Moderator: Richard Schwartz
Panelists: Alan Cameron, Harald Kreuzmair, Thorsten Peisl, Markus Ruetimann
Post-Trade Forum 2017 London
Post-trade service providers and the hunt for value
On Thursday, 7 December 2017, SIX Securities Services hosted another edition of its Post-Trade Forum in London. The question of how the post-trade industry can continue to grow in value for its clients and, ultimately, the end investor was discussed and debated together with industry participants and opinion leaders. With Brexit on the horizon, an explosion in alternative technologies, a rise in global market optimism and growing pressures to continue to manage costs, is this a realistic goal for the industry to achieve?
Recent research by SIX Securities Services confirms that this is a central concern for the industry: 67% of those surveyed agree that post-trade service providers will need to focus on new service creation and revenue opportunities by 2027, if they are to continue creating value beyond being “simply operational”.
So where do post-trade service providers go from here?
Panel discussion 1
The hunt for value: Has the existing correspondent banking model now run its course?
Moderator: Richard Schwartz
With change afoot, it is clear we cannot afford to blindly rely on the correspondent and transaction banking models that have served the post-trade industry so well historically. The challenge is to profoundly re-shape the way we work, leading to an interesting panel discussion on what form this could take, and how an industry that has grown to gigantic proportions can even begin to address these challenges.
Perhaps the most promising indicator of what could lie ahead is that banks have already shown themselves to be very adaptable, proving their ability to stay in the game. That said, agility remains a struggle as one panelist highlighted: "There is always appetite for evolution, but this will take time."
Of course, where conversations turn to correspondent banking and innovation, bitcoin and DLT (distributed ledger technology) are never far behind. One panelist quipped: "The madness comes from bitcoin and the lack of regulation around that." This led to a discussion around the respective benefits of regional versus central post-trade service providers, with the prevailing argument that size prevents these central providers from being as efficient as they could be. One person argued: "It is our responsibility to provide access to markets, but it has reached a point where institutional investors are interested. As a post-trade industry, we need to work out how we make assets more compliant." Although the panelists felt that there were plenty of opportunities in central and Eastern Europe for these asset classes, it was agreed that AML (anti-money laundering) is a huge issue throughout the sector.
Interestingly, this led to a discussion about whether the sector is focused on the right type of innovation. Should we not be working on the same problems that we are still struggling to solve? For one panelist, T2S (TARGET2-Securities) is “unacceptable”, with another warning that “it is great that we got it to T+2, but it is not the end of the game.”
Addressing the question of consolidation, one panelist expressed the view that consolidation of CSDs (central securities depositories) will not come, “even though it is something we would all like to see.” Another panelist was of the view that it will happen, but between asset managers: "There will be massive encouragement to consolidate from the buy-side, who want to trade with each other."
The pace of change was a key point for discussion. The operating rules are changing, and the industry must react, but technology has to be filtered in. Perhaps controversially, one of the panelists questioned whether there is anything broken in the post-trade industry that needs fixing? This was quickly countered with the view that although the movement of assets is not necessarily “broken”, it is highly complex and difficult. Someone argued that corporate governance needs fixing, while another pointed to KYC (Know your customer) as an area for concern.
In SIX Securities Services’ research, 43% of respondents believe that to achieve the same level of innovation as agile fintech companies, post-trade service providers will need to partner with other companies. Fifty-three percent of respondents point to the need to hire different kinds of talent from outside the industry if they are to retain clients. One panelist said: "Collaboration requires openness, though this has not always been part of our industry."
In the hunt for value, there is clearly a new path to forge for the post-trade industry as it fights commoditization in the years to come.
Panel discussion 2
The hunt for value: Clearing and collateral management – where to from here?
Moderator: Peter Randall
Panelists: Robert Barnes, Federico Becerra, Zorawar Singh, Roger Storm
This panel opened with a discussion around the challenge to continue not only running businesses but innovating, against a backdrop of change and indecision in Brussels and Westminster. The availability and pricing of collateral and HQLA (high-quality liquid assets) has been a talking point for some time, though the conversation is back in the spotlight with questions around how much more collateral would be required if euro clearing were to be moved away from London? With months of debate captured in one sentence, one panelist highlighted that “there are more questions than answers” around Brexit, warning that “institutions need to prepare for every possible option.” One panelist noted that a ray of light for the clearing industry post-Brexit could be the re-emergence of more regional banking.
Of course, it is a question of risk. One panelist argued that when talking about collateral, “we need to have a more accurate representation of the risk involved.” Another point of view expressed was that regulators risk asking too much, i.e. more than market participants can achieve, which may cause them to try and “game the system”.
MiFID II (the Markets in Financial Instruments Directive) will bring a number of new asset classes, the biggest one being ETFs (exchange-traded funds). The panel was in general agreement that there is huge opportunity across this sector, but that for ETFs to succeed, the transparency of what is underlying them has to be clear. The opportunity for collateral is also there for securities lending: One panelist highlighted that if ETFs grew to just 20% of daily lending, that would amount to an extra EUR 10 billion.
Again, the notion of innovation ignited debate. One panelist pointed out: "Our system has been built to go at the pace of the slowest common denominator." A subsequent question from the audience echoed this same concern: "Do we really think we are quick enough to keep up with the incoming innovation such as blockchain?" For one pragmatist, the future may not look too different: “If there are issuers, there are going to be owners, which there will always be.” Another outlined that change comes in three parts: the regulation, the technology, and the community. This community strand often comes when people see how they can make money, and so jump on the bandwagon. The panel saw the opportunities associated with blockchain, but pointed more generally to innovation in any way that helps investors make money more efficiently. It was, however, pointed out that innovation has to be about more than ideas – there must also be execution.
With MiFID II and GDPR (the General Data Protection Regulation) on the horizon, as well as continued political and economic uncertainty and an unprecedented rate of change from fintech firms, SIX Securities Services expects that 2018 will bring more significant self-reflection for the post-trade industry. There must be change ahead if the sector is to continue developing the high value business lines that it has worked so hard to establish.