Market participants offer their predictions for what should be an eventful year
A lot is set to change in 2024, from the continued development of groundbreaking new technologies, particularly AI, to North America’s shift to T+1 — although just how much firms are looking forward to that may vary. The industry also faces lingering problems from 2023 and earlier, with data management demands on the rise and cybersecurity threats increasing and evolving at pace.
Sharing their thoughts on these issues and more, experts from across the industry spoke to AST about their predictions for the year ahead.
T+1
The dates on many people’s minds as we enter a new year are 27 and 28 May — the North American T+1 implementation dates. Canada will be first, with the US following a day later due to the Memorial Day weekend.
“The transition won’t be seamless, and the first year is likely to be bumpy, with regulators needing to take a cautionary view in the preliminary phase,” says John Bevil, senior product manager for capital markets at Xceptor. However, “the market will rise to meet the deadline.”
“The industry, overall, will meet the go-live date,” assures Mike Sleightholme, president of Broadridge International, but agrees that not all are ready; “for some, it will come down to the wire”.
“As a Canadian custodian, we are well prepared and largely ready to go to meet the needs of the industry and our clients,” says Ash Tahbazian, chief client officer at CIBC Mellon. “Our custody system is currently settling trading activities across a wide range of settlement cycles including T+1 and T+0.”
Experts expect a shorter settlement cycle will provide many benefits to the industry; the Canadian Capital Markets Association anticipates a reduction in credit, market and liquidity risks associated with settlement failure. David Smith, managing director for capital markets practice lead at Broadridge, adds that the move will have “far-reaching benefits globally”, improving market efficiency and reducing counterparty risk, expediting recovery from market volatility and “paving the way for future advancements in market infrastructure”.
Alongside these benefits, however, “new risks will be introduced”, warns CIBC Mellon’s Tahbazian. Without an overnight batch processing cycle available, “post-trade activities—including reporting, reconciling, allocating block trades, and confirming trade details—will all have to be done on trade date”.
It’s already been acknowledged by many that moving from a T+2 to a T+1 settlement cycle will not simply cut available processing times in half. In reality, cut-off times will shave the window down to just hours. Especially for clients operating across borders, the time left to deal with the necessary processes in a T+1 environment will be significantly slashed. As a result, “we see many of our international clients and market participants using T+1 as a catalyst for strategic cloud-based automation projects,” says Broadridge International’s Sleightholme. This serves a dual purpose, ensuring that operations will be able to continue as North America makes its move while future-proofing for a potential shift to T+0 later down the line.
As it stands, sell-side suppliers are feeling the pressure most acutely, says Jeffrey O’Connor, head of market structure for the Americas at Liquidnet. “They have to invest now to reduce processing times, automate, and generally upgrade all things operationally when it comes to technology, people, and processes.”
“In 2024, we can expect further innovation and digitalisation in market infrastructure,” agrees Broadridge International’s Sleightolme. “Technology such as DLT and AI will be at the forefront of executive minds as they look to further streamline their post-settlement operations.”
A current priority for firms is “helping prepare clients to receive and deliver information more quickly, especially when making rapid adjustments”, Tahbazian explains. Technology preparations are also in order, with automation, streamlining and on-boarding processes all requiring changes or upgrades.
North America is not the first region to take the leap into T+1 — India began its phased transition in early 2022 — and it is far from expected to be the last. “T+1 is a specter on the horizon for EMEA,” says Paul Lynch, head of products at Equilend.
The UK Government’s Accelerated Settlement Taskforce is expected to release its full report and recommendations by December 2024, while the European Securities and Markets Authority (ESMA) launched a call for evidence on the potential impact of a shortened settlement cycle in the final quarter of 2023.
James Pike, head of business development at Taskize, a Euroclear company, thinks that Europe needs to be hot on the heels of the US if it wants to maintain its global position: “The harsh reality of Europe’s current liquidity woes is that if Europe does not replicate the US’s shift to T+1 post next May, the flow of investment will continue to move from the continent into US equities.”
That being said, while some are preparing for their own T+1 initiatives, others are raising concerns about APAC firms’ readiness for the North American shift. The region may be left worse off by the transition, explains Magnus Haglind, senior vice president and head of products for marketplace technology at Nasdaq. “The reduced window for managing risk will make it more challenging for Asia-based firms seeking to access US markets,” he adds, potentially reducing global participation in Asian markets and impacting international liquidity.
To remain competitive, Asian markets may “increase the ability to trade and settle out of hours,” Haglind continues, “allowing markets to serve global asset types and hedge risk effectively”. To make markets more attractive to global participants, technology upgrades and new liquidity drivers may be sought out in order to reduce costs, he suggests.
Cybersecurity
The past few years have seen more attention, and budget, allocated to cybersecurity. These investments are expected only to increase as time goes on, with Joe Latini, chief commercial officer at MUFG Investor Services, noting the impact that an increased quantity of retail investors will have on the space. These investors, “who are used to having account information at their fingertips”, will expect the same data availability from alternatives markets, he says, requiring fund managers to “implement cutting-edge data security applications and infrastructure” and ensure that data remains protected.
Cybersecurity is clearly a priority across the board. From a UK perspective, Rory Doyle, head of financial crime policy at Fenergo, comments that “fraud prevention must be a top priority in 2024” for those operating in the jurisdiction. Following the Economic Crime and Corporate Transparency Act, firms found to have insufficient fraud prevention “could pay a heavy price”.
Similarly, in the US, new SEC rules require the disclosure of any material cybersecurity incidents within days of their occurrence. Descriptions of firms’ assessment, identification and management processes around material risks must also be shared. Broadridge International’s Sleightholme adds that a focus on supply chain security in 2024 will produce “stricter audits, enhanced due diligence and increased surveillance of subcontractors”. This enhanced oversight is anticipated in the withholding tax space, too, with WTax expecting additional controls to be introduced around automated processes such as submissions portals.
Under greater scrutiny, “providers must reinforce their security credentials through detailed reports and transparent practices”, Sleightholme says. He advocates for collaborative approaches to information security, a strategy that he expects to increase in popularity over the year as firms “recognise the interconnected nature of our systems”.
Following Sibos 2023’s theme of collaborative finance, explored in AST Issue 327, the outlook for such initiatives appears hopeful. Although new technologies offer opportunity, they introduce an equal measure of risk to operations. AI will play “an ever-increasing role”, WTax predicts, optimising data management and assisting with increasingly complex reporting compliance. However, bad actors will be able to access the same technology that is revolutionising the industry — as such, AI-specific and AI-powered defences must be invested in to avoid vulnerability, Broadridge International’s Sleightholme affirms.
Looking at another area of technology development, Arnaud Misset, chief digital officer at Caceis, highlights the importance of robust data access security and data encryption technologies to avoid data leaks and enhanced decryption tools in the face of quantum computing progress — a space he expects to accelerate in 2024.
Data
Whether the issue lies around quality, quantity or accessibility, data is at the root of many of the most persistent problems for the financial services industry.
“Everything we do is shaped by having effective data,” MUFG Investor Services’s Latini assures, predicting “greater discussions regarding data ownership and management and how funds maintain investor and transaction data” in the year to come.
As operations continue to evolve at an ever-accelerating pace, regulation becomes increasingly complex and time consuming, progress is being hindered across the board.
Emerging technologies such as generative AI rely on strong data provisions, and unless real change is made soon the capabilities of such innovations will be limited.
“At a high level, poor data quality can lead to inaccurate risk assessments, missed opportunities, and reputational damage,” says Conor Lane, operational lead for data consulting at Delta Capita.
Not only will decision-making be slowed, trends and patterns can be missed and market changes harder to respond to.
Despite knowledge of the many serious issues that result from poor data management, Coalition Greenwich recently revealed that a third of the market is still manually cleansing at least half of their data. With volumes on the rise, and in an increasingly competitive market, “such a complex and error-prone process cannot continue”, says Xceptor’s Bevil.
As new risks emerge and with stakeholder demands on the rise, “organisations must move faster and make defensible, data-based decisions”, says CIBC Mellon’s Tahbazian. In order to do so, data must be surfaced at speed in order to address market volatility and capitalise on opportunities, he explains.
Currently, the problem lies on the operational side, states Caceis’ Misset. “The technology is available and mainstream”, but issues arise surrounding data governance, format and comprehensiveness.
While improvements are urgently needed, security must remain a top priority. Data is a crucial asset, and “there’s a delicate balance between making it accessible and keeping it secure”, CIBC Mellon’s Tahbazian observes. Clients want easy access to data in order to make better, more informed decisions — but measures need to be in place to prevent unauthorised parties gaining access.On the bright side, a recent Nasdaq survey revealed that a third of firms across the post-trade ecosystem plan to offer new data reporting and analytics capabilities within the next three years.
Moving into 2024, Delta Capita’s Lane expects four main areas to be prioritised in the space: data governance, data quality tools and processes, self-service data analytics and AI and machine learning integration. MUFG Investor Services’s Latini agrees that work needs to be done in the latter spaces, stating that “put simply, you can’t have effective AI in the industry without clean, precise data.”
“Real-time data accuracy will increase in the coming year”, predicts Equilend’s Lynch, anticipating an embrace of vendor solutions that offer low-impact implementation to respond efficiently to regulatory obligations. “Major players will likely handle technology and operational aspects in-house, but smaller and medium size players will have to rely on third-party solutions to obtain the same benefits,” Misset agrees.
Nasdaq’s Haglind expects the North American shift to T+1 to “force the industry’s hand and necessitate improvements in data quality and processing”, and adds that cloud will be an essential distribution vehicle as firms seek to support reconciliation and work from a single source of truth.
Matt Barrett, CEO of Adaptive, also sees cloud-based solutions as playing a “critical role” as firms seek to deal with increasing volumes of data.
“As cloud-based technologies continue to evolve, we can expect data management and storage solutions to enhance further in terms of scalability, cost-effectiveness, reliability, and security,” he predicts, democratising data access and allowing firms of all sizes to “harness the power of their data”.
ESG
COP28, held in Dubai, once again brought global powers together in an attempt to accelerate the fight against the climate crisis. On 13 December, extensive and fraught talks finally garnered a joint promise to move away from the use of fossil fuels and towards clean energy.
This promise will have a significant impact on the financial services industry, which has been under increasing pressure from investors and regulators to improve its green credentials over recent years.
The coming year “will bring even greater recognition of the global climate crisis”, says Diane Eshleman, chief sustainability officer at Delta Capita, recalling the various adverse environmental events of 2023. In line with this, “we foresee heightened regulatory and investor focus on ESG disclosures”, affirms David Gilchrist, head of product development for fund services at Ocorian.
“Many institutional investors are at a tipping point as the value proposition on ESG continues to rapidly change and develop,” says CIBC Mellon’s Tahbazian, with a growing number of firms recognising the economic benefits of engaging with ESG initiatives and subsequently being more willing to engage in the space.
On a practical level, the need for regulatory compliance plays a significant role in firms’ actions across the board. However, remaining compliant with ESG and sustainability regulations has posed a significant challenge to firms over recent years.
A primary issue is the lack of consistent definitions, with the very word ‘sustainable’ held in contention.
With regulators assessing ESG measures differently, firms creating their own labelling systems to describe what they’re offering clients and the world at large increasingly wary of greenwashing and misleading or inflated information, it’s no surprise that many are unsure who — or what — to trust.
While increasing awareness of — and scrutiny around — greenwashing has prompted tighter regulation and, in several cases, significant reputational damage, a new threat on the horizon is ‘greenhushing’.
In brief, greenhushing is the practice of deliberately under-reporting or hiding their ESG initiatives and credentials in order to avoid investigation and accusations of greenwashing. This skews the picture of what the industry is actually doing to promote sustainability, and only worsens the lack of transparency in the ESG space. Hopes are high that focus will increase around disclosures and compliance in 2024, but it’s important that clarity is a priority as the space continues to develop.
Data management is an issue across the industry — and the problem is especially clear around ESG. Collection and standardisation are “key challenges” facing the industry, says Géraldine Valentini, global head of corporate social responsibility at Caceis. Common sustainability measures aligned with Europe’s Corporate Sustainability Reporting Directive (CSDR) are set to be published in 2024, covering non-financial data and enabling banks to manage their investments and financing more precisely.
“CSDR demands greater transparency from institutions around their risk approach,” Valentini continues, with ‘double materiality’ — things that are important to both the company and society as a whole — enabling more accurate comparisons between firms’ ESG approaches.
Valentini predicts that mechanisms for measuring and monitoring decarbonisation commitments will continue to improve during 2024. “Collectively, we have the potential to drive significant growth in the global carbon market,” agrees Nasdaq’s Haglind. To date, problems have arisen around flexibility, standardisation and connectivity when it comes to carbon market access, but recent technology developments are enabling improved market liquidity and interoperability between registries, he shares.
This year has witnessed a continuation of ESG’s politicisation, with certain jurisdictions and political bodies taking a stand against sustainability endeavours in finance. Yet it’s hard to ignore the substantial impact of the climate crisis, with Eshelman highlighting the “obvious adverse effect on the economy” that climate-related disasters can, and do, bring.
The International Monetary Fund acknowledges the “significant economic harm” and “worrying tail risks” that the climate crisis threatens, adding that lower-income countries are particularly vulnerable. It goes on to warn that “climate change can entail significant risks to macrofinancial stability”, citing risks faced by nonfinancial corporate sectors as a result of climate damages and stranded assets. A refusal to see the measurable impacts of the climate crisis on the industry, if not the world at large, will in no way serve those who choose to see it as a purely political situation that seeks to harm their revenue.
Moving into 2024, it’s vital that firms do not let up on their ESG initiatives now that the hype cycle has moved on to the next big innovations. It is no longer possible to ignore the effects of the climate crisis, and the financial industry must play its part in driving progress.
The stage is set
The implementation of T+1 in North America this May will likely determine the tone for the rest of the year, and will determine other jurisdictions’ decisions on bringing in shortened settlement cycles. Along with technology advancements and market practice evolution, there’s a lot to look forward to in 2024.
