United we withstand
12 July 2017
In a climate of regulatory change, cost pressures and cyber threats, the network management industry will be at its strongest if it sticks together.
Stephanie Palmer reports from The Network Forum in Warsaw
Image: Shutterstock
As tempestuous weather swept through Warsaw, the first annual meeting of The Network Forum made for a harmonious environment within the storm, with conversations centring around collaboration and cooperation to tackle the many perils in the current environment.
In one session, panellists focused on the Target2-Securities (T2S) pan-European settlement platform, wave five of which is set to go live in September, with speakers suggesting that more harmonisation and standardisation is required to fully realise the benefits of the platform.
In a live poll, the audience was asked what they think could further materialise the intended benefits of T2S. Asset servicing harmonisation emerged as the most popular answer, named by 53 percent, followed by increased volume of cross-central securities deposirty (CSD) settlement, selected by 36 percent.
Karen Birkel, chair of the change review group at the European Central Bank, suggested that in terms of asset servicing, corporate actions would be the most difficult thing to harmonise, saying: “There’s still a lot of work to be done there.”
Allison Levy of BNY Mellon added that, while harmonisation would be “so welcome”, the markets each work very differently, and so it “will be really tough to bring all of that together”.
However, another speaker, Swen Werner of State Street, suggested that one of the real benefits of the platform is that it has created a process of governance which “over time will bring some of ?the standardisation.”
Birkel added that CSDs have already “collaborated fantastically” to make T2S migrations work in the first place. The whole project is about collaboration, and about prioritising and solving problems in a collaborative way, she said.
Working together could also be the key to tackling the risk of cyber crime.
In another session, Margaret Harwood Jones of Standard Chartered, who was moderating the panel, asked attendees whether they believe cyber crime is going to be the source of the next financial crisis.
More than half of respondents, 54 percent, answered with ‘highly likely’, while a further 17 percent said this is ‘inevitable’.
Harwood-Jones quoted statistics from a Standard Chartered whitepaper, saying cyber security is now considered one of the top three risks for banks. She added that the cost of cyber breaches is currently estimated at an excess of $500 billion, and expected to increase to more than $2 trillion by 2020.
Jamie Woodruff, chief technology officer of Metrix Cloud, suggested that firms tend to focus on the robustness of their infrastructure, forgetting about the “personal side to cyber security”.
He called humans the industry’s first and last line of defence, adding: “We don’t really train them adequately.”
The panel also discussed the issue of legacy technology as contributing to cyber risk. Phil Mort, executive director of J.P. Morgan, said the industry tends to talk about legacy technology “as if it’s an inevitability”.
“It’s not,” he said. “We choose to have legacy technology.”
Patrick Wheeler, a self-proclaimed ‘cyberpreneur’ added that, typically, IT departments tend to focus on their own businesses within an institution. However, networks are interconnected, and this is the “true legacy problem”.
While Wheeler sympathised with the complexity of the work required from project managers and IT managers in order to address this issue, he said: “It’s surprisingly hard, but there’s no excuse not to do it.”
Finally, Mort noted that, as cyber attacks evolve, the long-term challenge is “not going to be solved organisation by organisation”.
“There needs to be a significantly increased level of coordination” in everything institutions do, he said.
Institutions are often dealing with up to 150 regulatory bodies “that have their own view on what ‘good’ looks like”, and different levels of maturity, different priorities, and sometimes contradictory expectations, Mort said.
“As long as that continues there’s an inevitable drag on business,” he added.
“Without that type of uniformity approach, we will struggle to be as nimble and as agile as our adversaries are.”
Building a strong network defence will be the way to address cyber security in the future, Phil said, concluding that, as a community, “we are potentially so much stronger than individuals”.
Another speaker called on attendees to rally together to tackle the Central Securities Depositories Regulation (CSDR), saying: “We [are] duty bound, as an industry to act in our collective best interests.”
Phil Brown, co-CEO of Clearstream Banking, said that despite the challenge CSDR poses, he does “see benefits for the industry into the long run”, noting that the regulation is “designed to improve the efficiency of our operations as well as the transparency of how we function as market infrastructures”.
He added, however, that it doesn’t matter what industry participants think of the regulation—it is here to stay, and it is up to them to mould it and make the best of it.
Although he maintained that change can be good for the industry, Brown suggested that some aspects under CSDR could restrict the services offered by CSDs, and could have “unintended consequences on the market as a whole”.
The initial drafts of the regulation were not perfect, he said, and the industry came together to lobby for change during the consultation period—change that eventually came about.
There are still questions around whether CSDR will prevent CSDs from developing their services over the next three years or so, and some in the market would be “pleased to see CSDs throttled back in that way”, Brown said.
It is again up to the industry to “take some ownership and responsibility for shaping and implementing regulation”, Brown said, adding: “We have an obligation to do so, not just an opportunity.”
He asked: “How do we work together as an industry to implement the best version of CSDR?”
Concerns were also raised about new rules coming into effect under the second Markets in Financial Instruments Directive (MiFID II), which could restrict liquidity in the market and have a negative effect on securities lending and repo industry.
Anna Biala, a partner at Clifford Chance, highlighted some of the challenges of MiFID II that could affect custodians, pointing out that the directive prohibits title transfer collateral arrangements with retail clients.
She said it is currently unclear as to whether this includes securities lending and repo transactions, adding: “It seems that that was not the intention of the legislators.”
However, Biala pointed to restrictions relating to these arrangements with professional clients. If an investment firm wants to enter into a title transfer collateral arrangement with a professional client, it is required to consider the use of the transfer “in the context of the situation”, taking into account the “client’s obligation to the firm and the assets that are subject to the title transfer collateral arrangements”.
The firm must also provide “additional warning” around what the effect of the arrangement may be—a requirement that Biala called “surprising”.
She said custodians should consider that “the new rules might have an impact on securities lending and repo transactions”, and could have a wider effect on the market.
“[MiFID II] might impact market liquidity,” she warned.
Segregation rules under the directive are quite restrictive, she said. “The risk is that this will disrupt the flow of collateral in the financial systems, which is quite problematic bearing in mind that various regulations now require additional collateral.”
The topic of technology also inevitably came up in conversation, with Markus Ruetimann, chief executive of advisory firm Hardy London urging custodians to embrace innovation and collaboration in order to move forward.
Ruetimann suggested that it is surprising “our industry has really not changed”, and said it is the industry itself that has “introduced complexity” to its own clients.
“Our industry talks about disruption rather than about innovation and evolution,” he said.
Ruetimann named a number of “shared challenges” throughout financial services, including information security, reduction of profitability, emerging technologies, regulatory arbitrage and re-gaining client trust.
He said the real test in addressing these challenges is not actually in innovation, but in the ability to deliver value for money, and encouraged global custodians to “be more creative” and to “re-invent” themselves. He advised buy-side attendees to focus on simplification and automation, insight and immersion, talent, and culture in the business, in order to bring about digital change.
Safeguarding of client assets is a key point for success, and “protecting of data and client identity is very much back on the agenda”, he said.
At the same time, the approach to leadership should be shaken up, and new technical talent should be encouraged into the industry.
Ruetimann concluded: “We should all work together to encourage the industry and regulators to progress and help with transparency, standards and shared data.”
In one session, panellists focused on the Target2-Securities (T2S) pan-European settlement platform, wave five of which is set to go live in September, with speakers suggesting that more harmonisation and standardisation is required to fully realise the benefits of the platform.
In a live poll, the audience was asked what they think could further materialise the intended benefits of T2S. Asset servicing harmonisation emerged as the most popular answer, named by 53 percent, followed by increased volume of cross-central securities deposirty (CSD) settlement, selected by 36 percent.
Karen Birkel, chair of the change review group at the European Central Bank, suggested that in terms of asset servicing, corporate actions would be the most difficult thing to harmonise, saying: “There’s still a lot of work to be done there.”
Allison Levy of BNY Mellon added that, while harmonisation would be “so welcome”, the markets each work very differently, and so it “will be really tough to bring all of that together”.
However, another speaker, Swen Werner of State Street, suggested that one of the real benefits of the platform is that it has created a process of governance which “over time will bring some of ?the standardisation.”
Birkel added that CSDs have already “collaborated fantastically” to make T2S migrations work in the first place. The whole project is about collaboration, and about prioritising and solving problems in a collaborative way, she said.
Working together could also be the key to tackling the risk of cyber crime.
In another session, Margaret Harwood Jones of Standard Chartered, who was moderating the panel, asked attendees whether they believe cyber crime is going to be the source of the next financial crisis.
More than half of respondents, 54 percent, answered with ‘highly likely’, while a further 17 percent said this is ‘inevitable’.
Harwood-Jones quoted statistics from a Standard Chartered whitepaper, saying cyber security is now considered one of the top three risks for banks. She added that the cost of cyber breaches is currently estimated at an excess of $500 billion, and expected to increase to more than $2 trillion by 2020.
Jamie Woodruff, chief technology officer of Metrix Cloud, suggested that firms tend to focus on the robustness of their infrastructure, forgetting about the “personal side to cyber security”.
He called humans the industry’s first and last line of defence, adding: “We don’t really train them adequately.”
The panel also discussed the issue of legacy technology as contributing to cyber risk. Phil Mort, executive director of J.P. Morgan, said the industry tends to talk about legacy technology “as if it’s an inevitability”.
“It’s not,” he said. “We choose to have legacy technology.”
Patrick Wheeler, a self-proclaimed ‘cyberpreneur’ added that, typically, IT departments tend to focus on their own businesses within an institution. However, networks are interconnected, and this is the “true legacy problem”.
While Wheeler sympathised with the complexity of the work required from project managers and IT managers in order to address this issue, he said: “It’s surprisingly hard, but there’s no excuse not to do it.”
Finally, Mort noted that, as cyber attacks evolve, the long-term challenge is “not going to be solved organisation by organisation”.
“There needs to be a significantly increased level of coordination” in everything institutions do, he said.
Institutions are often dealing with up to 150 regulatory bodies “that have their own view on what ‘good’ looks like”, and different levels of maturity, different priorities, and sometimes contradictory expectations, Mort said.
“As long as that continues there’s an inevitable drag on business,” he added.
“Without that type of uniformity approach, we will struggle to be as nimble and as agile as our adversaries are.”
Building a strong network defence will be the way to address cyber security in the future, Phil said, concluding that, as a community, “we are potentially so much stronger than individuals”.
Another speaker called on attendees to rally together to tackle the Central Securities Depositories Regulation (CSDR), saying: “We [are] duty bound, as an industry to act in our collective best interests.”
Phil Brown, co-CEO of Clearstream Banking, said that despite the challenge CSDR poses, he does “see benefits for the industry into the long run”, noting that the regulation is “designed to improve the efficiency of our operations as well as the transparency of how we function as market infrastructures”.
He added, however, that it doesn’t matter what industry participants think of the regulation—it is here to stay, and it is up to them to mould it and make the best of it.
Although he maintained that change can be good for the industry, Brown suggested that some aspects under CSDR could restrict the services offered by CSDs, and could have “unintended consequences on the market as a whole”.
The initial drafts of the regulation were not perfect, he said, and the industry came together to lobby for change during the consultation period—change that eventually came about.
There are still questions around whether CSDR will prevent CSDs from developing their services over the next three years or so, and some in the market would be “pleased to see CSDs throttled back in that way”, Brown said.
It is again up to the industry to “take some ownership and responsibility for shaping and implementing regulation”, Brown said, adding: “We have an obligation to do so, not just an opportunity.”
He asked: “How do we work together as an industry to implement the best version of CSDR?”
Concerns were also raised about new rules coming into effect under the second Markets in Financial Instruments Directive (MiFID II), which could restrict liquidity in the market and have a negative effect on securities lending and repo industry.
Anna Biala, a partner at Clifford Chance, highlighted some of the challenges of MiFID II that could affect custodians, pointing out that the directive prohibits title transfer collateral arrangements with retail clients.
She said it is currently unclear as to whether this includes securities lending and repo transactions, adding: “It seems that that was not the intention of the legislators.”
However, Biala pointed to restrictions relating to these arrangements with professional clients. If an investment firm wants to enter into a title transfer collateral arrangement with a professional client, it is required to consider the use of the transfer “in the context of the situation”, taking into account the “client’s obligation to the firm and the assets that are subject to the title transfer collateral arrangements”.
The firm must also provide “additional warning” around what the effect of the arrangement may be—a requirement that Biala called “surprising”.
She said custodians should consider that “the new rules might have an impact on securities lending and repo transactions”, and could have a wider effect on the market.
“[MiFID II] might impact market liquidity,” she warned.
Segregation rules under the directive are quite restrictive, she said. “The risk is that this will disrupt the flow of collateral in the financial systems, which is quite problematic bearing in mind that various regulations now require additional collateral.”
The topic of technology also inevitably came up in conversation, with Markus Ruetimann, chief executive of advisory firm Hardy London urging custodians to embrace innovation and collaboration in order to move forward.
Ruetimann suggested that it is surprising “our industry has really not changed”, and said it is the industry itself that has “introduced complexity” to its own clients.
“Our industry talks about disruption rather than about innovation and evolution,” he said.
Ruetimann named a number of “shared challenges” throughout financial services, including information security, reduction of profitability, emerging technologies, regulatory arbitrage and re-gaining client trust.
He said the real test in addressing these challenges is not actually in innovation, but in the ability to deliver value for money, and encouraged global custodians to “be more creative” and to “re-invent” themselves. He advised buy-side attendees to focus on simplification and automation, insight and immersion, talent, and culture in the business, in order to bring about digital change.
Safeguarding of client assets is a key point for success, and “protecting of data and client identity is very much back on the agenda”, he said.
At the same time, the approach to leadership should be shaken up, and new technical talent should be encouraged into the industry.
Ruetimann concluded: “We should all work together to encourage the industry and regulators to progress and help with transparency, standards and shared data.”
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