Volume 16, 2023-2024

Each volume of Journal of Securities Operations & Custody consists of four quarterly 100-page issues. The articles published in Volume 16 include:

Volume 16 Number 4

Editorial
Simon Beckett, Publishing Editor, Journal of Securities Operations & Custody
Practice Papers
Generative AI in securities services
Søren F. Mortensen, Global Director Financial Markets, IBM UK

Generative AI (GenAI) is a technology that, since the launch of ChatGPT in November 2022, has taken the world by storm. While a lot of the conversation around GenAI is hype, there are some real applications of this technology that can bring real value to businesses. There are, however, risks in applying this technology blindly that sometimes can outweigh the value it brings. This paper discusses the potential applicability of GenAI to the processes in post-trade and what impact it could have on financial institutions and their ability to meet challenges in the market, such as T+1. We also discuss the risks of implementing this technology and how these can be mitigated, as well as ensuring that all the objectives are met not only from a business perspective, but also technology and compliance.
Keywords: GenAI; LLM in securities services; LLM model learning; risk of GenAI; NLP processing in post-trade; when to use GenAI
‘In this world, nothing is certain except death and taxes’ — but what about regulatory change for the investment management industry?
Paul Lumsden, Senior Consultant, and Simon Harris, Adviser, Investment Solutions Consultants

This paper seeks to highlight and address some of the key questions and challenges facing investment management companies navigating a geopolitical and economic landscape that continues to experience significant regulatory change. Managing the complexities of regulatory changes requires a strategic, integrated approach. By staying informed, leveraging technology, prioritising investor protection, engaging effectively with the board and ensuring robust governance and operational resilience, investment management companies can effectively overcome these challenges and maintain compliance in an ever-changing regulatory environment.
Keywords: regulatory change; culture; innovation; regulator; governance; operational resilience; horizon scanning; data lineage
The potential for artificial intelligence to address challenges faced by custodian banks
Hsien-Hui Tong, Executive Director, Investments, and Martin Lim, Investment Analyst Intern, SGInnovate

The pace of technological advancement over the last three decades has led to a slew of new companies adopting the latest technologies and marrying them to innovative new business models to threaten more traditional businesses. Start-ups such as Google, Meta and Amazon, to name a few, have revolutionised the way consumers engage with service providers, consume information and purchase goods. Fintech start-ups have also threatened to change the way financial services are provided, albeit with varying degrees of success due to barriers such as consumer trust in new brands, regulatory compliance and the financial strength of banks to build those same services internally. There is no denying, however, that custodian banks today face many challenges that are slowly eroding margins. Regulators are demanding shorter settlement times, clients are demanding greater control over their accounts, staff costs are rising and cyber security threats are increasing. This paper seeks to highlight some of the threats the industry is facing while exploring the role that artificial intelligence (AI) may be able to play in addressing some of these challenges. It offers a broad overview of not just areas of application but also weaknesses of the technology that the bank needs to be aware of and also possible issues with implementation. It also seeks to highlight the fact that AI is not a single technology, unlike distributed ledger systems. There are many nuances to AI, such as convolution neural networks, natural language processing and generative AI, and the judicious application of the right nuance of AI to the problem will be key to a successful implementation.
Keywords: artificial intelligence; AI; large language models; LLM; natural language processing; NLP; generative AI; GenAI
The impact of the Digital Operational Resilience Act on financial market infrastructures in Europe
Derek Duggan, Managing Director, Banks, Thomas Murray

This paper provides a comprehensive overview of the approach taken by financial market infrastructures (FMIs) across Europe as they prepare for full implementation of the Digital Operational Resilience Act (DORA) in January 2025. With the final deadline so close, concerns are emerging that some FMIs and regulatory bodies will not be ready to meet all of DORA’s requirements in time. The purpose of this paper is to examine those concerns based on current operational resilience practices in European FMIs, and to clarify the challenges and opportunities presented by greater attention to managing third-party cyber risk. The paper also covers industry perspectives and stakeholder feedback, based on interviews with industry experts (both internal and external) in fields such as banking, financial regulation and cyber security.
Keywords: Digital Operational Resilience Act; DORA; operational resilience; financial market infrastructures; European FMIs
EMIR 3.0: Overcoming the challenges of derivatives clearing with baby steps. Still beating around the bush?
Apostolos Thomadakis, Head of Research, European Capital Markets Institute, and Bas Zebregs, Expert Legal Counsel, APG Asset Management

The European Union’s (EU) ambition is to encourage clearing at EU Central Counterparties (CCPs) and with EU clearing members (CMs). This is to reduce reliance on systemic non-EU CCPs, and to build a more attractive and robust EU clearing market. To achieve this, the European Market Infrastructure Regulation (EMIR) 3.0 requires EU CMs and clients subject to the clearing obligation to hold active accounts at EU CCPs. Although it is very unlikely that the watered-down compromise will fulfil the EU’s ambition, more importantly it still risks diminishing the competitive position of EU companies, leading to EU clients who do not fall under the clearing obligation to use non-EU CMs, and directing non-EU clients’ euro-denominated interest rate swaps trading activity towards non-EU dealers. This seems contradictory to the policy objective of building a strong EU Capital Markets Union (CMU). With regard to supervision, EMIR 3.0 is a missed opportunity for a centralised supervisory framework. Just enhancing the current decentralised supervision mechanism, which is based on cooperation and information sharing between National Competent Authorities (NCAs), is not enough. A European centralised supervisor will not only strengthen risk monitoring and (eventually) minimise systemic risks but will also reduce supervision costs, the number of procedures, divergent interpretations of EMIR rules and the exchange of data. Whereas the main focus with regard to EMIR 3.0 was geared towards the active account requirement and whether or not to centralise supervision of EU CCPs, regulators and market participants would be ill advised to let discussions over third-country CCP equivalence issues distract them from other important and persistent challenges in the derivatives clearing markets. There are currently three pressing issues that require attention: clearing access and capital rules, portability and clearing models, as well as liquidity and collateral optimisation. A failure to address them risks undermining the key driver for derivatives clearing, which is increasing financial stability.
Keywords: CCPs; derivatives; clearing; financial stability; EMIR 3.0; active accounts; centralised supervision; clearing access; portability; collateral; margin
The benefits of asset tokenisation within securitisation
Gonçalo Lima, Capital Markets Ecosystem Lead, R3, Robert Barnes, Co-Chief Executive Officer, BPX and Managing Director, Anopolis, and Charles Kerrigan, Partner, CMS

Securitisation has allowed banks to move from an originate-to-hold to an originate-to-distribute model. While it is widely accepted that this helped banks to achieve higher profitability and diversification, it is also regarded as the main cause of the 2007–08 global financial crisis. The lack of transparency between the securities issued and the performance of the underlying loans led to extreme risk taking and amplified the impacts once the loans started to underperform. This paper explores asset tokenisation, which can bring similar benefits to securitisation while enabling more effective management of the risks due to the traceability and immutability of distributed ledger technology (DLT). The paper argues that tokenisation of assets has now progressed beyond the experimentation phase and is being adopted by major commercial banks, central banks and financial market infrastructures (FMI). In addition, it describes the regulatory tailwinds for market participants to get involved in deploying and using the technology that makes tokenisation possible. While tokens and securities are both claims on assets, tokenisation’s additional capabilities of traceability and programmability enable the terms of a claim to be modified programmatically under specific circumstances, for example through a smart contract. A further positive attribute of tokenisation is that it can significantly improve and compress the workflow of existing and new securities, bringing considerable benefits from both operational and cost perspectives. The paper goes on to argue that generalised adoption of DLT along with harmonised standards, interoperability and integration for tokenisation feature among key requirements on which market participants and technology providers are actively working. Finally, the paper makes the point that cryptographically proven data also acts as a stepping-stone for high-quality artificial intelligence (AI) implementations, which can continue to expand productivity and profitability for regulated financial institutions.
Keywords: distributed ledger technology; tokenisation; securitisation; post-trade workflow acceleration; bank profitability; risk; regulatory capital; liquidity; cost of funding
Attractiveness of African stock markets for foreign investors: An analytical perspective
Celia Becker, Africa Regulatory and Business Intelligence Executive, ENS

Africa appears to be an appealing investment destination, with African stock markets offering foreign investors the gateway to tap into the continent’s potential growth opportunities. Despite the significant growth and development of stock markets on the continent in recent decades, however, there remain some obstacles to overcome. This paper aims to examine the challenges faced by African stock markets which diminish their appeal to foreign investors and assess regional integration as a potential solution. Key takeaways: (1) African stock markets are often inadequately regulated and exhibit limited size, depth and liquidity, compounded by high currency volatility, prohibitive trading costs and macroeconomic and political instability, making them less attractive to foreign investors; (2) policy makers and regulators in developing countries should focus on fostering the development of vibrant and liquid public equity markets that are well regulated by creating a favourable market ecosystem through legislation, tax incentives and other measures to encourage listings; (3) for financial markets to operate effectively, they must exist within a comprehensive supportive framework encompassing legal, economic and political elements and coordinated monetary policies, potentially through currency zones; (4) the regional integration of stock exchanges can facilitate global integration, and some progress has been made in this regard. African stock markets remain weakly integrated, however, and economic integration initiatives are still hampered by low intra-African trade and inadequate infrastructure; (5) while the African Continental Free Trade Area (AfCFTA) lays a solid foundation for economic integration, African countries should allocate additional resources to implement the AfCFTA and ensure increased intra-Africa trade to assist in making its stock markets more attractive to foreign investors and potentially launching a continental exchange in the future.
Keywords: Africa; intra-African trade; liquidity; operational inefficiencies; macroeconomic and political instability; regional integration; regulatory control; stock market; vulnerability extreme events

Volume 16 Number 3

Editorial
Simon Beckett, Publisher
Practice Papers
How to build scalability into the design and implementation of an enterprise data framework
Sally Bashuan, Executive Director and Head of Data Governance, Federated Hermes

This paper begins by discussing the need to actively manage data as a valuable enterprise asset. It explores what an enterprise data framework (EDF) looks like, before identifying the elements that are key to creating scalability. These are: 1) speaking the language of the executive and gaining longterm investment and continued support; and 2) designing-in scalability through understanding the landscape, hooking into existing practices, ensuring the right data ownership, roles and responsibilities, avoiding the fool’s path by designing-in flexibility, and having strong triage processes. The paper then acknowledges that scalability is only possible through successful adoption of the framework. The paper finishes by examining who leads the implementation and what a successful chief data officer (CDO) looks like, how the creation of a movement is essential and how key culture is. It concludes that implementing an EDF into a live commercial environment is a matter of iterations and that moving through the maturity curve requires adaptability and resilience by not just the framework but also the CDO and the data function. Three guiding principles are identified: 1) relevance; 2) impact; and 3) being a good ancestor.
Keywords: enterprise data framework; scalability; CDO; chief data officer; data governance; data management; culture
ISO 20022: A migration strategy in securities markets for corporate events and triparty collateral management
Holger Neuhaus, Head of Market Innovation and Integration Division, Directorate General Market Infrastructure and Payments, and Benjamin Hanssens, Principal Market Infrastructure Expert, Market Innovation and Integration Division, Directorate General Market Infrastructure and Payments, European Central Bank

Anyone involved in processing corporate events and triparty collateral management needs automation and efficiency. A general transition to ISO 20022, the latest messaging standard available, will support further automation across Europe. Its rigorous structure and richer content — compared with the legacy standard ISO 15022 — enables efficient use of collateral across European financial markets and a harmonised process for asset servicing. The Eurosystem and the financial community have developed a Single Collateral Management Rulebook for Europe (SCoRE) setting out how to use ISO 20022. The adoption of this rulebook starts in November 2024 and use of the ISO 20022 format will then become increasingly common. The main issue is how long the legacy standard and local formats should run alongside ISO 20022. Market actors have not yet agreed on how long the transition should last because of a collective coordination problem. The result is a situation where everyone is worse off. To overcome this, a market-wide migration strategy is needed based on cooperation and incentives to define the point from which only ISO 20022 will be used. The Eurosystem is acting as catalyst for a common migration strategy to ISO 20022 because of the benefits it will bring to society.
Keywords: Eurosystem; collateral management; harmonisation; ISO 20022; co-existence; corporate actions; triparty collateral management
Decentralised clearing? An assessment of the impact of DLTs on CCPs
Rafael Plata, Secretary General, Max Chan, Risk Policy Adviser, and Fernando Cerezetti, Co-Chair, Risk Committee, European Association of CCP Clearing Houses (EACH) AISB

Recent years have witnessed noticeable expansion of new technologies related to distributed ledger technology (DLT) and blockchain networks in financial markets. As developments unfold, the key question that emerges is whether these technologies would work to foster traditional services or, conversely, would challenge their existence. Similar reflections exist for specific parts of the financial system. In particular for central counterparties (CCPs), proof-of-concepts and theoretical exercises have been conducted aiming at responding to such questions. While empirical experiences are yet to mature, theoretical exercises have suggested the impact on CCPs could be substantial, if not detrimental. The objective of this paper is to contribute to the literature and investigate the impact of DLTs on CCPs. Different from previous exercises, the paper resorts to the economic theory of financial service intermediation to substantiate the assessment. Using functional analysis and good type categorisation, the main conclusion of the paper is that under the current offering it seems challenging to foresee a scenario where any of the main services provided by a CCP would disappear or become fully disintermediated. The supporting argument is that the core functions of a CCP orbit around risk management, provided either as private or club type of good. Until now new technologies do not seem able to change the nature of these services and, therefore, render fundamental changes to CCPs less likely.
Keywords: central counterparties; central clearing; financial regulation; derivatives markets; OTC derivatives; systemic risk
A token-based operating model unifying traditional and token-based operations for security services
Stefan Teis, Director and Head of DLT and Digital Asset Services, and Mike Clarke, Managing Director, Global Head of Product Management and Head of UK&I Region (SeS), Deutsche Bank AG

Asset tokenisation is expected to have an impact on the financial services industry in the future. This paper examines the necessity for traditional custodians to enter tokenised markets to propose a future operating model for traditional custodians. We explore the advantages, such as leveraging regulatory expertise and existing customer bases and challenges, including the adoption of new technology stacks involved in such a model. Our proposed operating model utilises a blockchain infrastructure that relies on the use of tokens that spans both traditional and digital assets to create an automated platform. This platform can include the automation of credit risk and liquidity across multi-asset classes and multi-jurisdictional operations. Notably, our model introduces two types of tokens: value tokens (the fully digital or tokenised assets as well as tokenised money) and proxy tokens (among others, representing traditional assets). While value tokens carry value and represent tokenised assets, proxy tokens do not carry value. These proxy tokens are an internal representation of traditional assets that can facilitate managing the intra-day liquidity and extended credit lines offered to customers. Within our proposed operating model, all transaction instructions, whether in the traditional or tokenised realm, are streamlined through a unified ‘instruction worklist’. We conclude the paper with a proposed schematic architecture for the technical implementation of the operating model.
Keywords: custody operations; operating model; tokenisation; bridging traditional and digital assets; blockchain; liquidity management; credit lines
The evolving relationship between asset servicers and fintechs: Unlocking efficiency and collaboration
Matt Digby, Head of Strategic Partnerships, AccessFintech

Significant transformations are underway as asset servicers and FinTech companies forge new alliances. As asset servicers refocus their operations on value added services, they constantly seek adaptation. Innovative technologies, refined methodologies and data-driven insights hold immense potential for boosting operational efficiency. FinTech companies have emerged as valuable partners to asset servicers, enhancing efficiency, fostering operational excellence and driving customer-centric new solutions. This paper explores the exciting opportunities and novel strategies shaping the asset servicing landscape, shedding light on evolving custody services. Legacy processes, burdensome paperwork and obsolete technology have prompted asset servicers to pursue smoother interactions and more satisfying client experiences. Fortunately, the realm of FinTech offers a fresh avenue to address these persistent challenges. A central theme here is that evolving client expectations have spurred an imperative for asset servicers to embrace technology in order to maintain their competitive edge. Clients now demand greater flexibility and comprehensive services, driving a shift towards automation, streamlined workflows and data-driven insights to lower costs, manage risks and provide tailored client solutions. Nevertheless, various hurdles stand in the way of successful collaboration. Effective communication, transparent partnerships and proactive engagement emerge as critical elements for maximising the benefits of this relationship.
Keywords: risk management; data management; regulations and compliance; post trade services; global and local custodian banking; operational excellence
Winning with customers: Achieving differentiation in custody and asset servicing
Ankush Zutshi, Managing Director, Global Head – Corporate Actions and Securities Processing, S&P Global Market Intelligence

Custodians and asset servicers continue to face headwinds from a tough macro environment and changing regulatory landscape, while being at the cusp of seismic technology changes. This includes artificial intelligence (AI), large language models (LLM) and digital ledger technology (DLT) that are delivering ground-breaking insights from vast data sources and enabling digitisation of assets that can redefine value chains. The securities services industry is constantly challenged to get the right balance between providing robust and efficient core services and innovative solutions for the future. So, amid the deluge, where should these institutions focus attention to service evolving client needs and sharpen their competitive differentiation? Should companies prioritise new value creation in core services by continuing to focus on data quality, efficiency, risk reduction and resilience initiatives using latest technologies such as AI and machine learning (ML)? Or should they focus more on augmenting the client experience with newer datadriven services and insights? Is a data-sharing and collaboration-driven platform and ecosystembased approach going to drive the future? This paper touches on some of the considerations and strategies that custodians are focusing on today to achieve client-oriented differentiation in custody and asset servicing.
Keywords: custody; asset servicing; corporate actions; settlements; proxy voting; tax reclaims; legacy technology; API; onboarding; digital; ecosystem
The AI handbook for financial services leaders: Tips and tactics for mastering AI in banking and finance
Guy Mettrick, Industry Vice President, Financial Services, Appian UK

This paper explores the multifaceted realm of artificial intelligence (AI) implementation in financial services, providing insights into its potential, challenges and best practices. Highlighting the emergence of generative AI (GenAI) as a transformative tool, the paper underscores its significant impact on productivity and revenue generation within investment banks and capital markets. Addressing inherent risks of AI adoption, the paper stresses the importance of robust governance frameworks to mitigate operational, reputational and compliance risks. Specific attention is given to the phenomenon of GenAI hallucinations and the imperative for deterministic AI models to ensure data integrity and regulatory compliance. The paper outlines four key pillars of AI’s applications in financial services: predictive AI, anomaly detection AI, classification AI and GenAI. Examples highlight AI’s role in risk management, fraud prevention, customer experience enhancement and internal process optimisation, underscoring its transformative potential across the industry. The paper also covers the distinction between public and private AI models, emphasising the advantages of proprietary data-driven insights in ensuring competitive advantage and regulatory compliance. Concluding with actionable insights for AI implementation, the paper advocates for a strategic approach encompassing clear vision setting, risk oversight, data privacy management, centralised data architecture and comprehensive process automation.
Keywords: artificial intelligence; AI use cases; private AI; data fabric; process automation; risk mitigation

Volume 16 Number 2

Editorial
Simon Beckett, Publisher
Practice Papers
Digital asset custody deciphered: A primer to navigating the challenges of safeguarding digital assets
Colin Parry, International Securities Services Association

The International Securities Services Association (ISSA), Global Digital Finance and Deloitte have co-authored a report on Digital Asset Custody. This paper gives a synopsis of one element of the report and provides a brief explanation of digital asset custody (DAC) and the key facets that should be considered when looking at a DAC solution. DAC is different from traditional asset custody but it is not totally different. There are complexities that occur uniquely within DAC, and it is imperative that managers understand those aspects and the implications, such as permissioned versus permissionless ledgers, key management, etc. There are also a number of familiar terms used in DAC in a different way from traditional markets and is necessary for managers to challenge the existing wisdom for both DAC and traditional custody. To progress the opportunities that DAC — through distributed ledger technology (DLT) and tokenised assets — offer financial markets, however, the industry should not throw away all the learnings from traditional custody offerings. Custodians (in the widest sense) should merge their knowledge of safekeeping principles with the new abilities offered by DAC to ensure that they can manage the risks of operating in this new environment. An example of a new risk is that DLT evangelists will say ‘Blockchain is instant and immutable and therefore guarantees finality’, but is it true in all or any circumstance? Risk management starts with risk awareness and the purpose of this paper is to explain the risks that occur in the scenarios of providing or purchasing DAC.
Keywords: DLT; custody; digital asset custody; safekeeping
The growing challenge of attracting talent to post-trade and keeping employees’ skills current
Saija Korkala and Björn Welander, SEB

Digital transformation, emergence of modern technologies, regulatory drivers and ever-increasing quest for efficiencies has pushed the financial industry, including the post-trade business, through a tremendous change over the past decade. This change has introduced new requirements for systems and organisations, but most importantly towards staff working in these areas. In this paper, we discuss the implications of the changes in operational landscape for the required skill sets, the challenges and opportunities in attracting and retaining talent, and techniques to build the needed competences for organisations to be equipped for the requirements of the future. This is done by examining the research on general topics and linking that to experience from business and real-life examples related to talent attraction, talent management and competence building in post-trade. Based on that, we see that talent challenge is industry-agnostic, linking to both tight labour markets and changing competence requirements. To address this, companies must ensure that basic talent management practices are well deployed, try out some non-traditional talent pools and new ways of working, as well as bring talent attraction and retention activities to a level that resonates with the new generation (Gen Z and Millennials), who are much quicker in their career moves and are driven by different values and realities compared to their more senior colleagues. We conclude that building talent and skills inhouse is the most important way to approach this challenge, and as a side-effect it will also help in the specific challenge of talent retention. Building talent in-house, however, requires committed leadership and management, investment in learning tools and engaged staff to bring lasting results.
Keywords: talent; competence; post-trade; operations; securities; digitalisation
The role of financial market infrastructures in supporting a sustainable financial transition
Natalia Diaz-Stock, Euroclear SA/NV

This paper aims to describe the role of financial market infrastructures (FMIs), specifically central securities depositories (CSD) and international CSDs (iCSDs), in supporting a sustainable financial transition. It starts by laying out the central role of these FMIs in the centre of the financial value chain, where it plays a critical role in ensuring the smooth and efficient functioning, as well as stability of financial markets. FMIs operate multilateral technology systems and funnel vast amounts of data across multiple markets, including emerging markets and developing economies (EMDEs). The paper then highlights acute challenges in funding sustainability projects in those emerging markets and the need for solutions that help attract private capital and international investors. To help address some of these challenges, a case study is presented of Euroclearability and the establishment of efficient FMIs and secondary markets, drawing lessons from its current impact as a potential solution to bridge EMDE financing gap. A study of the impact of Euroclearability shows an average reduction in sovereign borrowing costs by 28bps, and 14bps for corporate borrowing costs. Additionally, Euroclearability is associated with greater liquidity in domestic sovereign bond markets, leading to higher trading volumes and lower bond yields in secondary markets. Finally, the paper delves briefly into the ways FMIs are well positioned to capture regulatory data flow and sustainability data. With strong track records in managing and quality-assuring data, FMIs can improve the processing of ESG metrics, such as regulatory disclosures, and facilitate the use of these new metrics between market participants.
Keywords: financial market infrastructure; FMI; CSD; sustainable finance transition; sustainability transition; ESG; efficient capital markets; blended finance; emerging markets
The challenges of implementing effective regulatory decision-making provenance
Brock Arnason, Droit Operating Company

Financial institutions face significant challenges in implementing and enforcing regulatory data, specifically in transaction reporting and point-oftrade decision making. The lack of understanding and adherence to correct reporting procedures often leads to compliance breaches and subsequent fines. In this paper, the author provides a comprehensive explanation of regulatory data and how implementation poses challenges such as managing numerous source systems, constructing accurate decision logic, ensuring auditability and handling regulatory changes effectively. The paper also examines the benefits of adopting a best-practice framework, covering examples of transaction reporting and point-of-trade decision making. Finally, the paper underscores the imperative for financial institutions to embrace a best-practice framework for regulatory decision-making provenance which involves automating compliance, reflecting industry consensus and implementing control processes to address regulatory changes. By doing so, companies can ensure compliance, mitigate risks and adapt to the evolving regulatory landscape.
Keywords: AML compliance breaches; transaction reporting; point-oftrade decision making; regulatory decision-making provenance; bestpractice framework for regulatory data management
A proposed mandatory swing pricing regime and the hard close requirement: Practical considerations
Jimena Acuña Smith and Nathan McGuire, Asset Management Group, Ropes & Gray

In November 2022, the U.S. Securities and Exchange Commission (the ‘Commission’) proposed rule amendments that would require, among other things, open-end mutual funds to implement a mandatory swing pricing regime under certain circumstances (the ‘Proposals’). To ensure that funds receive order information with sufficient time to make a swing pricing determination, the Proposals would require funds to set a hard cut-off time for the receipt of purchase and redemption orders. Currently, the vast majority of investments in open-end mutual funds are made through intermediaries and retirement plans, such that investors who submit orders to intermediaries and retirement plans before the time the fund has established for calculating its net asset value (NAV) generally receive the same day’s NAV, even if the fund receives the order information from the intermediary or retirement plan after NAV is calculated. This is how mutual fund pricing has operated in the US for over 50 years. The Proposals would upend current operations. Under the Proposals, an investor’s order would have to be received by the fund — not a financial intermediary or a retirement plan — before the cut-off time set by the fund for calculating NAV in order to be eligible for the same day’s NAV. If adopted as proposed, the Proposals would require extensive changes to mutual fund pricing systems and infrastructure in the US. In this paper, we acknowledge the arguments against the Proposals by an overwhelming majority of industry commenters and, without undercutting those arguments, we explore practical, regulatory and compliance considerations for funds seeking to better understand how the Proposals might affect their day-to-day operations.
Keywords: mutual fund; swing pricing; hard close; operations; dilution; first-mover advantage; systemic risk
Custody in the age of digital assets: The path to building market infrastructure fit for a tokenised economy
Seamus Donoghue, Metaco

This paper charts the dynamic evolution of finance and capital markets amid the digital asset surge. Tracing the historical trajectory from conventional banking to the current digital era, the paper underscores the intertwined narrative of finance and technology. Distributed ledger technology (DLT) and digital assets take centre stage, driving continuous financial operations and reshaping market dynamics. Custody emerges as a pivotal factor in this digital transformation. Established financial institutions strategically invest in digital asset infrastructure, recognising the seismic potential of tokenisation. Research from major companies projects significant tokenisation of assets, prompting global banks to align their strategies accordingly. The paper explores diverse use cases, from custody and trading services for cryptocurrencies to tokenising financial securities and real-world assets. Navigating the regulatory landscape proves crucial, with varying regulations across jurisdictions posing challenges. A unified regulatory framework is advocated for fostering global adoption. The paper delves into the technological nuances of safeguarding digital assets, exploring key management solutions such as multiparty computation (MPC) and hardware security modules (HSMs). The paper anticipates a shift towards recentralisation as the digital asset market matures, with established financial institutions and custodians poised to leverage trust, balance sheets and regulatory compliance to open up commercial opportunities in the digital asset space. In essence, the paper provides a sweeping overview of the current digital asset landscape, offering insights into challenges, opportunities and technological considerations shaping the digital asset custody value chain.
Keywords: digital assets; digital asset custody; DLT adoption; institutional adoption; custody infrastructure; tokenised securities; cryptocurrencies
Sustainability matters: Best practices and challenges on sustainability data and how to integrate ESG and climate risk into your operating model and risk framework
Pat Sharman, Securities Services Veteran and Co-Founder of Everyone Matters

Securities services companies need to respond to changing risks and the impacts they could have on operational resilience. Much of the focus has been on identifying risks relating to asset protection, or factors that can have an impact on revenue, such as falling interest rates. With the potential threat of climate change on asset prices, and the risk more broadly of climate change to financial markets, custodians need to rethink risk, both at an operational level and how they support asset owners and asset managers to help mitigate these risks.
Keywords: ESG; sustainability; climate risk; biodiversity risk; securities services; sustainable governance; governance
Case Study
Reinventing asset servicing with distributed ledger technology
Zhu Kuang Lee, Jing Yu Wong, Rachel Roch, and Xin Yi Tan, HSBC

This paper draws on the hands-on experience of HSBC in implementing distributed ledger technology (DLT)-based solutions through building its own proprietary tokenisation platform, HSBC Orion, and participating in various industry initiatives such the Hong Kong Monetary Authority (HKMA)’s inaugural tokenised green bond issuance. The paper highlights key considerations for building DLT-based solutions and provides a view of the future state of digital assets as the ecosystem continues to grow and evolve.
Keywords: distributed ledger technology; tokenisation; digital assets

Volume 16 Number 1

Editorial
Simon Beckett, Publisher
Papers
Breaking the mould with caution: Promises and risks of crypto-inspired clearing models in traditional central clearing
Aniket Bhanu, NSE Clearing

While numerous crypto exchanges have failed, their innovative clearing models may hold value for the traditional central clearing space. After describing the representative model of traditional clearing and with its strengths and challenges, this paper reviews the external pressures that often dissuade central counterparties (CCPs) from deviating from this archetype. The paper reviews the design innovations in post-trade services in crypto markets and critically examines the potential for implementing certain facets of such alternate models in traditional clearing contexts, taking a view of their promises as well as risks. The paper strongly advocates for a contingency-based approach to CCP design and discusses specific contexts where alternate clearing models could prove valuable for the markets. This journey must preserve the balance of efficiency and safety, anticipation and prudence, in order to maintain the resilience of CCPs while redesigning crucial procedures for improved market services.
Keywords: central counterparty; clearing; alternative clearing models; market infrastructure design
Asset managers and withholding tax: Problems, options and best practices for asset managers on withholding tax processing
Thomas König, Daniel Schneider and Manfred Artmeier, RAQUEST GmbH

This paper presents a detailed analysis of the critical role and complications surrounding withholding tax processing in the asset management industry. The paper first explores the substantial losses incurred by the industry due to a lack of proper attention and expertise in withholding tax matters, demonstrating the urgency of this issue. It then examines the current approach of relying predominantly on custodian banks for managing these issues, highlighting the shortcomings and risks inherent in this practice. The paper further investigates the current state of asset management companies, revealing their limited capabilities in managing withholding tax efficiently due to various factors including cost pressures, technological gaps and lack of awareness. To address these challenges, the paper proposes two primary options for asset managers: increased collaboration with tax advisers, and automation through software solutions. A detailed comparison is made on the pros and cons of these options. Collaborating with tax consultants, while beneficial in many ways, might fall short due to the complexity and volume of the withholding tax challenges. On the other hand, automation can provide significant benefits in terms of efficiency, accuracy, scalability, compliance and cost-effectiveness, although challenges related to implementation and integration exist. The paper concludes with a checklist of critical success factors for selecting, implementing and operating withholding tax processing software, providing practical guidance for asset management companies seeking to improve their handling of withholding tax matters. These findings underline the importance of a proactive approach and the necessity for asset managers to explore the potential of technology-based solutions in this crucial area.
Keywords: withholding tax processing; tax consultants; tax automation; asset managers; tax reclaim; tax relief at source
The transition to T+1: Accelerated settlement cycles and progress so far
Pardeep Cassells, AccessFintech

This paper examines the current momentum driving faster settlements in financial markets, specifically focusing on the shift from trade date + 2 (T+2) to trade date + 1 (T+1) settlement cycles. The U.S. Securities and Exchange Commission (SEC) and the Canadian Capital Markets Association plan to implement it in May 2024. His Majesty’s Treasury in the UK and the Association for Financial Markets in Europe (AFME) have both established taskforces to assess the feasibility of transitioning to T+1 settlement. This paper aims to provide readers with a comprehensive understanding of the accelerated settlement movement and its potential implications for global market participants. It will delve into the reasons behind the simultaneous adoption of this change across various markets, highlight the key changes being introduced in the US market, and explore its impact on market participants within the US. It will also address the consequences of accelerated settlement for international markets, raising critical factors that all market participants need to consider when facing settlement cycle changes. Practical recommendations to prepare for T+1 readiness will be offered. Readers can expect insights into the motivations driving the accelerated settlement movement, the key changes unfolding in major markets and the potential effects on international markets, ensuring preparedness for the forthcoming T+1 settlement era.
Keywords: accelerated settlement; settlement cycle; trade date + 2 (T+2); trade date + 1 (T+1); regulation
Operational challenges with complex assets : Navigating technology solutions for diversified institutional Investment portfolios
Scott Kurland, SS&C Technologies

In recent years, institutional investors have begun diversifying into asset classes previously deemed too complex or high-risk to suit their objectives. While these investments may hold the potential for exceptional returns, they also pose significant challenges from an operations and accounting perspective due to their bespoke nature. This paper explores the diversification trend and investment categories that are attracting attention (and capital) from institutions. It outlines the key operational issues these investments raise, as well as some strategies that can help investors overcome those issues and optimise the benefits of diversification.
Keywords: insurance investment accounting; insurance investment outsourcing; insurance investment operations; institutional investing; private markets; private credit; private debt; commercial real estate debt funds; Schedule BA investments; enterprise risk management
ESG as a key pillar of investment strategy
Eigil Ingebretsen, Storebrand Asset Management AS

In this paper we delve into the importance of environmental, social and governance (ESG) considerations as a cornerstone in investment strategies. The discourse takes the reader through a transformative journey, from understanding key pillars that needs to be addressed to truly succeed in ESG integration from setting the level of strategic ambition to it effectively into investment processes, focusing particularly on process integration and management. We explore key process steps in an investment process, such as strategic allocation, security selection, portfolio construction with a particular emphasis on risk assessment, stress testing and investment compliance. Specific examples are provided to elucidate how ESG considerations can be seamlessly incorporated into these critical steps to achieve fully aligned portfolios. Upon completion of the paper, readers can expect to gain a robust understanding of the ESG landscape, insights on how to integrate ESG considerations into their investment decisions and tools to future-proof their portfolios. The knowledge and skills acquired will be invaluable for asset managers, investors and other finance professionals looking to align their strategies with the emerging realities of the current investment landscape.
Keywords: ESG; data; data models; process integration; investment strategy
Trading operations: Intelligent automation and the T+1 mandate
Laura Ryan, John Almeida and Alan Paris, ServiceNow

As the financial services industry is finalising the adoption and implementation of the shortened settlement cycle on 28th May, 2024, and its implications to procedures, technology and behaviour, this paper lays out the benefits, challenges and best practices to ensure a smooth transition and implementation to all participants. The implications of these changes are enormous and open companies up to a variety of risks. This paper informs best practices to ensure a seamless integration, including operational, risk and communications. In addition, the paper focuses on practical steps to automating processes, centralising data and utilising technology to create a more efficient future. It points out that by utilising technology as a mechanism for continuous improvement, not only will companies be able to meet implementation requirements of this T+1 mandate but also create a mechanism to continue to meet regulatory changes. By utilising technology to create an environment of continuous improvement, powered by work orchestration, a fundamental shift in workforce behaviour can begin. In doing so, companies can ensure that they meet the operational requirements of this mandate, leading to efficiencies throughout their organisation and an improved employee and client experience.
Keywords: work orchestration; post-trade processing; streamlining; technology and automation; continuous improvement; trading operations; T+1; capital markets; asset management; banking; wealth management; trade settlement
Withholding tax relief and recovery: The key to enhancing operational alpha?
Jason Yule and Julia Bricker, WTax Canada

The evolving international tax landscape continues to provide complexities for investors, creating operational challenges, often eroding investment returns. This paper unpacks the withholding tax process along with the key hurdles that investors have to overcome when recovering taxes. While these hurdles have been expanded upon, an effort to quantify the effect on investment performance has been made to help investors understand the true cost of tax inefficiencies. The paper thereafter dives into emerging international tax trends, risk management considerations, and concludes with an analysis of solutions that investors can utilise to enhance their international tax relief and recovery process.
Keywords: withholding tax; international tax; tax recovery; tax reclaims; dividends; foreign tax recovery
Book review
Clearing OTC derivatives in Europe by Bas Zebregs, Victor de Seriere, Rezah Stegeman, and Patrick Pearson
Godfried De Vidts, ICMA ERCC