On the 29th March 2021, the UK supervisory authorities publicised the final policy statements surrounding operational resilience. These had been in the pipeline since 2018, when the original discussion paper was published, and ends an extensive period of consultation across the industry. The objective had been to find a common set of standards across the whole financial sector, to deliver an operationally resilient financial system that per the FCA can ‘absorb shocks, not compound them’. During 2020, the market had first-hand experience of the criticality of operational resilience itself, as the pandemic stressed capital markets systems and processes to the full. And though the industry coped adequately during this period, this was mostly a by-product of blood, sweat and tears as much as it was of structured oversight of robust systems and processes.
By outlining a clearly defined set of expectations and timelines – running through to a hard deadline of March 2025, requiring board ownership of impact tolerances – giving clear ownership for the outcome, and leveraging the senior managers regime to prescribe responsibility – making accountability personal, the industry will need to take these requirements seriously.
But didn’t the pandemic highlight the strong resilience of the capital markets post trade environment?
Not really. Taking a macro view, the industry avoided the type of post-trade meltdown that could have led to regulatory intervention to cap volumes or limit trading activity to safeguard the marketplace. But that shouldn’t mask some of the challenges that the industry faced nor the unique set of circumstances that surrounded it. Namely:
- The pace of the pandemic ramped up over a 6-week period, giving extensive notice of impending disruption. Not a typical timeframe for a resilience event to occur.
- All organisations were in the same situation, incentivising peers and competitors to collaborate extensively to mitigate the impact. It is unlikely that future resilience events will be this far-reaching nor encourage non-competitive behaviour.
- Government intervention helped the credit markets and shored up liquidity, avoiding market-wide stress around funding availability. This level of support is unlikely in more localised events.
What the pandemic also highlighted was the heavy reliance on manual tasks (people) across middle and back-office processes. This was evident through the disruption associated with specific countries going into lockdown – limiting staff attending the office and causing a knock-on effect in capacity to support processes such as making margin calls. It was further highlighted by the intervention of regulators to convene weekend working groups, to resolve exceptions and clear backlogs.
“More than 270 of Wall Street’s key trading staff were summoned for emergency weekend duty to clear a massive backlog of failed trades in March and April, highlighting the stress that built up in the financial system when the coronavirus crisis tore into markets.” FT, May 26th 2020
It also showcased just how low levels of digital adoption were across the industry, as most firms rapidly deployed digital communication platforms into teams that had been forced to work remotely. For all of the organisations that had claimed to embrace digital transformation, in most cases the reality was somewhat different. It showed just how reliant many still were on emails and spreadsheets to compensate for a lack of automation. 12 months on, even the adoption of a digital culture is still very much ongoing – which shouldn’t be confused with digital transformation (which is a big leap on from this first step).
An Opportunity to Transform?
Regulatory compliance has often been the catalyst for driving improvement of systems and processes within capital markets, as organisations leverage the mandatory nature of compliance to justify investment. Whether the policy statements create this catalyst across the post trade environment remains to be seen, but an initial analysis shows that the requirements appear to create an opportunity for change. Specifically:
- Definition and mapping of important business services. The requirement to define and map these services creates an opportunity to capture the disparate systems and processes that underpin the post trade environment. If conducted properly, this creates a case to properly capture and identify unstructured processes and manual pinch-points, bringing clarity to the cost and lack of scalability across middle and back office. This results in a visualisation that allows senior leadership to understand the reality of the post trade world in their organisations
- Definition and scenario testing of impact tolerances. By specifying board ownership of impact tolerances – the ‘maximum tolerable level of disruption to an important business service’ – senior accountability for the framework that organisations will use for demonstrating and measuring resilience is clear. This gives it profile.
- Governance and self-assessment. Leveraging the senior managers regime, the relevant SMF24 (and the board ultimately) will be accountable for delivery and maintenance of the framework. Whilst this level of accountability is not new, clarifying ownership will bring focus to the response from the organisation. This signifies its importance to regulators and the need for prioritisation.
- Remediation of vulnerabilities. Once mappings and ongoing testing of vulnerabilities have been identified, remediation work will be required to close any gaps. Whether these vulnerabilities relate to key worker dependencies or perhaps the complexity associated with third party relationships, mitigation will in most circumstances come through automation. This creates a catalyst for organisations to come together across functional silos and drive end to end improvements to their legacy systems and processes. Not only will this be impactful in terms of cost and efficiency, it will also become an ongoing feature of the annual investment cycle. Per the FCA, Firms will be expected to have ‘made the necessary investments to enable them to operate consistently within their impact tolerance’.
Taking a Transformational Leap
At first glance, organisations may view the policy revision as being merely an extension of work they have already done – which for some, may be correct. For the majority however, who are still stricken by low levels of automation and high post trade costs, this creates an opportunity to make a transformational leap in processing capability. As C-level executives plan their response, they should be looking to unlock process complexity and embrace innovation to support their compliance efforts. Success will require investment and leadership but where this is applied appropriately, digital transformation of post trade can become a by-product of compliance for these organisations. Not a reactive after thought.