The test of resilience
09 Dec 2020
Industry participants review the year that fundamentally changed the world forever, and discuss what lessons have been learned, the challenges faced, and predict what lies ahead for the new year
Image: feydzhet_shabanov/adobe.stock.com
As 2020 draws to a close, it is important to remember the lessons learned from this challenging and unprecedented year. While it has been the ultimate test of operational resilience, experts say financial services firms and market infrastructures have mostly fared well.
The COVID-19 pandemic saw many financial services firms move to a work from home setup and adapt to a new work environment. It has also highlighted the importance of technology, and for many firms it has shown that their current tech systems are not up to the mark. In addition, it has taught firms to always be prepared for the unexpected.
“The financial industry which is extremely technology-dependent has seen numerous outages as well as being close to exceeding their systems’ capacities,” says Elena Treshcheva, business development manager and researcher at Exactpro.
Experts suggest the main lesson to be learned from the disruptions of 2020 is that the only way to mitigate technology disruption is thorough preparation and pushing the technology systems way over their intended production limits through prior testing.
The main challenges
Increased volatility and high volumes resulting in pressure at all the stages of the business lifecycle, maintaining levels of productivity in a new remote environment, dealing with failures in settlement, and keeping afloat with regulatory changes amid the turbulence of the year all proved to be some of the major challenges.
From the point of view of George Ralph, managing director, RFA, the biggest challenge was ensuring that the asset management industry could maintain its prior levels of productivity, from a new remote working environment.
“This included maintaining infrastructure and connectivity internally and externally, while balancing costs and specialised software licensing with a focus on making collaborative working work, both internally and with partners in a secure environment,” Ralph comments.
It involved accelerating the evolution of operating models and reviewing technology and data architecture to fit the new working environment, while other challenges included operating through systems that were secure anytime and anywhere, increasing cybersecurity knowledge, behavioural analysis as well as application and training.
Increased volatility was something the industry worked hard to grapple with. This coupled with increased volumes led to record numbers of margin calls as well as increased trade exceptions.
This challenge particularly highlighted that a significant amount of post-trade activity remains manual.
For example, allocation, confirmation and settlement processes, as well as the collateral management lifecycle, have all created challenges, particularly for the buy-side.
In times of lower volatility, these manual processes have been manageable, but in today’s environment, Matthew Stauffer, managing director, head of institutional trade processing at DTCC, says: “A lack of automated post-trade processes can increase operational risk and cost for firms. In fact, during the volatility spikes in March and April of this year, some fund managers spent valuable time manually processing calls and reconciliation to settlement, keeping them from other business-critical activities such as securing counterparties’ credit and meeting margin obligations.”
In the settlement space, experts found that settlement failures spiked, which was highlighted in the Bank of England’s report ‘The Future of Post-Trade’ in June. Also, the ability to meet margin calls was a real worry for firms. However, Brian Collings, CEO of Torstone Technology, says this did highlight that efficient access to collateral and short-term funding through securities lending and repo can be vital to firms.
On top of these challenges, and lack of automation in some aspects of the industry, regulation still looms. Although some regulations were granted to deadlines in light of this, firms still had to keep working hard in order to be ready for compliance.
According to Alexandra Foster, director, insurance, wealth management and financial services at BT, regulators have done a good job in supporting the asset servicing industry during 2020.
Foster explains this has been done through the introduction of a number of measures, from the easing of restrictions to postponing regulation, giving the industry vital time to alleviate the operational burden accompanying the switch to large scale remote working.
Regulation ready
Going into 2021, the effects 2020 has had on regulation is expected to cause knock-on effects going into the new year with experts saying we can expect to see an ongoing regulatory response from the aftermath of the pandemic, particularly around liquidity and risk provision in supporting liquidity. In fact, the US is already seeing a formalisation of fixed income market structure to better support electronic trading.
“However, the political climate will realistically temper the response to some extent; to deliver wholesale regulatory change there needs to be consent on issues across jurisdictions, yet there are political differences which may impede consensus being formed. As such the regulatory response we see may well be fragmented and lacking in a standard approach,” notes Collings.
Weighing in on this, consultant Tony Freeman, says: “In financial services, pre-pandemic, there has been a huge focus on cybersecurity risk – perhaps to the detriment of wider operational resilience. The pandemic has exposed new risk issues – for example, geographical clustering – which will undoubtedly be reflected in new regulations post-pandemic.”
Lessons learned
Despite the hardships and challenges that came with the pandemic, invaluable lessons have been learned and there are opportunities to take advantage of.
For example, more broadly, skills in communicating remotely have been enhanced and being prepared, agile and ready for change is something many firms have upped their game on.
Another important lesson that has been learned is the power of data. Exactpro’s Treshcheva stipulates that the industry has received new data – including thresholds, metrics of what exactly happens during the times of disruption – which is extremely valuable and can be used to prepare for future crises.
Meanwhile, DTCC’s Stauffer points out that the pandemic has propelled the topic of middle and back-office automation to the board room level, paving the way for the implementation of new initiatives.
This includes digital transformation and the implementation of new measures that increase operational efficiency, including post-trade automation.
“As a result, firms have emerged from the crisis with greater clarity around what needs to be achieved in order to alleviate existing or potential operational concerns,” says Stauffer.
Firms have been working hard to address weaknesses exposed during the Q1 volume spike as a result of COVID-19 and, according to Stauffer, are in a much better place to deal with any volatility that may come as a result of subsequent waves of the virus, geopolitical impacts, or another crisis.
Weighing in on this, BT’s Foster says: “A positive outcome from 2020 has been increased cooperation within the industry. Competition was effectively put on the back burner as everybody pulled together, from asset servicers to technology providers, to ensure continued business and the stability of markets.”
Foster believes this trend of industry partners working closely together to co-create new products and services will continue into 2021 and post-pandemic.
Indeed it seems innovation is here to stay with the drive for greater automation and use of robotics.
A sense of optimism
As we head into the new year, with perhaps a sense of optimism from the news of a vaccine to be deployed, changes made from 2020 are likely to spill over into 2021.
While it can be agreed that nothing quite beats the face to face interaction and bouncing off of other people’s ideas in an office environment, the idea of working from home has changed dramatically with many employers now seeing the benefits of this.
Freeman affirms: “The pandemic has changed the way we work – probably forever. Working from home will become normal – but it won’t be the default. People want, and need, to physically come together. The bigger firms are likely to adopt a 50/50 balance between home and office working and, long-term, will adopt a more diversified geographical dispersion.”
As such the City of London and Canary Wharf will probably never recover the occupancy levels seen in 2019.
“There is no question that we will not be going back to whatever was considered ‘normal’ 12 months ago. While the concept of the ‘new normal’ is widely used, it is hard to foresee what it will ultimately mean – we are likely to see the new standard operational practices emerge and bed in over time,” comments Yousaf Hafeez, head of business development at BT Radianz.
It is believed that the industry will likely see the new standard operational practices emerge over time, as well as increased services moving to public clouds.
Going forward, there will be significant changes to the way data is used, stored, located and accessed. RFA’s Ralph notes: “In terms of changes to cybersecurity, managers will need to ask themselves whether their system is robust. How and when it is tested and are individuals, as well as businesses, are fully versed on policies.”
At Citco, managing director Jay Peller, similarly expects the future to continue to be about automation, data and more streamlined communications.
“Providing golden copy data to an investment manager, when and how they need it in a form that is reconciled and sufficiently enriched with other third-party data, will continue to be the holy grail,” he says.
Meanwhile, further reducing the manual element of the subscription and redemption process is also in our near future, as we continue to build on the exciting technologies that are in place today, according to Peller.
“There is no reason that an alternative fund manager cannot have an online application form covering their entire fund product suite, which an investor can complete at the outset of a client relationship and then all other transactions can be straightforward. Excellence in technology will continue to be a non-negotiable requirement both now and into the future,” he comments.
As well as changes around data and technology, Hafeez says it is also interesting to see how digital assets are increasingly being embraced by institutions. “2021 will no doubt be an interesting year,” he adds.
The new year will also be a crucial one. Firms will need to address the specific issue of long-term operational resiliency and decide which tasks can be accomplished internally and what needs to be outsourced. It will also be a year where we will be more prepared for the unexpected.
The COVID-19 pandemic saw many financial services firms move to a work from home setup and adapt to a new work environment. It has also highlighted the importance of technology, and for many firms it has shown that their current tech systems are not up to the mark. In addition, it has taught firms to always be prepared for the unexpected.
“The financial industry which is extremely technology-dependent has seen numerous outages as well as being close to exceeding their systems’ capacities,” says Elena Treshcheva, business development manager and researcher at Exactpro.
Experts suggest the main lesson to be learned from the disruptions of 2020 is that the only way to mitigate technology disruption is thorough preparation and pushing the technology systems way over their intended production limits through prior testing.
The main challenges
Increased volatility and high volumes resulting in pressure at all the stages of the business lifecycle, maintaining levels of productivity in a new remote environment, dealing with failures in settlement, and keeping afloat with regulatory changes amid the turbulence of the year all proved to be some of the major challenges.
From the point of view of George Ralph, managing director, RFA, the biggest challenge was ensuring that the asset management industry could maintain its prior levels of productivity, from a new remote working environment.
“This included maintaining infrastructure and connectivity internally and externally, while balancing costs and specialised software licensing with a focus on making collaborative working work, both internally and with partners in a secure environment,” Ralph comments.
It involved accelerating the evolution of operating models and reviewing technology and data architecture to fit the new working environment, while other challenges included operating through systems that were secure anytime and anywhere, increasing cybersecurity knowledge, behavioural analysis as well as application and training.
Increased volatility was something the industry worked hard to grapple with. This coupled with increased volumes led to record numbers of margin calls as well as increased trade exceptions.
This challenge particularly highlighted that a significant amount of post-trade activity remains manual.
For example, allocation, confirmation and settlement processes, as well as the collateral management lifecycle, have all created challenges, particularly for the buy-side.
In times of lower volatility, these manual processes have been manageable, but in today’s environment, Matthew Stauffer, managing director, head of institutional trade processing at DTCC, says: “A lack of automated post-trade processes can increase operational risk and cost for firms. In fact, during the volatility spikes in March and April of this year, some fund managers spent valuable time manually processing calls and reconciliation to settlement, keeping them from other business-critical activities such as securing counterparties’ credit and meeting margin obligations.”
In the settlement space, experts found that settlement failures spiked, which was highlighted in the Bank of England’s report ‘The Future of Post-Trade’ in June. Also, the ability to meet margin calls was a real worry for firms. However, Brian Collings, CEO of Torstone Technology, says this did highlight that efficient access to collateral and short-term funding through securities lending and repo can be vital to firms.
On top of these challenges, and lack of automation in some aspects of the industry, regulation still looms. Although some regulations were granted to deadlines in light of this, firms still had to keep working hard in order to be ready for compliance.
According to Alexandra Foster, director, insurance, wealth management and financial services at BT, regulators have done a good job in supporting the asset servicing industry during 2020.
Foster explains this has been done through the introduction of a number of measures, from the easing of restrictions to postponing regulation, giving the industry vital time to alleviate the operational burden accompanying the switch to large scale remote working.
Regulation ready
Going into 2021, the effects 2020 has had on regulation is expected to cause knock-on effects going into the new year with experts saying we can expect to see an ongoing regulatory response from the aftermath of the pandemic, particularly around liquidity and risk provision in supporting liquidity. In fact, the US is already seeing a formalisation of fixed income market structure to better support electronic trading.
“However, the political climate will realistically temper the response to some extent; to deliver wholesale regulatory change there needs to be consent on issues across jurisdictions, yet there are political differences which may impede consensus being formed. As such the regulatory response we see may well be fragmented and lacking in a standard approach,” notes Collings.
Weighing in on this, consultant Tony Freeman, says: “In financial services, pre-pandemic, there has been a huge focus on cybersecurity risk – perhaps to the detriment of wider operational resilience. The pandemic has exposed new risk issues – for example, geographical clustering – which will undoubtedly be reflected in new regulations post-pandemic.”
Lessons learned
Despite the hardships and challenges that came with the pandemic, invaluable lessons have been learned and there are opportunities to take advantage of.
For example, more broadly, skills in communicating remotely have been enhanced and being prepared, agile and ready for change is something many firms have upped their game on.
Another important lesson that has been learned is the power of data. Exactpro’s Treshcheva stipulates that the industry has received new data – including thresholds, metrics of what exactly happens during the times of disruption – which is extremely valuable and can be used to prepare for future crises.
Meanwhile, DTCC’s Stauffer points out that the pandemic has propelled the topic of middle and back-office automation to the board room level, paving the way for the implementation of new initiatives.
This includes digital transformation and the implementation of new measures that increase operational efficiency, including post-trade automation.
“As a result, firms have emerged from the crisis with greater clarity around what needs to be achieved in order to alleviate existing or potential operational concerns,” says Stauffer.
Firms have been working hard to address weaknesses exposed during the Q1 volume spike as a result of COVID-19 and, according to Stauffer, are in a much better place to deal with any volatility that may come as a result of subsequent waves of the virus, geopolitical impacts, or another crisis.
Weighing in on this, BT’s Foster says: “A positive outcome from 2020 has been increased cooperation within the industry. Competition was effectively put on the back burner as everybody pulled together, from asset servicers to technology providers, to ensure continued business and the stability of markets.”
Foster believes this trend of industry partners working closely together to co-create new products and services will continue into 2021 and post-pandemic.
Indeed it seems innovation is here to stay with the drive for greater automation and use of robotics.
A sense of optimism
As we head into the new year, with perhaps a sense of optimism from the news of a vaccine to be deployed, changes made from 2020 are likely to spill over into 2021.
While it can be agreed that nothing quite beats the face to face interaction and bouncing off of other people’s ideas in an office environment, the idea of working from home has changed dramatically with many employers now seeing the benefits of this.
Freeman affirms: “The pandemic has changed the way we work – probably forever. Working from home will become normal – but it won’t be the default. People want, and need, to physically come together. The bigger firms are likely to adopt a 50/50 balance between home and office working and, long-term, will adopt a more diversified geographical dispersion.”
As such the City of London and Canary Wharf will probably never recover the occupancy levels seen in 2019.
“There is no question that we will not be going back to whatever was considered ‘normal’ 12 months ago. While the concept of the ‘new normal’ is widely used, it is hard to foresee what it will ultimately mean – we are likely to see the new standard operational practices emerge and bed in over time,” comments Yousaf Hafeez, head of business development at BT Radianz.
It is believed that the industry will likely see the new standard operational practices emerge over time, as well as increased services moving to public clouds.
Going forward, there will be significant changes to the way data is used, stored, located and accessed. RFA’s Ralph notes: “In terms of changes to cybersecurity, managers will need to ask themselves whether their system is robust. How and when it is tested and are individuals, as well as businesses, are fully versed on policies.”
At Citco, managing director Jay Peller, similarly expects the future to continue to be about automation, data and more streamlined communications.
“Providing golden copy data to an investment manager, when and how they need it in a form that is reconciled and sufficiently enriched with other third-party data, will continue to be the holy grail,” he says.
Meanwhile, further reducing the manual element of the subscription and redemption process is also in our near future, as we continue to build on the exciting technologies that are in place today, according to Peller.
“There is no reason that an alternative fund manager cannot have an online application form covering their entire fund product suite, which an investor can complete at the outset of a client relationship and then all other transactions can be straightforward. Excellence in technology will continue to be a non-negotiable requirement both now and into the future,” he comments.
As well as changes around data and technology, Hafeez says it is also interesting to see how digital assets are increasingly being embraced by institutions. “2021 will no doubt be an interesting year,” he adds.
The new year will also be a crucial one. Firms will need to address the specific issue of long-term operational resiliency and decide which tasks can be accomplished internally and what needs to be outsourced. It will also be a year where we will be more prepared for the unexpected.
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