Volume 14, 2021-2022

Each volume of Journal of Securities Operations & Custody consists of four quarterly 100-page issues. Articles scheduled for Volume 14 are available to view on the Forthcoming content page.

The articles published in Volume 14 include:

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