A question of transparency
17 Apr 2019
Ten years on from the recovery of the financial crisis, what has changed in post-trade, both in terms of reporting for new, specific regulations and the day to day responsibilities of the industry?
Image: Shutterstock
Ever since the financial crisis of 2008, the asset servicing industry has become more aware of the need for clarity and transparency in the post-trade space—with regulators hot on the heels, it’s simply a case of needing to. Whether it means ‘post-trade transparency’ as a reporting obligation after a trade is executed, or the post-trade obligations and considerations day-to-day, after the financial crisis, post-trade fundamentally changed.
Now the world economy has somewhat recovered, it may even be fair to say a firm could not survive today without a clear and see-through system in place to ensure regulatory best practice.
And as Brian Collings, CEO of Torstone Technology, indicates: “A firm cannot survive for long without a successful, transparent post-trade programme. All stakeholders, from the internal compliance team to senior management, need to know the three lines of defence—risk management, review, and audit—are supported by a rigorous back office.”
David Veal, senior executive for client solutions at Corfinancial, highlights: “Many people witnessed immediate chaos after the financial crisis, with firms scrabbling to understand immediate counterparty exposures and settlement risk, along with a critical requirement to know the exact state of asset and cash positions.”
But what regional differences and stresses has this increased need for transparency brought with it and how does this differ between asset classes? How big a part do new technologies, such as blockchain, really play? Is blockchain just an industry buzzword, or can it really change the post-trade process in the years to come?
Ten years after the financial crisis, regulations aimed to make the world of post-trade more transparent.
Dave Zurkowski, product manager, market risk at KRM22, points out: “Regulations introduced post-global financial crisis with a view to improving market transparency have certainly helped. Stipulations for minimum frequencies of post-trade evaluation provided by some regulators have been particularly useful. The challenge is that these regulations vary across jurisdictions and markets would benefit from further regulatory harmonisation.”
With these challenges, how could regulators improve harmonisation in an effort for standardisation across different regions?
The Association for Financial Markets (AFME) in Europe’s post-trade division recently published a white paper setting out a vision for a future post-trade system in Europe. The paper outlined AFME’s vision for integrated, safe, and efficient post-trade in Europe.
To achieve the vision of low-risk and low-cost post-trading in Europe, the paper called for a number of strategies, including continuing a close and institutionalised cooperation between the public and the private sector. It also suggested intensified dialogue with European and national public authorities in a bespoke and targeted manner, and leveraging opportunities created by new technology.
As Paul Clark, head of international post-trade pre-sales at Broadridge, indicates, this is largely the case and regulators are willing to play ball with market participants.
He indicates: “Most regulators are now very collaborative with market participants and have shown a willingness to refine their processes where necessary, based on experience gained from the volume of change since the global financial crisis.”
However, he adds: “The major issues we see are often late announced changes close to deadlines from regulators that may require operational or technology changes—open and responsive dialogue throughout the rollout to agree scope and approach is the key.”
Post-trade gets technical
So as regulators themselves attempt to create a consensus for a post-crisis world, what part can technology play?
Collings articulates: “The industry has innovated in post-trade but, to quote writer William Gibson, ‘the future is here, it’s just not evenly distributed.’ While there are many innovations, they have not all been widely adopted.”
He indicates there are two main reasons behind this: “Replacing technology carries risk and that fear represses change. The second is that where technology spend does occur, it can be easier to get buy-in for ‘goal scoring’ over ‘ball passing’ technology.”
“No team scores goals without passing the ball, and the more efficiently that happens the better.”
Of course, whenever technology is considered, it isn’t long before the consideration of blockchain is muttered in the conversation. Although it’s the industry’s favourite buzzword right now, how can the technology really assist across different asset classes?
Nick Goodrich, director of business development at trueDigital, states: “Post-trade processing and settlement is an ideal use case for blockchain technology because of transaction immutability and shared access to the ledger.”
He adds: “All updates are recorded on chain and accessible by the correct counter-parties. In settlement, the blockchain provides an immutable single source of truth for transfer and recording of asset ownership and transfers. The industry is beginning to see these use cases and the shift from legacy technology to blockchain technology is beginning.”
Elsewhere, Roger Storm, head of regulation, risk and communities at SIX, also suggests blockchain is an opportunity but is still in its infancy.
He states: “Distributed ledger technology (DLT) and blockchain technologies still have to prove themselves financially. The technology shows tremendous promise, but it is not yet clear when it can replace existing structures.”
Collings suggests: “There are many proofs-of-concept that have shown the potential for different blockchain technologies to be used. At present, the major success stories are in bank-to-client services where the bank uses technology as an efficiency gain.”
But he adds what has proven harder is “the agreement of which technology to use between a peer group to exchange value. As such, the technology has value and is not an inhibitor, but the consensus around how to adopt it is”.
Achieving both low-risk and low-cost
With innovations in technology and data in mind, how can firms working in post-trade achieve low-risk while also achieving low-costs? Stephen Casner, CEO of the Americas at KRM22, comments: “In terms of lowering costs, firms need to reduce duplicity and redundancy of data acquisition and data management by using an integrated risk solution. Ideally, a firm would generate all of its post-trade risk management analysis from a single set of data.”
Similarly, Collings highlights: “Banks need a single platform that can manage their operations across assets. Moving fixed costs and repeated costs towards a flexible cost that is on demand, creates a much better economy for the bank. The use of cloud-based systems and a microservice architecture, employing modules that easily scale functionality up and down, really help.”
Storm remarks: “The cost of the post-trade servicing, including taxes and such, must be factored in when making such choices as it is deducted the cost of the gain/margin on the trade. The real cost of developing a good risk management system is related to sourcing accurate market data and knowledgeable resources who understand how these assets move.”
And as Clark mirrors: “The move away from multiple legacy single-asset class driven operations and technology platforms to a single real-time, multi-asset solution can deliver the low-risk and low-cost environment that financial institutions are looking for.”
Future predictions
With the market facing inevitable change from everything from regulation to Brexit, what else will these institutions be looking for in the future?
Goodrich predicts: “The industry will begin to shift to more efficient solutions than relying on legacy technology.”
Collings forecasts centralisation through single platform operations will become the norm, “with the use of data masking and anonymising to allow cross-border operations that are not in breach of regulatory guidelines”.
Casner indicates: “We are barely scratching the surface of what DLT can eventually do in post-trade. Almost all major activity is currently centred on trying to eliminate costly and inefficient data reconciliation processes.”
He adds: “While there is no doubt we are many years away from experiencing the benefits this technology can bring to portfolio risk systems, the benefits and adoption eventually will be very compelling. The post-trade risk space is ready for tremendous growth and innovation.”
Now the world economy has somewhat recovered, it may even be fair to say a firm could not survive today without a clear and see-through system in place to ensure regulatory best practice.
And as Brian Collings, CEO of Torstone Technology, indicates: “A firm cannot survive for long without a successful, transparent post-trade programme. All stakeholders, from the internal compliance team to senior management, need to know the three lines of defence—risk management, review, and audit—are supported by a rigorous back office.”
David Veal, senior executive for client solutions at Corfinancial, highlights: “Many people witnessed immediate chaos after the financial crisis, with firms scrabbling to understand immediate counterparty exposures and settlement risk, along with a critical requirement to know the exact state of asset and cash positions.”
But what regional differences and stresses has this increased need for transparency brought with it and how does this differ between asset classes? How big a part do new technologies, such as blockchain, really play? Is blockchain just an industry buzzword, or can it really change the post-trade process in the years to come?
Ten years after the financial crisis, regulations aimed to make the world of post-trade more transparent.
Dave Zurkowski, product manager, market risk at KRM22, points out: “Regulations introduced post-global financial crisis with a view to improving market transparency have certainly helped. Stipulations for minimum frequencies of post-trade evaluation provided by some regulators have been particularly useful. The challenge is that these regulations vary across jurisdictions and markets would benefit from further regulatory harmonisation.”
With these challenges, how could regulators improve harmonisation in an effort for standardisation across different regions?
The Association for Financial Markets (AFME) in Europe’s post-trade division recently published a white paper setting out a vision for a future post-trade system in Europe. The paper outlined AFME’s vision for integrated, safe, and efficient post-trade in Europe.
To achieve the vision of low-risk and low-cost post-trading in Europe, the paper called for a number of strategies, including continuing a close and institutionalised cooperation between the public and the private sector. It also suggested intensified dialogue with European and national public authorities in a bespoke and targeted manner, and leveraging opportunities created by new technology.
As Paul Clark, head of international post-trade pre-sales at Broadridge, indicates, this is largely the case and regulators are willing to play ball with market participants.
He indicates: “Most regulators are now very collaborative with market participants and have shown a willingness to refine their processes where necessary, based on experience gained from the volume of change since the global financial crisis.”
However, he adds: “The major issues we see are often late announced changes close to deadlines from regulators that may require operational or technology changes—open and responsive dialogue throughout the rollout to agree scope and approach is the key.”
Post-trade gets technical
So as regulators themselves attempt to create a consensus for a post-crisis world, what part can technology play?
Collings articulates: “The industry has innovated in post-trade but, to quote writer William Gibson, ‘the future is here, it’s just not evenly distributed.’ While there are many innovations, they have not all been widely adopted.”
He indicates there are two main reasons behind this: “Replacing technology carries risk and that fear represses change. The second is that where technology spend does occur, it can be easier to get buy-in for ‘goal scoring’ over ‘ball passing’ technology.”
“No team scores goals without passing the ball, and the more efficiently that happens the better.”
Of course, whenever technology is considered, it isn’t long before the consideration of blockchain is muttered in the conversation. Although it’s the industry’s favourite buzzword right now, how can the technology really assist across different asset classes?
Nick Goodrich, director of business development at trueDigital, states: “Post-trade processing and settlement is an ideal use case for blockchain technology because of transaction immutability and shared access to the ledger.”
He adds: “All updates are recorded on chain and accessible by the correct counter-parties. In settlement, the blockchain provides an immutable single source of truth for transfer and recording of asset ownership and transfers. The industry is beginning to see these use cases and the shift from legacy technology to blockchain technology is beginning.”
Elsewhere, Roger Storm, head of regulation, risk and communities at SIX, also suggests blockchain is an opportunity but is still in its infancy.
He states: “Distributed ledger technology (DLT) and blockchain technologies still have to prove themselves financially. The technology shows tremendous promise, but it is not yet clear when it can replace existing structures.”
Collings suggests: “There are many proofs-of-concept that have shown the potential for different blockchain technologies to be used. At present, the major success stories are in bank-to-client services where the bank uses technology as an efficiency gain.”
But he adds what has proven harder is “the agreement of which technology to use between a peer group to exchange value. As such, the technology has value and is not an inhibitor, but the consensus around how to adopt it is”.
Achieving both low-risk and low-cost
With innovations in technology and data in mind, how can firms working in post-trade achieve low-risk while also achieving low-costs? Stephen Casner, CEO of the Americas at KRM22, comments: “In terms of lowering costs, firms need to reduce duplicity and redundancy of data acquisition and data management by using an integrated risk solution. Ideally, a firm would generate all of its post-trade risk management analysis from a single set of data.”
Similarly, Collings highlights: “Banks need a single platform that can manage their operations across assets. Moving fixed costs and repeated costs towards a flexible cost that is on demand, creates a much better economy for the bank. The use of cloud-based systems and a microservice architecture, employing modules that easily scale functionality up and down, really help.”
Storm remarks: “The cost of the post-trade servicing, including taxes and such, must be factored in when making such choices as it is deducted the cost of the gain/margin on the trade. The real cost of developing a good risk management system is related to sourcing accurate market data and knowledgeable resources who understand how these assets move.”
And as Clark mirrors: “The move away from multiple legacy single-asset class driven operations and technology platforms to a single real-time, multi-asset solution can deliver the low-risk and low-cost environment that financial institutions are looking for.”
Future predictions
With the market facing inevitable change from everything from regulation to Brexit, what else will these institutions be looking for in the future?
Goodrich predicts: “The industry will begin to shift to more efficient solutions than relying on legacy technology.”
Collings forecasts centralisation through single platform operations will become the norm, “with the use of data masking and anonymising to allow cross-border operations that are not in breach of regulatory guidelines”.
Casner indicates: “We are barely scratching the surface of what DLT can eventually do in post-trade. Almost all major activity is currently centred on trying to eliminate costly and inefficient data reconciliation processes.”
He adds: “While there is no doubt we are many years away from experiencing the benefits this technology can bring to portfolio risk systems, the benefits and adoption eventually will be very compelling. The post-trade risk space is ready for tremendous growth and innovation.”
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