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Securities finance: planning for the great leap forward

From the desk of John Arnesen,

Consulting Lead, Pierpoint Financial

'I.T. runs the show these days' was a comment made at a recent lunch I attended. The comment was not limited to securities finance but made in a discussion about what is going on in general. Such observations are not new, many have held this view for years, and while it carries a negative connotation about the length and cost of projects which are rarely delivered on time, it doesn't have to be this way, and I would argue you want I.T. to run a large part of your strategy under a clear hierarchy of responsibilities. However, many of us have experienced the following conundrum.

You need to improve an aspect of your business; let's pick client reporting. You have several requests from clients for this or that to be included, and internally you are under some pressure to develop additional reporting for your risk management unit. You approach your vendors familiar with securities finance data that could well be providing the reports you want to improve. You may also have several Fintechs snapping at your heels to develop a client reporting suite that will blow you and your clients away. You receive quotes for both cost and delivery timescale, package the information and present it to the ultimate decision-makers. Depending on how your business is set up, you may have invited your I.T. to the process under the same requirements. The decision-makers challenge you on why this is necessary, what trading strategy will be implemented to improve revenue to pay for it, or worse still, which headcount will you reduce to cover the expenditure (yes indeed, I've heard that more since the pandemic).

Naturally, I.T. is in a favourable position. If their headcount is dedicated to your business, you are already paying for them, and your management will favour them despite the other projects they are currently working on at full capacity, which motivated you to seek an external solution in the first place. Like Grima Wormtoungue whispering in the ear of King Theoden, perhaps I.T. has convinced your management they can deliver the project just as quickly and under the same timeframe using existing staff (so they had spare capacity?) and meet all the specifications. So the decision is made to have I.T. run the project.

In the meantime, the clients that wanted the improvements to reporting are frustrated with your excuses and are becoming disgruntled. Three months after the expected delivery date, the project hasn't been delivered, it has become part of all the other projects they are working on, and is struggling with resources due to resignations, parental leave, or migration internally. What is the cost of a disgruntled client? Many of you have experienced a similar experience. It isn't unique to securities finance, but it is equally very unsatisfactory.

Unless the structure of your organisation centralises regulatory initiatives and funds them from a separate pot, SFTR and the ever-changing CSDR requirements suck up a lot of your I.T.' Change the Bank' budget. Even if there is a central hub in which these requirements are funded, your dedicated I.T. resources will be pulled into the project. And, it's not as if there can be a debate over this, as regulatory changes are mandatory; they take precedent over all other projects. One could argue that the heavy lifting of regulatory implementation is behind us, and resources are more available. Let's hope so, as there will be another critical and fundamental I.T. requirement on the horizon if it hasn't already arrived for some. Digital transformation.

I'll hazard a guess that all market participants agree that securities finance desperately needs to standardise common, non-competing processes. A lack of such creates enormous friction in post-trade services, leading to unmatched trades, mark-to-market disagreement, month-end billing issues, and others needing repair. We know why this happens. I refer to it at length in our paper, 'Securities Finance; 'A journey through time. Building on the past' You can download the paper here.

With much enthusiasm, I listened to the ISLA presentation on the Common Domain Model in October 2019, which has the potential to standardise functions in securities finance, that in theory, should eliminate the friction described above. This is a challenging project; getting the industry to agree on a common standard is akin to herding cats, but progress has been made by the Digital Steering Group at ISLA working with REGnosys. A proof of concept was presented earlier this year using a cash-collateralised transaction example. Standardisation is a beast to tame, it requires agreement and then buy-in from a wide-reaching set of vested parties to establish the standardised input for a selected function.

The pandemic has forced countries to develop vaccine passports to open their borders to travellers, and there has been no shortage of tech firms, IBM and Microsoft, to name just two, willing to help develop the protocols. In Europe, the GreenPass is designed to work across the entire European Union. A recent Economist article pointed out some flaws, however. Producing a QR code in an app or physically doesn't make them interoperable. Perhaps naively, I assumed that QR code readers are the same everywhere, but no, the information contained in the QR code can significantly differ from one country to another. The US QR code for vaccination status may contain less information about the individual due to privacy laws and cannot read your NHS app QR code. If there was ever a pressing issue to establish standardisation globally, it is this if travel is to resume in a meaningful way. Several bodies, including the World Health Organisation (WHO), are all over this, so it will be interesting to see how they solve the issues.

Standardisation is crucial to securities finance if it is to prepare itself for a more enterprise-wide digital transformation, which, to some extent, has already arrived.If a common domain model is to be successful, it will need to be 'common' in that a critical mass of participants need to adopt it. This is when you really need your I.T. to get involved. Currently, when sending messages to Equilend or Pirum, for example, they translate whatever you send into a standardised form, but a CDM will need to be embedded into your systems and developed by your I.T.. Ensuring there is the capacity to carry out the necessary work will determine the success of this leap forward. It is better to plan for it now during the 2022 budget preparation before the still unknown final requirements of CSDR consume all your I.T. resources, or worse, some new regulatory requirement.

#commondomainmodel #cdm

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