Onwards and upwards
The securities markets have undergone significant structural change in recent years, but market infrastructures and service providers maintain their appetite for new efficiencies
How can the industry further innovate post-trade services to best serve evolving client expectations? That question was asked in a myriad of ways throughout the securities sessions at Sibos 2017 in Toronto. Depending on where the speaker sat in the value chain, it was answered just as differently.
For market infrastructure operators such as central securities depositories and central banks, especially in Europe, the focus in recent years has been on improving harmonisation, building scale and removing the decades-old Giovannini barriers to clearing and settlement efficiencies.
There is no greater example of this effort than the pan-European securities settlement engine, TARGET2-Securities (T2S). The initiative, first unveiled by the European Central Bank (ECB) in 2006, recently completed its fifth and final wave of migration and is now settling an average of about 550,000 delivery-versus-payment transactions per day. “It is a substantial volume of activity,” said Marc Bayle de Jessé, chairman of the Market Infrastructure Board and the ECB’s director general for market infrastructure and payments, in conversation with Lieve Mostrey, CEO of Euroclear, during a session on Tuesday morning.
“The economics of building one European market together are so strong. It will take longer than expected,” said Mostrey, noting that service providers, including Euroclear, had developed offerings to help clients take advantage of the opportunities promised by the cross-border settlement.
“We are delivering an important piece of integrated market infrastructure for Europe with a harmonised framework around T2S, but it is not time to be complacent; we can do more,” said Bayle. “Integration has not yet fully come, despite the fact that we now have the same tools and have defined the same standards together with the market participants.” With many of the prerequisites now in place, the market is now ready to take the next steps toward greater harmonisation, he suggested. “We cannot say it is as natural to trade within a national market segment as between one place in Europe and another, because integration into a domestic European market is not yet fully achieved,” Bayle continued.
Threats and opportunities
On the brink of a more integrated Europe, where did Bayle and Mostrey see the opportunities – and potential threats – for all players in this emerging securities market ecosystem?
The rise of national interests over international cooperation at the political level remained one barrier to progress, agreed the speakers. While both market infrastructure executives also put cybersecurity concerns firmly on the threat side of the ledger, they were less equivocal on the role of FinTechs, previously characterised as competitors to securities market incumbents, but now increasingly seen as presenting an opportunity to fast-track the sector’s understanding and deployment of new technologies.
This means that the securities industry, sometimes hampered in its efforts to innovate by legacy systems and siloed thinking, could benefit from embracing new technologies and partners – especially the oft-cited startup mentality embodied by many millennials in FinTech – but Mostrey urged caution too. “It is important to keep our eyes wide open – we can learn so much,” she continued. “Richness will come from dialogue. Newer views have the potential to bring a lot of value to the market.”
Bayle reiterated that many digital technologies are still in their infancy, noting the ECB’s joint role as regulator, catalyst for harmonised usage of innovation, and market infrastructure operator, which demands a primary focus on safety, security and efficiency. “As regulators, we are the authority in the market, and we should make sure that our capacity to regulate and act is not undone by new technology, either by new entrants that would not be properly overseen or regulated, or by our capacity to access information and data,” he said.
Above all, Mostrey and Bayle agreed, market infrastructure providers must be able to guarantee resilience and robustness at scale and under extreme circumstances. No innovation – even distributed ledger technology, which is increasingly being implemented via pilot programmes across the securities ecosystem – can be allowed to put that at risk.
Another Tuesday panel provided a range of perspectives on the role of new technologies in improving securities market workflows, concentrating specifically on artificial intelligence (AI). Moderated by Diane Nolan, managing director of capital markets at Accenture, the session’s panelists discussed the deployment of various AI-based technologies in the middle and back office, including robotic process automation (RPA) and text analytics, with application in areas such as document and contract processing and trade reconciliation.
Matt Davey, head of business solutions at Societe Generale Securities Services, warned on the limitations of RPA, which effectively replicates low-value manual workflows. “RPA has the effect of setting your legacy systems in aspic. It’s very hard to make changes to those systems from that point, because you would disrupt the RPA that you put in on the top. It’s something of a one-step move,” he explained.
AI-based initiatives will only be as good as the data they consume, observed Sean Foley, CTO for worldwide financial services at Microsoft. “Fundamentally, AI is about reasoning over large amounts of data. If you don’t have high-quality data to begin with, the decisions derived from that data are going to be incorrect decisions with higher confidence.”
Louella San Juan, global head of client technologies, Morgan Stanley, pointed out the potential of AI to increase the excellence of banks’ processes and services “across the board”. But she also noted, “Good thought and good judgment is a collaborative process, and AI is quite far from that. And that’s what makes us unique as human beings.”
With pros and cons absorbed, the panel’s audience retained their enthusiasm for AI, with 63% asserting the technology had a future in their middle or back office at the end of the session.
A key driver of market participants’ interest in technology innovation – the changing economics of providing custody and securities services – was one of three ‘elephants in the room’ discussed on Wednesday afternoon, alongside regulatory pressures and geopolitical shifts. Moderator Guido Wille, head of market development at Clearstream, tried to give equal weight to all three topics, it was the retreat from globalisation, and in particular the implications of Brexit, that most animated the discussion.
It is widely understood that UK-registered banks will need the correct European passporting arrangement to conduct business going forward across the Eurozone. As such, Rob Scott, London-based head of custody, collateral and clearing at Commerzbank, believes many organisations are currently seeking full regulatory approval to incorporate or reactivate licences in various appropriate locations.
Whilst the scale of any exodus from London remains uncertain, Jyi-chen Chueh, head of custody services at Standard Chartered, identified a shifting of gravity in response to the growth of a local affluent middle class in Asia, the Middle East and Africa. “I think there is additional demand that is not necessarily taking business out of London or the US, but is actually creating a bigger pie,” he said.
Time for a rebrand?
Attracting – and retaining – diverse talent in the securities markets’ vital back-office functions was the topic of one of the final panels in a packed schedule at Sibos 2017. That diversity is good business is no longer up for debate, agreed the speakers. It’s a proven performance enhancer according to many studies, including one UK-based paper cited by former Barclays executive Hayley Sudbury, founder and CEO, WERKIN, which reported a 3.5% EBIT rise for every 10% increase in gender diversity on the senior executive team.
Such studies make the case for increased demand for talent from a wide range of backgrounds, but what about supply? The panel also agreed that the back office suffers from an image problem, which could dissuade millennials. “Let’s rebrand this and make it more exciting. That is half the battle in attracting the right talent,” said Sudbury, whose firm uses technology to support and develop mentoring programmes.
“We can learn from the FinTechs,” said Thomas Zschach, chief information officer at CLS, which provides risk mitigation and operational services for the global FX market. “It’s about agility and working for something with purpose and flexibility.”
At the end of a week that had demonstrated the sector’s capacity for reinvention and appetite for further technology-driven change, Martina Gruber, executive board member, Clearstream Banking, and Goran Fors, acting head of investor services, SEB, suggested the current pace of change made a compelling case for a career in securities services. “There are so many challenges ahead of us,” said Gruber. “T2S can change the world, [and] there is no better place to be. Let’s move the back office into the new era.”