Strong foundations
22 Feb 2023
Prompted by the wave of predictions being published by asset managers and others about the economic and political outlook for 2023, Brian Bollen asked firms to share their thoughts on what technological development might take place this year, and what could hinder it
Image: tostphoto/stock.adobe.com
Deciding where best to place the next foot forward in automation can only be informed by considering the wider context of the last 12 months.
This week marks a year since the Russian invasion of Ukraine, which began on 24 February 2022.
In the weeks that followed, Asset Servicing Times reported that DTCC had blocked Russian securities from the Bank of Russia and The Ministry of Finance of the Russian Federation.
The following week, on 1 March 2022, Euroclear said that it would no longer accept payment settlement instructions in Russian domestic securities. Countless others cut ties with the country.
As the war in Ukraine rumbles on, now into its second year, Joerg Ambrosius, chief commercial officer at State Street, affirms: “[This] macroeconomic environment will continue to put pressure on asset managers and custodians in 2023.”
This will, he says, lead to an “ever-greater focus on operating models and efficiency.”
Ambrosius’ predictions are mirrored in DTCC’s Systemic Risk Barometer Survey for 2023.
Released last December, the survey found that the aforementioned macroeconomic and geopolitical risks and trade tensions, which underpin inflation, are predicted to be the primary threats to the financial services ecosystem this year.
The number of respondents naming geopolitical risk and trade tensions as a high-level threat rose from 49 to 68 per cent since the 2022 Risk Forecast.
Though, offering a point of reassurance, Albert Cilia, managing director of Trident Trust’s Malta office, says: “Do not underestimate the resilience of the market! This isn’t the first challenging time for the market in our long history, and it won’t be the last.”
Taking the time
While the T+3 to T+2 shift in 2017 was “removing a buffer,” the move to T+1, predicted to be just a year away, could be tougher, and in contrast to Cilia’s optimism, the market may not be ready for this particular change.
“If 2022 was earmarked as the year for comprehensive T+1 planning, then, on reflection, we can say that it fell short,” claims Ludovic Blanquet, chief strategy and transformation officer at Xceptor.
Allowances can be made for the industry “falling short” in both 2020 and 2021, as it collectively dealt with the overnight changes necessitated by the COVID-19 pandemic.
However, broadly speaking, by the end of Q1 2022, most of the world was able to cautiously get back on track. So why did the industry continue to fall short of its T+1 demands last year?
“The volatility visited upon international markets as a result of the conflict in Ukraine forced firms to work around a deluge of sanctions and applied pressure to reduce trading across a range of assets,” outlines Xceptor’s Blanquet.
“Against this complex geopolitical and trading backdrop, few firms made meaningful progress towards finalising their plans for T+1.”
These geopolitical pressures, which have underpinned the ‘cost of living’ crisis, have also caused a ‘cost-of-running-a-business’ crisis.
“2022 was the year of deep cuts as companies desperately tried to adjust to changing economic conditions,” Joel Windels, vice president of SaaS platform, Vertice says. “Chief financial officers found ways to put their businesses into survival mode.”
Referencing these cuts, Windels say that this year “office space will contract, perks will dry up and software will be allowed to expire.
“Smaller security and IT teams, coupled with a reduction in cybersecurity software spending, could leave organisations exposed to a higher level of risk.”
He adds: “Bad actors will be well aware that the attack surface has grown for many businesses, resulting in a greater number of high-profile security incidents, like data breaches or attacks.”
Blueprints of promise
For her part, Pardeep Cassells, head of securities and claims products at AccessFintech, explains what the company is doing to improve fails-related data issues.
“We’re taking in even more data now and layering into that new services, such as enhancing transparency in inventory, so that clients know where shares are being held and in what quantity, and demonstrating whether there are enough in place to settle a trade,” she explains.
“We ensure that that knowledge is available from T+0, so organisations can use it to prevent trade fails, rather than finding out that a trade has failed and shares were being held in a different depot.”
Amid the shift to T+1, Trident Trust’s Cilia mentions the importance of considering the convergence between T+1 and technologies that support digital assets. “The handling of at least some volume of digital assets will become widespread and T+1 strategies must accommodate this,” he discusses.
“Tokenisation of assets and funds is accelerating as institutions explore new ways to issue and distribute digitised securities and new secondary markets evolve for digital assets. 2023 could also be the year when central banks and market infrastructure make CBDCs a reality.”
To this point, last year, DTCC tested their digital settlement network prototype against tokenised dollars. Participants included Bank of America, Citi and Northern Trust, amongst several other leading firms.
The system connected two asset networks to enable CBDC security settlements, with communication dependencies between the two reduced and counterparty risk eliminated.
The pilot additionally assessed network governance, with administrators able to resolve transactional issues if they arose.
Access to a digital Federal Reserve payments system was highlighted by DTCC as something that could prompt innovation and opportunity in the sector, with the use of a CBDC network expected to improve firms’ efficiency, transparency and reporting.
A little further back in time, a consortium of institutions, led by Euroclear, successfully experimented with CBDC for settling French treasury bonds on a test blockchain in late 2021. The experiment, which was commissioned by the Banque de France, included Agence France Trésor, BNP Paribas CIB, Crédit Agricole CIB, HSBC and Société Générale.
State Street’s Ambrosius agrees that this “institutional adoption of blockchain technology will continue to expand in 2023, as more institutions discover the merits of the technology to create operational efficiency gains, capital efficiencies and cost savings.”
As a concluding thought, when asked if he expects core asset servicing businesses to grow, almost irrespective of economic performance locally, regionally and globally, Trident Trust’s Cilia affirms: “Tougher market conditions tend to favour organisations with strong foundations.”
This week marks a year since the Russian invasion of Ukraine, which began on 24 February 2022.
In the weeks that followed, Asset Servicing Times reported that DTCC had blocked Russian securities from the Bank of Russia and The Ministry of Finance of the Russian Federation.
The following week, on 1 March 2022, Euroclear said that it would no longer accept payment settlement instructions in Russian domestic securities. Countless others cut ties with the country.
As the war in Ukraine rumbles on, now into its second year, Joerg Ambrosius, chief commercial officer at State Street, affirms: “[This] macroeconomic environment will continue to put pressure on asset managers and custodians in 2023.”
This will, he says, lead to an “ever-greater focus on operating models and efficiency.”
Ambrosius’ predictions are mirrored in DTCC’s Systemic Risk Barometer Survey for 2023.
Released last December, the survey found that the aforementioned macroeconomic and geopolitical risks and trade tensions, which underpin inflation, are predicted to be the primary threats to the financial services ecosystem this year.
The number of respondents naming geopolitical risk and trade tensions as a high-level threat rose from 49 to 68 per cent since the 2022 Risk Forecast.
Though, offering a point of reassurance, Albert Cilia, managing director of Trident Trust’s Malta office, says: “Do not underestimate the resilience of the market! This isn’t the first challenging time for the market in our long history, and it won’t be the last.”
Taking the time
While the T+3 to T+2 shift in 2017 was “removing a buffer,” the move to T+1, predicted to be just a year away, could be tougher, and in contrast to Cilia’s optimism, the market may not be ready for this particular change.
“If 2022 was earmarked as the year for comprehensive T+1 planning, then, on reflection, we can say that it fell short,” claims Ludovic Blanquet, chief strategy and transformation officer at Xceptor.
Allowances can be made for the industry “falling short” in both 2020 and 2021, as it collectively dealt with the overnight changes necessitated by the COVID-19 pandemic.
However, broadly speaking, by the end of Q1 2022, most of the world was able to cautiously get back on track. So why did the industry continue to fall short of its T+1 demands last year?
“The volatility visited upon international markets as a result of the conflict in Ukraine forced firms to work around a deluge of sanctions and applied pressure to reduce trading across a range of assets,” outlines Xceptor’s Blanquet.
“Against this complex geopolitical and trading backdrop, few firms made meaningful progress towards finalising their plans for T+1.”
These geopolitical pressures, which have underpinned the ‘cost of living’ crisis, have also caused a ‘cost-of-running-a-business’ crisis.
“2022 was the year of deep cuts as companies desperately tried to adjust to changing economic conditions,” Joel Windels, vice president of SaaS platform, Vertice says. “Chief financial officers found ways to put their businesses into survival mode.”
Referencing these cuts, Windels say that this year “office space will contract, perks will dry up and software will be allowed to expire.
“Smaller security and IT teams, coupled with a reduction in cybersecurity software spending, could leave organisations exposed to a higher level of risk.”
He adds: “Bad actors will be well aware that the attack surface has grown for many businesses, resulting in a greater number of high-profile security incidents, like data breaches or attacks.”
Blueprints of promise
For her part, Pardeep Cassells, head of securities and claims products at AccessFintech, explains what the company is doing to improve fails-related data issues.
“We’re taking in even more data now and layering into that new services, such as enhancing transparency in inventory, so that clients know where shares are being held and in what quantity, and demonstrating whether there are enough in place to settle a trade,” she explains.
“We ensure that that knowledge is available from T+0, so organisations can use it to prevent trade fails, rather than finding out that a trade has failed and shares were being held in a different depot.”
Amid the shift to T+1, Trident Trust’s Cilia mentions the importance of considering the convergence between T+1 and technologies that support digital assets. “The handling of at least some volume of digital assets will become widespread and T+1 strategies must accommodate this,” he discusses.
“Tokenisation of assets and funds is accelerating as institutions explore new ways to issue and distribute digitised securities and new secondary markets evolve for digital assets. 2023 could also be the year when central banks and market infrastructure make CBDCs a reality.”
To this point, last year, DTCC tested their digital settlement network prototype against tokenised dollars. Participants included Bank of America, Citi and Northern Trust, amongst several other leading firms.
The system connected two asset networks to enable CBDC security settlements, with communication dependencies between the two reduced and counterparty risk eliminated.
The pilot additionally assessed network governance, with administrators able to resolve transactional issues if they arose.
Access to a digital Federal Reserve payments system was highlighted by DTCC as something that could prompt innovation and opportunity in the sector, with the use of a CBDC network expected to improve firms’ efficiency, transparency and reporting.
A little further back in time, a consortium of institutions, led by Euroclear, successfully experimented with CBDC for settling French treasury bonds on a test blockchain in late 2021. The experiment, which was commissioned by the Banque de France, included Agence France Trésor, BNP Paribas CIB, Crédit Agricole CIB, HSBC and Société Générale.
State Street’s Ambrosius agrees that this “institutional adoption of blockchain technology will continue to expand in 2023, as more institutions discover the merits of the technology to create operational efficiency gains, capital efficiencies and cost savings.”
As a concluding thought, when asked if he expects core asset servicing businesses to grow, almost irrespective of economic performance locally, regionally and globally, Trident Trust’s Cilia affirms: “Tougher market conditions tend to favour organisations with strong foundations.”
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