How is Volante approaching the current market landscape?
We are a market initiative-driven company. We follow the regulatory landscape, as that’s where the technical landscape changes are, and we try to insulate our clients from those changes. We’re not in the business of rip out-and-replace, we’re in the business of adding additional functionalities. We target innovative institutions that want to face up to the challenges and turn them into opportunities for their business.
That mindset has worked very well for us over the last couple of years. Business is split between capital markets and payments, but everything ends up as payments—if it doesn’t generate the movement of money, then there is not a lot of point in doing it.
We’re supporting initiatives that are capital markets-focused in their own right, and others that are more focused on payments, but they’re all built from the same base application, and they both use the same architecture.
In terms of delivering efficiency in messaging for a custodian or investment bank, is a large overhaul necessary, or will smaller tweaks do the job?
It depends on what the customer is trying to achieve. Some projects require more tactical changes, some require an element of blue-sky thinking, and some will be completely transformational. In the current market climate, there are several organisations that would like to undertake more transformative projects, in theory, but may not realise quite how big a project can be.
By the time the seeds are sown and the client has decided what it wants to transform, and once all of the stakeholders are informed, often projects can appear too daunting. Alternatively, the market may have changed, or even the firm’s management may have changed.
The more time goes by, the less likely it becomes that these large-scale changes will happen.
We also see infrastructure that has been in place for a few years and that has seen a lot of investment, which means it is very sticky. Changing that solid infrastructure, either to replace it or just to make it conform to regulatory changes, comes at a vast cost.
So, we look at what needs to be done. In capital markets, the main area is compliance, and it takes up a lot of budget just to meet minimum compliance.
Organisations are thinking about efficiency, but they’re thinking about compliance first. You could gain 10 percent in efficiency, or have a $100 million operations budget, but if you fail to comply and end up with a $500 million fine, then it really doesn’t matter how efficient you are.
Everyone is mindful of lower costs, and everyone is trying to provide better services to differentiate themselves, but compliance comes first. Smarter banks and institutions are questioning whether they can go beyond that minimum compliance and do more with it, and whether they can do that without affecting their legacy systems.
For a lot of firms, the legacy infrastructure is becoming a kind of master of accounts—a statement of record. Anything outside of that core processing can be external.
This is particularly relevant for messaging, which can be done either internally or externally.
Some firms are considering whether they can create functionality that lives in its own ecosystem around that legacy infrastructure, that is more agile, and that communicates with the infrastructure, and with the external world.
Has the messaging side of custody become more complicated as volumes have increased? Are they looking to automate?
From a compliance perspective, it can depend on the jurisdiction. If a custodian is domestic in the UK, or even pan-Europe, the volumes involved are going to be very different to those of a global custodian.
But there are other challenges in the custody sector. For example, every global custodian that has a sub-custodian will have to deal with different message formats, and the nuances of those messages within each market. Previously, custodians had their own proprietary services, and each front manager would have a particular terminal for instructions to each custodian.
That hasn’t necessarily gone. Although more traffic is going over consolidated channels such as SWIFT, the fact is that those nuances are still there. A lot of outside institutions working in multiple markets will have multiple custody relationships and each will require something slightly different.
The different semantics mean particular fields have to be formatted in a particular way. Even within one market, it could be that one type of security has to be formatted in one way and another type has to be formatted in another way. And that’s before we get into domestic identifiers.
Custodians will have a lot of message flows coming in, but they’re not all standardised. This could be a few thousand messages per day, but the large institutions could have hundreds of thousands, plus a backwards flow of account information going back to the clients, in terms of pending transactions.
In the future, they will also have regulations such as the Securities Financing Transactions Regulation, which will require reporting, and they will end up with a huge amount of information going in and out, all nuanced with regards for geography, regulation, customer preference, and so on.
Having the ability to accommodate all these differences without having to recode the legacy infrastructure every time a new client is brought on board is key to maintaining agility. Without that agility, you are much more likely to go out of business.
Are any custodians managing these challenges particularly well? Are you seeing integration across different businesses?
There is a spectrum of capabilities, but I wouldn’t say that any custodian has necessarily conquered the problem. This is mainly because most organisations in financial services haven’t really integrated their back-, middle- and front-office trading systems. To find someone who oversees equity and fixed income, geography, or risk and compliance, we have to look for C-level and stakeholder engagement.
It’s important to be pragmatic. The introduction of a piece of integration software can be evangelised once changes start to happen and success can be shown.
This can then be applied in other parts of the business, and the result is a slow but steady adoption over time.
Our most successful relationships have generally involved implementing our technology in this way, rather than going in with a ‘big bang’ solution.
Are counterparties discussing harmonising messaging? Should this be down to SWIFT, or companies like Volante?
Target2-Securities (T2S), for example, is making a huge impact on European markets, and it has taken a lot longer than maybe many thought it would. Over time, however, it will affect the businesses that provide more localised custody. It will change some of their behaviour, and the types of services they provide. These are very similar to the very significant changes we saw when the UK’s Crest came in 20 years ago, but this time it will affect cross-border.
Clearinghouses, on the other hand, benefit from more and more asset classes having to be centrally cleared. Two of the biggest clearinghouses in the world are customers of ours, and they actively leverage our integration technology to stay abreast of their regulatory reporting requirements. In terms of how those organisations communicate with each other, undoubtedly there is a desire for harmonisation, and traditionally that has been dominated by SWIFT. More regulations are mandating ISO 20022, but that doesn’t mandate a delivery mechanism, so, as custody is a fairly low-margin business, it is likely that more cost-effective channels based on ISO 20022 payload over the internet with appropriate encryption, or indeed distributed ledgers, will be adopted.
There has got to be more of a drive for application programming interfaces (APIs) and open-source standards. They don’t have to be delivered via any particular network, but they would make better use of the API ecosystem between players, while new entrants might come to maturity based on distributed ledger technology.
Some custodians and depositories will undoubtedly try to emulate or embrace those technologies, protecting themselves against the new entrants. And some new entrants will undoubtedly gain some ground, but it’s not going to be easy for them, simply because this infrastructure and the custodians, central clearing systems and depositories have been around for an awfully long time.
So, while the technology might be there, the industry may not evolve as rapidly as, for example, the trading environment, where you see immediate effects. Instead, APIs, ISO standards, an understanding of semantics, and regulation will almost certainly be the combined cause of consolidation.