Making tracks
19 Oct 2017
The past decade has seen significant change in securities services, but some challenges lead to lessons learnt, says Deutsche Bank’s Satvinder Singh
Image: Shutterstock
In the 10 years since the beginning of the financial crisis, the securities services industry has been on a journey of discovery and unprecedented change, but the challenges faced—and the subsequent solutions—perhaps mean firms are better placed for a bright future.
From a macroeconomic and geopolitical perspective, certainty is still in short supply. Margins are squeezed and interest rates are low, although we may be seeing some early signs of change in that regard. In the meantime, several broad regulatory, compliance and infrastructure initiatives have forced industry participants to, at the very least, review their business models.
Deutsche Bank has taken a look at the securities transaction chain, in a bid to identify where exactly the bank can add value, and to find out what clients really want to buy and, equally importantly, how they want to buy it. Do they, for example, want a bundled or unbundled service? And how nimble can we be in the ways we offer products and capabilities to our clients?
Industry trends
At the same time, we need to take account of how the industry and its supporting technologies are evolving. There are several regulatory and infrastructure initiatives of which Deutsche Bank has been supportive from inception, Target2-Securities (T2S) being a good example. We do, however, cater to a dynamic and diverse set of clients, which are often in the process of evaluating their service propositions to their own clients.
We looked at our business model and asked how, in this changing, dynamic world, we could adopt a more modular or component-based approach to product and service provision, allowing clients to pick and choose what they want and when.
One result of this assessment was the launch in November last year of Asset Servicing Only, a component-based solution that allows our clients—whether banks, broker-dealers or asset managers—to outsource various aspects of their business to us, such as tax reclamations, corporate action processing and asset safekeeping.
In doing so, clients benefit both from harmonised, standardised solutions and from a modular approach that helps meet the requirements of the changing landscape, while connecting directly to T2S.
The model delivers component-based data facilitated by component-based products and new business models. This approach was only made possible by new technology and a collaborative foundation both internally and externally.
We believe this is in sync with the direction of the market. Our industry is at a pivotal point today, with two trends in evidence. First, clients want more modular solutions with greater choice to allow them to remain competitive in their own spheres of operation. From their service providers, they want to prioritise the areas that give them the most value and go directly to market infrastructures for other transaction-related processing.
The second major trend is that new technologies such as artificial intelligence, application processing interfaces or distributed ledger technology are starting to take centre stage. Our clients are spending more time evaluating these technologies, assessing how they could be leveraged to boost efficiency and, ultimately, reduce cost.
In the securities services business, engagement with these technologies is not driven by an abstract interest in the way they operate, but in their potential for enhanced analysis, delivery and security of data.
This last point should not be downplayed. Cyber security is becoming a huge topic from an industry perspective.
We are not only concerned with the safety of the assets we hold on behalf of our clients, but also the data we hold for them. We need to align with client expectations.
Learning from change
I would suggest that these challenges should be addressed using a four-pronged approach.
The first point is to nurture front-to-back collaboration and partnership. The second is to embrace a cultural change in the way we do business.
Third is a concerted focus on data and digital, which I put together purposely, and the fourth point is to help create sustainable business models. Underpinning all this is the need to bridge the gap between theory and reality; it’s important to ensure that what we propose is what we can deliver.
Front to back collaboration
At Deutsche Bank, we have placed great emphasis on learning from the best practices that exist from the front office to the back. As an organisation, we are increasingly integrated. Clients do not care how we are configured, as long as they are receiving a consistent service at a great price.
The only way to ensure that is to create a vertically integrated business solution that we can then scale and adapt.
Cultural change
Securities services are often portrayed as staid and conservative. I believe that, as an industry, we are open to change, but we need to embrace a mindset that encourages new technology.
Within Deutsche Bank, for example, you won’t hear much reference to ‘disruptive’ technology—that term is already an indication of a resistant mindset. We see new technology as something that is enabling us to rethink our business model, rather than as something disruptive.
The market experience with T2S is perhaps instructive here. The industry mood around the project has partly been shaped by the fact that it is one element in a set of changes that need to be completed before the full benefits can be felt. At the same time, by taking one component of the securities value chain and putting it on to an integrated platform, an apparent level of complexity was introduced by decomponentising the flow.
This is, however, only true at a superficial level. Participating markets in T2S may have underestimated how integrated they were and the challenges that would result from decomponentising settlement onto a common platform.
At the same time, the industry harmonisation that preceded the live launch of T2S could not have been achieved without T2S and that, in itself, has unlocked opportunities for technological integration based on a common platform. Attention is now shifting to issues of asset servicing and considering how the pan-European platform could be used to free up liquidity. As key regulatory changes such as the Central Securities Depositary Regulation, the second Markets in Financial Instruments Directive and the European Markets Infrastructure Regulation come into effect, the operational changes required to comply with them effectively will make the benefits of an integrated settlement platform suddenly very clear. Given the amount of data they hold, securities services providers are strongly positioned to create transparency to ensure compliance with regulations and provide further services that add value and insight to the client.
From a service provider’s perspective, the process of decomponetising needs to move beyond settlement into other aspects of custody, allowing different combinations of services to be offered to clients and facilitating new forms of collaboration with both clients and other providers of services currently working in their own silos.
The cultural change we’re seeking from a business perspective is about making sure we pay attention to how our clients and employees are using technology, and how they want to buy and deploy it. We need to ensure that the next generation of leadership in securities services is imbued with an openness about how technology can be used to enable our clients to get data and information.
Digital promise
Clients no longer simply want to know whether their trade has been settled. There is already a demand for real-time data correlations and intraday tracking of settlement progress. The question is not in the amount of data we make available, but the quality of the data as measured by what it allows clients to do. More is not necessarily better. Our data offerings must be targeted and useful. They must help our clients achieve what they are trying to achieve. Data must also help clients find operational improvements in their processes, and educate them as to where failures are occurring in their business and operating models, so that they can be empowered to effect change.
In that respect, developments at the retail level with digital technology demonstrate two aspects of client empowerment. On the one hand, clients can choose to access and manipulate information that previously required the intervention of their service provider. On the other hand, they are able to exploit functionality that was simply not available before.
Sustainability
Our own clients’ headcount can be affected if we are more efficient. Every piece of research that I come across says margins are being compressed along the value chain, and that this will not be reversed any time soon. Without adopting and adapting digital opportunities, existing ways of doing things will no longer be attractive from a business perspective. We need to facilitate a true partnership with our clients so they can thrive, thereby ensuring that we have a truly sustainable business model.
From a macroeconomic and geopolitical perspective, certainty is still in short supply. Margins are squeezed and interest rates are low, although we may be seeing some early signs of change in that regard. In the meantime, several broad regulatory, compliance and infrastructure initiatives have forced industry participants to, at the very least, review their business models.
Deutsche Bank has taken a look at the securities transaction chain, in a bid to identify where exactly the bank can add value, and to find out what clients really want to buy and, equally importantly, how they want to buy it. Do they, for example, want a bundled or unbundled service? And how nimble can we be in the ways we offer products and capabilities to our clients?
Industry trends
At the same time, we need to take account of how the industry and its supporting technologies are evolving. There are several regulatory and infrastructure initiatives of which Deutsche Bank has been supportive from inception, Target2-Securities (T2S) being a good example. We do, however, cater to a dynamic and diverse set of clients, which are often in the process of evaluating their service propositions to their own clients.
We looked at our business model and asked how, in this changing, dynamic world, we could adopt a more modular or component-based approach to product and service provision, allowing clients to pick and choose what they want and when.
One result of this assessment was the launch in November last year of Asset Servicing Only, a component-based solution that allows our clients—whether banks, broker-dealers or asset managers—to outsource various aspects of their business to us, such as tax reclamations, corporate action processing and asset safekeeping.
In doing so, clients benefit both from harmonised, standardised solutions and from a modular approach that helps meet the requirements of the changing landscape, while connecting directly to T2S.
The model delivers component-based data facilitated by component-based products and new business models. This approach was only made possible by new technology and a collaborative foundation both internally and externally.
We believe this is in sync with the direction of the market. Our industry is at a pivotal point today, with two trends in evidence. First, clients want more modular solutions with greater choice to allow them to remain competitive in their own spheres of operation. From their service providers, they want to prioritise the areas that give them the most value and go directly to market infrastructures for other transaction-related processing.
The second major trend is that new technologies such as artificial intelligence, application processing interfaces or distributed ledger technology are starting to take centre stage. Our clients are spending more time evaluating these technologies, assessing how they could be leveraged to boost efficiency and, ultimately, reduce cost.
In the securities services business, engagement with these technologies is not driven by an abstract interest in the way they operate, but in their potential for enhanced analysis, delivery and security of data.
This last point should not be downplayed. Cyber security is becoming a huge topic from an industry perspective.
We are not only concerned with the safety of the assets we hold on behalf of our clients, but also the data we hold for them. We need to align with client expectations.
Learning from change
I would suggest that these challenges should be addressed using a four-pronged approach.
The first point is to nurture front-to-back collaboration and partnership. The second is to embrace a cultural change in the way we do business.
Third is a concerted focus on data and digital, which I put together purposely, and the fourth point is to help create sustainable business models. Underpinning all this is the need to bridge the gap between theory and reality; it’s important to ensure that what we propose is what we can deliver.
Front to back collaboration
At Deutsche Bank, we have placed great emphasis on learning from the best practices that exist from the front office to the back. As an organisation, we are increasingly integrated. Clients do not care how we are configured, as long as they are receiving a consistent service at a great price.
The only way to ensure that is to create a vertically integrated business solution that we can then scale and adapt.
Cultural change
Securities services are often portrayed as staid and conservative. I believe that, as an industry, we are open to change, but we need to embrace a mindset that encourages new technology.
Within Deutsche Bank, for example, you won’t hear much reference to ‘disruptive’ technology—that term is already an indication of a resistant mindset. We see new technology as something that is enabling us to rethink our business model, rather than as something disruptive.
The market experience with T2S is perhaps instructive here. The industry mood around the project has partly been shaped by the fact that it is one element in a set of changes that need to be completed before the full benefits can be felt. At the same time, by taking one component of the securities value chain and putting it on to an integrated platform, an apparent level of complexity was introduced by decomponentising the flow.
This is, however, only true at a superficial level. Participating markets in T2S may have underestimated how integrated they were and the challenges that would result from decomponentising settlement onto a common platform.
At the same time, the industry harmonisation that preceded the live launch of T2S could not have been achieved without T2S and that, in itself, has unlocked opportunities for technological integration based on a common platform. Attention is now shifting to issues of asset servicing and considering how the pan-European platform could be used to free up liquidity. As key regulatory changes such as the Central Securities Depositary Regulation, the second Markets in Financial Instruments Directive and the European Markets Infrastructure Regulation come into effect, the operational changes required to comply with them effectively will make the benefits of an integrated settlement platform suddenly very clear. Given the amount of data they hold, securities services providers are strongly positioned to create transparency to ensure compliance with regulations and provide further services that add value and insight to the client.
From a service provider’s perspective, the process of decomponetising needs to move beyond settlement into other aspects of custody, allowing different combinations of services to be offered to clients and facilitating new forms of collaboration with both clients and other providers of services currently working in their own silos.
The cultural change we’re seeking from a business perspective is about making sure we pay attention to how our clients and employees are using technology, and how they want to buy and deploy it. We need to ensure that the next generation of leadership in securities services is imbued with an openness about how technology can be used to enable our clients to get data and information.
Digital promise
Clients no longer simply want to know whether their trade has been settled. There is already a demand for real-time data correlations and intraday tracking of settlement progress. The question is not in the amount of data we make available, but the quality of the data as measured by what it allows clients to do. More is not necessarily better. Our data offerings must be targeted and useful. They must help our clients achieve what they are trying to achieve. Data must also help clients find operational improvements in their processes, and educate them as to where failures are occurring in their business and operating models, so that they can be empowered to effect change.
In that respect, developments at the retail level with digital technology demonstrate two aspects of client empowerment. On the one hand, clients can choose to access and manipulate information that previously required the intervention of their service provider. On the other hand, they are able to exploit functionality that was simply not available before.
Sustainability
Our own clients’ headcount can be affected if we are more efficient. Every piece of research that I come across says margins are being compressed along the value chain, and that this will not be reversed any time soon. Without adopting and adapting digital opportunities, existing ways of doing things will no longer be attractive from a business perspective. We need to facilitate a true partnership with our clients so they can thrive, thereby ensuring that we have a truly sustainable business model.
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