believe there are structural and cyclical reasons for currently low cash equity and derivatives trading volumes (see chart 8). An aging population has led to a shift from riskier equity investments to fixed income and more diversified investments, such as absolute return funds. Currently accommodative monetary policies in the EU and U.S. have resulted in low market volatility and fewer opportunities for investors to outperform the market by selecting individual stocks. This could change a bit due to the unwinding of quantitative easing (QE) and further interest rate increases in the U.S., and speculation on the timing of interest rate increases in other markets. At the same time, a fundamental shift from active to more cost-efficient passive investment management has resulted in stagnant trading volumes in individual stocks (see chart 7).

Additionally, banks that were previously active market-makers and liquidity providers are withdrawing from proprietary trading due to decreased risk appetites post-financial crisis and higher regulatory capital requirements. We believe these developments are structural and will continue to constrain FMI companies' trading revenues.

Chart 7

Chart 8

Regulation Supports Growth, But May Expose The Sector To More Competition

Global regulators are incentivizing or mandating the clearing of plain vanilla derivatives. For example, in 2016, regulatory changes in Mexico encouraged pension funds and banks to clear their OTC derivative trades with local or global CCPs. Consequently, Mexican financial institutions started moving their OTC derivatives into the Mexican clearinghouse operator, Asigna. Although Asigna has "national champion" status in the Mexican derivatives market, following the geographical expansion of international CCPs, competition from foreign players is increasing, particularly from CME Group Inc. We think CME's expansion will challenge the stability of Asigna's business volumes and revenues in 2018-2019. Elsewhere, we see this move to central clearing supporting the earnings of a handful of incumbent CCP operators, such as U.K.-based LCH, that are well-equipped to risk manage these portfolios and attract significant volume.

The EU's Markets in Financial Instruments Directive (MiFID II) and its accompanying regulation, MiFIR, implemented on Jan. 3, 2018, places more focus on structured marketplaces and restricts trading in dark pools (private exchanges or forums for trading securities), potentially boosting trading volumes for FMIs (see "MiFID II: Disruptive Regulatory Change For European Financial Markets, Winners And Losers To Emerge Over Time," published on Jan. 2, 2018). Best-execution requirements also incentivize broker-dealers to channel trades to organized marketplaces. However, incumbent exchanges would need to compete for these volumes with organized trading facilities (OTFs), multilateral trading facilities (MTFs), and systematic internalizers (SIs) that banks and securities firms are increasingly registering. Stringent MiFID II trade transparency requirements may also shift some fixed income trading to non-EEA countries. However, in what could prove to be a negative for some FMIs, Articles 35 and 36 of the associated regulation introduce provisions on nondiscriminatory access to trading venues and CCPs. This could, for example allow trading firms to select a CCP, instead of being restricted to the trading venue's preferred CCP, or to open a futures trade at one venue and close it at another. The incumbents remain protected until at least 2020 thanks to transitional provisions. After that, these rules may lead to more competition and some margin compression, but we currently see the effects of the rules as unlikely to undermine the market dominance of Intercontinental Exchange, Inc. (ICE) and DBAG as operators of the largest European derivatives exchanges and associated CCPs.

Continued pressure from clearing members is also putting FMIs' margins at risk. For example, in August 2017 Euronext and Banque Centrale de Compensation S.A.(LCH SA) announced an agreement to renew their derivatives clearing contract, stipulating reduced fees for clearing members of 5% to 15% with effect from January 2019. As a result of fee income pressure an increasing number of FMIs have resorted to cost optimization programs to maintain their profitability. We think FMI management teams will continue to focus on cost-cutting initiatives throughout 2018.

The established U.S. market is not immune to increased competition either. 2017 saw Bats Global Markets Inc. (Bats) pursue aggressive pricing in single stock equity options and grabbing market share from the New York Stock Exchange (NYSE). In late June 2017 BlackRock Inc. transferred 50 of its ETFs to Bats and Nasdaq Inc. from NYSE. New entrants are also trying to disrupt the status quo. For example, having received a full exchange license in 2016, Investors Exchanges LLC (IEX) managed to grab a 2% market share in U.S. cash equities. In October 2017, IEX received regulatory approval from the SEC to list companies. It plans to begin listings in early 2018 for free for the first five years, putting pressure on dominating listing venues NYSE and Nasdaq.

Globalization is spurring competition in the FMI industry across the globe--for example, ASX launched a new 24-hour derivatives trading platform in March 2017 to increase global overnight trade. In addition, it continues to focus on listing sub-$1 billion foreign technology companies, potentially gaining exposure to high-growth fintech "unicorns" (private investment companies worth over $1 billion). Both the Hong Kong Exchange and Singapore Exchange opened overseas representative offices in Singapore and the U.S. respectively and are looking into attracting large international issuers for secondary listings.

Indices, Data, And OTC Derivatives Clearing Boost FMIs' Growth

Decreasing trading revenues from traditional exchange businesses are prompting FMI companies to look for alternative revenue sources. They have traditionally turned to index and data businesses for growth, as with the shift to passive investment management, an increasing amount of assets-under-management are now linked to indices, generating index usage fees for index providers and trading fees for FMIs offering derivatives linked to indices. We consider LSEG (FTSE Russell) and CBOE (S&P 500 index options and proprietary VIX index franchise) and, to a lesser extent, DBAG (STOXX) and Nasdaq (NASDAQ Composite) to have the strongest proprietary franchises among rated FMIs.

The data and information services segment has also enjoyed growth in recent years. MiFID II best execution and other regulatory requirements have boosted demand for market and reference data, risk management tools, and analytics.

With the implementation of mandatory clearing and uncleared margin rules, we expect more growth in the clearing of OTC derivatives--mainly swaps and foreign exchange (FX) derivatives (see chart 9). But where there is growth, there is competition. Notably, Eurex Clearing, a subsidiary of DBAG, starkly changed its approach in late 2017 by starting to share a significant part of the revenues of its interest rate swap segment with the 10 most active participants.

Global CCPs are partnering up with CLS Group (a specialist U.S. financial institution providing settlement services to its members in the FX market) and we expect them to start clearing physically settled FX trades in 2018. As members' clearing of OTC contracts through CCPs increases, so does their need for compression and portfolio margining services.

Chart 9

Is Bitcoin A Blessing Or A Threat For FMIs?

"Blockchain" (as a short-hand for distributed ledger technology--DLT) was arguably the sector buzzword of 2016, and "Bitcoin" replaced it 2017. Bitcoin, a cryptocurrency appreciated in price to over $19,000 in December from about $900 at the beginning of the year, demonstrating extraordinary volatility along the way.

For now, FMIs around the world see the adoption of Bitcoin mostly as an opportunity rather than as a potential disrupter to their business models as the launch of bitcoin futures by exchanges and developments in the usage of the underlying DLT may enable them to improve their trading and clearing networks.

The U.S. Commodity Futures Trading Commission allowed CBOE and CME to start trading bitcoin futures on Dec. 11, 2017 and Dec. 18, 2017, respectively. Nasdaq has announced that it will launch a bitcoin futures exchange in the first six months of 2018.

However, beyond these opportunities, we believe cryptocurrencies could potentially disrupt FMI business models. Companies worldwide had raised over $4 billion of capital through initial coin offerings (ICOs) in 2017. Although this represented less than 15% of total capital raised in initial public offerings (IPOs) at the NYSE, the boom in ICOs over the past few months could potentially erode exchanges' listing business in the medium term. Some countries such as China or South Korea have prohibited ICOs, while others (such as Japan) have embraced it. The SEC announced its first-ever enforcement action against an ICO on Dec. 4, 2017, with increasing regulation in the U.S. likely.

Throughout 2017, many FMI companies continued to explore and test use cases for DLT-enabled solutions that may improve the efficiency of their operations, particularly in post-trade services. In 2017, we saw the first concrete development in this space as ASX announced that it had decided to replace its equities clearing and settlement system (CHESS) with blockchain technology in the next two years. And Nasdaq has already successfully tested the possibility of using blockchain technology for IPOs and transactions in private securities.

Card Schemes To Benefit From Continued Shift To Cashless Societies

While an increasingly competitive payment services industry could be challenging for incumbents, as upstart financial technology or "fintech" companies aim to disrupt the sector, we see overall positive trends for the ratings on major payment networks. The global diffusion of electronic cashless payment systems, primarily at the consumer level, continues to benefit payments companies like Visa and MasterCard. Growth in the use of electronic payments is on the cards in both developed and developing economies based on regional consumer preference. A December report from the Federal Reserve Bank of San Francisco showed that, despite the growing use of electronic payments, cash is still very heavily used in most countries--with cash in circulation actually still rising. This implies that there is still a lot of growth potential for electronic payments. Some governments are also pushing for more electronic payments, partly in an effort to improve tax collections.

Our positive outlooks on our ratings on Visa and Mastercard partly reflect our expectation that they will continue to report strong profitability with roughly high single-digit to low double-digit earnings growth. So far, advances in financial technology from competitors have not eaten into the market dominance of these two companies. For instance, Apple Pay and Google Pay have had to rely heavily on Visa and Mastercard's payment networks. PayPal has succeeded in building its own sizeable payments business and has the capacity to circumvent Visa and Mastercard networks. However, many PayPal customers often still use Visa and Mastercard-branded cards when they pay for goods through PayPal. In fact, PayPal has signed separate agreements with both companies over the past two years to make Mastercard and Visa cards clear payment options for consumers using PayPal. While advances in financial technology will ultimately pose a major challenge to Visa and Mastercard, we do not see this scenario playing out in the next few years.

These companies are also working to gain share in moving payments between businesses. Several countries, including the U.S., are making an effort to speed up their currently slow automated clearing house (ACH) systems, which handle most business-to-business (B2B) payments. Visa and Mastercard believe they could use their current payment rails to move such payments. Mastercard, through its Vocalink acquisition, is also competing to build and manage fast ACH systems. There is some risk that building another system--or set of rails--to move payments could end up as a competitive threat to these companies' card payment volumes. However, B2B payments also represent a material opportunity.

Continued M&A Activity In The Pursuit For Growth

2017 may well be remembered as the year of the failed DBAG-LSEG merger (see "Ratings On Deutsche Boerse, London Stock Exchange Group, And Subsidiaries Affirmed After Merger Prohibition; Off Watch," published on April 3, 2017). This overshadowed a multitude of less publicized mergers and smaller bolt-on acquisitions that global FMIs pursued in 2017.

We believe that a lack of cyclical market growth may force FMI players to look for further deals to realize efficiencies from synergies and bring economies of scale. Low volatility is also forcing FMIs to look for revenues not generated by trading volumes. Therefore, we believe M&A activity will continue in the sector, particularly from small bolt-on tech and data-driven acquisitions.

Evolving Regulatory And Market Focus On CCPs And CSDs

CCPs have remained at the center of regulatory activity for the past few years. We foresee 2018 to be the breakthrough year for CCPs' revenue growth, with global implementation of most of the clearing mandates and initial margin requirements for uncleared derivatives.

In Europe, the central clearing of interest rate derivatives (about 80% of all global derivatives) for all financial counterparties has been mandatory since June 2017. This will benefit several international players (such as LCH and CME) as well as domestic players (such as Asigna in Mexico).The mandatory clearing of index credit-default swaps for all financial counterparties will start in the EU in February 2018. This is likely to boost revenues for a couple of international players next year, notably ICE and LCH.

Along with the onset of mandatory clearing rules, global regulators have toughened the requirements for derivatives that are not cleared by CCPs. In our view, these initial margin rules on uncleared trades are further spurring the flow of contracts into CCPs. At the same time, for the non-cleared illiquid or complex contracts CCPs have developed tools to calculate bilateral margin requirements and provide centralized trade processing, valuation, and risk calculation and optimization for OTC bilateral rates and FX markets. For example, LCH's SwapAgent product went live in September 2017, processing the first interest rate and inflation swaps.

We view positively continued cross-border rule harmonization and cooperation between regulators across the globe. For instance, on Oct. 13, 2017, the European Commission (EC) recognized that the Commodity Futures Trading Commission's (CFTC) rules for uncleared trades are equivalent to European Market Infrastructure Regulation (EMIR). Under this equivalence decision, non-EU CCPs regulated by the CFTC would continue to be recognized in the EU. Therefore, market participants could use them to clear standardized OTC derivative trades as required by EU legislation and receive lower risk weights on their CCP exposures, when calculating regulatory capital ratios.

However, the equivalence decision between the SEC and EU regulators is still pending. We believe such an agreement is important to maintain the business risk profiles of U.S. CCPs, regulated by the SEC, such as OCC, Fixed Income Clearing Corporation (FICC), and National Securities Clearing Corp. The SEC and EU regulators are still negotiating the terms of a substituted compliance regime. In order for EU bank-affiliate clearing members to continue using SEC-regulated CCPs and maintain existing capital treatment, U.S. CCPs must receive recognition from the European Securities and Markets Authority (ESMA) no later than June 15, 2018, unless this deadline is extended again or the EU authorities provide other relief. The EC has already extended a six-month transitional period before implementation of the capital charges under the Capital Requirements Directive IV (CRD IV) eight times. If EU bank-affiliate clearing members are unable to maintain the existing capital treatment for their U.S. CCP exposures, these clearing members' aggregate regulatory risk-weighted assets would increase significantly requiring them to maintain large amounts of additional capital. Additionally, without such recognition, a U.S. CCP cannot admit firms established in the EU to membership. It cannot clear for trading venues established in the EU, and it cannot clear products subject to the clearing mandate for market participants established in the EU. All of this could put material revenue pressure on U.S. CCPs regulated by the SEC.

The question of equivalence of U.K. and EU regulation post-Brexit is also high on the regulatory agenda, mainly because the European authorities could require the clearing of certain euro-denominated contracts to be conducted by CCPs established in the EU. Our base case scenario is for the clearing of euro-denominated repurchase agreements to be performed within the eurozone with no "location policy" implemented for other asset classes (notably swaps and CDS in euro). If, however, our base case scenario doesn't materialize and "location policy" is implemented for a wide range of asset classes, we might take negative rating action on London-based LCH if this materially damaged its OTC clearing business.

Regulators are shifting their attention to enforcing aspects of CCP liquidity risk management from the adequacy of CCP resources to absorb clearing losses. For example, on Feb. 3, 2017, ESMA announced the scope and methodology of its 2017 CCP stress testing exercise, which this time will also examine CCPs' resilience to liquidity stress, as well as to sizable clearing losses. In the U.S. in October 2017, the CFTC announced its liquidity stress-tests results for CME Clearing, ICE Clear U.S., and LCH. The Fed required FICC-GSD to establish an additional liquidity buffer to deal with extreme situations where it could not use repo arrangements. In response, FICC extended its Capped Contingent Liquidity Facility (CCLF) to its Government Securities Division (GSD) from its Mortgage-Backed Securities Division. The SEC approved this at the end of June 2017 and it is set to be implemented in mid-2018 (see "DTCC And FICC Ratings Are Unaffected By The SEC's Approval Of The Capped Contingency Liquidity Facility Framework," published on Nov. 20, 2017). We believe that such a large contingent liquidity burden on members that do not have a bank license (FICC has many such members) could potentially impair their financial stability.

The recovery and resolution of CCPs was one of the major topics in 2017. CCPs finalized their recovery and wind-down plans and introduced various additional loss allocation tools, such as variation or initial margin haircutting, partial or full contract tear-up, and the allocation of non-default losses to clearing members, in their rulebooks. We anticipate that a final resolution framework for CCPs in the EU will not come into force until at least 2019, assuming the regulation is not finalized until early 2018. The development of detailed technical standards would then follow. Meanwhile, CCPs will likely continue to propose updates to their rulebooks and procedures to bolster their resilience to unforeseen adverse events (see "Location, Equivalence, Oversight: Three Big Questions For European Clearinghouses," published on March 15, 2017).

More end-customers are seeking increased segregation and bankruptcy remoteness from their clearing members, other clients, and the clearinghouse itself. For example, buy-side clients increasingly obtain direct access to CCPs with sponsored clearing, offered recently by LCH and FICC. The custodial segregation model is also gaining traction, enabling the buy- and sell-side to deliver collateral directly to the clearinghouse.

2017 saw the completion of the migration of CSDs to the ECB's TARGET2-Securities (T2S) platform, which centralizes the settlement function for eurozone securities in central bank money. Consequently, cross-border settlement fees on eurozone securities decreased. However, to realize all T2S cost efficiencies, clients would need to move all their settlement business to one CSD. In our view, this will take some time and the likely players to benefit from this would be large CDS, such as Euroclear and Clearstream. For now, we forecast that both companies will, broadly speaking, gain as much in new revenues as they lose in settlement fees.

The FMI Sector Remains Lightly Leveraged

In our view, the global FMI sector will remain lightly leveraged in 2018, supporting the industry's strong creditworthiness. We estimate average debt-to-EBITDA for rated FMI entities to decrease to about 1x in 2018, commensurate with a minimal financial risk profile. We could raise our ratings on several FMI companies--such as CBOE, Visa, and Mastercard--if they improve their earnings and leverage metrics in 2018 by realizing synergies from new acquisitions and retaining cash.

Within our projections, we have assumed that some groups, such as DBAG, could take on more debt in 2018 to pursue bolt-on acquisitions. However, in all cases our ratings assume that the leveraged FMIs remain within their existing leverage thresholds, so that their financial risk profiles remain unchanged. Benign interest rates, together with the associated low average cost of debt in the sector, will support debt servicing, in our view. If leverage permits and acquisition targets fail to materialize, we consider it possible that some FMI groups (like DBAG, LSEG, ICE, CME, and Visa) could pursue share buybacks beyond what we have already anticipated. In particular, the tax reform in the U.S. allows U.S. FMIs to undertake larger buy-backs and larger acquisitions while sticking to their leverage targets. While not our base case, it remains possible that one or more FMI companies could take on sizable additional debt in 2018 to finance a transformational acquisition.

During 2017, significant debt issuances included:

• BM&FBOVESPA issued R$3 billion ($910 million) of debentures and a $125 million loan in December 2016 to conclude a transaction with Cetip.
• In early 2017, CBOE Holdings issued $650 million of senior notes to finance its Bats acquisition. At the end of June 2017 it restructured part of its debt, by issuing $300 million of senior notes (due 2019) and using the proceeds to pay back $300 million on the five-year term loan.
• ICE replaced the $850 million NYSE senior note that matured in September 2017, by issuing two new senior notes for a total of $1 billion (a five-year note and a 10-year one, for $500 million each).
• In September 2017, Visa issued $1 billion of 2.150% senior notes due 2022, $750 million of 2.750% senior notes due 2027, and $750 million of 3.650% senior notes due 2047. In October 2017, Visa used the majority of the proceeds from this new debt to redeem the $1.75 billion of senior notes scheduled to mature in December 2017.
• Nasdaq issued $500 million of senior floating-rate notes in the third quarter of 2017 to fund the acquisition of eVestment.

Thanks to strong cash generation in the first half of 2017, CBOE reduced its gross debt by about $250 million at the end of June 2017 from its peak of $1.65 billion at the time of the Bats acquisition in February 2017.

The impact of U.S. tax reform on U.S. FMIs' total debt issuance for 2018 is not clear. On the one hand, higher post-tax earnings could push some FMIs to seek larger acquisitions, partly funded with debt. On the other hand, some U.S. FMIs with substantial cash abroad (such as PayPal, Visa, or Mastercard) might be tempted to repatriate foreign cash at the much reduced one-off rate (15.5% instead of 35% before the implementation of the tax reform), funding projects (capital expenditures, acquisitions, share buy-backs) that might have otherwise been funded by debt issuances.

Chart 10

Table 1

Upside And Downside Scenarios For 2018

In addition to our base case scenario, we also consider upside and downside scenarios. There could be an upside to our base case scenario if cash equity and derivatives volumes spike due to stronger economic conditions, if major central banks' monetary policies change, or market volatility rises on a sustained basis. However, higher earnings distributions could limit any improvement in leverage and our ratings on FMIs beyond our base case.

On the downside, a decline in equity and derivatives trading volumes, for example associated with a dearth of market volatility and heightened competition, could put some pressure on FMI revenues. That said, as many FMI companies have diversified their revenues and increased non-transactional fees, we don't believe that marginally lower trading volumes would put significant pressure on the companies' earnings. Alternatively, even given stable revenue growth, unanticipated significant debt issuances could weaken the financial risk profiles of some FMIs and result in downgrades.

Table 2

Appendix

Table 3

Table 4

Table 5

Related Research

• MiFID II: Disruptive Regulatory Change For European Financial Markets, Winners And Losers To Emerge Over Time, Jan. 2, 2018
• Global Credit Conditions Are Broadly Favorable Going Into 2018, Dec. 6, 2017
• Hope Overcomes Fears As The Fundamentals Propel Europe Forward, Dec. 5, 2017
• DTCC And FICC Ratings Are Unaffected By The SEC's Approval Of The Capped Contingency Liquidity Facility Framework, Nov. 20, 2017
• Asigna Global Scale Outlook Revised To Negative On Weakening Business Position, 'A-/A-2' Ratings Affirmed, Nov. 1, 2017
• CBOE Holdings Inc. Outlook Revised To Positive On Good Operating Performance And Debt Reduction; 'BBB+' Ratings Affirmed, Sept. 15, 2017
• Initial Coin Offerings: A New Capital Market Takes Wing, But Not Without Controversy, July 25, 2017
• Liquidnet Holdings Inc. Ratings Raised To 'B+' On Improved Financial Profile; Outlook Is Stable, June 26, 2017
• BM&FBOVESPA 'BB/B' Ratings Remain On Watch Negative On Completed Merger With CETIP S.A.-Mercados Organizados, June 5, 2017
• Ratings On Deutsche Boerse, London Stock Exchange Group, And Subsidiaries Affirmed After Merger Prohibition; Off Watch, April 3, 2017
• CBOE Holdings Inc. 'BBB+' Issuer Credit Rating Affirmed On Bats Global Markets Inc. Acquisition, March 17, 2017
• Liquidity Matters For Clearinghouses, March 16, 2017
• Location, Equivalence, Oversight: Three Big Questions For European Clearinghouses, March 15, 2017
• The Future Of Banking: Blockchain Can Reshape The Financial System, Oct. 26, 2016