Differentiation through data

How are investment managers, investors and service providers responding to the growing status of data as an asset?

New cost pressures, technologies and asset classes are applying such an eye-watering squeeze on investment managers’ margins as to warrant new business models too. This phenomenon harbours inevitable implications for securities service providers, which must prove their mastery of technology, data and other assets to defend and grow their franchises.

Buy-side clients are seeking best-of-breed approaches to provider selection, according to Diane Teed, head of intelligent automation and change management, Brown Brothers Harriman.

“Clients should always have a choice to work with whoever is providing the best quality of service or the best capabilities,” Teed said. “As business complexity increases, asset managers will want more specialist providers and more ability to use a best-of-breed mode. That’s how we’re positioning ourselves in an open architecture model that is provider agnostic. We think our role is to be the provider that can solve client problems, rather than focusing on traditional segmentation.”

Best of breed

In a panel discussion, ‘Inside capital markets: Do new asset management business models have the power to disrupt the post-trade ecosystem?’, Teed cited an example in which Brown Brothers Harriman worked with a US$400 billion global asset manager operating across diverse markets, segments and asset classes to streamline reconciliation using a hosted platform to gather information from multiple systems and external providers. “We helped them achieve a higher match rate – 95% – than they could achieve on their own, using our subject matter expertise to solve one of their biggest problems, without needing to service every asset class for them.”

Sinclair Scholfield, head of sector solutions and consultant relations at State Street, suggested that even the largest securities services firms were no longer looking to be sole suppliers to their buy-side clients.

“The approach that we’ve taken is really to ensure interoperability,” Scholfield said. “Best-of-breed is fundamental. I don’t think that organisations are trying to be everything to everyone. Certainly, some clients may wish to go with one provider for everything, but the best-of-breed mindset is pretty prevalent in the asset management, asset owner, and institutional investor communities.”

In response to this trend, custodians are expanding from their traditional areas of expertise. State Street, for example, recently acquired order management system vendor Charles River Development as part of the firm’s efforts to provide services across the front, middle and back offices, with a particular emphasis on management of data flows, Scholfield explained.


Utility plays

Speakers across the securities sessions at Sibos 2018 agreed that while costs are dropping, margins are also tighter. This is leading asset management and asset servicing businesses to apply a range of strategies – technology integration, new product development and innovation, and development of utilities – involving collaboration to a greater or lesser extent.

Utilities can increase disintermediation and reduce risk, but there are challenges, noted Stella Clarke, chief marketing officer at technology vendor Murex, speaking in the panel session ‘Capital markets: Is the enemy within?’

“Utility-based approaches can bring a lot of benefit to the industry and could allow banks to accelerate their own transformation by outsourcing certain ‘non-compete’ aspects of securities processing, for example. The challenge lies in standardisation. While we’re starting to see some pockets of standardisation in the industry, many processes are still done very differently,” she observed.

Philip Goffin, global chief technology officer at investment platform provider FNZ, said there are potential opportunities to achieve new efficiencies through securities clearing and settlement utilities, but also expressed a degree of scepticism.

“I’ve seen utilities fail massively in the asset management industry historically, because they tend to become an inefficient collective mechanism. But with clearing and settlement, new opportunities are being created, particularly around blockchain and tokenization. Both new and existing parties may morph into new clearing and settlement models as part of the changing landscape over the next five years,” he said.

The use of data as an asset could be a key differentiator for asset managers and securities services providers. Scholfield said State Street is working on a sophisticated data provision service for multiple stakeholders, including asset owners, other custodians and regulators. Goffin suggested that the asset management industry overall needed to improve its data management capabilities to take full advantage of new innovations.

“Asset management firms don’t use data as a differentiator,” he remarked. “There have been a number of great data offerings in the asset management marketplace for some time. The problem is not that the offerings aren’t sophisticated, rather the asset managers don’t understand the value of their data and are not willing to look at how it can create value for their organisations. Traditionally, they haven’t needed to do that because they haven’t faced the kind of margin pressure and new entrants as today.”

Strategic significance

In a separate session, ‘The Golden Age of information: How can new technology break big data challenges?’, Shahmir Khaliq, global head of direct custody and clearing, Citi, asserted that attitudes are changing, with data management increasingly becoming a strategic concern for clients.

“During our client meetings here, a number of financial institutions have referenced their increased business need and focus on receiving and reviewing business data as close to real time as possible – including the ability to use such information to make more informed business decisions,” Khaliq said. “These expectations have led to a growing recognition that meaningful information delivery is now seen as a primary strategic objective for many clients and partners. Our goal as a core partner is to facilitate this key business requirement through an increased use of interactive information tools, allowing clients to make the most informed decisions possible.”

With growing strategic significance of data comes a more urgent need to protect it, noted Tim Lind, managing director, DTCC Data Services, DTCC, in that same session.

“We have a love-hate relationship with data,” Lind said. “The Facebook Cambridge Analytica episode created a visceral reaction amongst many people who viewed it as a violation of data privacy. Europe’s General Data Protection Regulation and other regulations governing the treatment of personal information have resulted in a real and good focus on privacy.”

While the highly regulated nature of the securities servicing sector can stifle the pace of innovation, incumbent service providers nevertheless believe that their domain expertise and legacy assets can still lend critical advantage when it comes to developing data services to serve evolving buy-side needs.

“Right now, banks actually can have a competitive advantage in the data space because we know how to custody assets and data’s an asset,” said Teed of Brown Brothers Harriman. “The challenge will be getting the data models, the infrastructure and the value propositions to line up before the FinTech firms face the same fiduciary and regulatory obligations that we have.

“We’ve worked in a highly secure and regulated environment for hundreds of years so we have an advantage right now. We know data. We originate relevant data, we have domain expertise as to the meaning and potential uses of the data, we have a better model for servicing data and we are expert in operating in a fiduciary capacity.”

Since the Global Financial Crisis, the aim of new regulation across the securities markets has been to improve investor protection and reinforce risk management, while also increasing transparency and the overall safety level of assets, thus creating a stable environment for market growth and competition. 

To what extent have reforms succeeded so far? In a panel entitled ‘Who is regulation for in securities markets? After all that investment, who has benefited the most?’ experts were guided through recent developments and toward future opportunities by moderator Graham Ray, global head of sales and relationship management for financial intermediaries at BNP Paribas Securities Services.

The panel’s regulatory representative took a cautiously positive view of the direction of travel. “The global community has sought to identify features of exchange-traded activity – namely greater data, transparency, and risk management in the post-trade infrastructure space – and looked to impose that across the non-exchange traded and non-securities market,” said Oliver Harvey, senior executive leader, market integrity group, Australian Securities and Investments Commission. “That’s a work in progress. Significant headway has been made. Almost every jurisdiction is now undertaking trade reporting of OTC derivatives. That’s been a significant value-add for us as an organisation.”

Harvey also acknowledged the role that regulators are increasingly expected to play in fostering innovation. “One of the things we constantly grapple with is an expectation that we are as precise as possible as regulators, but also are as flexible as we need to be to enable new ideas to be effective as soon as possible,” said Harvey, citing regulation of initial coin offerings as a case in point.

Improvements like the shift towards T+2 securities settlement sets a global standard and takes a full day of risk out of the cycle for cash equities, said Robert Palatnick, chief technology architect at US post-trade services provider DTCC. That’s a benefit for the entire industry, both on the buy- and sell-side, asserted Palatnick, who also spoke favourably of the wider use of standards such as ISO 20022 in the post-crisis securities market ecosystem, noting that regulation around transparency had helped to make platforms more stable and better able to recover from disruptive events. Further, standardisation initiatives such as legal entity identifiers had improved quality and consistency of data, thus supporting today’s efforts to derive more intelligence and value from transaction data, he added.

Holistic approach

Whilst reforms are broadly seen as necessary and positive for systemic stability and consumer confidence, the cost of implementing and complying with so many rule changes in such a short space of time has taken its toll on individual market participants, especially those operating in multiple jurisdictions. Justin Chapman, head of market advocacy and innovation research at Northern Trust, said his firm tried to take a “holistic approach” to regulation that impacts both clients and the bank itself.

“We look to identify how regulation impacts us directly but also the whole value chain around us. That’s probably the starting point for any opportunity,” Chapman said. “We’ve also tried to look not only at current regulation, but also to position ourselves – on behalf of our clients and our organisation – for future regulations as well.”

Prompted by a question from Ray on how product innovation had evolved alongside service providers’ responses to regulatory reforms, Chapman added that regional regulatory initiatives – for example the EU’s Central Securities Depository Regulation – had led to greater account structure optionality, at first in Europe and then beyond.

Chris Brycki, CEO of robo-advisor Stockspot, registered as a financial advisor in Australia, said the ultimate test for regulation was its impact on choice and value for end-users. If the combination of new technology and regulatory openness to competition is making investment advice and other services more accessible and efficient, lower in cost and with better outcomes, a decade of unprecedented change will have been worthwhile, he argued.

Concluding, Ray noted that the whole industry could draw benefits from the regulatory overhaul, not least due to the stable platform it provided for growth and innovation.