Last week saw us attend the Network Forum’s annual meeting in Athens, where custodians, market infrastructure providers and banks get together to compare notes on current and future challenges. It was an interesting couple of days, with the agenda a good mix of regulatory driven challenges (such as CSDR) alongside some of the obstacles to wider transformation objectives. Focus on market driven changes – such as T2S – alongside regulatory compliance were common themes dominating discussions but what was also evident was the slow pace of internal IT transformation and the impediment this created to adoption of new technology. Client service and overall process efficiency were clear objectives for most, but delivery of these have in the main been hampered by the legacy architectures that persist internally.
Here’s five things we took away from the week:
Criticality of Capital & Liquidity. Output from a survey by Soc Gen – which was released during the conference – reported almost a quarter of the respondents viewing the cost of capital and liquidity as being the biggest challenge for the industry over the next 5 years. This had increased from below 20% in the prior year, echoing the growing trend we see around this as an area of focus. Whether this is usage of intra-day liquidity or the challenges of collateral optimisation under LCR, the cost of inefficiency in this space is increasingly becoming evident to most.
Successful Transformation Needs To Be Boring. One of the digitalisation panels was refreshing in that it focussed less on the wide spectrum of technology available to support transformation and more on how to enable it successfully. The essence of the discussion was that success here is less driven by technology choice and more by the structure and processes to enable implementation. The complexity of most capital markets organisations requires transformation programmes to transcend functional, geographic and system boundaries. Governance, stakeholder management and change management best practice are hard to maintain consistently in this type of environment – but those firms that have digitalised their organisations have done so by emphasising the value of these behaviours rather than simply choosing good tech.
T2S As A Vehicle For Standardisation and Efficiency ? One of the breakout groups provided the platform for the inevitable discussion around the role of T2S in driving efficiency (and ultimately cost reduction). Whilst a common discussion point in 2019 – driven in part by the increase in settlement costs this year – the debate took a different angle to some of those we have seen previously. The standardisation benefits were acknowledged around risk reduction, insulation from CSD upgrades and regulatory compliance – ‘CSDR would have been a nightmare to implement across CSDs’ cited one panellist – but the discussion then moved onto efficiency and the role of T2S in this.
‘Focus on efficiency should start by looking at cost and not fees’ noted one panellist who outlined that that whilst fees may have increased this year, they are still 60% below the average CSD settlement cost from 10 years ago. ‘What should be focussed on should be the cost of technology, people and agent fees that are then added onto the settlement fee’ he argued to represent the true cost of processing. Which made a fair point. The true cost of efficiency is hidden internally amongst people, processing and technology budget lines, so driving cost reduction must focus upon these areas first. T2S will provide standardisation, and has done so in the past, but it can’t solve the internal cost base challenges of capital markets firms. That must be driven by the banks themselves.
Data Centricity Again. Alignment of data centrally, whether to improve customer experience, drive processing efficiency or optimisation of resources is easy to conceptualise but hard to do. With most organisations challenged by fragmented architecture, this becomes complex to unravel and hard to solve easily. So whilst it continues to be a hot topic for the industry, the criticality of driving towards architectures that makes this easy to consolidate increase. Taking collateral as an example – the historic challenge for an organisation used to be ‘what have I got and where is it’ – which was typically reliant on back office settlement date. However, now with regulation such as LCR and NSFR, this question is now not only ‘what have I got and where is it’ but also ‘what am I financing and where did it come from’. To solve this, some organisations are taking the extreme steps of external segregation of assets to control this manually – which is expensive and time consuming – because they cannot piece together this picture internally. Avoiding the data challenge by hard wiring these types of solutions only makes the longer-term problem worse.
The Transformation Challenge. The closing comments by the CEO of a European post-trade provider gave an honest and open assessment of the pace of change within the industry. And it wasn’t pretty…..
Their observation was that despite positive noises and back slapping by many around their pace of change, the industry was not doing enough to drive forward innovation and automation. Too much of the pace of change was slow or where it had started, it became distracted too easily. So C-suite executives should be looking internally at their own efforts to understand whether their direction was clear and also whether the transformation agenda was being given enough focus to drive clear, tangible outcomes. In the absence of this, the industry will continue to underperform within the realm of post trade as efficiency and innovation are central to longer term success