Various countries have put in place solutions to disclose beneficial owner information to regulators, from segregated accounts and more transparent omnibus holding models to regular reporting. The challenge is to harmonise the solutions and ensure they are compatible to guarantee a level playing field and facilitate cross-border investments. It will be up to regulators and market participants to agree on a common solution. Is T2S just a matter for intermediaries or does it affect fund issuers too?
It is expected that the impact will ultimately spread to fund issuers and final investors. T2S has the potential to transform the funds industry, by offering an open settlement platform for any form of asset. What general trends do market infrastructures and CSDs face, given the rise in regulation and the pressure to develop new business models?
All market infrastructures have now started to adapt their systems and business models to be compliant with new regulations. Most have decided to adapt existing systems internally, although a few opted for new platforms. The largest CSDs with international operations have revamped their value proposition for cross-border clients and are actively promoting these. The more domestically-focused CSDs have reinforced their links with domestic clients. PHILIPPE SEYLL, CO-CHIEF EXECUTIVE AND HEAD OF INVESTMENT FUND SERVICES, CLEARSTREAM
Regulators are insisting on more transparency from fund issuers about the identities of their end investors. How can the industry help to meet this need?
The account structures that Clearstream uses with fund agents offer operational efficiency benefits while complying with the rules imposed by regulators. This lets the fund issuers leave the end investor identification to the depositary clients. There are also needs for transparency reporting downstream to the fund issuers, which we have provided for over 20 years. We recently launched an enhancement to provide transparency of holdings in multiple levels of accounts. This is to handle chains of CSDs and depositaries, as for example in T2S. We have registered this with ISO 20022 to promote it as an industry-wide standard on transparency reporting. Is T2S just a matter for intermediaries or does it affect fund issuers too? What must fund companies do to ensure they are well prepared?
T2S will promote harmonisation of the participating markets, making it possible for fund companies to reach multiple markets through a single connection to T2S, which in turn will lower the overhead costs of the fund. Fund companies should monitor the harmonisation process with the legislative changes that may be required in some markets, in order to know when they can streamline their issuance process. What general trends do market infrastructures and CSDs face given the rise in regulation and the pressure to develop new business models?
One of the main trends facing market infrastructures and CSDs is to demonstrate that they provide optimal asset safety to their clients. Clearstream’s interaction with fund companies is contractually regulated and legal opinions on the domiciles of fund registers assure customers that their beneficial ownership is recognised in the markets where their assets are held. Clearstream’s processing infrastructure enables the settlement of subscriptions and redemptions on a delivery versus payment basis, which removes any settlement risk from the fund transaction. TONY FREEMAN, EXECUTIVE DIRECTOR OF INDUSTRY RELATIONS, DTCC Does blockchain justify the hype?
A secure distributed ledger with complete and traceable transaction history for a set of assets that is shared and accessible between trusted parties could provide significant operational improvements as well as mitigate risk and reduce post-trade costs. It is still too early to say how distributed ledger technology will be implemented across businesses and what impact it will have. The architecture and design of the technology are constantly evolving and there are no commonly accepted standards or certifications for any aspect of enterprise-wide use. This is why the implementation phase is a long way off. Technologists often talk about ‘disruption’ as a positive thing, but should there be more focus on minimising risk?
Disruption and risk mitigation are not mutually exclusive. If you take distributed ledger technology as an example, the most logical way forward is for the existing, regulated central authorities to help play a leading role in introducing standards, governance and technology. How is the market adapting to T2S, the European central bank’s centralised settlement project?
T2S is working well since the first wave of implementation went live over a year ago. Despite some delays due to the lack of preparation in some markets, the end of implementation is in sight as it is due in just over a year’s time on September 18, 2017. The next CSD waves of implementation in the European Central Bank timeline, due this September when Euroclear goes live, followed by Clearstream six months later, will likely have the biggest impact on the project. PHILIPPE DENIS, CHIEF DIGITAL OFFICER, BNP PARIBAS SECURITIES SERVICES Does blockchain justify the hype?
Blockchain is a new, relatively untested technology and there is always a certain amount of hype when the full applications and limitations are not known. However, we are starting to see practical uses. We are working with a French equity crowdfunding platform called Smart Angels to develop a share register, using blockchain, which will automatically register the shareholders of stocks issued through the crowdfunding platform. We aim to have developed the share register by early 2017. Technologists often talk about ‘disruption’ as a positive thing, but should there be more focus on minimising risk?
Risk can be interpreted in many ways. Take big data, for example. New regulations and technological advances have meant companies are managing huge amounts of data which is complex and a clear risk. The tools being developed to manage this data not only provide opportunities to streamline processes but also to limit the risk attached to holding this data. Rather than disrupting the financial services industry, technology will help it evolve and meet regulatory demands and market challenges. How is the market adapting to T2S, the European central bank’s centralised settlement project?
T2S is reshaping the post-trade competitive landscape, lowering historic barriers and enabling increased competition for local custody. This in turn is causing banks and brokers to look at ways of reducing costs, optimising collateral, rationalising their networks and consolidating their asset and cash pools. Asset owners are also looking to global custodians for support in optimising their use of assets. The biggest near-term goal is firstly to ensure the successful completion of the next three waves and then to encourage the participation of the countries which are not currently signed up. BILL GOURLAY, CHIEF EXECUTIVE, IDEA GROUP Is ‘fintech’ more than just a buzzword?
We are in a period where innovation is actively encouraged and many great ideas are being pursued, but the proof of the pudding will be to see whether financial services organisations have the ambition or foresight to adopt them on a widespread basis. Legacy systems and processes will need to be replaced, so firms need to be prepared to take the plunge, rather than stick with what they do today. Does regulation discourage technological innovation in financial services, or can they coexist?
The old phrase “the regulator is the greatest innovator” definitely applies here. Established firms still need a clear business case to justify the implementation of a fintech solution, and regulation is still a dominant feature in budget allocation discussions. Many innovative fintech ideas have struggled to gain adoption on the basis that they don’t have a regulatory driver, which is a great shame, but this is a business reality in today’s times of tighter controls on spending. Apart from what you have already discussed, what topics do you expect to be important at this year’s Sibos conference?
Brexit will undoubtedly be a major topic of discussion, as the uncertainty has already caused impacts across small and medium-sized enterprises. The traditional summer lull in business has definitely been extended and accentuated by Brexit, as target client firms have gone into their shells for an extra quarter in order to watch how this impacts the market. For many fintech firms, this will impact their financial positions and, in some cases, could have a devastating effect. HAYTHAM KADDOURA, CHIEF EXECUTIVE, SMARTSTREAM Is ‘fintech’ more than just a buzzword?
Organisations at the leading edge of innovation have gone a step further by taking advantage of mutualisation. A utility model allows financial institutions to outsource middle and back-office systems, gaining cost efficiencies as well as access to shared knowledge and experience with a consortium of banks. We have participated in a number of initiatives, such as the SmartStream Reference Data Utility, a group of banks, data providers and global exchanges. This is the future of the industry. Does regulation discourage technological innovation in financial services, or can they coexist?
A bank’s desire to optimise internal systems often comprising a variety of legacy systems is not always the best option. Many financial firms simply do not want to spend the time, money or effort to develop systems and processes in-house. Apart from what you have already discussed, what topics do you expect to be important at this year’s Sibos conference?
Innovation centres are becoming increasingly important, where technology companies bring solutions to market in a faster and more responsive way. They investigate and evaluate emerging and disruptive technologies using market experience and knowledge. The fallout of Brexit will also be a hot topic. Ahead of any formal negotiations there is already speculation about the implications of European regulation on the UK and the status of London as a financial centre. PENNY HEMBROW, GLOBAL LEAD, FINANCIAL SERVICES, CGI Is ‘fintech’ more than just a buzzword?
It is far more than a buzzword. Fintech players are addressing behavioural, cost and servicing gaps in what customers have traditionally received from financial organisations. Banks are being driven to either engage with fintech suppliers or develop their own services and products to compete. Fintech has adopted new technology-based service approaches such as distributed ledgers, automation, intelligent learning and digital-first customer journeys that shift the value perception as well as cost base of banking. Does regulation discourage technological innovation in financial services, or can they coexist?
They can coexist. Regulation can even be a catalyst for greater innovation. For example, the revised payment services directive (PSD2) in Europe is now becoming a catalyst for transformation of the transaction banking market as well as a catalyst for co-operation between fintech providers and banks. Under PSD2, banks that want to become customer-leaders can partner with fintech companies to offer their services and products through open APIs. Regulation is also there to safeguard the financial system in areas such as cybersecurity and fraud. Our research provides evidence that such protection is a differentiator for banks that embrace risk regulation in this manner. Apart from what you have already discussed, what topics do you expect to be important at this year’s Sibos conference?
The move to real-time payments and transaction processing; how to address the mounting burden of rising compliance and security; and how to innovate the customer servicing in transaction banking, mirroring the advances seen in the retail market. TOM CASTELEYN,HEAD OF PRODUCT MANAGEMENT FOR CUSTODY, CASH AND FX, BNY MELLON Do you see a tension between the high level of regulation in the financial services sector and the desire to innovate with technology?
Since the financial crisis, we’ve seen the rise of alternative investments; a move from active to passive investment; the digitisation of the market; and a surge in regulation. The level of regulation is sucking up discretionary spending that could otherwise be invested in innovation, technology and digitisation. The challenge institutions face is to develop robust solutions and maintain a variable cost model to adapt to changing market conditions. How are attitudes towards outsourcing evolving?
Outsourcing isn’t just about cost savings. The service provider is often in a better position to provide market-leading technology and scalable solutions. It’s more cost-effective and efficient for them as service providers to help ensure multiple institutions are compliant, than it is for each client to do so on their own. For asset managers, the benefits of outsourcing include access to the expertise of external staff, enhanced independence and transparency, and operational efficiency. How important is ‘big data’?
Big data analysis adds value for asset managers by informing their investment decision-making, distribution strategy and business management. One tool we are working on enables asset managers to assess sentiments towards companies. In terms of distribution, asset managers can use data insights to determine which funds are selling successfully and why. Big data can inform business management, too. For example, BNY Mellon’s Digital Pulse analytics platform gives data-driven insights that ensure evidence-based decisions are made in an efficient manner. PAUL STILLABOWER, MANAGING DIRECTOR OF GLOBAL HEAD OF CLIENT EXPERIENCE, RBC INVESTOR & TREASURY SERVICES Do you see a tension between the high level of regulation in the financial services sector and the desire to innovate with technology?
Fintech has the potential to significantly disrupt the financial services industry. However, in an increasingly competitive environment, the vital role of asset servicing in the safekeeping of financial assets means that due consideration should be given to the regulatory environment, ensuring that in the quest to improve efficiency, operational risk and safety are not compromised. How are attitudes towards outsourcing evolving?
Cost control is a consideration of outsourcing, but asset managers are also looking for support with regulatory change requiring significant knowledge and reporting services, as well as increased specialisation to accompany new fund structures. For example, the appeal of alternative investments means fund managers are making greater demands of the tools needed to manage them and are increasingly turning to specialist service providers and infrastructures. How important is ‘big data’?
For any data to be truly beneficial, it must be consumed in real time, be meaningful, easy to access and analyse. Within ‘big data’, enhanced and predictive data management applications are being developed by custody and asset servicing providers to provide fund managers with meaningful insights and data analytics capabilities for their own clients. Advances such as ‘data lakes’, where data is stored in its raw, unstructured form, make data streams potentially more agile than when stored in a traditional ‘warehouse’ as data can be amended and extracted as needed and according to differing criteria or applications. JEFF CONWAY, EUROPE, MIDDLE EAST AND AFRICA CHIEF EXECUTIVE, STATE STREET Do you see a tension between the high level of regulation in the financial services sector and the desire to innovate with technology?
On the contrary. We see regulation as a catalyst for innovation, with regulators increasingly demanding more data while at the same time raising the bar on the analytics they want the industry to perform. We are seeing a greater pace of digitisation, business model change and new product introduction, such as data aggregators, robo-advisers and trading and financing solutions. How are attitudes towards outsourcing evolving?
The focus of regulators on transparency is having a notable impact on clients’ business models. The changes aimed at de-risking the industry are raising capital requirements and compliance costs, forcing changes to strategies as well as significant investments to manage increased regulatory scrutiny and stringent investment guidelines. Asset managers see outsourcing as an opportunity to focus their attention on improving their reporting systems and invest in risk tools that can ensure their portfolios are compliant. How important is ‘big data’?
Big data impacts how asset managers invest and, in turn, how back and middle office providers address clients’ reporting and information needs. As we enter the era of the ‘internet of things’, we see an explosion of data both in volume and variety, with the industry increasingly aware of its value. The industry requires better tools to segment data and understand their client base – developing client analytics capabilities will help to improve relation-ships. BRUNO PRIGENT, HEAD OF SOCIETE GENERALE SECURITIES SERVICES Does blockchain justify the hype?
Blockchain, also known as distributed ledger technology (DLT), is in the limelight because it could bring about many advantages in certain activities, such as trade services. Perhaps, one day, we will have instant clearing and settlement. However, DLT should be seen as a possible solution to a certain need and not as something that we don’t know what to do with. We also have to differentiate the two DLTs that exist, which are the private DLT and the public DLT. At SGSS, we are working on several initiatives in line with efficient record-keeping that measure the benefits of the private DLT. It’s more difficult when looking at the public technology because we have to be able to bring together a whole community at the same time and for the same project. How is the market adapting to T2S, the European Central Bank’s centralised settlement project?
The delays to the introduction have given market participants more time to test the platform internally and with customers, to train staff and make operational changes. That has come at the expense of increased project costs. For custodians, this is a problem as we face a competitive environment and cannot pass costs on to our clients. In spite of this, there will be benefits from T2S. Among these is the ability to pool settlement liquidity in central bank money from multiple markets in one single account. This will enable financial institutions to redesign funding models – Societe Generale is doing this as a custodian at group level. Our model will reduce the fragmentation of settlement and liquidity pools. Technologists often talk about ‘disruption’ as a positive thing, but should there be more focus on minimising risk?
Technology is not the only disruptive force in banking; we also face disruption from new entrants and regulatory initiatives. In tackling these, financial institutions must always focus on minimising the risk inherent in change. One of our primary tasks as an asset servicer is to shield our clients from the impact of change and disruption. For example, in collateral management, regulation dictates that many counterparties will soon exchange collateral for the first time or have to collateralise positions that previously did not require this treatment. Societe Generale has developed TEMPO, a service that addresses these challenges and provides value-added services such as collateral sourcing and optimisation. The service is based on advanced financial engineering, innovation skills and sophisticated risk management. ©2016 funds europe