From the desk of John Arnesen
Consulting Lead, Pierpoint Financial
There is a universal joke that I believe everyone has heard. It takes a light ribbing of citizens of another country. It goes like this. A man on holiday driving in the countryside of (insert country) stops to ask directions of a local. 'I'm trying to get to (insert town or city). Could you point me in the right direction?'
The local replies, '(town or city) you say? Well, if I were going there, I wouldn't go from here.'
I've purposefully allowed the reader to insert their version into the brackets at the risk of offending anyone. My late Norwegian father would tell the joke of Sweden and Stockholm, and I'm sure Swedes told the same joke of Norwegians. I guarantee they both told it of the Danes.
There is a parallel to securities financing systems. If presented with the opportunity to wipe the slate clean from their current operating processes, I'll hazard a guess most would say, pointing at their trading system, 'I wouldn't go from here.' In the last panel of the Securities Finance Times Technology Symposium earlier this month, the audience was asked to vote on what they felt were the most pressing issues facing the industry today. Sixty-two per cent voted for 'legacy systems.' That is quite a telling finding; more than half of market participants find, to one degree or another, that the system which sits at the core of their business is either lacking in functionality or is not fit for purpose. There was no indication of the respondents' job functions, but regardless of whether they are from operations or trading, what once worked for their business no longer seems to do so. So what has changed, and how will the market address naming legacy systems as their biggest challenge?
I think it largely depends on the age of one's system and the speed and ability to release upgrades either internally or by the external provider. It's less relevant now as it is so long ago, but when we developed our version of DML in the late nineties, we started with the concept that settlement date and trade date are not necessarily the same thing! Everyone has mini development requirements; that's a given. I believe the speed of response rates required to capture loan opportunities has changed over the years. Once all the auto borrowing has been exhausted, long lists of locates from borrowers have to be checked for matches. Assuming the static data is correct, and a match is found, you have to agree on the rate or fee, swap settlement instructions, and other pertinent information. Now, you have to book the trade in your system, and this is where issues arise. Specific mandatory fields will seem onerous, the currency basis of the loan can create confusion with the currency of the security, and a host of other factors which some of you reading this will be nodding to in agreement. Now imagine it was a good day, and you have to book 28 loans.
Enter Trading Apps. Let me be clear; this isn't a promotion of Trading Apps (TA) or any other fintech I mention in this blog. It is simply the fact that they were the first to develop a suite of solutions in modular form to sit atop of existing systems. I am guessing that before embarking on the development, TA looked at market practices, interviewed a ton of participants and collated the feedback to come up with a product, that when I first saw it, got me rather excited, positive expletives and all. They primarily addressed the issue I described above by taking locate messages in all forms, translating them into a standard format and mapping them to the legacy system inventory database. Loan opportunities then produce an automatic message back to the borrower, and if a loan is agreed upon, it can book the details into the legacy system. Imagine doing that 500 times with little effort on the part of the trader? TA does far more than this, and at the risk of describing those features poorly, I encourage anyone that hasn't already done so to book a demonstration.
More recently, other platforms have emerged that took a similar approach by viewing the market and noting the typical, frictional operating methodologies that prevail and setting about solutions to address them. RepOptim has designed a series of features similar to TA, not aiming to replace legacy systems but to layer front office tools to enhance efficiency. Taking a big data approach and applying natural language processing, the system captures every locate ever received and produces useful outputs that act as a 'memory' of your activity. They have also developed a clever way to indicate where a trade constructed in a certain way could reduce leverage ratio costs for borrowers. I can't do justice in describing all RepOptim does, but if you are one of the 62% that named legacy systems as the most pressing issue, I highly recommend a demo to see if it addresses your frustrations.
This brings me to FinOptSys. One thing Roy Zimmerhansl and I feel essential is to stay updated on anything new or enhancements to existing products to advise clients should the need arise. When reviewing a demonstration of a new platform, we approach it from a lender and borrower mindset to see if we can 'break' the system for gaps that have not been considered. It may surprise you that when the guys at FinOptSys demonstrated their system to us over zoom, Roy was silent for 40 minutes. Yes, I know, hard to believe. Each time either of us was about to request to see a function, there it was, on every occasion. We couldn't seem to 'break' the system. Regardless of from which discipline you come to securities finance, the system can cover your needs and a whole lot more.
These are three examples of available solutions; there are no doubt others, and I should mention that plenty of work is going on from established systems vendors in response to client requests.It is quite a challenge to replace a legacy system. Straight through processing connectivity alone can cause reluctance to tinker with it after the effort and expense of embedding it. But clearly, something needs to be done if so many have issues.
In my opinion, separate trading and post-trade needs by layering a modular-based platform as described above and letting the legacy system drive the engine of settlement, reporting, and a host of other functions. There is a psychological barrier to cross regarding legacy systems, and most are not as fortunate as MUFG that have been building a business from scratch with the latest state-of-the-art kit. So rather than wait for endless upgrades or tweaks, go shopping instead. Yes, the expense will be a significant factor, but so is piling on new releases to a system that has outlived trading practices in 2021. It would be more than a shame if 62% of market participants felt the same this time next year.