What challenges do multi-asset class dealings pose to systems and processes?
In the front- and back-office today, there is an island of silos systems that have been acquired over a number of years that have to support the processing of individual asset types and instruments. Each of these systems is based upon their own data model and definitions. The primary issue is one of support, maintenance and cross communication. It is impossible today for banks or financial institutions to get a realistic view of where they are, what their liabilities are or what their commitments are, because the data is essentially isolated and in different languages.
The challenge for banking is how to rationalise that system landscape and how to normalise the data to get that holistic view. And why is that holistic view is necessary? Some regulations require monitoring of intraday liquidity and others require banks to provide sufficient collateral to safeguard against their commitments. Unless you know exactly where you are across the whole bank, you won’t know how much reserve you are required to hold. As a consequence, regulators will impose higher expected collateral requirements, meaning it will cost the banks.
Another challenge is how to support those individual systems. You have to apply people. It will be necessary to have people supporting and providing upgrades for the solutions, providing maintenance and to also support the ETL layers, the delivery of messages into the systems, and to be able to extract the data out of those systems. Today, we find that there are hundreds, if not thousands, of people engaged in the back office of a single financial institution and their job is purely to support the current systems.
There is an enormous frustration where the operations business units are managing multiple asset types. They have to log into multiple systems in which the data is being presented in both systems in a totally different way.
There are many dimensions to this challenge and the result is an enormous cost at a time when the banks are looking to make enormous cost reductions. We’ve heard some banks are asking for 70 percent cuts in their operating costs. You can’t do that with many different systems. You need to move to a new paradigm.
What difficulties exist when trying to achieve automation?
The key has got to be in two places. One is a common technology stack to make everything far more supportable, which leads to the learning and training required for operating staff becoming substantially lower in cost. The second is normalising the data to reduce the requirement for ETL, to be able to present it in a more efficient way and to collate it for reporting and monitoring. Each of the individual systems provides data in their own way. We see this in international systems, for example, there are multiple coding conventions for securities and equities, and those different systems have their equivalent internal identifiers, which recognise a particular asset and relate those assets to each other.
That is a conundrum in itself. You can cut that whole problem by clients, their counterparties and agents, identifying the accounts, funds and portfolios with their own unique identifies. There is massive translation problem that has to be undertaken and resolved in order for the systems to be able to communicate with each other. That is the crux of it.
If you want to be able to see a realistic view of where you are as an organisation you need to have a single, normalised data view. If you do not have that, then you’re disjointed. There has to be common way of defining all of that data and common practices that can operate that data. If you have multiple systems you are going to have to train it, or you’re you’ll have to use each of those individual systems. If you have a rationale of single technology stack, you’re only doing that training and that support once.
Will the systems you are developing aim to achieve a single platform?
SmartStream has been a thought leader for more than 15 years and we have always recognised that single stack technology is the only way to move forward. Our Transaction Lifecycle Management platform, released in 2002, has been providing solutions of single technology stack.
All of our solutions are built on a single technology stack, which enables us to provide one single technology across the whole back-office and post-trade sitting. Our clients are delighted because they have single teams now supporting cash management, post-trade management, corporate actions, and they’ve been able to reduce their business units.
Now we are seeing clients move from a traditional model of having a team for equities, a team for over-the-counter derivatives, and teams in other areas, and they are now consolidating the teams so they can have one team that can deal with all of those different asset types throughout their day in a single solution.
What effect do location and the increased demand for collateral have?
There are solutions that are processing each of the individual trades on an asset basis, and those trades need to lead to an aggregation of balance and positions. If they are held in different systems, somehow you have got to put those into one picture. Some systems are provided to perform different parts of a lifecycle of a trade. Separate systems might be responsible for booking trades, allocating orders, doing post-trade processing for confirmations, doing the payments of those commitments and managing the clearing of those securities. There may well be five or six systems involved in the lifecycle of a single trade and somehow they have to tie up the normalisation of the data while overcoming disparate identifiers.
The challenge is linking all of those together so that you can understand where you are, second by second.
Lehman Brothers went down in five minutes because it did not know what liquidity it had, what its commitments were and what it had to make in payments. Then Basel III came out and banks are being driven to put in place ways of monitoring what their collateral positions are, what there liquidity is, and how can they make the commitments that they have to provide on an intra-day basis.
What is really odd, although having spent 20 years in the business it is not a surprise, is that the first thing that banks are doing is aiming for a tactical solutions, which is to say they are meeting the implicit requirements of Basel III. Essentially, this means they are putting reporting monitoring in place, so they will generate a report.
Many of those institutions are putting a reporting system in place and putting people in, adding to the operational cost, and their job is to everyday go to the different systems, extract the data, put them into spreadsheets and then create a report.
That report tells them that they went out of business yesterday. What they need is to move the batch processing into intra-day transaction processing, to update their position in collateral on a minute by minute basis and to be able to alert and advise people who have commitments on when to take action and when to liquidise collateral to provide additional funding to meet the commitment. If you purely go for a tactical reporting basis, you’re too late. You have to do it so you are being predictive, but at the same time you need to be getting the enormous benefit of being able to maximise your funding opportunities.
As there are currently no single platforms, how can firms best address the challenges posed to them?
One way is to tackle the business operations. SmartStream is responding in that way, helping some of our clients, for example, in the reconciliation space. Any financial institution has multiple reconciliation solutions. Some have more than 10 that have been acquired over many years. When new instruments have been traded, they have bought a reconciliation system for that instrument type.
What we are helping those clients to do is to rationalise reconciliations into a single system. We do that by providing them with a system that is agnostic to asset type, so then there is one area of operations that is central and underpins everything in terms of the process, which is one platform, one technology. The next area of operations in the lifecycle can then be addressed. It is a matter of consolidating that.
An alternative way is to outsource, which is the extreme paradigm. Many banks are looking to uplift their operations and pass them on to a third party. That third party will use the scale of the operation to support multiple banks on a common utility base. They overturn the landscape of multiple systems by offsetting it to a third party that would provide that utility. That is effectively a single system: they are given the data, and they get data back.
It is all about cost and efficiency and being able to monitor what is happening in the bank.
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