Experts from asset servicing, technology and post-trade services speak to Funds Europe about issues likely to emerge at the Sibos post-trade conference, held in London from 23-26 September.
HANI KABLAWI, CEO OF GLOBAL ASSET SERVICING, BNY MELLON
What role will open architecture play in the development of the global investor solutions business?
In the highly competitive funds industry, firms differentiate themselves either through producing more alpha, gathering more assets or providing superior client service. To do that successfully, they need access to the choice of applications and solutions best suited to their business. Only an open architecture model for front-to-back operations provides them with that choice.
While data has never been so abundant or as easy to access, leveraging that data remains a significant challenge for most asset managers and institutional investors. Many are bound by outdated technology lacking the flexibility to cope efficiently with today’s quantity and diversity of data. Closed platforms restrict them to a particular vendor’s software and suite of solutions.
Open architecture platforms enable investors to capture insights from a wide variety of data sources and vendors. They can manage and analyse that information easily and securely to find insights in real and near-real time. The rewards are substantial. Open architecture makes it possible to access the broadest array of today’s digital technologies. It provides investors and portfolio managers with the most complete view of their investments. The ability to capture and analyse original, raw and unstructured data from a wide selection of sources into one platform yields potent information.
An example of this is our strategic alliance with BlackRock Solutions to deliver integrated data, technology and asset management servicing capabilities to our common clients – providing near real-time lifecycle information, more precise intra-day projections of net cash positions, enhanced exception monitoring, drill-down capabilities into core accounting and custody oversight, and closer integration and shared workflows. This is an example of an open and collaborative approach to navigating the digital future of the investment industry, working together with partners across the industry and alongside clients to develop flexible, insightful and effective solutions.
MARGARET HARWOOD-JONES, GLOBAL HEAD, SECURITIES SERVICES, TRANSACTION BANKING, STANDARD CHARTERED
Given the relative maturity of the securities services sector, where can a provider deliver new value to asset owners and global financial intermediaries?
The explosion of fintech opportunities and the move towards human-centred design are at the centre of the new ecosystem and servicing models. These new models focus strongly on the client experience, streamlining the operating model, and realising the value of data across the service chain. Technology solutions such as APIs mean that information can be delivered directly into global custodians’ systems, and on to their end clients when they need it, in a format that is easy for them to consume and analyse.
Evolving thought processes, enabled by new and different underlying technologies, create opportunities for securities services specialists to add value. Digital assets drive opportunities for crypto-custody offerings and the concept of asset tokenisation offers an opportunity to create a market place for assets which have traditionally been illiquid. The possibilities around data and a single pool of data are endless, with securities services specialists playing a pivotal role around aggregating this data and providing analytics to the parties along the value chain.
Client engagement is shifting towards a genuine partnership-centred approach which focuses on listening, on fully understanding a client’s needs and concerns, and on enabling co-creation to ensure that delivery meets client requirements.
Even within the traditional securities services space, there are good opportunities in emerging and frontier markets. These markets, while relatively less mature, offer the chance for international securities services providers to leverage their experience of well-established markets, allowing them to demonstrate leadership through the sharing of this experience across borders.
Market advocacy and market information is increasingly becoming a product differentiator, with securities services providers seeing strong client appetite for market intelligence. By optimising their on-the-ground relationships with the local regulators, they are uniquely positioned to ensure the voice of the client – the asset owner and the financial intermediary – is heard in the local market.
PAUL STILLABOWER, GLOBAL HEAD OF PRODUCT MANAGEMENT, RBC INVESTOR & TREASURY SERVICES
How is asset servicing changing as the financial services industry engages in digital transformation?
A fundamental step has been to focus time and attention on our overall data architecture and governance model. We have invested to ensure those foundational components are rock solid yet flexible, empowering us to respond to the full range of requests we receive from our clients – from delivering solutions through APIs, visualisation tools or our front-end portal, to providing an advanced analytics platform for more bespoke insights. Having the right architecture model enables us to meet disparate demands.
Digitisation is easy to say but difficult to do when working off older source platforms – and in some cases, multiple platforms, which have been acquired, built or added onto over time. This means a flexible approach, based on a sound foundation, is necessary as clients, markets, infrastructures and other counterparties are at different rates of sophistication and technology adoption – and there is wide variation in the ability of different parties to interface with technologies. For example, there have been distributed ledger technology projects which have not progressed at the intended pace as potential users lack the ability or desire to implement the solution.
In an increasingly challenging environment for clients, where they are under pressure to comply with new regulations or deal with margin pressures, those challenges are being passed on to asset servicers. A key strategy to address those issues, and one that we have adopted, is to invest in ‘subject matter experts’ capable of providing guidance through complex change issues.
PETE CHERECWICH, PRESIDENT, ASSET SERVICING, NORTHERN TRUST CORPORATE & INSTITUTIONAL SERVICES
What role will artificial intelligence play in the future of securities lending?
Artificial intelligence, automated insights and analytics offer the securities lending industry great opportunities and have the potential to create a significant amount of value for our clients. We believe AI can be specifically utilised as a tool to solve problems, generate efficiencies and drive optimisation. For example, Northern Trust has recently developed an innovative pricing engine that utilises machine learning and advanced statistical techniques to drive revenue growth for clients. This works by forecasting more effectively the rate to loan securities in the securities lending market.
With this latest advance, we have created an infrastructure and framework that can intelligently adapt to market conditions. However, the potential benefits from machine learning techniques extend far beyond this initial application. For the industry, there is an opportunity to invest in technologies that will help derive these outcomes beyond the pricing engine we have developed.
I look forward to discussing some of these opportunities in greater detail and to be part of the conversations during Sibos this year. Artificial intelligence will play a key role in the future of the securities lending industry. It is increasingly important that, as an industry, we recognise these opportunities and push forwards to achieve these benefits for our clients.
SARJ PANESAR, GLOBAL HEAD OF BUSINESS DEVELOPMENT, ASSET MANAGERS, SOCIETE GENERALE SECURITIES SERVICES
How can technology help asset managers comply with transparency regulations?
Increased transparency is a common hallmark of regulation over the past decade. In practice, this means asset managers must become savvier with data and more flexible in how data is reported. How is this being achieved? To date, asset managers have largely delegated responsibility for fulfilling their obligations to security services providers. Some asset owners have built their own solutions, but the clear majority outsource to third-party service providers.
Using data more effectively can be easier said than done. While regulations such as the Packaged Retail Investment Products Initiative have encouraged standardisation of data – and much has been learnt, for example, from the implementation of Solvency II – there are currently no industry standards in many areas. Secure FTP [file transfer protocol] and even email formats are often used for data transfer.
However, innovation is poised to overcome this challenge. Application programming interfaces (APIs) could be the next stage in the evolution of post-trade services. They allow different systems to integrate seamlessly, linking a fragmented systems environment where legacy technology remains commonplace, making infrastructure more cost-effective, and accelerating implementation times. APIs pull rather than push data, making real-time visibility feasible.
Technological innovation is also delivering relatively low-cost solutions in the form of cloud computing and data lakes, which facilitate the use of open infrastructure. The advantages offered by open architecture are considerable. They allow asset managers to look across their exposure in a holistic way. Even if asset managers choose to work with different custodians based on geography and asset classes, reporting can still be easily aggregated.
New regulations such as Institutions for Occupational Retirement Provision (IORP) II, which seeks improved workplace pensions governance and accountability, are expected to accelerate the adoption of open architecture to help both asset owners and managers to meet their regulatory requirements.
MICHAEL MCCLAIN, GENERAL MANAGER, EQUITY CLEARING AND DTC SETTLEMENT SERVICES, DTCC
What are the major steps to promoting accelerated settlement for securities?
In July, countries across APAC [Asia-Pacific] shortened their settlement cycles to T+2, harmonising settlement with Europe, Middle East and Africa, and the US. When it approved shortening the settlement cycle from T+3 to T+2 in the US, the Securities and Exchange Commission (SEC) mandated an analysis of even shorter settlement cycles.
The then-chair of the SEC, Mary Jo White said: “In moving forward, it is critical that we maintain an unwavering commitment to act in the best interests of investors and the markets,” and that “today’s proposal will solicit input from a wider audience regarding the benefits and costs of a T+2 standard settlement cycle, as well as alternatives such as T+1 or T+0”. That analysis is due in September 2020 and it will examine the question of what accelerated time to settlement will look like in practical terms.
Just after the move to T+2, DTCC worked with the industry looking into the potential of a trading platform for T+1 settlement. We are able to settle trades on a T+1 and even T+0 basis today. However, some in the industry believe it would be an expensive initiative to comply with.
Without an industry-wide platform for accelerated settlement, we have explored other ways to accelerate the settlement cycle which could bring greater efficiency and lower risk to the marketplace. While the industry conversion to T+2 was a historic achievement, on average, over $5 billion is still held by NSCC [National Securities Clearing Corporation] in risk margin to manage sell-side counterparty default risk in the system while buy-side counterparty default risk remains largely unmanaged.
In addition to holding risk margin, NSCC requires additional liquidity resources for peak settlement days, further adding to the costs and risks for US markets. These capital costs could be mitigated by further reducing the time between trade and settlement and thus DTCC is considering a proposal to move settlement of eligible trades to the morning before market open on settlement day, effectively eliminating a day of settlement risk without removing a calendar day.
DEMI DEREM, GENERAL MANAGER, INVESTOR COMMUNICATION SOLUTIONS INTERNATIONAL, BROADRIDGE
How should you prepare for Shareholder Rights Directive II?
The updated Shareholder Rights Directive (SRD II) aims to increase the accuracy and transparency of communications between issuers and investors, ultimately facilitating more active shareholder engagement by making it easier for shareholders to exercise their rights, specifically through global shareholder voting.
Developed in response to the financial crisis, these aims also reflect changing shareholder behaviour, with investors demanding more transparency, control over financial returns and influence over how the companies they invest in are run. The deadline for EU member states to transpose this into local national law is September 2020, meaning the countdown to implementation has started and firms must get ready to comply.
SRD II’s impact is global – it applies to all firms that hold shares in EU-based issuers listed on regulated EU markets. For intermediaries – banks, brokers, custodians and wealth managers – the impact is significant and applies across both retail and institutional securities services. These firms are required to offer an effective online proxy voting service that supports distribution of proxy notices to all clients “without delay” and same-day processing of vote instructions.
Firms supporting institutional clients must, if requested by a shareholder, confirm issuer receipt and recording of vote instructions. Intermediaries must also identify shareholders when requested by issuers – with a same-day response and verification of the authenticity of requests.
SRD II compels asset managers to align their investment strategy and decisions with the risk profile and long-term investment requirements of their institutional investor clients. Both institutional investors and asset managers must be more transparent about their engagement with investee companies and about how they integrate shareholder engagement into their investment strategy.
SRD II dictates that this information must be reported annually from the year commencing June 2019 and made available on the firms’ websites. These firms must also annually disclose voting behaviour and explain significant votes and their use of proxy adviser services. The Directive introduces a comply-or-explain obligation around meeting these requirements.
RICHARD FODDER, SENIOR VICE PRESIDENT, INVESTOR SERVICES AND HEAD OF SALES TO EUROPEAN BANKS, BROWN BROTHERS HARRIMAN
Will we see a rise in global custodians seeking a ‘white-labelled’ global custody solution?
Whilst there have been examples of white labelling or outsourcing of global custody in the past, these have largely been unsuccessful. Today’s commercial and legislative environments suggest that we will not see any new ones, particularly in the institutional sector. Where we have seen growth, however, is in making our operational and technological resources and expertise available to banks and intermediaries looking to deliver a robust global custody product tailored to the requirements of their specific client base.
We expect the number and scope of such arrangements to increase, facilitated by the rapid evolution of data servicing and management capabilities which allow greater integration with other products than has previously been the case. For universal banks, global custody’s value is defined by the extent to which it can be integrated into the wider bank infrastructure and, therefore, the bank’s overall client proposition. Global custody establishes a foundation upon which a broad range of other products and services can be delivered.
Key to this revenue objective is platform interoperability. Using our clients as an example, relationships have evolved from discussions about a specific financial function, such as global custody, to the processes and technology used to support our delivery of that function – and whether elements could be integrated into our client’s existing infrastructure as either a replacement for, or an enhancement of, legacy platforms.
We leverage data servicing experience to implement interfaces designed to help clients achieve a high degree of interoperability. The focus has changed from process to the data environments in which processes exist. An integrated data environment which promotes full platform interoperability can capitalise upon the investment made in legacy platforms and highlight specific gaps in functionality.
Our objective is to maximise the use of data whilst minimising its processing, an efficiency which also promotes the reduction of cost and risk. The key to a bank delivering a high-quality global custody product is that it should meet clients’ requirements whilst aligning to their business strategy. The detailed product definition will therefore be unique to every institution and can only be fulfilled by a modular and interoperable technological environment with full data integration.
ANDREW BATEMAN, HEAD OF CAPITAL MARKETS, BUY-SIDE AND CROSS-ASSET SOLUTIONS, FIS
As the asset servicing industry drives for digital transformation, how are you redesigning your approach to IT security to ensure safety of client data and assets?
The asset servicing industry is undergoing a radical transformation driven by global regulatory scrutiny and cost pressure. In response, administrators are automating and digitising processes to improve efficiencies, performance and decision-making, as well as satisfying complex reporting requirements.
Asset servicers have long had two central functions – enhancing investment strategies and keeping clients’ assets safe. Modernising and digitising the industry is an enormous task. While there are some pioneers, many companies are falling behind. An area of transformation that should be paramount, but is currently lagging, is IT security as the digital arms race has left many participants with their guard down.
GDPR was a wake-up call for company boards – the real prospect of breaches and substantial fines as asset servicers digitise their systems has galvanised action by some. Our 2019 Readiness Report, analysing digital transformation in asset servicers, shows a strong response from ‘readiness leaders’ (the top 20% most sophisticated firms) with 88% indicating they have strong cyber-risk management capabilities compared to just 33% of the rest of the industry.
There is a significant gap that needs to be plugged. Powerful AI and IT systems detect changes in behaviour or unusual activity. These systems are designed to stop breaches, carrying out penetration testing, building and hardening procedures, and providing data loss prevention. This takes place while human teams work around the clock to test security – carrying out attack drills to measure weakness and response, providing threat intelligence, monitoring data and responding rapidly to incidents. As custodians and banks undergo radical digital transformation, their cyber security should follow the same trajectory to keep their secure assets under lock and key.
TOM DORIS, CHIEF DATA SCIENTIST, LIQUIDNET
What role will artificial intelligence play in driving improvements in trade and investment analytics?
AI can be applied at various levels, based on what we want to extract from our data. We can use AI and machine learning techniques to model the data so that we can readily find anomalies, events or conditions that are unusual or interesting. This approach is relatively mature and is already being adopted. This allows traders to manage the deluge of market data and focus their attention on the situations where something interesting and unusual is happening – where human judgement can then add alpha or mitigate risk.
AI allows us to describe situations and events that are interesting to the individual by providing examples, rather than specifying explicit rules. In the past, such opportunities were identified with complex rules in stock screeners or laborious manual processes to review data. The new techniques make it easier to describe what we want and they also help to automate identification of the data that is most useful for the problem we want to solve. Emerging alt-data sets can play a significant role here by augmenting or replacing the factors used in screening.
AI, specifically natural language processing, has the potential to change radically how we interact with written content (‘unstructured data’) by making it more efficient to search large swathes of text. Much of the recent progress in AI research in academia and other industries has been around improving personalised content recommendations. In trading and investing, this is a more complex problem because what is important and interesting can change rapidly. However, the same techniques used to recommend movies and articles can be applied to our domain.
For the most difficult questions and uncertain situations, data and analytics are just the starting point. Deliberation and discussion among subject matter experts, interspersed with further data analysis, is required to reach good decisions. AI can help by tracking the relationships between points of evidence, hypothesis testing, and speeding up the data analysis cycle.
PETE EGGLESTON, DIRECTOR, BESTX (STATE STREET)
What is the asset management industry doing to fine-tune trading data and improve transaction cost analysis?
The use of data to help improve the execution process within the FX market has increased significantly in recent years. There are multiple use cases, covering all aspects of the trade lifecycle from pre-trade, through the execution itself – in terms of helping traders make more informed decisions – and post-trade analysis. Decision-makers can be deluged with too much data, especially if it is not delivered in an easily digested and intuitive format. The topic is evolving rapidly, not simply around ‘big data’ but how to turn this into actionable ‘smart data’.
Key to helping the industry with this challenge is to deliver rigorous analytics, packaged and summarised in an intuitive, interactive and visual web-based user interface. The software is designed to allow a fund manager to codify their best execution policy, specifying the execution factors that are relevant for their business and execution style, together with user-defined, systematic outlier detection and monitoring. In State Street’s latest product upgrade, a new Peer Analysis module was included for the buy-side, which allows clients to opt in and share their performance data in an anonymous, community data pool, providing the basis for relative comparisons of performance against their peers.
The foreign exchange and fixed income best-execution analytics platform is used extensively by liquidity providers and effectively delivers a utility to the industry (i.e. a level playing field comprised of a common language of methodology and metrics). This provides the market with a standardised platform – a key challenge in any over-the-counter market – enabling meaningful and positive interactions between liquidity takers and providers.
WIM RAYMAEKERS, GLOBAL HEAD OF BANKING MARKET, SWIFT
What are the next moves in promoting digital transformation of cross-border payments?
In a world where businesses and consumers expect payments to occur in seconds through online portals and apps, they rightly expect the same in international payments too.
So, in 2017, Swift embarked on a radical global overhaul of cross-border payments to enable money to move faster, more transparently and free of friction. The launch of Swift gpi has dramatically enhanced the cross-border payments experience, introducing a new service which increases the speed, transparency and predictability of payments – no matter where they originate or are going. This enables customers to make high-speed cross-border payments in minutes or even seconds, with nearly 50% of these payments being credited to end beneficiaries within 30 minutes.
We believe the next step is to make real-time, 24/7 cross-border payments as seamless, convenient, cost-efficient and accessible as domestic payments. With this in mind, we have completed a number of real-time payment trials cross-border. For example, in October 2018 Swift carried out its first instant payments trial, in conjunction with the New Payments Platform (NPP) in Australia, involving 12 banks in China, Singapore, Thailand and Australia. The fastest Swift gpi payment was sent from China, reaching Australia in 18 seconds.
Swift, alongside the European Central Bank, has also commenced a trial with a group of banks to test instant gpi cross-border payments in Europe using the Target Instant Payments Settlement (TIPS) platform. It aims to extend the reach of instant cross-border payments into the European market by enabling gpi in the TIPS system. By 2020, every bank on Swift will be able to track its payments end-to-end. A payments revolution is underway.
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