To find out what impact regulation is having from the perspective of a technology services provider, Best Execution spoke to BT’s Alexandra Foster, global head of strategy & business development, financial technology services, and BT’s Jon Vyse, head of post-trade and payments messaging, global banking & financial markets.
Why are global regulators advocating the adoption of robust and reliable infrastructure? Is this due to the increasing cyber security threat? What are the other reasons and which regulations specifically target this area in the post-trade world?
Alexandra Foster: I think every regulatory initiative goes back to the original G20 recommendations and the need to reduce systemic risk. This has been one of the main drivers for the need for reliable, robust and sustainable infrastructure.
Jon Vyse: There are concerns over cyber security being the next black swan event and it is being taken very seriously. However, it is one of a number of many different worries of regulators and central banks. Overall, they are focusing on the need to manage and mitigate the operational risks that can lead to systemic risk. The Bank of England, for example, has identified critical market players and has made a number of recommendations over the years about making them subject to higher standards of resilience. This is to ensure that if one party goes off air or out of business, it will not cause the same severe disruption that we saw in 2008.
What has been the impact?
Alexandra Foster: What we have seen is a move to managed services and a demand for an end-to-end solution across the lifecycle of a trade from pre-trade, through trade and execution, to clearing and settlement to efficiently manage operational risks. It may well be that firms need to work with more than one service provider in each area in order to meet the regulatory requirements for operational resilience.
Why are alternative networks vital to ensuring the high availability of essential services, such as financial messaging? How do they work and what are the benefits in the post-trade world?
Alexandra Foster: We are in a changing environment with regulation moving the industry towards standardisation. FIX Trading Community is one group that has done a lot of work in the pre-trade space and is looking to develop standardised messaging formats for post-trade. However, it will be a long journey as there are around 180 different protocols in the market and people are using different tools. This is why we believe it is important to offer an agnostic service that can handle all relevant and multiple financial message formats.
Jon Vyse: Our aim is to support the market when it is ready to move, but I agree it will take time because several banks are reluctant to adopt standards because they want to maintain their competitive advantage. However, the current situation is not sustainable and standardisation will be forced upon the market and we want to be able to respond to it. I do not think though that there will only be one messaging format that is used but there will be different ones to address different markets. In a way it is like mobile phones in that there are different brands but they all use the same core networks.
What are the cost savings?
Alexandra Foster: A Yankee Group report found that moving to a managed communications environment can help users to achieve year-on-year savings in total cost of ownership of communications of over 50%. One of our clients, Winterflood Securities, said by moving to BT SettleNET their network costs have reduced by around two-thirds. BT SettleNET is a managed service linking financial institutions with CREST, the central securities depository for the electronic settlement of UK, Irish and international securities, operated by Euroclear UK & Ireland.
What does a one-stop-shop service include and what are the benefits of using this approach?
Alexandra Foster: I am not sure I would call it a wholesale one-stop-shop because it sounds like the outsourcing arrangements of the 1980s. Instead, people are opting more for end to end reliable and scalable managed services that can deliver the right business outcomes. As I said previously, there will be more than one provider. For example, you may have one solution for the post-trade and another for the pre-trade.
Looking at the impact of other regulatory initiatives, what solutions are buyside firms looking for in collateral management. What gaps need to be filled?
Jon Vyse: The whole collateral management space appears to be creating opportunities. The issue is about moving collateral in the most efficient way possible around the world in order to address the supply and demand balances. This will require solid infrastructure and we are currently talking to several people about how we can support them. I think it will take a while – maybe a year or two – before solutions emerge.
Alexandra Foster: As I mentioned earlier, everything comes back to the G20 recommendations and I can see regulations coalescing to create global liquidity hubs. This will require automation and the ability to allocate collateral to the most liquid places whether it is Singapore, London or New York to cover global exposures. I can also see the development of collateral algos and routers to help people find the best places to post collateral in real time. It is not in play at the moment but there are several discussions taking place on the subject.
As you have both said there are a lot of opportunities being created from regulation, what challenges do you foresee?
Alexandra Foster: I would say artificial intelligence and machine learning and the data requirements they will bring as well as the development of visualisation tools. We used them for the Olympics in London and we are now looking at how they can be used in the post-trade world. Another challenge is how companies manage the adoption of the cloud when reviewing their policies regarding regulations. The most important thing though is to be proactive and not reactive to these challenges.
Jon Vyse: I would say one of the biggest challenges is the ability to implement the changes brought by regulation at a sufficient pace. Traditionally the industry has been slow and relied on old systems but today regulations are demanding firms to move at a much quicker rate than they are used to.