Volume 14, 2021-2022

Each volume of Journal of Securities Operations & Custody consists of four quarterly 100-page issues.

The articles published in Volume 14 include:

Volume 14 Number 4

Editorial
Simon Beckett, Publisher
Papers
Securities services embrace next generation technology
Stephan Hänseler, Head of International Custody, SIX

The securities services industry is facing several acute challenges, including rising costs and intrusive regulations. Despite this, the sector is responding. Having spent years embracing digitalisation, post-trade providers are continuing their journey by leveraging automation and adopting disruptive technologies such as application programming interfaces (APIs), artificial intelligence (AI), Blockchain and digital assets. Not only can this help firms net operational synergies, but it will enable them to widen their product suites and services. At the same time, however, this disruption cannot be rushed. Both traditional and new technologies, alongside asset classes, will coexist for many years to come, while a host of logistical complexities still need resolving. This is especially true with regards to the lack of standardisation as it applies to certain technologies. A thoughtful, carefully considered approach to innovation and digitalisation is essential if the benefits of these new technologies are to be fully realised.
Keywords: digitalisation; post-trade; technology; financial market infrastructures; regulation; trade settlement
AI in capital markets: Navigating legal and regulatory considerations
Mike Pierides, Partner, James Mulligan, Associate and Christopher Archer, Associate, Morgan, Lewis & Bockius

In capital markets, digitisation and cloud technology have catalysed opportunities for AI by enabling firms to collect, store and analyse larger datasets from a variety of internal sources than ever before. The past year brought greater regulatory activity around AI in the UK, EU and US than in any prior year, although regulatory regimes remain disparate. When considering legal issues that arise from use of AI, facets of multiple legal fields are relevant, albeit differing between jurisdictions, such as intellectual property rights frameworks and contractual areas such as data ownership, data rights, risk and liability allocation and compliance responsibilities. In this paper, the key legal considerations and recent regulatory developments are categorised into four actionable, international themes: (i) due diligence of data as an asset; (ii) effective organisational ongoing controls; (iii) intellectual property management; and (iv) third party contract and risk management. With so much in flux, we find that the best approach for now is to consider such themes and ensure robust governance, transparency and explainability of each of the AI systems, human oversight of the AI and contractual arrangements with third party providers. Perhaps ironically, ‘getting AI right’ is currently, to a large extent, more an art of human judgement than any formulaic compliance with rules.
Keywords: artificial intelligence; machine learning; digitisation; financial regulation; legislation; intellectual property
Maintaining momentum of accelerated digital transformation created by the pandemic
Jeff Coleman, Partner, Head of Investment Operations, Mercer

Like many financial services firms, Mercer, an investment management company, started planning and kicking off several digital transformation initiatives in the early winter of 2020. These projects ranged from the creation of a data management repository to the migration from a proprietary on-premises trading system to a third party hosted system. The latter will be the focus of the comments in this paper. The goal of these projects was to increase operational efficiencies and to transform data into information and make that information more accessible and useable. And then, everyone went home. In this paper, the challenges, learnings and unexpected benefits resulting from managing large-scale digital transformative projects during a pandemic will be discussed, and how that momentum can be maintained as teams return to the office, at least in some form. The intent of this paper is not to be a technical deep dive into the specifics of any projects, but rather a discussion of experiences. The goal is to provide the reader with additional considerations when undertaking a digital transformation project, real-life examples of unexpected considerations and how focusing on people, no matter what the initiative, should yield positive outcomes, even in unexpected ways.
Keywords: digital transformation; work from home; people; pandemic
Increased focus on operational resilience
Annik Bosschaerts, Chief Operating Officer and Gloria Lio, Head of Global Securities Operations, The Bank of New York Mellon

A wide range of recent well-publicised risks to operational continuity, including but not limited to cyber threats, combined with seemingly more frequent natural disasters and extreme weather-related events have contributed to a broad, heightened interest in operational resilience, which features as an area of considerable focus for corporates and financial institutions, as well as the global regulatory community. This paper discusses the key principles of a strong operational risk framework that remain relevant even as technology and tools advance. These principles include a deep understanding of the businesses and activities that are of greatest operational importance and the specific resources required to execute them, the development and maintenance of business continuity and crisis management plans and the performance of robust testing that is designed to illuminate opportunities for improvement. Recent developments in the global regulatory focus and approach to operational resilience are discussed, including the important differences between regulators and the lack of a single set of universal rules. While this creates challenges for global firms, the authors discuss how the global Custody business and its related ecosystem has been demonstrating its resilience throughout the COVID-19 pandemic, highlighting the interdependency of the participants on each others' resiliency.
Keywords: resilience; operational resilience; business continuity; regulatory; cyber
Now is the time to conquer the last mile to full data automation
Christian Nentwich, Co-founder and CEO, Duco

Innovative new technologies and a desire to update the operating model are paving the way for financial services firms to automate data management across their organisation. This is something that historically has been impossible due to the proliferation of unstructured financial data that legacy technology is unable to handle. The resulting mass adoption of spreadsheets as a workaround created a ‘last mile’ of data processes that firms have been unable to automate. This paper explores the current technology landscape in financial services, the problems this has created for data management and the benefits for firms of using new tools to conquer the ‘last mile’ of automation.
Keywords: data; automation; machine learning; digital transformation; business agility; data governance; spreadsheets
Collecting as much data as possible: Is that a key differentiator for private market investments?
Catherine Le Caranta, Offer Manager, SimCorp

Private markets are considered by investors as the new El Dorado for delivering much-needed performance and diversification. However, private market asset classes raise new challenges as they require a different operational approach. This paper focuses on the data requirements for private market investing and questions the idea that getting ‘as much data as possible’ is truly best when considering the output in relation to the effort and cost spent on operational tasks.
Keywords: alternative; unstructured data; cost; standardisation; limited partners; private market
Shortening the settlement cycle: Why Europe should not wait too long to introduce T + 1
Apostolos Thomadakis, Researcher, European Capital Markets Institute

The amount of time required for the settlement of securities is a long-running issue for European capital markets. Twenty years ago, the Giovannini Group looked at the large number of securities settlement systems that existed in Europe (and still do). In 2014, based on the Group's proposals for improving the settlement cycle, the EU moved from T + 3 (trade date plus three business days) to T + 2 (trade date plus two business days), with the US following a few years later in 2017. The US is now ready to shorten its settlement cycle further to T + 1 by March 2024. Although there are benefits from such a move (eg capital and liquidity efficiencies, lower margin requirements, risk reduction, increase scale and speed of processing, lower costs, investor protection), there are also challenges (eg cross-border transactions, securities lending market, operational challenges). This paper discusses what Europe would do. Will it follow the US or not? And if yes, when? Before answering these questions, the EU should: i) address the significant problems caused by the diversity and fragmentation of the EU's capital markets and market infrastructures, ii) collect views from all different stakeholders (eg central securities depositories, buy and sell side, regulators, central counterparty clearing houses and other types of market infrastructure) and iii) conduct a feasibility study on a move from T + 2 to T + 1. Given that such an endeavour will take time, the EU should kick off the discussion immediately.
Keywords: T + 2; T + 1; settlement cycle; securities transactions; automation; efficiency; risk; costs; central securities depositories; SD
From stock exchanges to asset exchanges
Charles-Henry Monchau, Chief Investment Officer and Valérie Noel, Head of Trading, Banque Syz

In the digital assets universe, a security token is more than a currency — it often represents ownership of an underlying real-world asset. Indeed, the SEC hearings have changed the future of how cryptocurrencies work through more stringent regulations. Unlike ICOs — which collapsed during the 2017 craze — STOs — which stands for Security Token Offerings — are actual financial securities and thus backed by something tangible like the assets, profits or revenue of a company or an asset. In the coming years, we are likely to see a significant rise in the number of STOs. Indeed, while institutional investors have consistently stayed away from cryptocurrencies and ICOs in the past, the reasoning they used in keeping such a distance (aka we do not invest in unregulated securities) does not apply to security tokens. One of the most promising features of security tokens and STOs is their ability to offer tokens as a digital representation of shares of a company's stock. In addition to the tokenisation of company shares, real goods and assets can stand behind the tokens. In the future, the widespread tokenisation of real assets could become a new trend. One of the most promising markets for tokenisation is real estate. Tokenisation of a residential house will give people the opportunity to become its owners and conduct voting on digital platforms, making decisions based on the share of each of the voters in the house. In our opinion, tokenisation will thus enable the democratisation of capital markets. It will also make the market more efficient. And finally, tokenisation will open up trillions of dollars in liquidity. In short, tokenised securities are bridging the gap between traditional (financial and real) assets and crypto markets because they are aligned with everyone's interest. And this will be hugely disruptive.
Keywords: tokenisation; STOs; private assets; cryptocurrencies; digital assets; asset exchanges
Embarking on a digital journey to cater for future growth
Ulrik Modigh, COO, Head of Operations & Technology, Nordea Asset Management

Only a third of all strategic initiatives are successfully implemented. This leaves huge untapped potential that can be unleashed by rethinking the way the organisation executes on their plans. Organisations need to adapt to a new approach to ensure their strategy works to enable better choices, higher engagement and a greater impact. However, before embarking on a strategic initiative, one must acknowledge that conducting a strategic transformation is an infinite exercise of keeping up with requirements, assessing and adapting to trends and development, whilst engaging and empowering the employees. Nordea Asset Management set out on a strategic journey with the overarching vision of being ‘Client driven, Investment led and Tech enabled’. This implied investigating how to adopt modern technology principles, reduce dependencies on legacy infrastructure and free up time with employees. This, to enable the organisation to focus on application functionality, utilise cloud-native platforms, exploit elasticity and scalability of cloud computing and make data available in a structured and non-complex manner. Making applications interoperable through a robust IT infrastructure and having data sources integrated and accessible — making the vision of ‘tech enabled’ come true. Nordea Asset Management made the strategic choice of embarking on a digital transformation to accelerate growth and strategically drive the business and the organisation forward. The choice was made after considerable investigations and market research. The key to making the strategic initiative come alive was securing the ownership of the transformation with the business, the business being the driver of customer value and thereby owners of the problem to be solved. This enabled Nordea Assets Management to ensure that the solutions being built were both fit for the customer and the growth of the business, as well as for the future digital services and data solutions. With a well-designed and resilient Technology base, companies can scale efficiently and enable the organisation to deliver even more value to customers, faster, while continuously increasing the experience for employees. Engaging the individuals and igniting the vision for the future is a key trait of an organisation adapting to disruption. And a prerequisite for a successful transformation is the ability to ‘keep the lights on’, having the legacy systems working and maintaining the strong relations, while at the same time bridging the complexity and creating an environment of trust, respect and curiosity to build the future.
Keywords: transformation; cloud; data; people; strategy; asset management; enterprise architecture

Volume 14 Number 3

Editorial
Simon Beckett, Publisher
Papers
The age of collateral convergence
Staffan Ahlner, Global Head of Collateral, Senior Managing Director, State Street Financing and Collateral Solutions

This paper investigates how collateral management is changing as more buy-side firms engage in the practice. Services are being adapted to meet the unique characteristics of the buy side, to ensure regulatory compliance, improve operational efficiency, manage risk, maximise trading opportunities and improve liquidity. UMR has been the primary driver for the increased buy-side focus on collateral management. With phase six being imposed in September, the smallest in-scope firms will need to manage and optimise collateral for the first time. In addition, CSDR means all market participants need to manage collateral to avoid settlement fail penalties. Collateral management is also needed to capture opportunities, by freeing up capital across an organisation. It is becoming engrained in buy-side treasury functions, with the development of pre and post-trade analysis to determine the best use of assets. Buy-side firms, which are less heavily regulated and internally divided into silos, can take a far nimbler, dynamic approach. This means providers must offer a wider range of capabilities, including peer-to-peer arrangements, and counterparty management will become a key differentiator. Technology and digitalisation will play an increasingly key role in services. Smaller firms rely heavily on automation to contain costs and sophisticated data analytics tools to react quickly to alpha-generating opportunities. In addition, the trend for ESG investment means a technological solution is required to allow asset owners to apply the same exclusionary criteria to collateral. Firms may opt to build in-house, select best-of-breed solutions or fully outsource to a holistic, front-to-back provider; smaller firms are demonstrably more likely to opt for the latter.
Keywords: collateral, UMR, peer-to-peer, counterparty management, automation, ESG
Why as-a-service operating models are the future of banking technology
Ihyeeddine Elfeki, Global Lead of Trading & Risk Solutions and Mark Perkins, Global Offering Lead of Cloud and as-a-Service Solutions, Luxoft Financial Services

Service-oriented technology operating models and cloud-based solutions such as Software as-a-Service (SaaS) and Platform as-a-Service (PaaS) are transforming enterprise business. These operating models shift the onus from traditional ownership of software and technology from the datacentre upwards to a model where hardware and software are consumed on a pay-per-use basis. Providers host and maintain the infrastructure and application from the ground up, simplifying the landscape for customers. ‘As-a-service’ is used to collectively describe these new consumption models, which are poised to deliver a paradigm shift in the capital markets industry, enabling Trading Systems as-a-Service. This paper gives the reader an insight into how market trends have evolved around the adoption of as-a-service offerings and where the market sees them heading. The industry drivers behind the shift will be explored and how it maps to parts of the capital markets organisation. The paper also outlines best practices for achieving this shift, including transforming the way business processes are structured and overcoming potential pitfalls during the journey. The overall aim is to help the reader look at their own organisation from a transformational perspective and determine how to begin the shift to as-a-service.
Keywords: as-a-service, SaaS, digital transformation, IT consolidation, outsourcing, cloud, capital markets, trading systems
The new era for collateral: Optimisation, funding and yield strategies
Martin Aasly, Senior Portfolio Manager and Xavier Bouthors, Senior Portfolio Manager, NN Investment Partners

The growth of regulatory requirements has drastically increased the magnitude of collateral consumption for buy-side market participants in recent years. This has forced companies to rethink their strategies surrounding collateral consumption, trading and collateral yield strategies. With a specific focus on pension and insurance companies, this paper discusses some of the challenges that these institutions are facing and makes actionable recommendations towards collateral optimisation practices. Further, it provides guidance towards prudent liquidity management and raises essential elements for collateral-driven revenue generation.
Keywords: collateral, optimisation, margin, liquidity, cash funding, repo, securities lending, HQLA
DeFi and banks: Is this the end of traditional banking?
Carlo R.W. de Meijer, Director, MIFSA

The unregulated DeFi market has experienced remarkable growth in 2021. DeFi use cases bring a number of benefits and may remove a number of the shortcomings of the traditional financial ecosystem. Next to that the attitude of a growing group of new generation consumers is changing triggered by higher yields and the emergence of alternative digital and crypto assets. This paper attempts to answer a number of questions such as: what does DeFi mean for the traditional financial system?; should traditional financial institutions worry and why?; should they adapt to the new Defi environment?; what steps could be taken?; and finally, what will the new financial ecosystem look like?
Keywords: DeFi, CeFi, yield farming, DApps, Gen Z
The true cost of doing nothing in asset management
Thomas Chevalier, Executive Director, Temenos Multifonds

The asset management industry as previously known has changed forever. For the last two years, the industry has faced a time of unprecedented demands that will ultimately produce new winners and losers. While it can already be seen that a number of asset managers have taken the leap towards innovation, is what can be seen on the surface really preparing them for the future? Do digital investor portals, environmental, social and governance (ESG) investments and a growing interest in crypto-currencies mean they are digital to the core? And if not, why not? This paper looks at the key strategies asset managers need to adopt to make sure their investment operations can support the needs of investors, now and in the future. It covers adopting a long-term IT strategy versus worrying about short-term profit and embracing new technologies like cloud and artificial intelligence (AI) to enhance operational efficiency and transparency across the organisation.
Keywords: asset management, investment operations, fund administration, technology, investment strategy
Distributed ledger technology and the evolution of post trade
Gonçalo Lima, Capital Markets Ecosystem Lead, R3 and Enrico Rossi, Research Fellow, UCL Computer Science Department

The consistent trend towards dematerialisation and business process automation that has been developing around the world over recent years has also shaped the recent evolution of securities markets. The emergence of distributed ledger technologies (DLTs) has the potential to disrupt the present-day business model of security markets based on central securities depositories (CSDs). The transition from centralised analogic infrastructures (such as CSDs) to more distributed digital and protocol-based infrastructures (such as DLTs) has a variety of implications that have only recently started to emerge and raises new questions and unexplored issues. This paper analyses the impact that technological innovations in the field of DLTs have on the business of CSDs, assesses the nature of that impact and figures out what lies ahead for CSDs in an age of technological revolution and transformative changes. It highlights that current infrastructure is functional but complex, fragmented and limited in scale and scope and mainly zooms in on Custody and CSDs whose roles are evolving. The paper discusses how DLTs and digital assets are transforming the securities end-to-end process. On the one hand, the DLT disruption is challenging current constraints of traditional settlement times, operating hours and also national boundaries. The paper discusses how as DLTs disintermediate and ‘decentralise’ the role played by CSDs, the operational and counterparty risks are also reduced. As a result, market participants, while maintaining their critical roles in ensuring fair and effective markets, can now transform themselves and embrace a new operational, technological and regulatory framework. On the other hand, the paper also discusses how this disintermediation can introduce novel types of operational, technological and regulatory risks in security markets and post trade too. These new aspects introduce further re-centralisation and re-intermediation in the industry, mainly in the form of custodians, which are increasing their relevance within a DLT ecosystem to address novel technological and operational risks. More generally, the work discusses how hierarchical, closed and permissioned governance structures are naturally more suited to reduce novel regulatory, technological and operational risks, together with the contextual definition of industry-wide standards, which ensure interoperability between old and new systems, regulatory harmonisation and compliance. In sum, while the decentralisation and disintermediation potentially fostered by DLTs can contribute to the reduction of certain types of risks in post trade the emergence of brand-new risks requires other forms re-centralisation and re-intermediation. This requires the emergence of novel actors and novel architectural solutions. Ultimately, the paper outlines how the collaboration between regulatory authorities and industry participants is becoming a key enabler for wider DLT adoption, especially in heavily regulated industries. This has a direct impact on financial market infrastructures (FMIs) that are challenged to become more client-oriented, to be able to cope with increasing competition and to take advantage of new opportunities to grow through novel business models.
Keywords: distributed ledger technology, custody, CSD, settlement acceleration, digital exchange, post-trade

Volume 14 Number 2

Editorial
Simon Beckett, Publisher
Papers
Sub-custodian network management in a post-pandemic world
Andrew Osborne, Senior Vice President, Global Head of Network Management, Northern Trust

This paper describes a vision for sub-custodian network management in a post-pandemic world. It examines how the COVID-19 crisis affected risk assessment functions and the approach to due diligence. It also considers the wider roles network managers play in market advocacy, intelligence gathering, relationship management and infrastructure development, and looks at whether the global pandemic has accelerated a bifurcation of these roles. It makes the case for continued on-site meetings when the pandemic ends and examines new considerations for such visits. It goes on to explore some of the components that will shape the future evolution of the network manager, including the impact of digitalisation and technological innovation and trends and themes transforming the custody business itself. Successful network managers should embrace the digital paradigm, and support and enable their sub-custodians to do the same. As sub-custodian business models change and markets evolve, network managers should continue to leverage their high level of market expertise to support their own organisations in their decision making. Network managers should increasingly become agents of change, as they navigate new complexities and identify opportunities for key stakeholders across the sub-custodian network.
Keywords: network management, due diligence, on-site, future, sub-custodian, pandemic
Advancing the settlement model of the US securities markets
John Abel, Executive Director, The Depository Trust & Clearing Corporation

In a securities settlement cycle, one of the greatest factors affecting market risk — including counterparty risk, credit risk and default risk — continues to be time. One of the areas of exposure remaining in the settlement system today is the risk of a sudden event that could affect the transfer of cash or ownership of securities from trade execution through trade settlement. The current standard cycle for settling equity trades in the US is trade date plus two business days (T+2); however, industry consensus is growing that accelerating this settlement cycle to one day or less will better serve market participants by reducing costs and mitigating risk. While shortening a settlement cycle sounds simple enough, the execution is more complex. Equity clearance and settlement is part of a large ecosystem of global financial markets, interconnected processes and linked systems. Accelerating the US cash market settlement cycle will have both upstream and downstream impacts on other parts of the market structure, such as derivatives, securities lending, financing, foreign clients and foreign exchange and collateral management. Settlement is one of the most powerful and critical processes of The Depository Trust & Clearing Corporation (DTCC), and as the backbone of the US financial services industry, DTCC clears and settles hundreds of billions of dollars in equities transactions every day. This paper suggests that the industry’s primary goal must be to create efficiencies without introducing additional risk to markets. DTCC is actively working with its industry partners towards a path to accelerated settlement of T+1 and beyond by taking a careful, methodical approach to examine all issues and potential impacts for the entire US equities market.
Keywords: accelerated settlement, DTCC, market volatility, margin procyclicality
COVID-19 and the evolution of the alternative asset manager operating model
Michael Fastert, Chief Operating Officer and Chief Legal Officer, TIG Advisors

As a result of one of the great human tragedies of the 21st century, the world has been enduring some form of ‘lockdown’ or curtailment of ‘normal’ since early 2020 due to the global COVID-19 pandemic. The impact of COVID-19 on the human condition has been immeasurable; sociologists and psychologists will have source material for many decades as they attempt to put this virus and its ramifications on the world into context. Most of those reading this are neither of the above, however, so the focus for this paper will be the effects of COVID-19 on the asset management industry and how we as an industry operated during the pandemic. Most importantly, this paper will seek to explore trends that were accelerated as a result of the pandemic and what the future operating model for the asset management industry could look like. As my core expertise is the alternative asset management industry, this commentary will focus mostly on that particular subset of the industry, but certain aspects will be applicable to different types of fund operating models across the spectrum.
Keywords: COVID-19, business model, outsourcing, cloud, alternative investments, automation
Meaningful data products: Custodians enhance their solutions
Ryan Cuthbertson, Global Head of Product, Standard Chartered

Client requirements are fundamentally changing, and this is forcing custodian banks to think more laterally about how they deliver services to customers. Increasingly, custodians are scoping out new ways of sharing meaningful and thoughtful data sets with clients as seamlessly as possible through an array of different transmission methods, including application programming interfaces (APIs) and SWIFT, among others. This paper outlines some of the data solutions that custodians are developing, together with how clients are benefiting from them in areas such as settlement efficiency, market access, and environment, social, governance (ESG) investing. The paper also notes, however, that data solutions are not without their challenges. Custodians’ banks will need to ensure that the data they disseminate to clients is accurate, secure, and is not so detailed that it completely overwhelms the end users. Elsewhere, the absence of comprehensive data regulation has prompted some market participants to push for the adoption of data standards, but this is not straightforward. A balance is, however, required on standardisation so that it does not undermine innovation, a theme that the paper explores in depth. This paper is essential reading for market leaders in the custody world who are looking to strengthen and deepen their data capabilities for clients.
Keywords: data, digital assets, data solutions, data insights, technology, innovation
How the COVID-19 pandemic has accelerated the adoption of technology for due diligence
Zachary Jarvinen, Vice President, CENTRL

COVID-19 has undoubtedly left a mark on every aspect of communication, which includes risk communication with businesses and financial institutions. As the world finds a new normal, the analysis of risk and due diligence processes has transformed, paving the way towards a technology driven approach. This paper delves into the implications of COVID-19 on the bank network community and how it has accelerated the adoption of due diligence technology.
Keywords: due diligence, risk management, bank network management, COVID recovery, technology, automation
Exploring coexistence in the securities industry: Why the ISO 20022 central dictionary is the key to interoperability and realising data opportunities
Juliette Kennel, Head of Standards, SWIFT

This paper looks at how the securities industry can better manage coexistence between different message formats along with realising the many opportunities presented by available data. This is with a view to arriving at greater efficiency, profitability and interoperability within securities and across financial services. It begins with an overview of the quantities and types of data produced by the industry, discussing the costs and risks this poses if it is not sufficiently well managed. It then moves into a discussion of the need for a common language for all parts of financial services, including securities, to agree on in order to communicate more effectively. The paper focuses on using the global ISO 20022 standard for this purpose. It covers the question of migrating to it as a message format, for which there is little appetite within the securities industry in the short to medium term. ISO 20022’s central repository and data dictionary provide a solution, creating the common language that can help to ensure interoperability between entities. It includes discussion of the many benefits of using ISO 20022 in this way, such as reduced costs, risks and timeframes. It highlights how ISO 20022 as a data model can be applied to developing standardised application programming interfaces and building connections with emerging technologies and industries such as distributed ledger technology and crypto assets. The paper also looks at the risks and limitations posed by a prolonged period of coexistence. The use of a common data dictionary can enable firms to interoperate without having to align data exchanges at the syntax level; however, there are still associated costs, risks and inefficiencies. The conclusion is that securities market participants should collaborate to adopt a common data dictionary that can be integrated into their systems, their software and their processes.
Keywords: coexistence, data, ISO 20022, interoperability, securities, securities services, standards
Wealth management requires a 360-degree compliance programme
Jeffrey Cowley, President, InvestEdge

While the tsunami of regulation following the 2008 financial crisis has receded, compliance for wealth management companies continues to grow more complex. In recognition of the difficulty of meeting evolving standards and obligations, the US Government now offers incentives to companies that adopt technical solutions. RegTech that surfaces issues in a timely manner and holistically across an institution’s book of business is seen as directly correlated with transparency and accountability. It is also good business. Today’s solutions empower companies to streamline account management, reduce risk, lower cost and strengthen client relationships. The author shares best practices and important questions to consider when designing and implementing a 360-degree compliance programme. The key to success is synergy among people, processes and technology. Successful compliance starts with stakeholders across the front, middle and back offices. With guidance and best practices gained from interactions with regulators, consultants and technology providers, the company establishes the procedures to ensure the programme properly addresses its investment management business and its regulatory risk. With the right people and procedures in place, thoughtful RegTech serves as the glue that enables proactive, efficient, 360-degree compliance. With the breadth of data and volume of regulations that companies contend with today, a 360-degree compliance technology platform should employ comprehensive and accurate data; exception-driven rules to eliminate false positives; well-designed workflows that distribute tasks logically across the front, middle and back offices; and efficient oversight tools. Technology cannot replace sound, human-driven policies and procedures but when combined with customer relations and portfolio management into a 360-degee programme, RegTech provides vital protection against regulatory, operational and reputational risks and gives investment managers an understanding of their businesses they could never achieve before. This paper discusses the evolution of 360-degree compliance programmes and share best practices for designing and implementing them. It analyses how, when applied across all investable accounts and business segments, technology can transform compliance from a reactive to a proactive process.
Keywords: RegTech, WealthTech, compliance, investment management, FinTech, wealth management, fiduciary monitoring
Blockchain-based tokenisation: Status and implications of early design decisions
Maja Schwarz, Senior Business Development Specialist, NEC Laboratories Europe

Blockchain-based tokenisation is increasingly getting attention with more assets and asset classes being tokenised. Ownership rights in the assets are represented on the blockchain where they can be traded without direct intermediaries, which is seen as one of the main blockchain promises. In this paper, we describe the still emerging adoption of blockchain technology that shows persistently positive indicators of growth, despite frequent doubts of its usefulness. More precisely, we explore recent developments in the tokenisation space, with particular focus on the stage and scale of current products and services, and the degree to which these deliver on the blockchain promises. We further provide a perspective on how banks could approach tokenisation and deliver related services. With blockchain, trust in intermediaries is replaced by trust in the consensus of validating nodes of the used blockchain platform. This has substantial consequences for banks planning to offer new services, since they care about the cost of transaction, its confirmation time, privacy, liability, and even the carbon footprint of underlying processes. In order to support decision making, we provide an analysis of how these parameters differ depending on the blockchain platform type and its consensus protocol.
Keywords: blockchain, tokenisation, comparison of private and public blockchains

Volume 14 Number 1

Editorial
Simon Beckett, Publisher
Papers
Effective oversight of outsourced functions in the financial industry
Francesca Valenti, Legal Consultant and Andrea Vianelli, Group Head of Legal & Regulatory Affairs, Amagis Capital Group

With the rise of technology solutions and their application in the financial markets (also referred to as FinTech), several regulated firms, ranging from small to institutional players, are increasingly availing of third parties (both regulated and unregulated) across the globe to perform a process, a service or an activity that would otherwise be undertaken by such regulated firms. Effectively, the decision to avail of such arrangement, labelled as outsourcing, can be the result of multiple business considerations, including (i) reliance on third parties due to their more efficient and cost-effective systems, (ii) scalability, (iii) lack or limited internal resources and/or in-house capabilities, but also (iv) intragroup allocation of functions and (v) agility and flexibility. The financial industry, however, is facing an increasing scrutiny over outsourcing arrangements, especially in respect of information technology (IT)-related outsourcing, by regulators across the European Union (EU) and the United Kingdom. The key regulatory concerns range from stakeholder protection, operational resilience to business continuity. To ensure that such concerns are duly addressed by regulated entities, EU supervisory authorities and the Financial Conduct Authority (FCA) intervened with binding guidelines on outsourcing and a strengthened regulatory framework applicable to outsourcing, covering the pre-outsourcing phase and extending from day-to-day monitoring. This paper aims to provide a pragmatic overview on certain best practices designed to ensure effective monitoring of outsourced functions and sustainable operational resilience. A first section shall focus on the notion of outsourcing and shall identify the main regulatory framework(s) affected by outsourcing rules. The following section will focus on the impact of outsourcing in the investment services industry, with a particular emphasis on asset managers, credit and financial institutions and investment service providers, without looking at the insurance sector. A third section will provide a five-step guidance on building an effective outsourcing monitoring model with a particular focus on small-medium enterprises, while the following section will focus on exit strategies. Before drawing the conclusions of the analysis carried out earlier, a final section will identify what the authors believe being the ultimate goal of ensuring effective third-party outsourcing monitoring, namely the creation of a sustainable control environment designed to deliver operational resilience in the long term.
Keywords: financial industry, outsourcing, EBA guidelines, monitoring
Central securities depositories and reform of the settlement process
Eddy Wymeersch, Professor, Ghent University

The organisation and regulation of the European securities clearing and settlement business is again up for reform. The present dispersed European landscape calls for more integration as part of the formation of a European capital market, as proposed by the European Commission. These reforms would result in legislative changes, some of which are analysed in this paper, having raised active interest in the financial world: a new technique of dealing with settlement finality, proposing a mandatory buy-in tool as an effective instrument against settlement fails, and an analysis of settlement internalisation, which has risen to levels that, according to the Commission, might ‘undermine confidence in the CSD function’ and in the markets. On the two topics of settlement finality and settlement fails, data has now become available and is included. The third item analyses the use of distributed ledger technology (DLT) in the settlement infrastructure. As part of its work stream on digital finance, the Commission has published a proposal — as a ‘pilot project’ — for a regulation dealing with the main items that have to be adapted upon the introduction of DLT in the existing securities settlement system (SSS) and multilateral trading facility (MTF) segments of the market. For central securities depository (CSD) using DLT, the existing regulation would remain applicable, but the operations would be exempted from numerous requirements applicable today. The impact on the markets will have to be closely monitored, hence the Commission’s ‘pilot project’. The European Central Bank (ECB) has already formulated its position of cautious optimism.
Keywords: improving finality by mandating a buy-in agent, the internalisation of transactions, the use of distributed ledger technology for market infrastructure, positions of Commission and ECB
Custody rebooted: How the asset servicing industry must adapt for the digital future
Peter Cherecwich, President of Asset Servicing, Northern Trust

This paper describes a vision of the securities services landscape in 2030 and beyond based on current technology and industry trends alongside Northern Trust’s own experience and innovation research. It explores the components shaping that future, such as blockchain, digital assets and decentralised finance (DeFi), and the underlying drivers of change including regulatory developments, an increasing demand for sustainability and the search for alpha. The complete, and potentially profound, nature of this transition will result in each step in the industry’s value chains being required to grow increasingly astute, agile and creative. Within this context, custodians will become a conduit for their clients to a new digital world — navigating the complexity of an evolving landscape and highlighting opportunity whilst continuing a safeguarding role. The paper explores practical steps that all industry participants will need to consider in order to competitively position themselves for this step change in the belief that, ultimately, the conclusion of this process will be a more efficient, transparent and flexible ecosystem enabling products and services that are unimaginable today.
Keywords: Digitisation, Blockchain, decentralised finance, digital assets, digital infrastructure, cryptocurrency
Keeping pace with dynamic markets: FINRA’s journey with AI-based surveillance techniques and tools
Susan Tibbs, Senior Vice President, Raghu Raman, Vice President, Chi-Keung Chow, Principal Developer and Robert A. Gomez, Principal Advisor, Financial Industry Regulatory Authority

Trading markets are dynamic. The composition of trading centres and market behaviour are constantly evolving. The number of market events is also constantly increasing, often in response to significant events like the COVID-19 pandemic. The dynamic nature of trading markets poses significant challenges for regulators that are responsible for exercising oversight of market activities. This paper discusses the Financial Industry Regulatory Authority’s research and development projects dedicated to experimenting with the development and improvement of artificial intelligence, machine learning and deep learning market surveillance techniques or tools. Such experimentation is critical for regulators to continue to keep pace with dynamic markets. The development and improvement of such techniques and tools holds the potential for continued effective oversight of market activities.
Keywords: Market surveillance, artificial intelligence, machine learning, deep learning
Securities operations: Future pricing models and operating models — Trade-offs between cost, operational efficiency and diversification
Samir Pandiri, President, Broadridge International

A significant cost for sell-side firms, but not a differentiator: this is the reason why, in recent years, Securities Operations have not seen the investment needed to modernise fully, as the demands of the front office have come first. But a confluence of regulatory, technological and market trends is now forcing a fundamental change in post-trade, with innovative pricing and operating models coming to the fore. The volume spike in the COVID-19 pandemic was a final catalyst for many firms to look at their options afresh. This paper outlines the challenges facing securities operations, analyses current developments in pricing and operating models and looks ahead to the opportunities that more flexible models offer. I am grateful for numerous insights from Broadridge clients and colleagues.
Keywords: Post-trade, CSDR, outsourcing, derivatives, cloud, back office
Outsourcing investment data management: Experiences with the tendering process
Bruce Russell, Executive Director, Shoreline Asset and Wealth Management Consulting

This paper explains why Custodians have demonstrated a significant interest in offering Data as a Service (DAAS) to their Clients on the basis that they should be in a prime position to provide a compelling offer. Notwithstanding this, Custodians have not yet fully delivered to their potential, and we explore why this is the case and what some of the specific barriers are. Understanding these limitations, we then present the reader with a ‘checklist’ that they can use when considering appointing Custodians for DAAS. The reader should expect to understand what current limitations exist with respect to Custodian DAAS and how they can assess these via a tendering process. Further, Custodians can consider these observations and consider what changes they may be able make as they further develop their DAAS offer to the market.
Keywords: InvestmentData, Data as a Service, Custodian, DAAS
Understanding the value of enterprise compliance technology
Adam Schaub, VP of Product Management, RegEd

The increasing costs and complexities of compliance and the intensifying competition for financial professionals and compliance staff are pushing financial services firms to adopt regulatory technology. The RegTech market has expanded from 150 vendors to more than 400 within just four years as firms seek effective and efficient solutions to their compliance and regulatory needs. Firms reduce regulatory risk and increase operational efficiency by replacing manual processes, internally built systems, off-the-shelf software that has been modified for compliance needs or some combination thereof, with built-for-purpose, integrated enterprise solutions for needs such as licensing and registration, conflict of interest disclosure review and administration, oversight and risk management and supervisory policies and procedures. However, some firms have difficulty ascertaining an accurate return on investment in enterprise technology because of the challenges involved in identifying and considering all of the benefits of an integrated platform and the culture of compliance that it creates. Although returns such as cost savings and productivity gains can be measured rather easily, benefits such as fines avoided and a reputation for strong compliance are often harder to quantify. To understand the value of enterprise technology, a firm must evaluate its effectiveness and efficiency in meeting a firm’s regulatory and compliance needs and assess the impact that it makes in recruiting and retaining top talent by offering an experience that emphasises ease of use and the elimination of manual tasks. This paper offers a detailed look at quantitative and qualitative benefits that a firm should consider in evaluating the effectiveness, efficiency and experience of a built-for-purpose enterprise compliance and licensing platform.
Keywords: Enterprise compliance, regulatory technology, compliance software, licensing and registration, culture of compliance, enterprise compliance platform