How many more battles still need to be fought against legacy systems and other external factors before the industry reaches an amicable point of standardisation and collaboration within the landscape of a digitally transforming, post-pandemic world?
If the battle to update post-trade systems were to be loosely synonymous with any movie blockbusters, it could be the World War One epic, 1917. The way the film is shot, in one long, intense 117 minute sequence — following two soldiers’ exhaustive secret mission through enemy territory while up against the clock — liberally mirrors the industry’s journey to tackle out-of-date legacy systems amid the backdrop of cost-heavy minefields and regulatory deadlines. Like the film’s two protagonists who showed resilience and faith in each other, global markets’ resilience and robustness have shone through in the form of higher transactional volumes and levels of domestic and international inflows, in spite of (and also because of) acute moments of global volatility, especially during 2020. Banks, custodians and the like are not facing anything as drastic as a war, of course, but what may have felt like a long, intense ongoing battle against an abundance of regulatory hurdles, all the while implementing often impractical but necessary COVID-19-secure workplace logistics over the course of the last two years.
When we look to the history books, most periods of volatility are followed by some form of pact or new world order, even if in retrospect they come to be seen as makeshift or they merely paper over the cracks — the Treaty of Versailles, the armistice which officially ended the First World War (in which 1917 is set) is a good example of this. Many historians say it paved the disastrous road toward the Second World War that began less than two decades later. Of course, banks and custodians are unlikely to receive their own form of new world order overnight, particularly when it comes to standardising and updating post-trade processes — nonetheless, mandates, roadmaps and pacts are always being made in an effort to step closer to this goal. T+1 could be considered the metaphorical medical corp behind a market participant’s ongoing frontline battle to lower the risks through shortened settlement times, at least. The months and years ahead may see market participants reach a standardised agreement that does even more than what T+1, or even T+0, is setting out to achieve, but they will all need the right resources to achieve this — which may take considerable time.
Gathering the intelligence
We know that banks and custodians, as well as central securities depositories (CSDs), braced themselves for the unknown in 2020. The COVID-19 pandemic — its awfulness and very human element aside — forced the industry into a resilience that had never been needed before, particularly when it came to managing higher transactional volumes in post-trade. This gave way to a new-found nature of resilience that the industry knows it needs to increase in the years ahead.
“There is a general feeling that the systems that support higher levels of transaction volume have to continue to evolve to meet future needs, and account for potential disruptions,” deems Caroline Butler, global head of custody at BNY Mellon Asset Servicing.
Expanding on this, Ryan Marsh, global head of distributed ledger technology and digital innovation, Securities Services, Citi, comments: “Many industry participants were able to pivot quickly to more digital or automated solutions, however in many cases these alternatives have been temporary in nature. It is important that the industry focuses on remaining paper-based processes and seek to eradicate them where possible.”
One gaping industry wound that often leaves financial services limping behind other sectors in its streamlining and advancement is not the use of data, broadly speaking, but the irrelevance of said data, and the slow speed of its delivery, particularly to areas along the settlement chain. In 1917, the right intelligence, and the speed at which it was given by Lance Corporal Will Schofield, managed to halt a large-scale battle. For financial services, of course, data needs to be made readily available and also easy to access for settlement and transaction completion.
“It is important that the industry as a whole finds better ways to share transaction data along the settlement chain. If better quality data is shared faster, then it can improve the ability to deal with problems and enable better decision making,” says Citi’s Marsh. “It is also important that market infrastructure and industry participants invest in technologies if they have not already done so that can support real-time processing of data and move away from batch processing that has been so prevalent in the past.”
Preparing the reserves
It is moving away from these outdated practices, such as batch processing, that will increase the efficiency of post-trade processes and, in most cases, bring them closer to real-time, which by their nature are two factors that will help the industry take a step closer to post-trade standardisation. Though the benefits may not be seen in the short-term, due to initial costs of necessary updates, the end should justify the means.
Brian Collings, CEO of Torstone Technology, says: “Real-time processing is key to matching the shorter settlement cycle and many back-office systems will struggle to deliver that, as they still run on a batch basis. Every part of the workflow needs to be more efficient, and any batch processes will impede efficiency.”
He adds: “The costs will outweigh the benefits if firms are not on modern technology because legacy systems will carry an outsize total cost of ownership.”
However, in recent years, the term “artificial intelligence (AI)” has often been thrown around and overused as a blanket solution for pushes towards digitalisation that are in some cases not even necessary. There are some areas, albeit minimal, that still need manual or human intervention.
As Jeremy Dobrick, chief information officer and head of operations at BNY Mellon Asset Servicing, highlights: “There are still a few processes that require us to apostille a document, or apply a wet ink signature.”
Though he adds: “The key for the industry is making new [automated] practices the norm and not regressing back to paper-based processes following a broader return to office globally.”
To help streamline post-trade processing post-pandemic, machine learning (ML) may well be the better resource ready and waiting in reserve, instead of AI which has for many years caused a quaking in some pairs of boots, with its connotations of employee replacement — a potential move to a method of change that has, very understandably, been met with both suspicion and defense in some places.
BNY Mellon’s Dobrick says: “We are seeing early success with AI. However, there is a growing consensus that replacing people entirely with bots or technology intelligence removes human expertise which, once gone, is costly to replace — not to mention the cost affiliated with the maintenance and functionality of the bots themselves. So, the key is finding the right balance.”
Whether the right choice be AI or ML (or indeed both) for a bank or custodian, Torstone Technology’s Collings outlines the important differentiations between the two, indicating: “ML is well-suited for automating tasks in which pattern recognition is the key factor, which makes it a good fit for processes like exceptions management and reconciliation.
“AI is often used to describe technologies that are actually ML tools, but AI application is in reality more limited, partly due to transparency issues. ML is able to spot patterns in data in which it is trained but has a more defined remit of output, where true AI is making more fundamental decisions.”
No matter the choice, the basis of a good battle plan goes back to intelligence — having the right data to utilise these methods of technology and having a solid foundation of cohesion in which to evolve them.
As Jennifer Peve, managing director, head of strategy and business development at DTCC, expands: “The key to success in leveraging these tools is in having a strong data strategy and developing a data analytics platform.”
She adds: “Cloud-based data platforms can offer financial institutions speed, flexibility, and scale to provide firms with real-time access to highly accurate and valuable data in a governed manner.”
T+1 and T+0: Walking in to new territory
We are approaching the first anniversary of the launch of DTCC’s two-year industry roadmap to shorten the settlement cycle for US equities to one business day (T+1). In the grand scheme of things, the move to T+1 is a solution to win a battle against settlement shortcomings, but it is well known that it will not (nor does it set out to) win the war on all post-trade inefficiencies.
“The turning toward T+1 or even T+0 for greater straight-through processing will not solely provide the cure for settlement inefficiencies, but it is the best reachable reality in the next few years to come,” says BNY Mellon’s Dobrick. “We have to also keep the prospect of T+0 at a wide scale in mind.”
But levels of efficiency can very much depend on the region in question. Comparisons between an Asia-based, North America-based or European-based custodian, bank or CSD need to be outlined when considering the reality and context of this debate. As Cécile Nagel, CEO of EuroCCP, deems: “In Europe, a shift to T+1 would be a huge endeavour given how diverse it is compared to the US. Europe comprises 27 markets with numerous different processes across their respective CSDs, and while TARGET2-Securities (T2S) has helped achieve some harmonisation, more work remains to be done.”
She adds: “This also begs the question as to whether the industry should look further afield towards T+0.”
For an industry that is of course on the frontline through periods of extreme economic volatility, particularly during the last two years and indeed before, there are those that say it will be a challenge, but will essentially just be another storm to weather.
Camille McKelvey, head of MarketAxess post-trade, straight-through processing business, expands that MarketAxess and the industry is ready and able to face changes like the move to T+1 or T+0.
“As an industry we get used to working in a certain way and any deviation from that requires a coordinated re-organisation. In Europe, this becomes even trickier as there are so many different CSDs, but we have proven that this can be done before so we are confident that it can be done again.”
Looking at what banks and custodians can expect and should prepare for within post-trade this year, Citi’s Marsh indicates: “In the near term we expect better distribution and use of data coupled with AI to have the most significant impact in post-trade.”
BNY Mellon’s Butler predicts: “[The industry] will see greater collaboration across the ecosystem — not to drive individual benefits but, rather, to solve industry pains. I think that there will be a push from our clients to be more proactive in collaborating on cross-industry innovation, technology solutions and leveraging fintechs to drive adoption and change.”
With the right intelligence provided by the data, collaboration from and for the industry, coupled with strategic reliance on the right kind of technology that is ready and waiting in the reserves, 2022 could be the year that banks and custodians do not just ‘keep on keeping on’ in post-trade, but actually reach the frontline to their own, tangible and realistic idea of a ‘new world order’.
