A price to pay?
18 Oct 2023
Jenna Lomax investigates what the future of securities services holds at a time when it is weighing up different costs to meet a vast array of obligations
Image: mike_mareen/stock.adobe.com
“Post-trade is going the wrong way. What I mean by that is, it is getting more complex and more expensive,” said Citi’s global head of custody and clearing, Matthew Bax, at Sibos’s ‘Future of Securities Services’ panel.
“It is becoming more disparate, and, effectively, there are a small number of players that you can actually turn to for assistance,” he went on. “From an efficiency, expense and globalisation perspective, that’s going to be the challenge.”
These days, the securities services’ ongoing challenges and costs just come with the territory, but as globalisation continues to develop, and cross-border payments become more commonplace, interest rate hikes may underpin more decisions regarding operational and technology spend.
Another consideration for the future of securities services is cyber security. In some cases, organisations are using the support of third-party specialists to improve their security and know-your-customer processes — both are paramount cogs for operational resilience. Additionally, with T+1 implementation now less than a year away, robust systems will be needed to help firms manage this transition and to prevent any decline in settlement efficiency.
Discussing today’s challenges in further detail, Richard Anton, chief operations officer at CIBC Mellon, surmises: “Market dynamics are shifting. While there was a surge in investment during the COVID-19 pandemic to digitise processes rapidly, businesses now face the challenge of resetting their expectations.
“Clients are seeking solutions that optimise operational processes, enhance agility, and drive cost-effectiveness, thereby ensuring their ability to navigate a potentially more challenging economic environment.”
Recent statistics from fund services provider Ocorian found that alternative fund managers, for one, are increasingly turning to third-party suppliers to support their fund management business.
The fund services provider found that price is the biggest driver for fund managers looking to change providers. Remarkably, the quality of services and the provider’s overall reputation came in as the second and third priority, respectively.
“Outsourcing fund administration is a cost-efficient option,” affirmed Paul Spendiff, head of business development, fund services at Ocorian, when commenting on the findings.
A legacy of problems or opportunity?
As the industry looks to welcome in a new year, it will be very much occupied with the transition to T+1, expected in May 2024. A recently released whitepaper from SmartStream, entitled ‘The race to T+1 settlement’, discusses the impact that the shift to a shortened settlement cycle in North America will have on global financial services organisations and financial products. The move will be enhanced by pre-existing pressures, SmartStream outlines, such as “the imperative to improve margins”.
“With the upcoming T+1 requirements, we are having many conversations with financial institutions who are discovering that partnering with a vendor as opposed to buying a solution is more cost-effective, and this avoids maintaining in-house builds,” affirms Vincent Kilcoyne, executive vice president of product management at SmartStream.
He adds: “In terms of partnering with Smartstream, this means they are getting a solution quicker and taking on a more cost-efficient way to reap the benefits of a proven solution, from a vendor that has invested in research and development for decades.”
However, it is no secret that some areas of the securities services industry are decades behind innovation, particularly in its attempt to keep up with impending T+1 compression times as well as other, imperative changes. Often hindering back-office growth, or its ability to streamline, are in-house builds that are no longer effective or are too costly to run, as SmartStream’s Kilcoyne alludes to.
This was a central discussion at Sibos’ ‘Future of Securities Services’ panel. Moderator Barnaby Nelson, CEO of The ValueExchange, asked what area of securities services had received the most investment during 2023, and what other areas had, as a result, suffered from lack of funds. Citi’s Bax affirmed that legacy system updates needed the most funding in order to streamline post-trade processes, though he elaborated that “the industry should build a new fabric around [them].
“While we’re spending a vast amount on legacy transitions, it is important to remember those systems are incredibly scalable; they are pretty safe and we know exactly what they’re doing,” Bax added. “We’ll all have to transition our legacy systems; they’ll become more of an internal problem, because they are an expense issue, as opposed to a client-experience problem.”
“Broadly speaking, the industry has come to the uncomfortable realisation that its technology spend is going to continue to increase in the short term, while its operations spending will likely stay fairly flat. The real trick is to invest in your technology as much as you possibly can, and hold your operations spending flat. When you come out of the technology spending curve, look at what you can do for your operational processes.”
Additionally, this shift in action and attitude could have the potential to bring greater opportunities for innovation, such as developments around AI and machine learning. In theory, through greater automation, firms should have access to higher-quality reporting, underpinned by real-time data.
Clearstream’s CEO Stephanie Eckermann, who was also on the panel, said: “Data and AI have both been in security services for a long time.” She added: “We’re really progressing with both, to the point where we can give something back to our clients.
“For example, using predictive models on settlement efficiency helps to identify causes for settlement fails, which in turn, helps our clients to optimise settlement efficiency and reduce penalties. Most of these processes are now AI-driven.”
A number of back-office companies have already integrated AI into their software stacks to provide efficient services for their clients and to deliver business value. On the other hand, machine learning has, for the most part, been adopted to help users and machines better understand data.
Although some onus is being put on AI or machine learning to help improve settlement times, this practice is still in its infancy; the responsibility still lies with the workforce who are implementing these AI or machine learning initiatives. However, before such initiatives can be successfully integrated, data management needs to be streamlined and effective. Yet, data management software firm Solidatus indicates that US and UK data leaders in banking and financial services are facing ‘data burnout’.
In a recent survey, the company found that 71 per cent of senior data leaders in financial services are on the brink of quitting their jobs due to data distress. Some 74 per cent of data leaders polled say they have experienced workplace stress or have had to take sick days as a result of it.
Additionally, 33 per cent cite “too many disparate and siloed data sources” as the cause of their data distress.
Commenting on the whitepaper, Philip Dutton, CEO and founder of Solidatus, said: “Data distress could be costing the global banking system hundreds of billions of dollars in lost productivity and missed opportunities.”
The industry can simply not afford to lose productivity, nor miss opportunities amid the countdown to T+1, and while facing other regulatory and operational obligations.
Remaining people-centric
“Given that post-trade is people- and expertise-driven, training — and training people with the intention of training them for a long post-trade career — is so important,” affirmed Clearstream’s Eckermann at Sibos. “That’s a big challenge that we all need to manage.”
Citi’s Bax surmised: “Out of all the challenges we face in post trade, talent is one of the most important. The five- to 10-year horizon on post-trade talent is the one to watch out for.”
As well as giving the right training for the future, the industry will need to find the right way to entice the workforce to commit to it. New research by workspace platform, Hubble, reveals that businesses “still haven’t ‘solved’ their workspace, three years after the post-lockdown working shake-up”. Its survey of CEOs and leaders across HR, operations and workspaces, indicates that “businesses are still in ‘test and learn’ mode” — whether they are testing out a remote workspace strategy or a hybrid-working model.
On the other side of the coin, recent KPMG research has suggested that the majority of chief executives think employees will be working in-office five days a week by the end of 2026. Of the 1300 global CEOs surveyed by KPMG, 64 per cent predicted a full return within three years. In addition, nearly 90 per cent also said they are “likely” to link financial rewards like bonuses and promotions to office attendance.
Wherever the next generation of talent is taught, “investing in their development and education — through comprehensive graduate schemes and mentorship programmes — is not only advisable but crucial for the sustained growth and innovation of our sector,” affirms CIBC Mellon’s Anton.
“By investing in their education and providing a supportive learning environment, we not only empower the next generation of leaders, but also ensure the resilience and adaptability of our industry in the face of evolving challenges.”
He concludes: “A well-structured graduate scheme can provide a foundational understanding of the intricacies involved, allowing them to grasp the nuances of settlement, clearing, and related activities. This initial exposure lays the groundwork for future specialisation and leadership within the field.”
“It is becoming more disparate, and, effectively, there are a small number of players that you can actually turn to for assistance,” he went on. “From an efficiency, expense and globalisation perspective, that’s going to be the challenge.”
These days, the securities services’ ongoing challenges and costs just come with the territory, but as globalisation continues to develop, and cross-border payments become more commonplace, interest rate hikes may underpin more decisions regarding operational and technology spend.
Another consideration for the future of securities services is cyber security. In some cases, organisations are using the support of third-party specialists to improve their security and know-your-customer processes — both are paramount cogs for operational resilience. Additionally, with T+1 implementation now less than a year away, robust systems will be needed to help firms manage this transition and to prevent any decline in settlement efficiency.
Discussing today’s challenges in further detail, Richard Anton, chief operations officer at CIBC Mellon, surmises: “Market dynamics are shifting. While there was a surge in investment during the COVID-19 pandemic to digitise processes rapidly, businesses now face the challenge of resetting their expectations.
“Clients are seeking solutions that optimise operational processes, enhance agility, and drive cost-effectiveness, thereby ensuring their ability to navigate a potentially more challenging economic environment.”
Recent statistics from fund services provider Ocorian found that alternative fund managers, for one, are increasingly turning to third-party suppliers to support their fund management business.
The fund services provider found that price is the biggest driver for fund managers looking to change providers. Remarkably, the quality of services and the provider’s overall reputation came in as the second and third priority, respectively.
“Outsourcing fund administration is a cost-efficient option,” affirmed Paul Spendiff, head of business development, fund services at Ocorian, when commenting on the findings.
A legacy of problems or opportunity?
As the industry looks to welcome in a new year, it will be very much occupied with the transition to T+1, expected in May 2024. A recently released whitepaper from SmartStream, entitled ‘The race to T+1 settlement’, discusses the impact that the shift to a shortened settlement cycle in North America will have on global financial services organisations and financial products. The move will be enhanced by pre-existing pressures, SmartStream outlines, such as “the imperative to improve margins”.
“With the upcoming T+1 requirements, we are having many conversations with financial institutions who are discovering that partnering with a vendor as opposed to buying a solution is more cost-effective, and this avoids maintaining in-house builds,” affirms Vincent Kilcoyne, executive vice president of product management at SmartStream.
He adds: “In terms of partnering with Smartstream, this means they are getting a solution quicker and taking on a more cost-efficient way to reap the benefits of a proven solution, from a vendor that has invested in research and development for decades.”
However, it is no secret that some areas of the securities services industry are decades behind innovation, particularly in its attempt to keep up with impending T+1 compression times as well as other, imperative changes. Often hindering back-office growth, or its ability to streamline, are in-house builds that are no longer effective or are too costly to run, as SmartStream’s Kilcoyne alludes to.
This was a central discussion at Sibos’ ‘Future of Securities Services’ panel. Moderator Barnaby Nelson, CEO of The ValueExchange, asked what area of securities services had received the most investment during 2023, and what other areas had, as a result, suffered from lack of funds. Citi’s Bax affirmed that legacy system updates needed the most funding in order to streamline post-trade processes, though he elaborated that “the industry should build a new fabric around [them].
“While we’re spending a vast amount on legacy transitions, it is important to remember those systems are incredibly scalable; they are pretty safe and we know exactly what they’re doing,” Bax added. “We’ll all have to transition our legacy systems; they’ll become more of an internal problem, because they are an expense issue, as opposed to a client-experience problem.”
“Broadly speaking, the industry has come to the uncomfortable realisation that its technology spend is going to continue to increase in the short term, while its operations spending will likely stay fairly flat. The real trick is to invest in your technology as much as you possibly can, and hold your operations spending flat. When you come out of the technology spending curve, look at what you can do for your operational processes.”
Additionally, this shift in action and attitude could have the potential to bring greater opportunities for innovation, such as developments around AI and machine learning. In theory, through greater automation, firms should have access to higher-quality reporting, underpinned by real-time data.
Clearstream’s CEO Stephanie Eckermann, who was also on the panel, said: “Data and AI have both been in security services for a long time.” She added: “We’re really progressing with both, to the point where we can give something back to our clients.
“For example, using predictive models on settlement efficiency helps to identify causes for settlement fails, which in turn, helps our clients to optimise settlement efficiency and reduce penalties. Most of these processes are now AI-driven.”
A number of back-office companies have already integrated AI into their software stacks to provide efficient services for their clients and to deliver business value. On the other hand, machine learning has, for the most part, been adopted to help users and machines better understand data.
Although some onus is being put on AI or machine learning to help improve settlement times, this practice is still in its infancy; the responsibility still lies with the workforce who are implementing these AI or machine learning initiatives. However, before such initiatives can be successfully integrated, data management needs to be streamlined and effective. Yet, data management software firm Solidatus indicates that US and UK data leaders in banking and financial services are facing ‘data burnout’.
In a recent survey, the company found that 71 per cent of senior data leaders in financial services are on the brink of quitting their jobs due to data distress. Some 74 per cent of data leaders polled say they have experienced workplace stress or have had to take sick days as a result of it.
Additionally, 33 per cent cite “too many disparate and siloed data sources” as the cause of their data distress.
Commenting on the whitepaper, Philip Dutton, CEO and founder of Solidatus, said: “Data distress could be costing the global banking system hundreds of billions of dollars in lost productivity and missed opportunities.”
The industry can simply not afford to lose productivity, nor miss opportunities amid the countdown to T+1, and while facing other regulatory and operational obligations.
Remaining people-centric
“Given that post-trade is people- and expertise-driven, training — and training people with the intention of training them for a long post-trade career — is so important,” affirmed Clearstream’s Eckermann at Sibos. “That’s a big challenge that we all need to manage.”
Citi’s Bax surmised: “Out of all the challenges we face in post trade, talent is one of the most important. The five- to 10-year horizon on post-trade talent is the one to watch out for.”
As well as giving the right training for the future, the industry will need to find the right way to entice the workforce to commit to it. New research by workspace platform, Hubble, reveals that businesses “still haven’t ‘solved’ their workspace, three years after the post-lockdown working shake-up”. Its survey of CEOs and leaders across HR, operations and workspaces, indicates that “businesses are still in ‘test and learn’ mode” — whether they are testing out a remote workspace strategy or a hybrid-working model.
On the other side of the coin, recent KPMG research has suggested that the majority of chief executives think employees will be working in-office five days a week by the end of 2026. Of the 1300 global CEOs surveyed by KPMG, 64 per cent predicted a full return within three years. In addition, nearly 90 per cent also said they are “likely” to link financial rewards like bonuses and promotions to office attendance.
Wherever the next generation of talent is taught, “investing in their development and education — through comprehensive graduate schemes and mentorship programmes — is not only advisable but crucial for the sustained growth and innovation of our sector,” affirms CIBC Mellon’s Anton.
“By investing in their education and providing a supportive learning environment, we not only empower the next generation of leaders, but also ensure the resilience and adaptability of our industry in the face of evolving challenges.”
He concludes: “A well-structured graduate scheme can provide a foundational understanding of the intricacies involved, allowing them to grasp the nuances of settlement, clearing, and related activities. This initial exposure lays the groundwork for future specialisation and leadership within the field.”
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