The securities industry is relishing digital asset opportunities while tackling persistent settlement issues

The opportunities of new asset classes, addressing settlement fails, and a shift to T+1 lead the agenda within the securities stream of this year’s Sibos.

There is little debate about the biggest talking points in the securities world in 2022, with a welcome balance of challenges and opportunities atop the agenda.

To address the latter – and to lead with an air of positivity – new technologies and digital assets have both taken a giant leap over the past 12 months moving further into adoption stages in the securities space.

Digital assets, in particular, are earmarked by securities services providers as an area of focus, led by ever-growing client demand. Whereas incumbent custodians have been active observers and commentators on the subject for some years, the past 12 months have seen the largest banks enter the fray with business units dedicated to the burgeoning sector.

In what should be one of the most anticipated securities panels of the week, custody giants BNY Mellon, State Street and Northern Trust will discuss the matter in the panel ‘Servicing digital assets: Who will win the battle?’ joined by market infrastructure providers, DTCC and Clearstream.

Traditional and digital markets co-exist today, and we expect the boundaries between them will continue to blur over time”

Justin Chapman, global head of digital assets and financial markets, Northern Trust

“Clients who hold both asset types will need market access support and solutions across the entire spectrum of investment types and markets. They will also need help navigating continued change in securities markets, including new regulation, market evolution and the development of emerging technology capabilities.

“It’s not surprising that some in the market are focused on digital assets as a distinct business line. However, successful asset servicers ultimately need to bridge the gap between traditional and digital assets and help investors navigate the transition between the two. We believe a more holistic approach to providing and managing access to the markets will become a key differentiator for us in the asset servicing marketplace.”

With the headwinds facing securities services providers in recent years well documented, the digital assets space provides a new battleground for these servicers to grapple as they ready themselves to cater for the growing demand in the sector.

Despite impending regulation for digital assets worldwide, this space represents a greenfield opportunity for custodians to capture new business. The session will look to answer the widespread questions the industry still has around these assets. Is there still a need to keep these new assets in a custody account or a depositary bank? How will traditional intermediaries and securities servicing firms such as custodians and central securities depositories (CSDs) adapt and compete? Or will they partner with fintechs that, despite often lacking maturity and established business knowledge, have an edge when it comes to agility and ease with using new technology?

Though developments using distributed ledger technology (DLT) in the securities space have been few and far between, some of the active use cases have involved areas of ‘low hanging fruit' ripe for innovation. One of these areas is corporate actions. A manual and unnecessarily costly area, a collaboration between SWIFT, Symbiont and a range of securities players has been formed to pilot an ambitious enterprise blockchain solution, capable of sharing accurate information with all stakeholders in near real-time. This will enable asset managers and custodians to reduce the cost and risks associated with managing corporate actions, and will be discussed on day one.

Before addressing the challenges being discussed at this year’s Sibos, one could also argue that the nature of the discussion ‘Green, clean, and ESG: Rewiring capital markets for a new generation of responsible investors’ carries with it some positive steps for the industry. Acknowledging that as the biggest investment trend for funds continues to gather pace, the securities market will have to adapt to these requirements and help push the ESG agenda forward.

“The ESG agenda has been a relatively polarising topic across the capital markets over the last 12 months,” says Virginie O’Shea, founder, Firebrand Research.

“However, as we’ve seen increasing focus on climate risk and much more evidence on climate change, that political and industry environmental focus isn’t going to go away. It’s a fascinating backdrop against which to explore how the separate categories of E, S and G are impacting the industry already and how they will transform the investment sector of the future.

Whether they continue to become part of the investment process across the globe or certain regions diverge, or they develop into separate categories in their own right, is still up for debate. What is certain is that a veritable mountain of regulation is on its way and firms will have to adapt accordingly.”

Virginie O’Shea, founder, Firebrand Research

Now, if your career is embedded within the securities world, you will no doubt know that settlement has been one of the most talked about, contentious matters within the industry since the start of the pandemic.

This has been for multiple reasons, but most notably, abnormally high rates of settlement failures across the world, as ‘unprecedented’ market events appear to be becoming more, well, precedented.

In addition, Europe rolled out its long-awaited Settlement Discipline Regime (SDR) under the Central Securities Depositories Regulation (CSDR) in a bid to reduce settlement fails and shine a light on the reasons behind them through reporting requirements.

Now eight months into the regime, the shaky start and teething problems have been publicised with penalties occurring frequently, fail rates still high and issues across the industry with Standard Settlement Instructions.

During Sibos, the issues with settlement and the shift to T+1 in the US, Canada and India will be discussed in-depth.

In ‘Tackling the root of securities settlement fails’, a panel of experts will look at why some transactions fail to settle on time, the rising costs and risks associated with this, and delve into a new service that is said to address the issue once and for all.

With T+1 coming into force in the US in 2024, preparations are truly underway, with the Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) publishing guidance for the implementation in August this year.

While the US and Canada are now set on this path, the debate around leveraging the adoption of DLT and digital assets to go for instantaneous settlement rumbles on, but many securities experts remain against the notion given the current state of the industry.

In the panel ‘Is T+1 the goal or a step to instant securities settlement?’ experts will answer: what prevents securities from settling instantly – technology, time zones, liquidity, or is there something else?

“Any time constraint on securities lending where the lender will either need to get the original securities back from loan, or substitute the lender with another counterparty, brings numerous challenges for the industry,” says Javier Hernani, head securities services, SIX, “particularly in a situation where the security has been sold late in the day, in order to effect settlement the next day.

“However, perhaps the biggest challenge will come when all relevant market participants are ready to adapt to T+1 at a certain point in time. There could be wide ranging implications to respective stakeholders if various technology infrastructures suddenly need to handle the switch all at the same time. This reinforces just how important early modifications to processes, technology and behaviours will be to avoid an increase in potential settlement fails.”