New technologies and the role of data explored in part one of our three-part series on the key takeaways from the securities stream at Sibos 2019.
Stagnating stock markets are not good for custodian banks or their buy-side clients. But asset managers facing additional cost pressures, such as a shift to low-cost indexing and fee disclosure, expect custodians to further cut their safekeeping, fund accounting and transfer agency charges.
New technologies, such as robotic process automation (RPA), artificial intelligence (AI), machine learning (ML) and blockchain, can in theory cut costs without sacrificing service quality or margin. But practice is harder than theory.
“It's easy to say, `Let's just be more efficient," said Ann Doherty, a managing director in securities services at J.P. Morgan. “The reality for organisations like ours, who've been in the custody and fund administration business for 30 or 40 years, is we've got a fairly complex technology stack.”
The techniques have been around for decades. The maths have been around for decades. It's really the data that is the difference.
Innovation alongside legacy infrastructures
Legacy systems and operational processes, which work well, cannot simply be jettisoned. Distributed ledger technology (DLT) is a good example of this. As Mike Bodson, CEO of DTCC, pointed out, the efficiency of existing post-trade services defeats the case for replacing them with DLT.
“But as we see with ASX, who faced the choice of rebuilding their platform, [that is] a perfect opportunity to use DLT,” added Bodson. “And I think that's really what's going to drive market by market to use new technologies to replace the existing technology.”
Tom Zeeb, head of securities and exchanges at SIX Group, thought that in the meantime DLT can be used to tokenise illiquid asset classes rather than re-tokenise existing securities that already clear, settle and custody efficiently.
Eddie Astanin, chairman of the executive board of NSD in Russia, agreed. “Our experience shows that the cost of migration from the traditional system, which worked for CSDs, to DLT is quite high,” he said. “That is why we believe that DLT will work well on the markets where infrastructure is not well developed.” His first target market for DLT is grain storage precisely for that reason.
This diversion of DLT investment into tokenisation helps explain why technologies other than DLT are expected to have a more immediate impact on securities services. Tom Casteleyn, global head of custody at BNY Mellon, said RPA has already reduced the time taken to review transactions for sanctions breaches by a third.
Michael McGovern, head of investor services fintech offerings at Brown Brothers Harriman (BBH), said BBH had used machine learning to eliminate 12 full-time equivalent price-checking staff (FTEs) on just one fund complex, and cut a third of the work required to repair reconciliation breaks.
“Unfortunately, our industry still suffers with a massive amount of people that do reconciliation,” said Tom Casteleyn. “At our company there are more than 1,000 people that do that kind of activity.” The main constraint on losing them, he added, is a lack of trained and qualified talent capable of exploiting DLT.
Data: a catalyst for change
Data, after all, is what has made recent advances in AI and ML possible. “The techniques are not new,” explained Michael McGovern. “The techniques have been around for decades. The maths has been around for decades. It's really the data that is the difference.”
And it’s data that is transforming the relationship between custodians and their clients. The buy-side is now using data to manage its service providers. Martin Cook, EMEA head of technology and operations at BlackRock, said they are using data to measure the operational efficiency of custodians.
Sanjiv Sawhney, global head of custody and fund services at Citi, thought the principal challenge and opportunity in the securities services industry was the consolidation of data from multiple service providers on behalf of a single client.
Ann Doherty agreed, arguing that technology that facilitates the sharing of data between multiple custodians and multiple clients could be transformative. “At some point, if the industry is to become more efficient, we will all have to collaborate in that way,” she said. “And I think one of the most exciting things about technology recently, has been the ability for that to happen.”
Phil Brown, CEO of Clearstream Holding, took the same view, arguing that an economically challenged securities services industry was now ready to collaborate. “I do feel there's more momentum behind the industrialisation of some of these problems,” he said. “I don't know how it gets started, but I feel there's more discussion around these kinds of things than there's ever been.”