Shorter settlement timetables mean the securities services industry must shift from exchanging structured data messages to sharing transactional data. That requires an openness to collaboration. At SWIFT's recent Smarter Securities events, in Asia, Europe and North America, bankers, brokers and asset managers explained why and how collaboration needs to work.
Post-trade has always been about data. Terms are agreed, trades settled and assets serviced through the exchange of data, step-by-step, between asset managers, global brokers, local brokers, sub-custodians, global custodians and central securities depositories (CSDs).
“We’ve been in this environment of messaging, point-to-point, for quite a bit of time,” said Shereef Zedan, Senior Project Manager, Capability and Industry, Northern Trust. “How do we squeeze more and more out of that environment? It’s fair to say that, for a while now, we’ve been at the point of diminishing returns. We really do have to put in lots of effort and money just to get very fractional benefits. The logical next step is to think about, as opposed to just a network of messaging, more transaction management.”
Moving towards transaction management
If the parties to a transaction are to manage it simultaneously, data-sharing is a must. This is driving a revolution in post-trade, in which competitors, clients and vendors are collaborating to use data to reinvent existing services and invent entirely new ones.
“Our view used to be that we’ll come up with the solution based on what we think our customers want, and deploy those,” said Kevin Autrey, Vice President, Capital Markets Operations, Fannie Mae. “We definitely learned that that is probably not the best strategy in today’s age. Today’s age is, are you willing to listen to those customers directly? And you’re almost partnering with them.”
Stephen Pemberton, Managing Director, Global Head of Product for Banks and Broker-dealers, at HSBC Securities Services, agreed that “co-creation” or “working with clients and other third parties to achieve desired outcomes” is superior to “the old way of working, whereby we built a product or a solution and hoped it worked and clients would adopt it.”
Siraz Mouhamadmoussa, Regional Head of Global Custody Product APAC at BNP Paribas Securities Services added the bank no longer aims to “do everything ourselves, in-house” and favoured “the industry partnership, collaboration.”
Collaborative ventures that work do not impinge on competitive advantages. They also need incentives. These can vary – cost savings for some and new revenues for others – but must be aligned. “Just launching collaboration is not easy,” said Ray Saadon, CEO, Access Fintech. “You have to give a trigger or a carrot.”
“It is incredibly hard to create change in the ecosystem,” explained Saadon. “It’s even harder when the promise is, ‘It’s going to be valuable when everyone is going to be on and why don’t you be the first or the second one on?’ So you have to create value for the early participants.”
One example of this was cited in discussions between banks and asset managers on how to avoid expensive penalties and buy-ins under the Settlement Discipline Regime (SDR) of the European Central Securities Depositories Regulation (CSDR), scheduled to come into effect in February 2022.
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The status quo is incompatible with same-day settlement
CSDR was also responsible for the shortening of European Union (EU) settlement timetables to T+2 in October 2014. The United States is already embarking on a plan to shorten its own settlement timetable further to T+1.
“Time equals risk,” explained Michele Hillery Managing Director, General Manager – Equities Clearing and Settlement, DTCC. “If you take a day out you take a day’s worth of risk out of the marketplace.” She believes a shift to T+0 is “inevitable,” even though it imperils the benefits of netting and will increase demand for credit.
China has adopted a T+0 timetable already. This has created operational challenges for investors in Europe and North America, requiring trades in Chinese securities to settle intra-day.
“In a T+0 settlement environment we literally have hours - just a couple of hours - to really complete the whole process,” said Kinson Tong, Director, Global Portfolio and Reconciliation Services, APAC, Invesco Hong Kong Limited. He thinks T+0 is impossible if asset managers, brokers, custodians and CSDs do not share data in real-time. In fact, T+0 will require the re-engineering of post-trade processes. “When we moved to T+2 not everybody did the right investments to imagine and to plan for what was coming next,” explained Michele Hillery.
Michael Drumgoole, Managing Director, Direct Custody and Clearing, Securities Services, Corporate and Investment Bank at J. P. Morgan agreed. “When we’re faced with a shorter settlement cycle the way that the industry is going to react is basically, `How can I do what I currently do in a shorter time-frame?’” he said. “So when it was moving from T+3 to T+2, we moved matching from T+2 to T+1. We don’t really change an awful lot about what we are trying to do in terms of the end-to-end process.”
Stephen Pemberton was equally concerned about automating the status quo: “As we think to the future, are there certain processes within that end-to-end workflow that we can just strip out completely? That is for me is where we become much more transformational. I understand that’s not easy to do.”
Dean C. Hernandez CIPM, Senior Investment Professional, Nationwide, warned that a two-tier market could develop between firms capable of adapting to T+0 and the rest. “An efficient market has to include everybody, and not all of us have that wealth of resource and we need to be making sure that we’re not leaving others behind and creating a market for a few that is dramatically better than the market for many,” he said.
The answer is collaboration
The answer to both challenges, argued Liang Xu, Managing Director of Operations, Beijing Gao Hua Securities Company Limited, is collaboration. “We need a digital ecosystem that allows the whole industry to effectively collaborate on exception resolution and automate the post-trade processes to increase overall efficiency,” he said. “We believe that no single firm can do this alone. This will be an evolutionary process, so effectively the industry needs to adopt more of a network-based solution.”
As Phil Brown, CEO, Clearstream Holding, and chairman of the board of ISSA, pointed out, SWIFT is well-placed to encourage that collaboration. “We are a network and yet competitive ecosystem in the post-trade world,” he said. “We collaborate with each other naturally, but we compete. And I think SWIFT is a great example of that. SWIFT is one of those organisations which is the very embodiment of the collaboration that we seek while we compete with each other.”
The SWIFT strategy is already moving away from sequential messaging to simultaneous access to transaction data through its platform that will host not only data from the parties to a trade but also from third-party service providers that can add to or make use of the data such as reference data vendors and exception management venues.
“Network-based, interoperable solutions are the ways of the future to reduce the duplication and a bifurcated process and data, and all will help to accelerate the digitisation of the post-trade world,” concluded Liang Xu. “Now, network-based solutions are of course collective solutions - therefore, they are something that we actively look to collaborate with our peers, our clients and also other players in the ecosystem.”
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