Volume 13, 2020-2021

Each volume of Journal of Securities Operations & Custody consists of four quarterly 100-page issues. Articles scheduled for Volume 13 are available to view on the 'Forthcoming content' page. The articles published in Volume 13 include:

Volume 13 Number 3

  • Editorial
    Simon Beckett, Publisher
  • Practice papers
    How COVID-19 has shaped the operational resilience of Knab Bank
    Ebbe Negenman, Chief Risk Officer and Member of the Board, Knab

    In this paper, I describe the learning skills of the risk team and the chief risk officer (CRO) when acting on the COVID-19 crises that emerged in the world in 2020. Being a digital bank made it easier for us to continue our operations in the lockdown situation, but still Knab had to solve many issues that did arise. Also, the lockdowns worked as an accelerator for improving the digitisation of our competitors. The base of our success is our company and risk culture. We strive to learn continuously and are open to taking intelligent risks. As a result, we create an ability to learn faster than others. This might after all be the only sustainable competitive advantage.
    Keywords: risk culture, resilience, digital bank, operational risk

  • Bridging pre-trade and post-trade processes with the Legal Entity Identifier for a more efficient trade and client life-cycle management
    Burcu Mentesoglu Tuncer, Senior Business Relations & Policy Research Manager and Clare Rowley, Head of Business Operations, Global Legal Entity Identifier Foundation

    High reliance of post-trade processes on non-standardised datasets, different data definitions within the same firm and legacy systems make the post-trading services complex and costly for all market participants. In this paper, we discuss how the Legal Entity Identifier (LEI), a data element that is associated with post-trade process and reporting, has the potential to transform client onboarding and pre-trade activity and as a result improve the whole trade life cycle. We present GLEIF’s new Validation Agent model as a practical solution that allows financial institutions to obtain and maintain LEIs for their clients in cooperation with accredited LEI Issuer Organizations. Once the link is made between the client and the LEI, the financial institutions can more effectively address reporting throughout the trade life cycle, especially in the critical phase of post-trade settlement.
    Keywords: Legal Entity Identifier, transaction reporting, client onboarding, non-economic data, data reporting, standardisation

  • Tokenisation: Assembling the building blocks of an institutional digital assets marketplace
    Carlos Domingo, CEO and Co-Founder and Elizabeth Mathew, Head of Capital Markets, Securitize

    The tokenisation of securities using distributed ledger technology (DLT) is blurring the traditional distinction found in the level of automation in capital market services in the public and private markets. In the last three years, security tokens have helped dozens of issuers and both individual and institutional investors based in dozens of countries manage their private securities in a compliant and fully digital way. We take a long-term view in that all assets will ultimately be tokenised and that this will reduce frictions in asset issuance, servicing and ownership transfers, and remove barriers to accessing capital markets and financial innovation. The authors are in a unique position to witness the transformation in the way business-to-business (B2B) consensus is established in traditional capital markets, as well as to be a pivotal part of the buildout of the nascent decentralised capital markets infrastructure. The authors share their thoughts based on the initiatives they have undertaken so far, in the hope that this invites thoughtful discussion from experienced industry participants.
    Keywords: DLT, blockchain, security tokens, tokenisation, decentralised finance, reconciliation, consensus, private markets

  • Innovating operational resilience with financial messaging standards
    Jeremy Kwok, Calastone

    The unforeseen crisis that was brought on by COVID-19 in 2020 has caused numerous disruptions to the industry. The key to remaining operationally resilient is to adapt. This paper explores the opportunity and benefits from the upcoming Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment message migration to ISO 20022. This paper recommends that the industry should proactively embrace new financial messaging standards. This effort should be championed as an investment to future-proof shocks with operations and regulatory risk. This is not just another ‘IT project’ but rather a globally coordinated effort where major central banks are leading the effort. In the end, the paper also advocates best practice on adopting the latest standards from a business analysis perspective.
    Keywords: operational resilience, financial messaging standards, SWIFT ISO 20022 migration

  • Navigating the Custody Rule: A guide for investment advisers
    William Nelson, Assistant General Counsel, Certified Financial Planner Board of Standards and Bradley Ecker, Student, University of Denver, Sturm College of Law

    This paper focuses on prominent issues surrounding the Custody Rule (Rule 206(4)-2) of the Investment Advisers Act of 1940. The Custody Rule has recently raised several issues for Securities and Exchange Commission (SEC)- registered investment advisers as they try to navigate through new markets and new industry practices. As such, this paper addresses the SEC’s recent guidance regarding custody with respect to standing letters of authorisation, asset transfers between client accounts, inadvertent custody, access to client log-in information, trustee relationships, the COVID-19 pandemic and non-delivery versus payment (DVP) transfer arrangements.
    Keywords: custodian, Custody Rule, investment advisers, SEC, compliance, guidance

  • Identification, quantification and monitoring of operational risk
    Rajat Baijal, Managing Director–Global Head of Enterprise Risk, Cantor Fitzgerald

    This paper analyses some of the challenges of operational risk. Specifically it looks at using the risk and control self-assessment (RCSA) process to effectively identify and assess operational risk, using key risk indicators (KRIs) to enable a dynamic process around monitoring of operational risks and utilising the risk event management process to record and manage loss of data and perform appropriate trend analysis to enhance the control environment.
    Keywords: operational risk, risk and control self-assessment (RCSA), key risk indicators (KRIS), risk event management

  • Smart close-out netting
    Akber Datoo, Founder and CEO, D2 Legal Technology and Christopher D. Clack, Professor, Centre for Blockchain Technologies, Department of Computer Science, UCL

    Smart close-out netting aims to standardise and automate specific operational aspects of the legal and regulatory processes of close-out netting for prudentially regulated financial institutions. This paper provides a review, analysis and perspective of these operational processes, their benefits for prudentially regulated trading institutions, their current inefficiencies, and the extent to which they are amenable to standardisation and automation. The main concepts of smart closeout netting are introduced, including the use of a controlled natural language in legal opinions and the use of a data-driven framework during netting determination.
    Keywords: automation, close-out netting, legal opinions, regulatory capital, risk, standardisation

Volume 13 Number 2

  • Editorial
    Simon Beckett, Publisher
  • Practice papers
    Financial stability and nonbank financial institutions: Lessons from COVID-19 — What worked and what needs to be addressed
    Joanna Cound, Managing Director of Public Policy, EMEA, BlackRock

    This paper summarises the key events in the market turmoil of March 2020 and the official sector’s interventions. It then sets out the lessons we have drawn from COVID-19, identifying what worked and what we believe needs to be addressed. Finally, it details our policy recommendations and areas for future policy debate.
    Keywords: ETF primary markets, CCPs, COVID-19, ecosystem-wide data, nonbank finance, asset management, Mutual funds, credit rating downgrades, systemic risk

  • Cash correspondent bank monitoring: The industry aligns in response
    Derek Duggan, Director, Thomas Murray Network Management

    Recent years have seen a series of scandals in the transaction banking industry, with several groups falling foul of anti-money laundering regulation, sanction busting and other systemic failures. Regulators are now responding to these failures, requiring banks to perform third-party oversight of their correspondent bank agents, and banks are scrambling to put monitoring programmes in place — with mixed success. In this paper, the author discusses why banks should be monitoring their cash agent banks, which operational risks they should look out for and how the industry has worked together to mutualise a service solution. A working group of 25 of the leading banking groups globally defined a managed services solution to meet their regulatory and commercial obligations and facilitate a comprehensive benchmarking capability of service providers. The service, which is managed by Thomas Murray specialists, incorporates document follow-up, response completion support and, where applicable, site visits to respondent banks to support participation. The reporting is an operational risk assessment per bank, benchmark analytics (by market, currency, regionally and globally), and market profiles along with ongoing surveillance monitoring. With this industry initiative, the lack of cash correspondent banking scrutiny, especially in today’s remote operational environment, has collectively been addressed.
    Keywords: correspondent banking, third-party risk management, network management, transaction banking

  • Data matters: Best practices and strategies for the use of securities lending data — Revenue attribution, performance measurement and alternative uses of lending data
    Nancy E. Allen, Director and DataLend Global Head, EquiLend

    Securities lending data holds the key to unlock additional value from a securities lending programme. This paper dives into the data available today and the best practices and strategies for the use of that data. Revenue attribution and performance measurement techniques are discussed alongside examples of real analysis produced and used by market participants today. The paper also covers how to identify missed opportunities and addresses the pitfalls and considerations to be understood when conducting analysis of a lending programme. Finally, it explores the future use of data to drive artificial intelligence and further automation in and beyond the securities financing markets.
    Keywords: market data, securities lending; performance measurement, analytics, Big Data

  • The unique and complex considerations of digital asset custody
    Richard Walker, Principal, Deloitte Consulting, et al.

    Digital assets as an asset class has matured with increasing rates of adoption among retail and institutional investors. As custodians engage, they are facing unique complexities across many regulatory bodies, new varieties of audit and controls considerations and evolving risk frameworks. There are also opportunities for custodians to add new services, such as lending, staking and trading. Per Deloitte’s 2020 Blockchain Survey, 94 per cent of banking and capital markets executives said that they believe that digital assets will be at least somewhat important in the next three years. This paper explores various considerations for custodians of digital assets as explained from the various leaders within Deloitte’s digital asset practice.
    Keywords: digital assets, custody and cryptocurrency

  • Beyond the hype: How can the financial industry benefit from artificial intelligence?
    François Mercier, Direction FinTech et Innovation, Autorité des Marchés Financiers, Quebec

    Artificial intelligence (AI) has been in the spotlight for several years now and even remains so during the difficult COVID-19 period. There has been a lot of AI hype and a lot of AI-related ‘buzz-phrases’ such as ‘data is the new oil’, fueled by our imagination. In practice, nowadays, AI is more related to machine learning (ML). In this paper, we will review the different approaches that defines ML to have a better sense of the concrete strengths and weaknesses of each. In particular, we will tackle some misconceptions, which involve some mismatches between expectations and practical results. In addition, we will also see how some breakthroughs from academics, such as beating the Go world champion, could translate in applications for the financial industry. Finally, we will see the implications for business and organisation, beyond technical aspects. Indeed, the AI hype tends to create a lot of noise, making harder for decision makers and executives to distinguish noise from actionable signals. For instance, change of organisation culture is perhaps the most important for successfully deploying ML systems in real use cases. It requires changing many things from recognising the value from data from existing processes; increasing the organisation’s risk appetite; creating new teams and fostering internal and external collaborations. As an example, we will review the strategy from Quebec’s Autorité des Marchés Financiers (AMF) for implementing these changes. Beyond a specific organisation, the whole financial industry could benefit from this new wave of innovative technologies as other sectors.
    Keywords: artificial intelligence, machine learning, culture, innovation, regulator

  • Digitalisation: The future of securities markets
    Kromvel Tumanyan, Head of Financial Services Support and Correspondent Accounts Division, CJSC VTB Bank (Armenia) and Levon Klekchyan, Chief Depository Services Officer, Central Depository of Armenia

    Securities markets are going digital, and business processes are transforming. All securities markets participants must partake in this transformation. While clients need online and more available services, securities markets must consider the regulation aspect of transformation, as well as ways to provide services using online solutions. Financial services are going online. This change is bringing big opportunities for developing a wide range of products and services. In this paper, we discuss the importance of digitalisation, the ways to achieve it and the kind of solutions that are comparable with digital trends and expected by customers.
    Keywords: digitalisation, securities market, automation, online, technologies

  • Securities Finance: Data applications for beneficial owners
    Monica Damas-Shaw, Director of Securities Finance and Samuel Pierson, Director of Securities Finance, IHS Markit

    We use the IHS Markit Securities Finance dataset and beneficial owner consulting team to map the evolution of industry practices. Securities lending plays a critical role in global capital markets: the practice is broad, encompassing borrowing securities to cover a failed trade, borrowing to sell short, liquidity and financing. With the number of investors participating in securities lending continuing to increase, there is a need to have guiding principles in place with regard to lending programme controls and the evaluation of performance and risk. Part of the challenge from a beneficial owner’s perspective is being able to access quantitative and qualitative data to properly compare themselves to similar entities in order to make changes to existing parameters and perform a thorough review of their programmes. Having more transparency and a better understanding of the data allows beneficial owners to identify opportunities that may increase the profitability of their programmes, while allowing for changes to programme parameters within their risk/reward appetite. The increased focus on ESG (environment, social and governance) for many beneficial owners has resulted in new evaluations of securities lending programmes as they relate to ESG policies for respective investments. As internal priorities evolve for beneficial owners, regulation has also become an important factor of consideration for securities lending participants. It has affected the complete chain from execution of initial trades to monitoring and reporting. We provide evidence of these changes from academic research, industry working groups as well as the IHS Markit Securities Finance dataset and consulting business.
    Keywords: data evolution, beneficial owners, collateral, performance measurement

  • Asset managers and the quest for collateral and liquidity
    Manan Shah, Director, PricewaterhouseCoopers

    This paper describes how asset management firms have been directly impacted by regulatory reforms and this impact also includes the dealer balance sheets. It goes on to cover the lasting influence this has had on asset managers exploring available options to fill in the void. Many asset managers are willing to pay the premium price to access liquidity including at times of market stress. It analyses the available options, which require thorough introspection and possible investment and changes to the existing business models.
    Keywords: asset management, collateral management, liquidity, buy-side, electronic trading platforms, central counterparties, clearing, dealer balance sheet

Volume 13 Number 1

  • Editorial
    Simon Beckett, Publisher
  • Practice papers
    Why the experience of COVID-19 will accelerate progress towards digitalisation and automation
    Mariano Giralt, Managing Director, Global Head of Tax and Regulatory and EMEA Digital Lead, BNY Mellon Asset Servicing

    This paper explores the weaknesses within securities operations highlighted by the coronavirus disease-2019 (COVID-19) pandemic and considers the extent to which COVID-19 will serve to accelerate progress towards a more digitised and automated industry. It is illustrated with a review of the practical challenges that the COVID-19 lockdown caused for obtaining tax relief on overseas investments. These challenges arose primarily from the difficulties involved with moving the paper documentation — including physical documents with wet ink signatures — needed to obtain withholding tax relief. An often cumbersome, costly and time-consuming administrative process in normal times, COVID-19 exposed its vulnerabilities, leading to a backlog of claims.
    Keywords: digitisation, automation, standardisation, withholding tax, COVID-19

  • Transitioning into the next normal: Capital markets redefined
    Lisa O’Connor, Head of Capital Markets Strategy, SWIFT

    Challenged with the unprecedented impact of COVID-19 and a challenging geo-political landscape, the financial industry has positioned itself in survival mode for 2020. There is, however, a silver lining, and there has been much discussion recently about how the pandemic has accelerated digitisation, among other trends. On the back of this industry momentum, this paper highlights some digitisation trends improving areas, such as social capital, operational flows, business prospects and industry collaboration. The paper also shares what the industry can look forwards to in its next normal and fundamental considerations when working with evolving technology advancements to maximise its potential.
    Keywords: agile work environment, digital connections, evolving market structures and platforms, market utilities, cloud infrastructure, industry consortiums for innovation, interoperable digitisation strategies, streamline shared resources, regulatory reprioritisation, APIs, standardisation

  • Common challenges of data governance
    Rajib Chakravorty, Director, Vinayak Data Management

    This paper focuses on the challenges that an organisation faces in the implementation of data governance. The inclusions in the paper range from the definition of ‘data governance’ to leadership participation, data strategy, roles and responsibilities, related budgets and ownership, training and communication plan, organisational cultural aspects (with respect to data) and business value for sustainability of data governance. The paper elaborates some of the challenges and highlights the lacunae in the process like business value of data governance. Before creating any governance structure, it is required to spend more time contemplating the ‘prime directive’ for data management. And the prime directive is straightforward and simple. It means to deliver to the end user, data that they have trust and confidence in, and that is precisely what they expect it to be, without the need for manual reconciliation and multiple transformations. This is the goal of data governance. The paper also provides in-depth information about data governance and why it is critical for organisations. In this paper, one will get an overview of the challenges involved and how data governance can help the organisation; a clear idea of the benefits and risks; a look at practical, real-world examples and the details of the components of an effective data governance programme. In addition, it will also articulate the characteristics of a data-driven culture and the 8-Point Data Governance Model that can be utilised to design and develop a scalable, fit-for-purpose data governance programme for any organisation.
    Keywords: data governance, data quality, data silos, data strategy, sustainability, data ownership, data culture, principle, metrics, data stewards

  • Principles for effective automation in post-trade processing: Part 2 — thought experiments for friction-free trade processing
    Martin C.W. Walker, Director of Banking and Finance, Center for Evidence-Based Management

    This is the second of a two-part series. Part 1 published in issue 12.4 of this journal described a model for gathering the data needed to understand how well automation was working in trade processing and where to focus investment on. Collecting the right type of data in a cost-effective way is essential to understanding which problems to focus on and also measuring the success of solutions put in place. Is it possible, however, to start with a clean slate where most sources of friction and complexity in trade processing simply cannot exist? This paper defines two models for trade processing that seek to eliminate the core sources of problems in three areas: trade capture, including trade enrichment; creating and maintaining consensus on the details of a trade; and correctly and consistently generating the trade events that come after execution, including those related to settlement. The first model, ‘T-Instant’, is based on creating a completely centralised and vertically integrated utility for trading, trade processing and issuance of securities. The second is a more distributed model called the ‘Continuous Consensus Model’ where parties to a trade can agree on a data model and data processing model that are combined with the ‘pairing’ rather than the matching of trades. This model allows for the continuous real-time identification of differences and also the sharing of data to help with a consistent view of a trade between all parties involved.
    Keywords: exchanges, trading, post-trade, capital markets, STP, T-Instant

  • Challenges and regulatory prospects in EU cross-border UCITS/AIF registration
    Josef El Semari, Vice President and Head of Global Fund Registration Department, ACOLIN Europe

    The European investment fund market remains strongly nationally fragmented. Most of the asset managers in Europe distribute their funds only within their own country. They abstain from cross-border funds distribution due to very varying and complex regulation within European countries. Entering new European markets to distribute funds still proves to be time- and resource-intensive, despite European Union’s (EU) efforts to harmonise the relevant legislation across Europe and allow free exchange and flow of capital. The investor shall therefore come into the benefit of more choice, better value and greater protection. This paper takes a closer look at the current situation of the fund’s distribution in Europe in light of the recent legislation updates, pointing out potential challenges and possible outlook on the future of cross-border fund distribution. It outlines the findings from the practical experience of the Global Fund Registration Team of ACOLIN Group, based on its daily practice of assisting clients in entering new markets and maintaining funds under multiple jurisdictions. Some examples illustrate concrete hurdles asset managers face on a regular basis when distributing funds cross-border in EU.
    Keywords: funds distribution, European fund market, Capital Market Union, cross-border distribution, UCITS directive, AIFMD, third country passport, Brexit

  • The sustainable investment assessment: Data and methodologies
    Maryse Gordon, Business Development Manager, Data and Analytics, Information Services, London Stock Exchange Group

    Sustainability has been making an impact across many industries, and within Financial Services, it has changed the methods and motives in which investors grow their wealth. The data and analytics surrounding sustainable development goals have been key to providing the right information to determine the effects, whether they be risks or opportunities, of an investment, and whether it aligns to an investor’s sustainability objective. As the scope of information available and the methodologies for assessing, qualifying and using this data continues to evolve, the pre- and post-trade world is working towards integrating this notion into their business strategies and aligning to new adviser and investor values. Using examples in Fixed Income from Beyond Ratings delivered via The Yield Book, London Stock Exchange Group, this paper will discuss some of the sustainable data available within financial services, how effective qualitative and quantitative data elements are in this analysis, and how the pre- and post-trade communities have been adopting these data elements into their processes.
    Keywords: sustainability, data, analytics, ESG, regulation, investment

  • Outsourcing and collaboration: What to expect now?
    Clive Triance, Founder, Cognitive Tiger

    The world is changing faster than has ever been seen before, technology is accelerating everything, artificial intelligence is here, robotic engineering is happening, natural voice and language technologies are beginning to become real-voice technologies, the lines are blurring, and the way customers, clients and consumers demand interaction has changed forever. The pressure from fintech development is brutal. It is fast and it is disruptive, and in the midst of all this, many large organisations are affected by falling profits due to the COVID-19 crisis. This paper discusses how these firms need to be able to articulate their values clearly to their buyers of services and they need to remain relevant in the ‘new normal’. It analyses how, to survive and thrive, large financial services firms need to uncouple expensive costs for non-differentiating processing and the associated support and redirect their investments to things that add value and form their unique selling proposition. Across the board in financial services, large global and regional firms are reconsidering their operating models and accelerating to find global trusted partners that offer complete outsourcing solutions. The options are to change now or to become meaningless, potentially obsolete. For those that move quickly, uncouple people and information technology costs and deliver the changes that matter, then the picking will be rich, but the window is small for everyone and closing fast. The next generation has a different view of what they want and how they want it. It is time to plug in to change or be left behind. How will you change to meet this challenge?
    Keywords: outsourcing, cognitive change, trusted technology partnerships

  • Tax policies and developments affecting foreign portfolio investment in sub-Saharan Africa
    Celia Becker, Africa Regulatory and Business Intelligence Executive, ENSafrica

    Despite the increase in nonofficial cross-border capital flows to sub-Saharan Africa following the 2007/2008 global financial crisis, the region is still receiving a limited amount of foreign portfolio investment (FPI) compared to other developing markets. This paper seeks to explore the factors explaining sub-Saharan Africa’s lack of FPI and what measures could be implemented to encourage FPI in the region. The key takeaways of this paper are: Tax structures have been identified as one of the key impediments to FPI in Southern Africa. Although various sub-Saharan jurisdictions exempt capital gains on the disposal of listed shares from tax, significant withholding taxes are generally levied on dividend and interest payments to foreign investors. Mauritius, a popular hub for African investment, has recently been under the spotlight with a number of sub-Saharan African jurisdictions terminating or amending their tax treaties with the country or introducing domestic antiavoidance measures to combat perceived treaty shopping. This is expected to have a negative impact on investment flows through Mauritius. In addition, coronavirus disease-19 relief measures introduced by sub-Saharan authorities focus on safeguarding local businesses and foreign direct investment rather than FPI. The quality of governance is also a significant factor in attracting net portfolio inflows, and there is a clear need in sub-Saharan Africa for simple, efficient tax systems and appropriate tax incentives to support investor-friendly policies and encourage and stimulate FPI.
    Keywords: COVID-19, domestic antiavoidance, foreign portfolio investment (FPI), governance, investment hub, sub-Saharan Africa, withholding tax