Strategy is key
17 Apr 2019
Penelope Biggs of Northern Trust provides insight into the company’s recent acquisitions and partnerships and discusses how the blockchain phenomenon creates opportunities but needs more strategy
Image: Shutterstock
Why did Northern Trust’s look to set up the integrated trading solutions?
For quite some years, we’ve had a brokerage team in the US, but we could see our clients outside the US really wanted to be able to combine the execution side with their custody operations. So we had been looking to acquire a firm that was really strong in brokerage and execution activities, that operated in the UK, Europe, Middle East and the Asia Pacific and that was also a cultural fit.
Eventually, we found Aviate, they ticked all the boxes, but by that stage, the second Markets in Financial Instruments Directive (MiFID II) was looming on the horizon, so we realised that because of MiFID II, the brokerage side was going to look fundamentally different. So we had to have a different model to go to market with.
Aviate and Northern Trust combined provide trade execution, downstream processing, settlement and interaction with the market, as well as regulatory reporting. A front, middle and back office integrated trading solution. That was initiated about eighteen months ago. We have won a lot of clients, some European clients, as well as some big names in the US. Now we’re bringing the solution to Asia and Australia, where organisations such as the superannuation funds are starting to think of insourcing asset management, but without wishing to set up full trading and execution capabilities in house.
Asset managers want to trade and want to drive bottom-line performance; they don’t want to have to do all the operational ‘plumbing’. They need somebody who can execute and someone who has that mindset of liquidity and transparency and can deal with all downstream activities and that’s what integrated trading solutions (ITS) essentially is. Sometimes things tick a lot of the boxes, you can sense that the time is right and it really worked well.
How has the solution developed since its initial launch in October?
Each time we look at a new opportunity in the market, that tends to mean we have to tweak it, or shape it, or add a different flavour. Sometimes, it’s a different flavour for the regulatory landscape. With ITS, it has been more about tweaks—adding more assets classes to our execution capability, enhancing reporting, integrating with external order management systems.
I don’t think there’s been a whole set change, but there’s definitely been an evolution of the product since October and I would say, more and more integration with all of the middle-office activities. It’s a step-by-step process.
How will ITS help asset owners and asset managers achieve better overall trading and performance outcomes?
ITS helps with managing costs as the asset owners and asset managers can outsource trade execution and related downstream activities to us. They don’t have to hire staff, they don’t have to keep all the systems that they would traditionally have to keep. Those systems are pretty expensive, so saving in that way helps drive their bottom line performance.
They also don’t have to do the risk or compliance activity, which can be quite a burden. It streamlines their regulatory requirements and it saves them money to deliver operational performance.
How does ITS meet MiFID II directive guidelines?
The regulatory reporting disclosures and analysis we provide helps demonstrate the manager that you’re in compliance. It will keep evolving as the need for transparency around costs and execution activity increases. ITS gets straight to the heart of MiFID II. On a global scale, the local markets and regulators are still trying to achieve transparency around best execution.
What else did Northern Trust achieve last year?
Until recently there were around 2,000 people at Northern Trust within ‘operations’—people that were doing activities which were so close to the client we decided to move all the ‘client close’ operations, like derivatives, in to our asset servicing part of the business in order to provide ‘operations with context’.
As all the people moved in and we set up the new structure, we also wanted a different way to develop products and go to market. We set up 12 primary product umbrellas, which most of our capabilities fall under. We’ve reconfigured several teams to fit within these product umbrellas—regulatory is a key one of these.
Sometimes there’s a danger that product development can operate in a vacuum. So for every one of those product umbrellas, we have appointed an executive from our global leadership team as the product executive—responsible for the product ownership, strategy and direction.
What will your main projects be for this year?
The first is around the strategic technology and operating model Matrix. Matrix is our platform for the future, in terms of how we deliver data to our clients, how we process and how we operate.From the back of Matrix comes a very sophisticated transfer agency portal for our end investors. Matrix also supports our blockchain digital solutions.
We’ve launched a series of solutions using blockchain which, to me, is really exciting because everybody talks about it, but you need something practical and you need a strategy to deliver it. Matrix is the plumbing, or the infrastructure, that sits behind our blockchain digital strategy. With blockchain, the most important thing is questioning how it evolves now.
We have clients live on the private equity blockchain, but there’s more we can do in terms of additional capabilities. We have to assess how we can further automate private equity, but can we then take it to other asset classes? It’s got to evolve over the coming years, but it’s live and it is real, which is exciting. But where does that take us within the cryptocurrency space? We have to be aware of what the rules are and what the regulators say, but cryptocurrencies cannot be ignored. You have to be thinking about them, you can’t stick your head in the sand with the world moving on. We’re questioning where we can operate safely in this kind of space to differentiate ourselves and support our clients and their future needs.
What technology trends are you seeing in other areas right now?
We made a couple of investments in new foreign exchange technology. We invested in a company called BEx, a Chicago-based FX technology company.
It has high-end software and algorithmic trading capabilities—this doesn’t take the thinking out of the process but automates the thinking that goes into the algorithms they produce.
As of a couple of months ago, we decided to fully acquire BEx and take the company and its capabilities in-house, which is exciting because it enables us to further drive transparency and automation in foreign exchange.
We wanted to see if there was a highly automated, sophisticated way to go about currency hedging, so we made an investment in another foreign exchange company called Lumint.
Lumint had a fantastic culture and technology that provided “look-through hedging”. This investment gives us greater capabilities and increased transparency and analytics in our FX service offering. None of the aforementioned are just technology, all of them have a service element too.
Are there any other regulations that will be a challenge for 2019/2020?
There are a number of regulations out there whether it’s fundamental MiFID III or RG97 in Australia.
We have to wait and see what will happen with the Central Securities Depository Regulation and we have to see how the Securities Financing Transactions Regulation will play out. It’s just starting and that’s big for people involved in securities financing.
We’ve got the General Data Protection Regulation here in the EU. In the US it’s being looked at differently, but they’re trying to achieve the same goal. We will see more regulation in 2019/20, but it will be heightened in different markets based on different needs and drivers.
The pace of need won’t slow down but how we innovate around it and derive insights for our clients is the key.
For quite some years, we’ve had a brokerage team in the US, but we could see our clients outside the US really wanted to be able to combine the execution side with their custody operations. So we had been looking to acquire a firm that was really strong in brokerage and execution activities, that operated in the UK, Europe, Middle East and the Asia Pacific and that was also a cultural fit.
Eventually, we found Aviate, they ticked all the boxes, but by that stage, the second Markets in Financial Instruments Directive (MiFID II) was looming on the horizon, so we realised that because of MiFID II, the brokerage side was going to look fundamentally different. So we had to have a different model to go to market with.
Aviate and Northern Trust combined provide trade execution, downstream processing, settlement and interaction with the market, as well as regulatory reporting. A front, middle and back office integrated trading solution. That was initiated about eighteen months ago. We have won a lot of clients, some European clients, as well as some big names in the US. Now we’re bringing the solution to Asia and Australia, where organisations such as the superannuation funds are starting to think of insourcing asset management, but without wishing to set up full trading and execution capabilities in house.
Asset managers want to trade and want to drive bottom-line performance; they don’t want to have to do all the operational ‘plumbing’. They need somebody who can execute and someone who has that mindset of liquidity and transparency and can deal with all downstream activities and that’s what integrated trading solutions (ITS) essentially is. Sometimes things tick a lot of the boxes, you can sense that the time is right and it really worked well.
How has the solution developed since its initial launch in October?
Each time we look at a new opportunity in the market, that tends to mean we have to tweak it, or shape it, or add a different flavour. Sometimes, it’s a different flavour for the regulatory landscape. With ITS, it has been more about tweaks—adding more assets classes to our execution capability, enhancing reporting, integrating with external order management systems.
I don’t think there’s been a whole set change, but there’s definitely been an evolution of the product since October and I would say, more and more integration with all of the middle-office activities. It’s a step-by-step process.
How will ITS help asset owners and asset managers achieve better overall trading and performance outcomes?
ITS helps with managing costs as the asset owners and asset managers can outsource trade execution and related downstream activities to us. They don’t have to hire staff, they don’t have to keep all the systems that they would traditionally have to keep. Those systems are pretty expensive, so saving in that way helps drive their bottom line performance.
They also don’t have to do the risk or compliance activity, which can be quite a burden. It streamlines their regulatory requirements and it saves them money to deliver operational performance.
How does ITS meet MiFID II directive guidelines?
The regulatory reporting disclosures and analysis we provide helps demonstrate the manager that you’re in compliance. It will keep evolving as the need for transparency around costs and execution activity increases. ITS gets straight to the heart of MiFID II. On a global scale, the local markets and regulators are still trying to achieve transparency around best execution.
What else did Northern Trust achieve last year?
Until recently there were around 2,000 people at Northern Trust within ‘operations’—people that were doing activities which were so close to the client we decided to move all the ‘client close’ operations, like derivatives, in to our asset servicing part of the business in order to provide ‘operations with context’.
As all the people moved in and we set up the new structure, we also wanted a different way to develop products and go to market. We set up 12 primary product umbrellas, which most of our capabilities fall under. We’ve reconfigured several teams to fit within these product umbrellas—regulatory is a key one of these.
Sometimes there’s a danger that product development can operate in a vacuum. So for every one of those product umbrellas, we have appointed an executive from our global leadership team as the product executive—responsible for the product ownership, strategy and direction.
What will your main projects be for this year?
The first is around the strategic technology and operating model Matrix. Matrix is our platform for the future, in terms of how we deliver data to our clients, how we process and how we operate.From the back of Matrix comes a very sophisticated transfer agency portal for our end investors. Matrix also supports our blockchain digital solutions.
We’ve launched a series of solutions using blockchain which, to me, is really exciting because everybody talks about it, but you need something practical and you need a strategy to deliver it. Matrix is the plumbing, or the infrastructure, that sits behind our blockchain digital strategy. With blockchain, the most important thing is questioning how it evolves now.
We have clients live on the private equity blockchain, but there’s more we can do in terms of additional capabilities. We have to assess how we can further automate private equity, but can we then take it to other asset classes? It’s got to evolve over the coming years, but it’s live and it is real, which is exciting. But where does that take us within the cryptocurrency space? We have to be aware of what the rules are and what the regulators say, but cryptocurrencies cannot be ignored. You have to be thinking about them, you can’t stick your head in the sand with the world moving on. We’re questioning where we can operate safely in this kind of space to differentiate ourselves and support our clients and their future needs.
What technology trends are you seeing in other areas right now?
We made a couple of investments in new foreign exchange technology. We invested in a company called BEx, a Chicago-based FX technology company.
It has high-end software and algorithmic trading capabilities—this doesn’t take the thinking out of the process but automates the thinking that goes into the algorithms they produce.
As of a couple of months ago, we decided to fully acquire BEx and take the company and its capabilities in-house, which is exciting because it enables us to further drive transparency and automation in foreign exchange.
We wanted to see if there was a highly automated, sophisticated way to go about currency hedging, so we made an investment in another foreign exchange company called Lumint.
Lumint had a fantastic culture and technology that provided “look-through hedging”. This investment gives us greater capabilities and increased transparency and analytics in our FX service offering. None of the aforementioned are just technology, all of them have a service element too.
Are there any other regulations that will be a challenge for 2019/2020?
There are a number of regulations out there whether it’s fundamental MiFID III or RG97 in Australia.
We have to wait and see what will happen with the Central Securities Depository Regulation and we have to see how the Securities Financing Transactions Regulation will play out. It’s just starting and that’s big for people involved in securities financing.
We’ve got the General Data Protection Regulation here in the EU. In the US it’s being looked at differently, but they’re trying to achieve the same goal. We will see more regulation in 2019/20, but it will be heightened in different markets based on different needs and drivers.
The pace of need won’t slow down but how we innovate around it and derive insights for our clients is the key.
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