September 2013

SIBOS: Will ‘big data’ solve all our problems?

DataWhen delegates arrive at the annual banking transactions conference, Sibos, which is held this year in Dubai, what will they discuss? Funds Europe asked senior executives at top firms to share their views.

KEN TREGIDGO, DEPUTY CHIEF EXECUTIVE, CALASTONE

Much has been said about “big data”. How can businesses make the most of their data to improve their offering and raise revenues?
Process automation is the industrial revolution of the fund management industry. In the past decade, automation has made fax machines redundant and shifted information flows on digital channels.

Automation has resulted in lower costs, reduced risk and quicker processes. This is just the beginning; fund managers and investors will soon benefit from the availability of timely, accurate and rich data.

The next revolution will exchange scarce and outdated information, often based on surveys and estimates, with real data. Data will support fund managers in planning their strategies, investors in making decisions and intermediaries in steering their marketing, pushing the industry closer to the other financial sectors where information has changed the landscape.

How are technological developments such as mobile banking and cloud computing affecting the securities industry?
The funds industry operates in a conservative mode. At Calastone’s launch five years ago, the pre-dominant method of straight through processing connectivity (STP) was using file transfer (SFTP). Since then, the industry has moved to a more robust STP solution, such as Swift, FIX, Web services, MQ, JMS, with file transfer now just 20% of Calastone’s flow.

Cloud computing has reduced the cost base for STP, where it can be used. Our sector is still governed by rigorous compliance rules, where the end point of a communication process must be owned by the correspondent. While this is changing, the number and type of processes that can be run in a pure cloud solution are restricted.

We have seen a migration of processing into private cloud solutions that reduce the cost base but also position systems to make more use of shared cloud solutions if and when compliance rules change.

What are the challenges in providing a common set of practices for the securities industry?
In the funds world, the focus has tended to be on the message format and connectivity, rather than the end-to-end business process flows. In order to support full automation, changes may have to be made to processing systems, adding to cost and complexity.

For cross-border flows, variances in market practice can make it difficult for distributors, who may have to make significant system changes to cater for the different business practices. For example, treatment of dilution levies, settlement date and net/gross settlement across different markets. While islands of standardisation do exist, participants may be forced into bundled services and adopting multiple message formats, adding to the cost and complexity of automation.

A common standard such as ISO20022, which supports the definition of terms and data elements, is important as it enables the implementation of common business processes.

The key to lower automation costs is to provide flexibility, interoperability and the ability to unbundle services so that participants can mix and match services from different providers to suit their needs.

RETO FABER, EMEA HEAD OF DIRECT CUSTODY AND CLEARING, CITI

What do you think will be the main themes under discussion at this year’s Sibos conference?
The continued unprecedented change in the industry, for example: the increase in regulation, such as the Alternative Investment Fund Managers Direcitve (AIFMD) and the Foreign Account Tax Compliance Act (Fatca), which impose significant new costs and compliance obligations on banks and their clients; the increased cost dynamics of the industry resulting in further consolidation and diminishing of agent banks; the European post trade settlement environment as we prepare for Target2Securities.

Navigating through these myriad changes requires commitment, innovation and partnerships; commitment to our clients that we will continue to invest in our business, innovation so we remain competitive, and partnerships to leverage the strengths of other institutions.

What have been the main challenges in adapting to regulatory changes, and do you think there is a risk of regulation having a negative effect on market competition by concentrating risk among only the larger players?
Adapting to the many regulatory changes globally is a challenge. Significant resources are required to track, understand and implement these changes. They are taking an ever increasing percentage of the available technology resources, which have negative implications elsewhere. If this pace continues, there is a risk that some will choose not to attempt to compete and will get out of this space. That said, the industry has excess capacity in almost every country currently, so it is unclear whether a few players exiting will necessarily have a material impact on competition.

PHILIP BROWN, HEAD OF CLIENT RELATIONS EUROPE AND AMERICAS, CLEARSTREAM

What are the challenges in providing a common set of practices for the securities industry?
Working with industry bodies like the International Securities Services Association (Issa), Swift and the International Securities Market Advisory Group (Ismag) remains a key component of our drive towards standardisation. These organisations play an important role in driving consensus in this complicated topic. As ever, it’s about striking the right balance between fixing minimum common standards on the one hand, to guarantee a minimum level of quality, and enabling the market to evolve and innovate in line with competitive forces on the other.

Much has been said about “big data”. How can businesses make the most of their data to improve their offering and raise revenues?
This question of how to best optimise ''big data'' for wider use is likely to see quite a trend in the coming months and years. It is certainly something we are exploring at Clearstream. Of course, data sensitivity and protection issues will have to play a part in any such discussions and developments.

What do you think will be the main themes under discussion at this year’s Sibos conference?
For years now, we have all been talking about and seeking to shape the regulatory framework in order to make the financial services industry less risky and more robust. Now that we are drawing close to crunch time for the implementation of many of the new regulations, a key question bound to play out in discussions is how each is paying for adaptation costs and other budget investments needed to meet the new regulatory requirements, especially in the context of continued market pressure on costs.

YVES POULLET, CHIEF EXECUTIVE, EUROCLEAR BANK

Much has been said about “big data”. How can businesses make the most of their data to improve their offering and raise revenues?
Data is the lifeblood of our capital markets. Get it right and you have a sound basis on which to make intelligent decisions. Get it wrong and you risk contaminating parts of your organisation and the transaction chain in general. At Euroclear, we settle around €550 trillion of securities transactions annually, so we certainly have a “big data” inventory. We recently teamed up with Markit to share our Eurobond data with the market and with SmartStream to provide a Central Data Utility for our clients to enrich and refine the data they retrieve from their chosen sources.

Services that reduce operational risks, improve data quality and increase efficiency by reducing trade breaks and repairs will grow in demand.

What are the challenges in providing a common set of practices for the securities industry?
Market practice harmoni-sation on a regional or global basis is a cumbersome and difficult process. It took years for us to harmonise market practices in Belgium, France and the Netherlands. While everyone agrees that common practices and standardisation will improve efficiency and reduce costs, it requires change. With so many change initiatives already being pursued, driven by regulations and new business models, there is no appetite for more. Some firms make a living out of bridging the gaps in market practices and divergent standards, so there is some inertia to retain the status quo. Moreover, at least in Europe, regulators have been very slow in harmonising regulations affecting various fiscal and legal practices.

What do you think will be the main themes under discussion at this year's Sibos conference?
The underlying theme that we expect will weave its way into many discussions is how firms will be able to remain relevant to their clients. With the pressures of complying with new regulations and self-imposed cost-containment programmes, firms need to hone in on the areas where they can continue to add value to their clients. Delegates will be listening carefully to what is said by their clients, competitors and suppliers during the panel discussions, in the exhibition areas and during the social events. We also suspect many will be exploring potential partnerships with firms that share the same objectives and offer complementary services.

CLARE FRASER, MANAGING DIRECTOR, STRATEGY, OMGEO

What do you think will be the main themes under discussion at this year's Sibos conference?
Industry readiness for shortened settlement cycles in the EU will be a big topic this year due to the forthcoming Central Securities Depository Regu-lation (CSD-R). Firms will need to be able to settle trades two days after trade date, with a proposed implementation schedule of January 1, 2015. With firms needing to test their systems in advance of the implementation of CSD-R and the Target2Securities initiative, market participants will need the necessary operational processes in place by mid-2014. In short, the industry needs to start getting ready now.

Much has been said about “big data”. How can businesses make the most of their data to improve their offering and raise revenues?
To be of any commercial use, data must be correct and therefore businesses must ensure there are the appropriate checks and balances in place to promote data accuracy. From a trade processing perspective, accurate and compliant account and standing settlement instruction (SSI) data lowers costs and mitigates counterparty risk by minimising trade fails. Furthermore, by automatically appending the correct account data and SSIs to trades, greater settlement efficiency can be achieved.

What have been the main challenges of adapting to regulatory changes, and do you think there is a risk of regulation having a negative effect on market competition by concentrating risk among only the larger players?
Regulation will require market participants to reconfigure their operational processes and increase the level of automation in their middle and back-office functions. Overall, this will benefit the financial markets industry as it will reduce operational and counterparty risk, as well as increase efficiency. A good example is the move to shorten settlement cycles through the CSD-R. Although it will require market participants to increase efficiency in the middle office, harmonising settlement cycles to T+2 will reduce risk.

ULF NOREN, GLOBAL HEAD OF SUB-CUSTODY, SEB

Much has been said about “big data”. How can businesses make the most of their data to improve their offering and raise revenues?
Most of the bigger companies represented at Sibos, along with the big companies in their respective client base, have recognised the need to deal with big data in a parallel and integrated way with their overall data. To many, this is not so new. Yet making the most of it – finding a structure, tools, and minimising the cost of dealing with the variety of data – will determine improvements in offering and profitability.

In the financial sector, there are massive opportunities in combining different data sources, like text, voice and images, and the process improvement potential is huge if managed, analysed and owned correctly.

Banks are heavily regulated when it comes to storage of material and some studies indicate differences of up to 20 times between traditional database storage and cluster storage.

What have been the main challenges to adapting to regulatory changes, and do you think there is a risk of regulation having a negative effect on market competition by concentrating risk among only the larger players?
To a mid-sized European bank, the main challenges have been: the amount of regulations kicking in at the same time; understanding how this affects business and product lines and what clients’ actions and expectations are likely to be and; understanding how risks and liabilities change and deciding whether to accept increased risk liability and capital allocations.

The sheer cost of being compliant with and finding solutions to benefit from the multitude of regulations can be a trigger for further concentration.

Not every player will be in a position to absorb the hefty bill.

We believe the phenomena will be most evident on a local or regional scale while a concentration globally seems less likely as there is a competition, risk and choice counterweight balancing that trend.

What do you think will be the main themes under discussion at this year's Sibos conference?
I hope this year’s Sibos conference will be a buzzing forum for constructive and focused business discussions and for sharing and learning in the challenging and complex environment that Sibos delegates face.

The headline topics will include: regulations, market infrastructure, further standardisation and automation, cost and efficiency, future business models, further integration of value chains, risk management, dealing with stability issues in an unpredictable environment, public perception, centralisation-offshoring-outsourcing and data management.

Increasing corporate participation and technology focus will also be high on the discussion agenda, as will integration of markets in the EU, parallel with how the integration agenda is run in Africa, Asia and the Americas.

BRUNO PRIGENT, HEAD OF SOCIETE GENERALE SECURITIES SERVICES

Much has been said about “big data”. How can businesses make the most of their data to improve their offering and raise revenues?
As transactions have become more straight-through processed, securities services providers have less knowledge about the business they handle for their customers. Providers need to build large datawares and specific datamart in order to rebuild their knowledge and understanding of clients and to monitor their overall activities so as to be capable of responding to their specific needs. Providers can improve their offering by supplying clients with information and thus accompany them in the management of their business, from straightforward aspects, such as optimising foreign exchange between frequency, execution spread and ticket cost to sophisticated tasks such as matching asset liquidity with the fund shareholder’s structure and stability, as required by the Alternative Investment Fund Managers Directive (AIFMD).

What have been the main challenges to adapting to regulatory changes, and do you think there is a risk of regulation having a negative effect on market competition by concentrating risk among only the larger players?
The main challenges result from the consequences of the European Market and Infrastructure Regulation and Dodd-Frank, where the central counterparty (CCP) clearing houses are in the process of becoming extremely large. Regulation can have positive effects, such as allowing the provision of over-the-counter clearing as a result of better monitoring of these types of instruments, while on the other hand it can generate negative effects by increasing the size of CCPs which also leads to an increase in systemic risk.

What are the challenges in providing a common set of practices for the securities industry?
A big challenge lies in pricing the service offer which results from these practices. The offer must be scalable, high quality and simple – sophistication, though more refined, is expensive and difficult to maintain – while maintaining a wide product cover. The pace of change also needs to be right: the offer needs to take account of regulatory developments but come at the right moment, neither too early nor too late. Otherwise, it becomes too costly to maintain both the existing and the new practices over time.

Daniel E Retzer, managing director and chief technology officer, SunGard XSP

Much has been said about “big data”. How can businesses make the most of their data to improve their offering and raise revenues?
This answer comes in two parts: what should businesses be doing with their data, and what businesses should be doing with the data about their data. On the first point, “big data” reaches beyond the basic structured data that signifies the relationship businesses have with their customers. It allows them to craft business intelligence solutions that are based on unstructured data, which is a reflection of customer interactions with products, and more importantly, other people. On the second point, these very observations have value. The data about data provides rich context for guiding future products and services.

How are technological developments such as mobile banking and cloud computing affecting the securities industry?
The current era of technology is all about one thing: consumerisation. It’s about the consumers of technology dictating to the providers of technology or technical products, rather than just settling for “good enough”. This places a burden on companies and industries that have traditionally been slow to adapt to the overwhelming pace of innovation and customer-driven demands. To that end, mobility is the primary customer touch point for many firms, and the cloud serves as the infrastructure that supports the mobile application market. The combination of the two results in a platform for rapid innovation and delivery.

What are the challenges in providing a common set of practices for the securities industry?
Market differentiation and competition will always serve as barriers to unifying set practices in any industry. Inevitably, someone will find a way to provide a more cost effective solution that will give them a market advantage. Meanwhile, a standards body may present a change that, on the surface, offers advantages such as reduced costs and improved quality for practitioners, but which in fact puts them at a disadvantage because of the cost of implementation.

The issue with seeking commonality of any business practice or technology is that inevitably someone will be disadvantaged. This results in resistance and a dampening of innovation.

Arun Aggarwal, managing director, UK, Ireland and Nordics, Swift

What do you think of the main themes under discussion at this year’s Sibos conference?
The over-arching themes of Sibos in Dubai reflect the primary concerns of the financial industry in the current environment: achieving operational excellence, coping with worldwide shifts and of course dealing with the onslaught of new regulation.

The “big issue debate” on Wednesday, September 18, will be a must-attend because it focuses on “regulation and beyond”, and brings together speakers from central and commercial banks to address key questions including, what will be the shape of the financial sector that emerges once the wave of regulatory change is complete?

The topic of regulation and its impact topped the agenda at the Swift Business Forum London earlier this year, in particular the question of how global business models can survive regulatory fragmentation, and I fully expect this topic to be top priority at next year’s Business Forum in London in April.

The regulatory fog is clearing, but the full implications of the new regulations and the question of how to efficiently and cost-effectively comply with them remain open to debate and will do for some time to come.

Much has been said about “big data”. How can businesses make the most of their data to improve their offering and raise revenues?
While “big data” is the latest buzzword, it is worth remembering that there are a number of tools already available to the community that help to address the big data challenge.

Standards, such as those Swift manages on behalf of the industry, are a key enabler for making sense of vast quantities of data. Take for example the legal entity identifier, for which there is currently a partial solution in place and which global regulatory bodies are looking at developing on a global basis. This will be crucial in allowing regulators to accurately assess a given institution’s exact exposure from among a morass of data about trades.

In addition, business intelligence tools – like those Swift provides to customers to give them business insights based on analysis of the traffic they send over Swift – have a key role to play. One visible example of business intelligence in action is the Swift Index, a range of proprietary fact-based indexes, based on Swift payments traffic, which can be used to derive an early indication of the short-term evolution of GDP for a country or group of countries.

What are the challenges in providing a common set of practices for the securities industry?
The challenges are well-rehearsed: it is difficult to overcome a legacy of disparate practices when there are competing priorities, commercial pressures and investment constraints. That said, a lot of progress is being made. Harmonisation initiatives such as Target2Securities in Europe will encourage common practices around settlement and enforce adoption of industry standard ISO20022 messages for communication. In the funds industry, adoption of ISO20022 is increasing all the time. Figures from the European Fund and Asset Management Association for the last quarter of 2012 show a steady growth in the percentage of ISO automated fund orders to 43.8% (up from 37.6% in the corresponding quarter of 2011).

Across the securities industry, the outlook for achieving common practices is probably better than it has ever been. Regulation is mandating processes such as electronic trade confirmation, centralised clearing and trade reporting. Adopting industry standard practices and communications protocols and reusing common infrastructures such as Swift is really the only way to accommodate these new processes cost-effectively
and efficiently.

©2013 funds europe