ROSS WHITEHILL, CHIEF EXECUTIVE OFFICER, THOMAS MURRAY
Custody and infrastructure due diligence: are the road trips over? What does best practice look like?
Across the industry, monitoring of counterparties and on-the-ground due diligence has switched, almost instantly, to a remote world of telephone and video conference to maintain good visibility on counterparty performance, compliance with procedures and controls, and risk minimisation across operations and technology.
Many challenges have arisen from initial due diligence ‘visits’ – conducted remotely via these ‘virtual’ channels – including inconsistent electrical supply, intermittent internet connectivity and limited bandwidth in some markets. These may be compounded by difficulties in accessing the right people simultaneously and time-zone differences that would not otherwise have been relevant. Regulators have been supportive throughout this period. While there is no regulation specifying that due diligence must be performed on the ground, for more than 30 years the industry has adopted an in-person model as the most appropriate way of ensuring standards are met, risks and market practice changes are understood and relationships maintained.
Against this background, we reflect on whether on-the-ground due diligence is superior, whether this might be confined to high-value and high-risk markets and whether the interval between physical market visits can be extended. Recent experience prompts us to look closely at the role technology can play in creating an enhanced remote service. It also raises the question of whether the industry might co-operate to meet counterparty/market due diligence in the future – and, indeed, whether this would be permitted by regulators.
R. VIVEKANAND, HEAD OF TCS FINANCIAL SOLUTIONS, TATA CONSULTANCY SERVICES
How mainstream are digital assets and cryptocurrency now? How is the supporting infrastructure and custody framework evolving?
We are at a unique point in history, where some of the technology advances achieved in the past few years have been further accelerated by the pandemic. Artificial intelligence, machine learning and cloud have been available for some time, but they are now accessible at scale at the right price. The financial services industry is becoming more pragmatic in its use of blockchain.
At a time when interest rates are near zero or less, digital assets are one area in financial services where acceleration is expected. A combination of factors is likely to drive their adoption, including the availability of mature, secure technology and ease of use of cryptocurrencies in many parts of the world, providing a faster and simpler peer-to-peer payment option than provided by traditional payment services. Regulatory changes are enabling the use of digital assets and cryptocurrencies in some developed economies.
The evolution of cryptoassets has also shaped the growth of the supporting infrastructure. A number of these elements are in incubation and will soon create a large supporting system that will provide a further spur to the growth of investment in this direction: central bank digital currencies (CBDCs) provide an option for national infrastructure institutions to be a part of the crypto space, while also protecting sovereignty and security. Digital exchanges are making it easier for retail investors to buy and sell cryptoassets, making hitherto illiquid assets available for investment. Tokenisation is providing avenues for creating greater liquidity in less liquid assets, while custodians are providing cryptoasset custody alongside the custody services they offer for other asset classes. To support these developments, efficient and effective know-your-customer (KYC) and anti-money laundering (AML) processes are being applied to the digital asset space to prevent illicit purchases, financing of terrorism and tax evasion.
I imagine the future to be a world in which almost all assets are tokenised and stored, similar to the transition from use of physical documentation 40-50 years ago to electronic storage today. Cryptoassets and currencies will have a significant role to play in that economy.
PIERRE COLLADON, SENIOR ADVISER IN STRATEGY FOR MARKET INFRASTRUCTURES, SOCIETE GENERALE SECURITIES SERVICES
SRDII: how has the industry responded to the September 2020 deadline?
In my opinion, widespread efforts have been made globally in different directions to respond to the September deadline for the second Shareholder Rights Directive (SRDII).
Intermediaries have been working intensively, despite the pandemic, with the industry conducting their response in parallel. On a European level, common market practices have been defined, while at a national level, markets had to simultaneously run their adaptation plans.
Local regulatory frameworks have not necessarily adapted to SRDII implementing rules, leading to a situation where there may be no sanction regime in place for some time.
Looking ahead, the current priority is to fine-tune compliance in all the business activities covered by SRDII implementing rules, and to assess potential local differences and gaps in a specific market.
The second priority is to adapt to the use of the new formats that have not been used before (ISO20022 for General Meeting and Identification of Shareholders) and to improve them. The same approach should be adopted for any standard and market practice.
The third priority is a need for stability in terms of the legal and regulatory framework.
It will enable the ecosystem to find its economical balance by allowing stakeholders to carry out their business in an efficient and accurate way.