"Journal of Digital Media Management is one of the most thoughtful and complete journals on the subject of digital asset management. The articles are written and reviewed by some of the foremost experts in the industry."
Volume 15, 2022-2023
Each volume of Journal of Securities Operations & Custody consists of four quarterly 100-page issues.
The articles published in Volume 15 include:
Volume 15 Number 4
-
Editorial
Simon Beckett, Publisher -
Papers
MiFIR review: The right balance
Ugo Bassi, Director of Financial Markets, and Martijn Rookhuijzen, Seconded National Expert, European Commission
Trading in shares in the European Union (EU) is fragmented across a large number of execution venues applying varying degrees of transparency. The review of the Markets in Financial Instruments Regulation (MiFIR) aims at creating the right conditions for the establishment of an entity, the consolidated tape provider, that provides a consolidated picture of core trading data to the market. Co-legislators principally disagreed on whether or not such a consolidated picture should include close to real-time data on prices and volumes on all pre-trade transparent trading venues (pre-trade data). Authors argue that important use-cases require the inclusion of pre-trade data and that the provisional political agreement reached on 29th June rightly recognises this. The review of MiFIR also includes amendments to the conditions under which individual execution venues are required to publish such pre-trade data. While there are good reasons for allowing ‘dark trading’, too much dark trading could harm the quality of price formation for shares. There is no strong evidence that the ‘volume cap’ which caps certain variants of dark trading has positive effects. The authors argue in this paper that a holistic and data-based approach to capping dark trading can contribute to the quality of price formation for shares. The consolidated tape will provide relevant data for such an approach.
Keywords: MiFIR; double volume cap; market structure; capital markets; consolidated tape -
An institutional approach to the custody of crypto assets: The decision making and trade-offs in crypto asset custody
Thomas Brand, Head of Institutions, and Ilari Karhu, Junior Portfolio Analyst, Coinmotion
The rapid emergence of new asset classes causes many challenges that professional and institutional investors face while considering allocating funds to these assets. With the new asset class — in this case, crypto assets — challenges are often related to regulation and technological implementations. The custody of crypto assets fundamentally differs from how traditional assets — such as equities — are kept safe and sound. Because of this, it is crucial to understand the fundamental difference of crypto asset custody as institutional adoption arises and clarify different strategic, operational and regulative trade-offs between other solutions. This paper discusses different solutions for crypto asset custody and their perceived trade-offs. As the industry and the need for trust grow, it is crucial to have proper and clear regulation frameworks and operating environments for reliable custodians to thrive. To further clarify perceived trade-offs and requirements, one alternative investment fund from the Nordics was interviewed. From the interview, a few simplified assumptions were created related to the decision process of crypto asset custody solution, which institutional actors might need to consider. In addition to various strategic and operational requirements, one of the essential factors in choosing a custody solution for institutional actors (ie in the Nordics) may be the local laws and regulations related to the field of crypto assets. Local regulations may force institutional actors to rely on third-party solutions, which may have different trade-offs compared to other solutions.
Keywords: crypto assets; digital assets; custody; institutional investors -
Cross-border clearing: Implications for developing markets
Alicia Greenwood, Director, Post Trade Services, JSE and CEO, JSE Clear
The widespread introduction of central clearing in many jurisdictions has introduced the benefits of more robust and transparent risk management for markets, with the ultimate objective of improving investor protection. All jurisdictions wish to optimise an ‘open for business’ model that attracts international flows and supports deep, liquid and high-quality markets. The inconsistent adoption of central clearing by different jurisdictions may, however, introduce market fragmentation effects and negatively affect liquidity. Liquidity pools may move away from jurisdictions where central clearing requirements are more onerous than in other jurisdictions, or where central clearing has not yet been adopted at all. Jurisdictions must ensure a considered approach when reconciling their local regulatory and market expectations with cross-border and global clearing expectations, and the impact this may introduce to trading behaviour.
Keywords: central clearing; regulatory equivalence; market fragmentation -
From cost to opportunity: Holistic regulatory change management
Anand Narayanan, Executive Director - Head of Regulatory Change Management, Sumitomo Mitsui Banking Corporation
Regulations and regulatory change management (RCM) are critical for safeguarding organisations and the overall economy by providing operating guardrails for managing risks. This paper discusses the purpose of regulations, the role of regulators and the need for proactive adoption of a robust RCM framework. It provides a practitioner’s perspective for establishing in-house RCM operations, outlining opportunities for adopting regulatory technology to support efficient compliance and organisational growth needs.
Keywords: regulations; regulators; regulatory change management; RCM; compliance; risk; RegTech; rule analysis; regulatory library; requirements inventory; target operating model -
Data modernisation using a logical data management platform
Charles Southwood, Regional VP, Denodo Technologies
Like many industries, the capital markets industry relies on reliable access to trustworthy data. For this industry in particular, it is becoming critical for success, if not survival. This type of data access, however, requires modern data infrastructures, and not many organisations are prepared to furnish such infrastructures. This paper introduces ways to modernise the data infrastructure without ripping out and replacing expensive hardware. It covers key capabilities of modern data infrastructures and compares and contrasts emerging technologies such as cloud data warehouses, data lakes, data virtualisation, logical data fabric and data mesh. The paper provides a business case for complementing investments in centralised data management tools, such as cloud data warehouses or data lakes, with a logical data management approach.
Keywords: data management; business agility; data lakes; data warehouse; cloud; big data; data fabric -
Using RMB bonds as collateral for OTC derivatives
Jing Jia
Using Renminbi (RMB) bonds, especially Chinese Government bonds (CGB), as collateral for both onshore and cross-border over-the-counter (OTC) derivatives is a hot topic following China switching to a netting jurisdiction in August 2022. Since then, Chinese financial institutions are required to exchange initial margin and variation margin with offshore counterparties for dealing cross-border derivatives. As the market infrastructure for using RMB bonds as collateral for cross-border OTC derivatives transactions is not well established and RMB bonds are not extensively accepted by foreign counterparties as eligible collateral, Chinese financial institutions are unable to utilise their huge RMB bond holdings. At the same time, many foreign investors are allowed to access China’s onshore RMB bond market with RMB bond holding up to RMB 3.4tr, but are unable to use those inventories as collateral for their onshore and cross-border derivatives trading and other financial transactions. Using RMB bonds as collateral is also an initiative of RMB internationalisation. The purpose of this paper is to give an extensive explanation of the status of using RMB bonds as collateral in the Chinese market, point out challenges faced by market participants and provide suggestions to promote using RMB bonds as collateral for both onshore and cross-border derivatives transactions. This paper provides the full picture of China’s onshore RMB bond investment and bond collateral management along with the latest data. It also provides extensive analysis for deficiencies in respect of the RMB bond collateralisation. It concludes with suggestions for the future development of the Chinese market to use RMB bonds as collateral for both onshore and cross-border OTC derivatives.
Keywords: RMB bond; bond collateralisation; OTC derivatives; RMB internationalisation -
EU capital markets at a crossroads: Getting the MiFID II/MiFIR review right to unlock Europe’s growth potential
Niels Brab, Head of Group Regulatory Strategy and Chief Regulatory Officer, Deutsche Börse Group, Germany
This paper explores the aims and scope of the MiFID II/MiFIR Review and its significance in unlocking Europe’s growth potential amid current socioeconomic challenges. The EU’s capital markets currently underperform globally, necessitating urgent structural reforms to enhance competitiveness and participation. The Markets in Financial Instruments Directive II (MiFID II)/ Markets in Financial Instruments Regulation (MiFIR) regime, designed to foster fair competition and investor confidence, has fallen short due to market fragmentation and regulatory inconsistencies. Addressing these issues requires transparent, resilient and integrated capital markets that prioritise liquidity, price formation and investor protection. Fragmentation in the EU equity market is a pressing concern, with off-book volumes increasing and exchanges experiencing a decline in trading flow. Enhancing transparency requirements, minimum order sizes and the dark trading cap, while simplifying waivers and deferrals, can help address these challenges. Implementing a consolidated tape (CT) to increase transparency in off-exchange trading is also crucial, with a phased-in approach recommended for reliable and high-quality data. Placing societal interests at the heart of these reforms is vital for achieving the EU’s strategic autonomy and ensuring long-term economic growth. The MiFID II/MiFIR Review presents an opportunity to promote transparency, efficiency and investor protection, garnering citizen support and contributing to critical societal challenges. Readers can expect to gain knowledge of the current state of EU capital markets, the shortcomings of the MiFID II/MiFIR regime and the necessary reforms to unlock Europe’s growth potential. They will understand the challenges posed by market fragmentation, the importance of transparency and liquidity and the role of a CT in enhancing the investment climate.
Keywords: equity trading; exchanges; financial market infrastructure
Volume 15 Number 3
-
Editorial
Simon Beckett, Publisher -
Papers
Opportunities in digital assets and digital custody: Tracking the modernisation of standard custody offering
Radoslaw Ignatowicz, Senior Director, Product Owner — Custody, Global Investor Services, Raiffeisen Bank International and Alfred Taudes, Professor, Wirtschaftsuniversität Wein (Vienna University of Economics and Business), Department of Information Systems and Operations Management
Digital assets are a new asset class whose adoption necessitates a transformation of custody similar to the transition from paper-based securities to a fully dematerialised securities system. This paper explores how traditional custodians can manage this transition in a proper way and employ distributed ledger technology to increase the efficiency of their operations and to provide digital asset and traditional services in an integrated way. Starting by describing the status of custody, the paper then describes the opportunities and challenges of blockchain-based digital asset custody and elaborates on the proper ways of integrating the novel platforms and processes in the business model of a traditional custodian. On this basis, a framework is developed for a future integrated custody service.
Keywords: digital assets; digital custody; blockchain; key management; tokenisation -
Diversity, equity and inclusion: Strategies for success
Lydia Buttinger, Formerly the Head of Shared Services in Risk and Compliance and Secretariat to the Board Risk and Capital Committee, abrdn
The diversity, equity and inclusion (DEI) agenda has been growing in importance in recent years and is now seen by many firms as essential to a productive and effective workforce and a healthy culture. In addition, with increasing regulatory scrutiny in this area, firms are investing more in strategies to promote DEI in their workplace. However, many firms still struggle to identify which programmes bring the greatest benefits. This paper explores the fundamental case for DEI in the workplace, looking at the benefits for firms and wider trends in DEI. It also examines the regulatory perspective and analyses the findings of the FCA multi-firm review published in December 2022 on approaches to D&I (diversity and inclusion) in financial services. Finally, this paper turns to look at the essential elements of an effective DEI approach, including a clear strategy driven by firm-specific data, buy-in from the top, a positive firm-wide culture, measurable targets and interventions across the employee life cycle. Practical examples are provided of workplace initiatives and how firms can build success.
Keywords: diversity; equity; inclusion; conduct; culture; training -
Digital acceleration: How to build a robust enterprise data framework
Pierre Kovacs, Senior Vice President, Endava
This paper addresses data as a corporate asset that needs to be protected, but also shared and made accessible. The paper recognises data's role as the bedrock of the analytics that drive business decisions and that should be gathered routinely during normal, transactional operations. The paper acknowledges that the volume and sources of data and its users are diverse, global and continue to multiply. This, in turn, identifies the need for flexibility to design and develop a scalable model for data management that will support future growth and risk management capabilities. This paper outlines how to build a data framework, recognises the scale and complexity of the problem and recommends courses of action. These recommendations include data scoping, awareness of context, the wider macro trends and pressures, goal definition and the need to be outcome led. The paper further identifies that although most firms are already at some stage of their digital journey, there is no real ‘end goal’; it is a constant process. To successfully build a robust enterprise data framework, it therefore becomes crucial to work diligently and understand the steps required. The paper discusses approaches, pitfalls and the constantly evolving solution landscape. The paper concludes that the journey to a robust data management framework is complex, but, through embracing digital acceleration, it is possible to gain the competitive advantage to which the framework aspires.
Keywords: data strategy; enterprise data framework; data programme; data management; risk management; digital acceleration -
The effect of the last two phases of the uncleared margin rule on participant swap decisions
Esen Onur, Supervisory Economist, David Reiffen, Senior Economist and Rajiv Sharma, Derivatives Research Analyst, US Commodity Futures Trading Commission
The last two phases of the uncleared margin rule went into effect in September 2021 and September 2022. In this paper, regulatory data is used to analyse the impact these regulatory changes had on non-deliverable forward (NDF) foreign exchange markets. The data suggest that the changes had little impact on total trading activity. However, a substantial increase is observed in the extent to which traders who came into scope during these phases centrally clear their trades. This is consistent with the premise that the rule change lowered the cost of clearing a trade relative to the trade remaining a bilateral contract between the traders. This finding is in contrast to the impact of previous phases in the sense that central clearing was chosen almost exclusively by clearing members in those earlier phases.
Keywords: Uncleared Margin Rule, Central Clearing, Non-deliverable forwards, NDF, Swap Market Regulation -
Leverage and derivatives: The case of Archegos
Antoine Bouveret, Senior Economist and Martin Haferkorn, Risk Analysis Officer, European Securities and Markets Authority
In March 2021, the default of Archegos, a US family office, led to large losses for some global banks. Archegos was able to accumulate large exposures to, and leverage on, equities by entering into derivatives transactions with bank counterparties. When the price of the underlying stocks started to decline, the firm was unable to meet variation margins, resulting in the liquidation of the stocks by the counterparty banks. In this paper, European Market Infrastructure Regulation (EMIR) data is used to analyse Archegos’ positions and show that it is possible to track the steep increase in concentrated exposures that the family office undertook in February and March 2021. The findings show how regulatory data collected under EMIR can be used to monitor leverage and concentration risk in derivatives markets.
Keywords: back office; back-office inefficiencies; digitalisation; artificial intelligence; core banking systems transformation; digital transformation -
How technology could serve to overcome obstacles to active ownership
Christiane Hölz, Managing Director, Deutsche Schutzvereinigung für Wertpapierbesitz
Shareholder voting is the cornerstone of corporate governance and accountability, and necessary to reduce the agency problems that exist in corporate settings and limit their related costs. Taking an investor survey as a starting point, this paper delves into the obstacles shareholders currently face when wanting to exercise their voting rights, and notes several EU initiatives to tackle the problem. It continues to reveal the reasons for the main obstacles and offers ideas to remodel the existing intermediated shareholder voting setup through new technologies, such as DLT, to simplify the voting process and enhance (retail) investor engagement in corporate decision taking.
Keywords: shareholder voting; CSDs; intermediated securities; blockchain; DLT; engagement; corporate governance -
A new approach to close-out netting legal opinions in respect of OTC derivatives and securities financing transactions
Akber Datoo, Founder and CEO, D2 Legal Technology and Professor, School of Law, University of Surrey, Paul Williams, PhD student, University of Surrey, and Rhodri Whiteley, Undergraduate student, University of Oxford
Close-out netting has been, and remains, crucial to the success of capital markets transactions such as OTC derivatives. A key credit risk mitigant, it has significant regulatory capital impact for prudentially regulated financial firms if they have obtained reasoned legal opinions confirming the enforceability of the close-out provisions of the relevant master trading agreement. These legal opinions are, however, complex and extremely nuanced, resulting in excessive costs in reviewing and (sometimes incorrect) application of the advice they provide. This paper considers the inherent challenges in the review and application of these legal opinions and whether they could perhaps be partly expressed in formal logic to address these challenges.
Keywords: close-out netting; ISDA; legal opinions; regulatory capital; automation; derivatives
Volume 15 Number 2
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Editorial
Simon Beckett, Publisher -
Papers
The move to T1: Why are we talking about it?
Pardeep Cassells, Head of Financial Products, AccessFintech
The move to a one-day settlement cycle (T1) in the US will encourage market participants to streamline settlement processes and reduce associated risk. A recent statistic from a tier one bank showed that, based on a trading volume of EUR2.5bn per day, almost 30 per cent of this (EUR700m) is locked up due to failing trades. An 80 per cent reduction in time given to settle means sustaining settlement rates will be challenging for organisations unless fundamental changes to processes are made. These changes fall into three categories: behavioural, procedural and technological. To make behavioural changes, organisations should: understand root causes of failures to increase efficiency, such as the need for several rounds of matching; maximise automation so teams in all regions have access to the same better-quality data across time-zones via the same infrastructure; and adopt data-sharing protocols for a more collaborative ecosystem with greater access to data. Procedural changes include changing batch times, giving middle and back-offices visibility into inventory and ensuring Standing Settlement Instructions are readily available and properly maintained to combat multiple in-house and vendor platforms that do not communicate. Technological advancements include the move to streamline technology stacks and operate through fewer settlement systems, avoiding the need to manage data in Excel spreadsheets and multiple platforms. Single-source providers like AccessFintech offer connectivity to vendors and drive down additional application programming interface (API) connection build costs. The market must focus on increasing automation and better interoperability and data sharing between counterparties to prepare for a proposed go live in 2024.
Keywords: securities; settlement; T1; post-trade; data collaboration -
The sustainability agenda and its implications for post-trade technology adoption
Corinne Neale, Managing Director, Sustainability Thought Leadership, BNY Mellon Securities Services and Sarah Smart, Head of Aladdin Oversight and Data Enablement, Aviva Investors
Environmental, social and governance (ESG), referring to the process of integrating ESG factors into investment decisions, and sustainable and impact investing, referring to the intent to deliver an environmental or social outcome on top of financial performance, are growing very rapidly. BNY Mellon and Aviva Investors reflected on implications for post-trade technology adoption. Rapid growth in demand is accompanied by increased expectations from a range of parties including regulators with a focus on disclosures and labelling, international institutions seeking greater alignment and lobbying groups asking for more data. All of this is affecting data to be sourced, controlled and reported, and reporting is complicated by lack of consensus on ESG definitions and difficulty in comparing data and incorporating investors' preferences across jurisdictions. Each party in the post-trade custody chain depends on reference data and needs access to the same accurate sustainability ESG reference data. Missing, different and inaccurate reference data creates errors and discrepancies. Sustainability data acquisition is thus becoming an emerging area of focus for post-trade servicing teams, particularly finding, formatting, correcting and monitoring updates and maintaining asset coverage, creating a shift in operating model. Technology is a critical enabler given the growing volume of data, lack of a single ESG definition and the need to prove product claims and support clients' preferences throughout the custody chain.
Keywords: sustainability; ESG; technology; governance; controls; cloud -
Evaluating risk and stress-testing challenges for central counterparties
Franck Viollet, Senior Risk Expert, CCP Directorate, European Securities and Markets Authority
This paper discusses the types of challenges that stakeholders face in evaluating risk and margin models for central counterparties (CCP). Two important tools to evaluate the adequacy of CCP resources to cover potential future exposures are back-testing and stress-testing. The paper discusses challenges when designing and analysing back-tests, including the use of unit tests and the inclusion of add-ons. The design and specificities of supervisory stress-testing are covered with a particular focus on liquidity and concentration risk.
Keywords: back-testing; stress-testing; margin model; statistical performance; add-ons; model risk -
Review of the EU post-trade legislation: Draft regulation to amend CSDR and regulation on a DLT pilot regime for markets infrastructures
Pierre Marsal, Attorney at Law, European Issuers
This paper aims to examine the two most recent EU initiatives to update the existing regulatory framework for central securities depositories (CSDs). First, it analyses and evaluates the draft regulation released on 16th March, 2022, which amends the existing CSDs Regulation (CSDR) of 2014, including simplifying the passporting process and enhancing cooperation among competent and relevant authorities. It also establishes a more targeted scope for the CSDR's settlement discipline regime. The proposed simplification measures indeed appear timely, but it remains to be seen whether they will increase competition and improve settlement efficiency. Secondly, it assesses the challenges of the existing EU legal framework for digitalising post-trade activities. It concludes that the existing framework does not permit the full tokenisation of the settlement of token securities, and thus it requires adaptation. Against this backdrop, the paper fully supports the stepwise regulatory approach followed by the EU. The recently adopted regulation creating a pilot regime to test Distributed Ledger Technology (DLT) market infrastructures and allow them to be exempted from some existing requirements temporarily will help identify possible medium-term options for a suitable legal framework. Meanwhile, users should remain alert to the fact that exemptions remain proportionate and are conducive to improving CSDs' efficiency.
Keywords: central security depositories; draft regulation 2022 amending CSDR; pilot regime; distributed ledger technology; market infrastructures -
Are your back offices missing the AI train?
Nathalie Zeghmouli, Vice President, Digital Transformation
For the last few years, there has been no conference, no top management meeting where digitalisation and artificial intelligence are not part of the agenda. However, the reality shows that the financial industry in general and back offices in particular have undergone little transformation to date. While there are numerous white papers and analysis demonstrating how crucial it will be for the industry to rethink the operating processes, the published business cases remain relatively ‘shy’ and are addressing single areas, these being HR, legal or reconciliation. Those digitalisations provide targeted satisfaction and efficiencies but do not address the ageing, not to say dying, infrastructure and inherent inefficiencies. Back in 2017, a Capgemini survey demonstrated that 60 per cent of customer dissatisfaction arises from the back office. It is time to restructure back offices to remove those inefficiencies. To overcome the multiple challenges resulting from the legacy infrastructures, it will be key not only to modernise and digitalise the systems but also to recognise that efficient digital transformation cannot be decoupled from a fundamental back-office process remodel and mindset shift. It is important to be clear that artificial intelligence is not the ultimate solution but a suite of tools that supports this transformation. We, human beings, need to analyse, define and organise the back offices of 2025.
Keywords: back office; back-office inefficiencies; digitalisation; artificial intelligence; core banking systems transformation; digital transformation -
Resolution planning framework constraints: An analysis based on the Sberbank Europe AG resolution case
Leonhard Riebl, Bank Sector Analyst, European Banking Authority
The paper aims to assess the effectiveness of the resolution planning framework based on the example of the Sberbank Europe AG case. This case is noteworthy, as it was the only one to date involving a banking group that was undergoing a resolution situation and that was, before this event, already fully subject to SRB's resolution planning standards. Furthermore, in this situation, the authorities decided on a resolution strategy materially different to the one prepared as part of the resolution planning. Thus, the paper focuses specifically on the effectiveness of the resolution planning measures that had to be implemented under this very different resolution situation. The paper does not aim for an assessment of the general effectiveness of the whole resolution framework in this case (such as effects on financial stability). However, the paper includes an analysis on potential improvement potentials in the framework in order to support the resolution planning efforts to contribute more significantly to the authorities' decisions and actions in a resolution situation. It thus aims at strengthening the planning efforts for the benefit of both the authorities (in case of a resolution event), as well institutions by allowing them to better align the resolution planning with their general crisis management efforts. This paper is thus addressed to actors active in the resolution planning area both in the industry as well as the authorities.
Keywords: resolution planning; Sberbank Europe AG resolution case; SRB expectations for banks effectiveness; resolution preparation; resolution strategy change
Volume 15 Number 2
-
Editorial
Simon Beckett, Publisher -
Papers
The move to T1: Why are we talking about it?
Pardeep Cassells, Head of Financial Products, AccessFintech
The move to a one-day settlement cycle (T1) in the US will encourage market participants to streamline settlement processes and reduce associated risk. A recent statistic from a tier one bank showed that, based on a trading volume of EUR2.5bn per day, almost 30 per cent of this (EUR700m) is locked up due to failing trades. An 80 per cent reduction in time given to settle means sustaining settlement rates will be challenging for organisations unless fundamental changes to processes are made. These changes fall into three categories: behavioural, procedural and technological. To make behavioural changes, organisations should: understand root causes of failures to increase efficiency, such as the need for several rounds of matching; maximise automation so teams in all regions have access to the same better-quality data across time-zones via the same infrastructure; and adopt data-sharing protocols for a more collaborative ecosystem with greater access to data. Procedural changes include changing batch times, giving middle and back-offices visibility into inventory and ensuring Standing Settlement Instructions are readily available and properly maintained to combat multiple in-house and vendor platforms that do not communicate. Technological advancements include the move to streamline technology stacks and operate through fewer settlement systems, avoiding the need to manage data in Excel spreadsheets and multiple platforms. Single-source providers like AccessFintech offer connectivity to vendors and drive down additional application programming interface (API) connection build costs. The market must focus on increasing automation and better interoperability and data sharing between counterparties to prepare for a proposed go live in 2024.
Keywords: securities; settlement; T1; post-trade; data collaboration -
The sustainability agenda and its implications for post-trade technology adoption
Corinne Neale, Managing Director, Sustainability Thought Leadership, BNY Mellon Securities Services and Sarah Smart, Head of Aladdin Oversight and Data Enablement, Aviva Investors
Environmental, social and governance (ESG), referring to the process of integrating ESG factors into investment decisions, and sustainable and impact investing, referring to the intent to deliver an environmental or social outcome on top of financial performance, are growing very rapidly. BNY Mellon and Aviva Investors reflected on implications for post-trade technology adoption. Rapid growth in demand is accompanied by increased expectations from a range of parties including regulators with a focus on disclosures and labelling, international institutions seeking greater alignment and lobbying groups asking for more data. All of this is affecting data to be sourced, controlled and reported, and reporting is complicated by lack of consensus on ESG definitions and difficulty in comparing data and incorporating investors' preferences across jurisdictions. Each party in the post-trade custody chain depends on reference data and needs access to the same accurate sustainability ESG reference data. Missing, different and inaccurate reference data creates errors and discrepancies. Sustainability data acquisition is thus becoming an emerging area of focus for post-trade servicing teams, particularly finding, formatting, correcting and monitoring updates and maintaining asset coverage, creating a shift in operating model. Technology is a critical enabler given the growing volume of data, lack of a single ESG definition and the need to prove product claims and support clients' preferences throughout the custody chain.
Keywords: sustainability; ESG; technology; governance; controls; cloud -
Evaluating risk and stress-testing challenges for central counterparties
Franck Viollet, Senior Risk Expert, CCP Directorate, European Securities and Markets Authority
This paper discusses the types of challenges that stakeholders face in evaluating risk and margin models for central counterparties (CCP). Two important tools to evaluate the adequacy of CCP resources to cover potential future exposures are back-testing and stress-testing. The paper discusses challenges when designing and analysing back-tests, including the use of unit tests and the inclusion of add-ons. The design and specificities of supervisory stress-testing are covered with a particular focus on liquidity and concentration risk.
Keywords: back-testing; stress-testing; margin model; statistical performance; add-ons; model risk -
Review of the EU post-trade legislation: Draft regulation to amend CSDR and regulation on a DLT pilot regime for markets infrastructures
Pierre Marsal, Attorney at Law, European Issuers
This paper aims to examine the two most recent EU initiatives to update the existing regulatory framework for central securities depositories (CSDs). First, it analyses and evaluates the draft regulation released on 16th March, 2022, which amends the existing CSDs Regulation (CSDR) of 2014, including simplifying the passporting process and enhancing cooperation among competent and relevant authorities. It also establishes a more targeted scope for the CSDR's settlement discipline regime. The proposed simplification measures indeed appear timely, but it remains to be seen whether they will increase competition and improve settlement efficiency. Secondly, it assesses the challenges of the existing EU legal framework for digitalising post-trade activities. It concludes that the existing framework does not permit the full tokenisation of the settlement of token securities, and thus it requires adaptation. Against this backdrop, the paper fully supports the stepwise regulatory approach followed by the EU. The recently adopted regulation creating a pilot regime to test Distributed Ledger Technology (DLT) market infrastructures and allow them to be exempted from some existing requirements temporarily will help identify possible medium-term options for a suitable legal framework. Meanwhile, users should remain alert to the fact that exemptions remain proportionate and are conducive to improving CSDs' efficiency.
Keywords: central security depositories; draft regulation 2022 amending CSDR; pilot regime; distributed ledger technology; market infrastructures -
Are your back offices missing the AI train?
Nathalie Zeghmouli, Vice President, Digital Transformation
For the last few years, there has been no conference, no top management meeting where digitalisation and artificial intelligence are not part of the agenda. However, the reality shows that the financial industry in general and back offices in particular have undergone little transformation to date. While there are numerous white papers and analysis demonstrating how crucial it will be for the industry to rethink the operating processes, the published business cases remain relatively ‘shy’ and are addressing single areas, these being HR, legal or reconciliation. Those digitalisations provide targeted satisfaction and efficiencies but do not address the ageing, not to say dying, infrastructure and inherent inefficiencies. Back in 2017, a Capgemini survey demonstrated that 60 per cent of customer dissatisfaction arises from the back office. It is time to restructure back offices to remove those inefficiencies. To overcome the multiple challenges resulting from the legacy infrastructures, it will be key not only to modernise and digitalise the systems but also to recognise that efficient digital transformation cannot be decoupled from a fundamental back-office process remodel and mindset shift. It is important to be clear that artificial intelligence is not the ultimate solution but a suite of tools that supports this transformation. We, human beings, need to analyse, define and organise the back offices of 2025.
Keywords: back office; back-office inefficiencies; digitalisation; artificial intelligence; core banking systems transformation; digital transformation -
Resolution planning framework constraints: An analysis based on the Sberbank Europe AG resolution case
Leonhard Riebl, Bank Sector Analyst, European Banking Authority
The paper aims to assess the effectiveness of the resolution planning framework based on the example of the Sberbank Europe AG case. This case is noteworthy, as it was the only one to date involving a banking group that was undergoing a resolution situation and that was, before this event, already fully subject to SRB's resolution planning standards. Furthermore, in this situation, the authorities decided on a resolution strategy materially different to the one prepared as part of the resolution planning. Thus, the paper focuses specifically on the effectiveness of the resolution planning measures that had to be implemented under this very different resolution situation. The paper does not aim for an assessment of the general effectiveness of the whole resolution framework in this case (such as effects on financial stability). However, the paper includes an analysis on potential improvement potentials in the framework in order to support the resolution planning efforts to contribute more significantly to the authorities' decisions and actions in a resolution situation. It thus aims at strengthening the planning efforts for the benefit of both the authorities (in case of a resolution event), as well institutions by allowing them to better align the resolution planning with their general crisis management efforts. This paper is thus addressed to actors active in the resolution planning area both in the industry as well as the authorities.
Keywords: resolution planning; Sberbank Europe AG resolution case; SRB expectations for banks effectiveness; resolution preparation; resolution strategy change
Volume 15 Number 1
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Editorial
Simon Beckett, Publisher -
Papers
Why should I start worrying about EMIR Refit 3.0?
Melanie Bristow, Sinead Stringer and Rachel Hewitt
The industry is expecting that the European Market Infrastructure Regulation Refit Technical Standards for Transaction Reporting (EMIR Refit 3.0) will be published shortly, but past regulatory implementations indicate that there are practical steps that could already be considered in preparation to be operationally ready and compliant. EMIR Refit 3.0 constitutes a significant number of changes for the industry, using past experiences this paper looks at some of the key challenges of EMIR Refit 3.0 as written in the draft regulation and what firms could consider as part of the planning phase of the programme to get a head start. Initiating the programme early on, frontloading operational readiness and considering the client journey are themes that are explored further for practical application.
Keywords: digitalisation; post-trade; technology; financial market infrastructures; regulation; trade settlement -
Adaptation of CCP and CSD services for the new era
Pataravasee Suvarnsorn, Senior Executive Vice President and Head of Operations Management Division, The Stock Exchange of Thailand, Managing Director, Thailand Clearing House, The Stock Exchange of Thailand Group
As the world is moving towards innovations and new technology to engage new customers and new expectations, central counterparty (CCPs) and central securities depositaries (CSDs) should consider not only maintaining their positions as financial market infrastructures for fostering market confidence, but also strengthening their roles and the services they provide and they should be ready to move with agility for any upcoming new experiences. This paper discusses how CCPs and CSDs should adapt so as to nourish their values in their traditional environment and also utilise their capability in order to move synchronously with new trends and technology. Four aspects are mentioned for consideration namely 1) increasing agility via good collaborations to cope with new environments and customer needs, 2) enhancing core businesses to maintain trusted entity roles, 3) preparing for local and global connectivity via international standard messages to support longer service hours and 4) embracing new technology to accommodate new products and services.
Keywords: CCP; CSD; adaption; trusted parties; harmonisation; synchronisation; DLT -
Distributed ledger technology: Cutting through the paradox
John Siena, Associate General Counsel, Office of the General Counsel, Brown Brothers Harriman
Despite recent market turmoil, distributed ledger technology (DLT) is expected to accelerate its transformation of the financial services industry. Assets made available for investment using DLT will extend beyond cryptocurrencies, non-fungible tokens (NFTs) and the like to embrace assets of all kinds, including equity and fixed income securities, loans, real estate and others that today generally are supported by highly fragmented legacy proprietary frameworks. DLT offers the prospect of a safer, more cost-efficient, more widely adopted operating environment across all types of assets and transactions. However, legal and regulatory frameworks for financial services have taken time to adapt to this sea change. While certain regulatory and legislative developments have grabbed headlines, less appreciated is the state of play of so-called ‘private law’. Private property law addresses ownership rights in digital assets as well as whether and how these rights may be asserted indirectly through intermediaries, requisites for transfer of ownership, rulesets for resolution of disputes regarding ownership and whether and how interests in such assets may be secured by collateral arrangements. More broadly, and more fundamentally, as the UK Law Commission has recently noted, ‘property law is default law’ and is particularly useful because, in principle, property rights ‘are recognised against the whole world, whereas other — personal — rights are recognised only against someone who has assumed a relevant legal duty’. This distinction is especially important where a party having responsibility for an asset becomes insolvent. Within individual legal systems, digital assets and methods for their transfer have struggled to integrate themselves with existing laws such as the law regarding property rights and laws addressing the impact of insolvency. Each legal system by and large has addressed this challenge in its own way and in its own time, complicating prospects for a broad, scalable take-up of DLT as a replacement for current inefficiencies and fragmentation as well as for new types of assets. This is likely to be especially problematic in the context of cross-border investments, holdings and dispositions — especially if the law of more than one jurisdiction might apply to the same investment. This paper argues that it is essential that legal systems grappling with digital assets are mindful of the risks and pitfalls of inconsistency with other legal systems and that in this respect consistent application of governing law and choice of forum especially should be considered. In particular, the efforts of the International Institute for the Unification of Private Law (UNIDROIT) should be supported in order to establish a conceptually sound set of principles for all jurisdictions to apply, regardless of the peculiarities of their respective legal systems.
Keywords: digital assets; distributed ledger technology; DLT; crypto assets; property law -
The data revolution in operations management: Unlocking innovation by embracing change
Duncan Cooper, Head of OMNI Digital Services, EMEA and Steve Taylor, Head of Data Management Platforms, BNY Mellon
This paper analyses how, for too long, back-office operations teams within investment organisations have endured the ongoing tension between ‘running the organisation’ and ‘changing the organisation’. Although there are many impediments to change, the cost of inaction is too risky to sustain. With the rise of new and different asset types and the resulting explosion of datasets that need to be consumed at increasing velocities, investment organisations must transform their data management operations, or they will not be able to run their organisations efficiently. A data transformation that takes data out of the exclusive domain of IT teams and empowers operations teams with both access and accessibility can not only break down data silos and unify fragmented technology, but it can also free up time for uncovering valuable insights. That being said, a successful transformation means embracing change within an agile business model that values progress over perfection. The benefits of doing so create a flywheel effect that builds momentum as users deploy these solutions: improved data management generates trust in the data; improved outcomes fuel interest; data discoverability drives insights; and accessibility opens the door to creativity and innovation.
Keywords: transformation, data, investment, technology, accessibility, change -
Expansion into private markets fuels outsourcing demand
Kevin Moran, Managing Director, Global Head of Business Process Outsourcing, Broadridge Financial Solutions,Inc.
As cost and performance pressures continue to escalate, traditional and alternative asset managers are looking for ways to drive growth. In many instances, this is being achieved via product diversification. For example, there is an abundance of long-only and hedge fund managers launching private equity, private debt or even infrastructure products. Although diversification or hybridisation does have strategic advantages, it only works if the process is well thought through. Accordingly, investment firms need to think carefully about how they structure their operations when moving into the highly esoteric world of private markets. A sensible approach to outsourcing will therefore be necessary if managers are to achieve reduced costs, risk mitigation and performance enhancements.
Keywords: asset management outsourcing; managed services; private markets; business continuity; automation; risk mitigation -
Accelerating the settlement cycle: An opportunity to modernise across the industry
Robert Walley, Principal, Deloitte Risk and Financial Advisory, Deloitte & Touche
The financial services industry has analysed the benefits and barriers of accelerating the US securities markets to trade date plus one day (T + 1). The focus of this paper is on the areas impacted and the need for driving industry modernisation efforts through technological advancement and operational scalability while at the same time seeking to mitigate risks and operational inefficiencies in the capital markets infrastructure. The purpose of the paper is to provide the reader with an understanding of the impacts across the different brokerage functions, businesses, behaviours that need to be considered, in order for individual firms and the industry as a whole, to transition to a T + 1 settlement. Firms will need to prepare for the transition which will be effective 28th May, 2024.
Keywords: accelerated settlement; T + 1; brokerage operations; settlement; securities operations -
The new world of meta finance and its yet to be tested efficiencies
Christopher Edmonds, Chief Development Officer and Ashwini Panse, Chief Risk Officer, North American Clearing, ICE
Technology has been a long-standing catalyst for change, innovation and the emergence of new business models. As technology evolves and matures, the financial services industry revisits its current processes and capabilities to assess if leveraging more modern technologies can drive additional client and business value. There are some proposed use cases for distributed ledger technology (DLT) that propose disintermediating the entire financial industry. There is no doubt the broader financial industry agrees DLT presents an opportunity to shape the future vision of capital markets and recognises the value inherent in the shared DLT platform that can build security, privacy and auditability into every financial transaction and could potentially eliminate costly reconciliation. However, DLT, like any emerging technology, must be thoroughly vetted through rigorous testing. Moreover, regulators across the globe are promoting responsible innovation and fair competition among markets and market participants. And for innovation to be responsible and competition to be fair, it must comply with regulations. Meta finance aka decentralised finance (‘DeFi’) that runs on decentralised infrastructure, remains immature and volatile, with several economic, technical, ethical and public policy issues still waiting to be addressed. DeFi enthusiasts claim that meta finance is doing to money what email did to postal services, with a promise to provide a secure financial platform that is open to anyone with access to a computer and an internet connection. It has the potential to transform global finance, but activity to date has focused on the community of digital asset owners. DeFi offers efficiencies driven by automation and disintermediation, powered by blockchains and smart contracts with a vision of a more efficient payment system, with instant transactions and lower costs no matter where on the globe one is located. Its efficiencies and safeguards, however, are yet to be tested and the broader community feels safe and secure with the belts and braces traditional finance offers today. DeFi is not devoid of risks relating to high volatility, market manipulation, fraud, illicit finance and lack of governance, which collectively could severely damage market integrity and investor confidence.
Keywords: decentralised finance; digital assets; innovation; traditional finance; distributed ledger technology; smart contracts; blockchain -
The art of the recovery: How the changing ESG landscape adds alpha — and risk — to securities class action and foreign withholding tax recovery
Ali H. Kazimi, Managing Director, Hansuke Consulting, Len A. Lipton, Managing Director, GlobeTax and Jeff Lubitz, Managing Director, ISS Securities Class Action Services
Securities class action recovery and foreign withholding tax reclamation drive investment performance for investors and provide a competitive advantage for financial institutions that offer robust services. Emerging environmental, social and governance trends offer enticing new opportunities for increasing returns from these services while adding complexity and risk for asset servicing professionals. This paper summarises both the emerging opportunities and wider changes in the regulatory landscape, concluding with considerations for restructuring asset servicing business models to adapt to the shifting landscape.
Keywords: withholding tax recovery; class actions; risk management; ESG; operational alpha