Technology is at the heart of the Sibos conference and has the power to transform the funds industry. But are firms throwing their weight behind automation? What use can they make of ‘big data’? We asked a number of experts.
ETIENNE DENIAU, HEAD OF BUSINESS DEVELOPMENT, ASSET MANAGERS AND OWNERS, SOCIÉTÉ GÉNÉRALE
Do senior fund management executives have a high enough regard for technology standards and automation?
For the time being, operational automation and technology standards don’t seem to be at the forefront of asset management firms’ concerns. They do, however, see standardisation as a means to reduce operational risk and cost. They also expect standards to help facilitate regulatory compliance, particularly in the wake of the recent regulatory tsunami. As for the digital race, asset managers tend to run with the pack, with very few forerunners, in order to transform their fund distribution models. Nevertheless, asset managers do recognise the need to find a new, efficient model for communicating with their prospects and investors and have already begun soliciting input from their transfer agency and IT providers.
What is the difference between the custody service of a CSD [central securities despositary] and a traditional custodian, and how will competition between CSDs and global or regional custodians develop?
Although being a direct participant to an issuer CSD does provide an additional level of safety for assets issued, asset servicing remains limited. Custodians, on the other hand, are able to provide broad-ranging services such as tax reporting, market claim processing, investment approval applications, proxy voting and representation at general meetings. Custodians are also the voice of the client when lobbying in local market associations.
As corporate action notifications in some markets are provided by multiple players, CSDs are not equipped to collect and dispatch this important information, which ultimately becomes the responsibility of the CSD participants. Also, many issuer CSDs do not follow Swift standards and participants must therefore connect to their platform or receive proprietary messaging, which can come at a high development and maintenance cost.
Finally, it is simply not possible to discuss legal contracts or financial conditions with CSDs and liability is strictly limited to operational risk. Regarding investor CSDs, they are simply providing global custody on other markets, essentially competing with international CSDs.
PHILIPPE SEYLL, HEAD OF INVESTMENT FUND SERVICES, CO-CEO CLEARSTREAM BANKING
Sibos will discuss how regulation and market dynamics are pushing market infrastructures and CSDs towards new business models. How would you describe this evolution?
We are indeed seeing a raft of changes. We are witnessing the emergence of new markets, especially in Asia, as well as of new market participants. IT companies and consultancies have amassed so much expertise in servicing the sector that they are acting as market participants in their own right. The increasing regulatory burden and the pressure on fees could also lead some participants to exit the market.
CSDs are all feeling the pressure of increased regulatory responsibilities. Regulators are focusing on asset protection and on reducing network risk. This has resulted in new custody models with different account structures but has also meant that CSDs are taking on increasing liabilities.
We at Clearstream see it as ‘disruptive innovations’. Like many innovations of that kind that help create new market conditions and customer value, it eventually disrupts the existing market conditions and value network.
What is the difference between the custody service of a CSD and a traditional custodian, and how will competition between CSDs and global or regional custodians develop?
CSDs and global or regional custodians face different regulatory and legal obligations. CSDs have a low-risk business model, which meets stringent asset protection and restitution requirements. CSDs tend to have larger liquidity pools than other custodians and they are certainly less fragmented. Another difference is that CSDs place a strong focus on standardisation and automation and tend to avoid manual processing and ad hoc developments. Our customer base is highly professional and constantly pushes us on product innovation. As a specialised custodian, Clearstream standardises fund processing and increases efficiency and safety in the investment fund sector.
VALÉRIE LETELLIER, MARKET MANAGER, SWIFT
What is the issue of ‘resilience’ and how does it affect fund managers? Are there lessons to be learnt from other industries?
An important question for fund managers is whether or not outsourcing affects portfolio selection and has an impact on the fund’s operating risk and performance. Research from the Swift Institute based on over 13,000 mutual funds in Europe showed that outsourcing is very common; 12% of funds use external advisors, 41% use external administrators, 45% use external transfer agents, 58% use external custodians, and all funds outsource to external trustees and auditors.
One significant area of post-crisis regulation is to ensure counterparties understand their exposures to each other through the issue of ‘legal entity identifiers’ (LEIs). LEIs are designed to help banks allocate their risk-weighted capital more efficiently, allowing them to do more business with particular investment managers. Swift is an issuer of both LEIs and Bank Identifier Codes (BICs) via its SWIFTRef reference data platform, which a number of investment managers are already using.
In a recent Swift survey (called Operational Challenges in Investment Management), fund managers expressed interest in a concept similar to Swift’s Market Infrastructure Resiliency Service, which could potentially be applied to cover the risks of a custodian bank, fund administrator or transfer agent failing.
The top priorities uncovered from the survey were regulation, automation and financial crime compliance solutions to combat ‘know your customer’, anti-money laundering, and sanctions screening challenges. Swift has already developed a number of solutions in these areas such as the KYC registry, providing a central repository to which banks and funds participants can contribute KYC information to support due diligence processes.
THOMAS ZEEB, CHIEF EXECUTIVE, SIX SECURITIES SERVICES
How is the market faring with T2S, the European Central Bank’s centralised settlement project, and what can we expect next?
The market is adapting well and the focus of the industry for the next three or four years will be adjusting business models to make the best of harmonisation now that T2S has begun. Large custodian banks will have to drive down their costs, decide what they can and should centralise and revisit old assumptions about what constitutes efficiency. This is why we’re already seeing a drive towards network consolidation, and that will take time to play out. Investment banks have mostly been sitting on the sidelines. They should be looking at the implications for liquidity requirements now, well before the final migration wave in 2017.
How is blockchain a game-changer for payments and clearing & settlement?
There’s a lot of noise right now in the marketplace around blockchain technologies. Our approach at SIX Securities Services tends to be a little more pragmatic. We are currently applying the principles of blockchain thinking, technologies and distributed ledger principles to existing models and studying the impact.
What we are seeing is that bringing blockchain thinking – as opposed to merely the technology – into the post-trade arena could render clearing redundant. Also, the need to have all of the elements for a trade readily available will significantly challenge the collateral management business. Echoes of questions raised in the 1990s seem to be returning rapidly: Real time: how fast is too fast? Understandable, considering that the disruption power of a blockchain approach lies in cash management. This could leave banks and other financial institutions gasping for breath.
TONY FREEMAN, EXECUTIVE DIRECTOR, GOVERNMENT RELATIONS/INDUSTRY RELATIONS, DTCC EUROPE
Does the fund management segment pose any systemic market risks?
The debate about systemic risk in the buy-side is far from over. Regulators appear to have agreed that assets under management is too crude an indicator of risk but it’s likely they will now start to examine specific areas, such as securities lending, for structural risk assessments.
How is the market faring with T2S and what can we expect next?
The market appears to be coping very well with T2S and it has had no material impact on fund managers. As more markets join, it is likely there will be a gradual reshaping of the post-trade landscape as consolidation projects take effect.
What is the difference between the custody service of a CSD and a traditional custodian, and how will competition between CSDs and global or regional custodians develop?
CSDs have historically not offered a full service offering that properly competes with custodians – but T2S has spurred some CSDs to offer a more developed product that competes with custodians. These CSDs will start to offer this product outside their home market because T2S has harmonised the settlement process. This will initially be in settlement, previously performed by local agent banks, but will likely expand into the asset-servicing arena.
BILL GOURLAY, CHIEF EXECUTIVE, IDEA GROUP
Can you describe some of the specific changes or challenges facing asset managers now in the technology sphere that you operate in, and how do you rate the ability of solutions to meet these challenges?
The asset management sector still faces many technological challenges, some in dealing with new challenges posed by regulation, and others in breaking away from the chains of legacy systems. The regulator, as ever, is the greatest innovator so will continue to force asset managers and their service providers to collect large amounts of data for reporting purposes.
Costs involved in readying systems to meet these challenges will be high and, in the majority of cases the provision of these systems will be by external parties, which will place strains on project and oversight resources. Knowing what, and when, to outsource will be key.
Remarkably, legacy systems and the incredible resilience of the fax machine will continue to hamper operational efficiency. Given the ability to make substantial bottom-line savings through the adoption of financial messaging automation across the vast majority of asset classes, asset managers really need to continue to focus on this area and motivate their service providers to make the most of these overdue improvements.
What has been the most important breakthrough for technological development in the industry of recent years?
The rise of ‘FinTech’ is the most important breakthrough to my mind, but not necessarily because of any one development, or because it’s new, as we all know that financial technology has been around for 40-plus years. However, the mindset shift that this has provoked across the industry is the key change as new players, models and challenges arise. The financial industry has an excellent opportunity to take advantage of this, and needs to embrace these changes rather than see them as a threat which just requires lip service, or worse still, as something that needs to be squashed. Financial firms need to have the courage to make these changes across their working practices, otherwise they will encourage new firms to fill the voids created by inefficiency.
DARON PEARCE, GLOBAL INVESTMENT MANAGER SEGMENT HEAD FOR INVESTMENT SERVICES, BNY MELLON
Do senior fund management executives have a high enough regard for technology standards and automation?
Investment managers essentially fall into two camps, one more populous than the other. Some firms – typically larger players with a significant passive business – are very focused on technology and innovation, and their processes are highly automated.
Then there is a larger group that are almost exclusively focused on the intellectual capital, people-oriented elements of managing funds, who focus their resources on stock picking, for instance, rather than operational capabilities. It is a somewhat polarised picture, though of course there are firms that fall between the poles.
What is also true, however, is that even the less technology-inclined firms are recognising the benefits of technology in the current challenging business environment. Engagement is very much on an upwards trajectory, and that is manifesting itself in a notable shift to embrace outsourcing, and the benefits it offers around complexity, efficiency and – importantly – competitive advantage. By outsourcing non-competitive functions – essentially trade execution onwards – firms can focus on meaningful differentiators.
What kinds of insight do fund managers obtain from ‘big data’ regarding investor trends and how does this help them?
Big data analytics facilitate the provision of real-time information and the generation of actionable insights that help managers enhance their business performance, increase efficiency and lower structural cost and risks. The application of business intelligence to fund distribution analytics and fund flows, for instance, is already generating very real results and benefits.
We’re already seeing technology in this space moving beyond its ‘traditional’ ambit – operational, processing-oriented – into the realm of Amazon-type insights into customer behaviours, whereby managers can access data on buying choices, investor demographics, churn rates – and use this to focus their development and sales strategies more effectively and profitably.
ANGUS FLETCHER, HEAD OF MARKET ADVOCACY, GLOBAL TRANSACTION BANKING, DEUTSCHE BANK
Sibos will discuss how regulation and market dynamics are pushing market infrastructures and CSDs towards new business models. How would you describe this evolution?
There is a clear drive to reduce the post-trade costs that exist today due to harmonisation and lower margins, without compromising on the safety measures in the system that regulators have brought to bear over the past few years. This is forcing CSDs and their participants to look at new models in order to determine how best to offer services to a client base whose requirements are evolving. We have already seen some CSDs – the larger ones in particular – evolving their offerings such as providing collateral services, linking up with CCPs [central counterparties] and exchanges, extending services to new customer segments.
On top of this, many parties are starting to look at innovative technologies, although these will ultimately require regulatory endorsement, and would require adoption across multiple parties. The evolution of models will take time, but CSDs should be thinking about all possibilities and models, in order to remain relevant. What is clear is that remaining stationary is not an option.
What is the difference between the custody service of a CSD and a traditional custodian, and how will competition between CSDs and global or regional custodians develop?
There is clearly space for both, with both playing different roles in certain aspects and similar roles in others. Many of the differences are driven by regulatory restrictions and demands. Customers will need to weigh up the benefits of utilising one type of organisation over another, or a combination of both, depending on their business model and their required service level. We will therefore continue to see growth of ‘co-opetition’ amongst the larger players – CSDs and custodians.
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