All Change In Warsaw- John Gubert, GTL Associates
Rewiring securities post-trade!
17 May 2017
The wide-ranging agenda for the Network Forum Annual Meeting in Warsaw in June highlights the fact that we are at a crossroads. We are at the cusp of a technological and structural transformation of the industry. There are likely to be material shifts in footprint between the commercial, market infrastructure and financial technology sectors. The big question has to be who will survive and how, for the current industry ecosystem is unsustainable.
At a technology level, I see three major drivers to consider. First the profligate and ineffective duplicative investment in technology across the value chain. Second, the historic mechanistic digitisation of the industry. Third the challenge of cybersecurity. During the Warsaw Meeting, we need to avoid a DLT centric approach to issues. DLT is most probably part of the solution, it offers elimination of multiple duplicate databases. But the broader environment is not transactional, as are current viable volume product solutions using DLT. The post trade market is portfolio or multi-holding driven with a need to capture historic and future term flows associated with any holding. It would be useful if the Warsaw Meeting moved away from a myopic or segmented view of the future industry technology needs to consider how the overall turnkey environment will look. I suspect that includes the need for robotics to remove repetitive manual process, including much current offshoring activity; cloud computing to allow shared applications; intelligent and consistent cross market data identifiers as well as improved and more user friendly message standards. Whilst appreciating the data integrity of Block-Chain solutions, we need a fresh look at point of entry security management, improved and mandatory operational controls around data content and genuine contingency avoiding extant single points of failure in low volume markets and perhaps  dual ones in the high value, high volume world.
On the structural side, the trend to outsource to utilities should continue and this needs to be discussed at the Warsaw Meeting as different sessions examine re-engineering options. This is a difficult political area as it implies a shake up for many vested interests and challenges several intermediaries’ misplaced belief that market inefficiency can be a source of competitive advantages. Just as there has been consolidation across commercial sector service providers, the same needs to occur across market infrastructures. It may be anathema for the diehard nationalists, and perhaps many in the legal profession fearful of cross border conflicts of law, but, although local point of entry, local language front end modules are logical, so is shared cross border infrastructure. And common markets’ infrastructure would also be a key driver to lower risks and costs through standardisation of process and communication across markets. It would allow adoption of risk mitigation functions such as Central Clearing, Lending and Borrowing and Trade Repositories which, in many markets, are uneconomical or unattainable on current revenues. And, if we are to maximise the value proposition within T2S, we could use its banking functionality to enable cross currency enhanced DVP and ally it to asset servicing utilities to ensure a high value true core custody proposition. The reality of life is that the best future settlement proposition is within T2S as long as the ECB manages sensibly the political relationship between non Euro National Central Banks and itself. And the pragmatist has to concur that the ICSDs, already multi domestic market, offer the best option for common CSD processing utilities and have the potential to become the centre of excellence for asset servicing. However, they would need to revolutionise their operating model to allow robotics and AI to take over from costly labour intense processes; thus radically easing the cost of service and improving undoubtedly its quality.
Risk, including asset safety risk, needs to be assumed by the private sector as it is inappropriate that such risk is carried by the public or even cooperative purse. And the private sector is the logical service provider for funds with their fiduciary requirement and non-fund asset gatherers as they buy multi instrument, multi-country, on and off market services for cash through to the most illiquid of instruments.  Such a service, requiring liquidity provision, global scope and a broad range of payment services is, from a risk and product perspective, beyond the scope of the ICSDs, CSDs or other infrastructure service providers.
This implies change. And change will need scale. Some have the scale to fund the change but they are few. The technology architecture of the new world has to be more collective.  The change to be managed is fundamental as it starts with the structure of the basic asset account, from which much else flows. The trouble is that most IT providers are product silo, rather than integrated service, specific. They are not turnkey managers; the problem that brings is a lack of natural catalysts for the changes needed. On the infrastructure front, the market utilities delude themselves about their risk free status, although they have been fairly adept at transporting their risks to the balance sheets of their clients. Again there are potential catalysts, such as DTCC, ECB and the ICSDS, but they are feared by their smaller peers and resented still by segments of the custodian market.
G30 in the late 1980’s was a formidable catalyst for change, the G20 post the financial crisis guided the market from a strategic perspective. And IOSCO, at a policy rather than processing level, has been a valuable partner in that change. Who though today has the integrity and credibility to provide the thought leadership, influence and pragmatism that is needed if we are to stop talking about change, stop mending bits of the chain and really transform the post trade activity of financial markets for the benefit of all users. Can the different Warsaw Meeting discussions contribute and move this debate forward?