Industry dynamics are fundamentally changing as the impact of rising interest rates reverberates across markets around the world, says AccessFintech’s Pardeep Cassells. As financial institutions of all kinds are adjusting to the new environment the industry finds itself in, the companies that serve them must adjust as well
We enter 2023 against a turbulent backdrop. For our clients, 2023 will be a year in which they sharpen their focus on improving operational efficiency — particularly in terms of technology spend. Organisations are tightening their belts in the face of a possible recession, which means every dollar spent is coming under increasing scrutiny. The pressure to ensure investments support performance is growing, and financial institutions want their technology projects to free up capital and support their bottom line sooner rather than later. The urgency for immediate results is something we see accelerating.
Decisions such as clients’ investment in internal processes, and where they choose to allocate spend for new technology projects, will be underpinned by a concrete understanding of how any given project will help them make or save more money. Incremental improvement is no longer on the menu.
Reducing fail rates — especially for firms in the EU, where Central Securities Depositories Regulation (CSDR) penalty rates are well established — is one of the swiftest ways asset managers can realise efficiencies now. The opportunity to unlock millions of dollars and reduce penalty fees, using a collaborative data-sharing network, has been proved.
Growing the network to include more participants and reduce fail rates further will only increase the benefits. We anticipate that 2023 will be a year where the network effect truly starts to take off.
Following the collapse of FTX, the dramatic turbulence in crypto markets is likely to spur a policy push that will see regulators act more stringently to safeguard both financial stability and individual investors. We are already seeing signs of this kind of activity.
What does a more rigorous regulatory outlook mean for financial institutions? Data integrity is one aspect that is paramount. In December, the U.S. Securities and Exchange Commission (SEC) announced what could be its first enforcement action using the Consolidated Audit Trail (CAT) — the world’s largest financial database. The costs of maintaining CAT are estimated to be over US$2 billion a year, and firms are looking for solutions to help them facilitate a smooth process and ease the burden of managing a constant stream of data.
In Europe, CSDR – both Phase 1 and Phase 2 – is top of mind as we enter 2023. CSDR had a chaotic start in 2022 and the focus on implementation will not be less this year, as organisations continue to face huge costs.
Many funds put tactical bandages in place in 2022 to fulfil their Phase 1 obligations. These worked to an extent, but the bleeding has not stopped and we are seeing institutions looking to implement more strategic solutions, especially with Phase 2 just around the corner.
Finally, we have T+1 making its mark in multiple regions. India has already moved to T+1, and the US and Canada are due to follow suit by the end of 2024. Although the move to T+1 is largely thought of as a regulatory change, it is equally market-driven. It is interesting to note that the US’s move to T+1 is being led by the Securities Industry and Financial Markets Association, which means the market itself is pushing the change.
Industry players see the benefits T+1 can bring and a path to making it a reality. Crucially, these benefits include improved market liquidity. Research projections estimate it could improve up to 40 per cent — a drastic improvement.
The impetus to move to T+1 is also strong in Europe, where a mindset shift is clearly underway. The Association for Financial Markets in Europe has thrown its hat into the ring and the UK government recently followed suit with the announcement of its accelerated settlement taskforce. We expect 2023 to be the year that the world’s major markets coalesce around the idea of moving to T+1 by the end of 2024. Indeed, with the US already on this path, it is difficult to see this not being the case elsewhere.
