What trends are you currently seeing in financial technology?
This is a very open question and one that I would love to discuss at length. I would summarise the trends as follows:
Digital transformation
Clients experience in retail and communications have shaped expectations. As the world becomes more digital and tech-savvy, financial institutions are looking to enhance processes, adopt digital transformation projects and engage best of breed financial technology providers in partnership with in-house solutions.
The move to real time
The market increasingly demands enterprise-wide real time risk analysis and processing in all facets of an organisation. Non-straight-through processing (STP) processes are now increasingly being consigned to history.
Artificial intelligence
Artificial intelligence (AI) continues to grab the headlines. AI is fast-developing and steadily evolving from advanced robotic technologies like machine learning and predictive analytics to real growth in cognitive computing.
Connectivity and interoperability
Financial technology companies are increasingly being required to act interoperably and enable clients to connect to the network economy as it interacts with key market infrastructures and counterparts.
Software as a service and the cloud
Cloud adoption in banking is increasing. That said, the focus on security and regulatory compliance remains pivotal. We would not be surprised to see more middle and back-office adoption of cloud solutions in the near future.
Regulators adopting technology
Given recent regulatory led developments—liquidity coverage ratio (LCR), European Market Infrastructure Regulation (EMIR), Markets in Financial Instruments Directive (MiFID) and Securities Financing Transactions Regulation (SFTR)—it is likely that the regulators will increasingly adopt a wide range of data gathering and analytical tools in an effort to learn more about institutions’ and systemic activity.
And in the collateral space?
For Pirum and our clients, it’s about the six C’s:
Cooperation is key to how we approach collateral and all our new products. We are working closely with our design partners through an agile and iterative process to ensure what we are developing and releasing is fit for purpose and meets their specific requirements.
Complexity is escalating, for example, on uncleared margin requirements and mandated central clearing where more products—as well as more participants—are being increasingly caught up by the requirement to post margin and manage collateralised exposures. This trend has driven firms to adopt a more strategic, centralised collateral management function that allows them to manage and view the varying demands for collateral against their pool of available inventory irrespective of entity and location.
Cross product requirements across repo, securities lending, over-the-counter (OTC) derivatives, exchange traded derivatives and treasury means that historically siloed businesses need to be far more integrated and operationally efficient. Firms have reacted by reducing these silos and in turn have adopted a far more enterprise-wide approach where improved STP can reduce the burden of manual processing, key staff dependencies and scalability bottlenecks.
Control as a collateral management process is now mandated through various regulations, including the Dodd-Frank Act and EMIR, thus there is a need for standardised risk mitigation requirements and best practice. Firms are looking to reduce operational risk and meet tight, cross border collateral deadlines through the automation of key lifecycle events of the margin management process.
Compliance with incoming regulation such as Basel III has meant that affected banks and financial market infrastructure’s must ensure sufficient resources are allocated for the efficient operation of margin call management. Collateral record keeping and monitoring on a near real-time basis has become essential to enable firms to manage daily requirements and limits as well as provide robust supervisory oversight and audit trail reporting.
Capital impacts of Basel III and IV regulation in terms of heightened capital adequacy and liquidity requirements have meant that the cost of and capacity for collateralisation have also been greatly affected. In response, firms are focused on gaining increased efficiency of finite financial resources by looking at more dynamic and complex methods of optimisation.
Do you think machine learning will have a part to play in the future of securities finance?
AI continues to grab headlines and it should come as no surprise that AI and machine learning are being utilised more than ever across industries where large datasets are readily available. Everything from recruitment, healthcare, law, transport, security to finance are reaping the incredible benefits of automation. Undoubtedly, AI will shift and reshape the way firms operate in the future. We expect to see increased automating and scaling of typically manual, repetitive and laborious tasks to allow firms to focus on more value-add matters.
The challenge is consolidating and making sense of the large data potentially available to our industry and recruiting the talent required to interpret and utilise the data in a meaningful way. This is an exciting time for securities finance to explore potential solutions with AI, robotic process automation (RPA) and machine learning. When we look across the post trade flows within the existing Pirum products from the most straight forward in contract compare, to more complex challenges such as collateral management, what becomes clear is that AI and machine learning presents us with an opportunity to automate existing post trade flows even further. All of this leads us to be of the opinion that newer technologies can be evolutionary rather than revolutionary and Pirum will be looking to deploy AI and machine learning technologies to our clients with minimal technical effort required from their side.
Where are you with your SFTR offering?
We’re working actively with our design partner participants who are feeding into our proposition to ensure it really delivers what they need. A lot of the current focus is on how Pirum’s reporting clients will source the vast array of data points they need to report for a single transaction.
From our perspective as providers we’re looking at how we can potentially make that burden easier either through connections to other market infrastructures, which hold key pieces of information such as triparty agents and central counterparties (CCPs), or through the provision of some of the additional reference data clients may need such as legal entity identifiers (LEIs) or classification of financial instrument (CFI) codes.
From a development standpoint, we’re well into our build and, even though the overall SFTR implementation date isn’t yet finalised and the first reporting date is likely to be in later 2019, our intention has always been to deliver the solution to our clients significantly ahead of time to give them the option to test as much as possible.
Given the scale of the reporting exercise as well as the potential impacts on existing processes we feel this time will be crucial for market participants to ensure their internal practices are conducive to clean, timely reporting.
What other regulations are Pirum and its clients having to consider right now?
Coinciding with the SFTR go live we also have to ensure that clients who sign up to our solution with IHS Markit are able to fulfil their own MiFID obligations too when borrowing or lending to central banks. Aside from that, General Data Protection Regulation (GDPR) has garnered a lot of attention recently amongst our clients and we have ensured we have met and adhered to this by keeping our clients and staff informed and acknowledging Pirum’s own terms of use and privacy policy.
The Central Securities Depositories Regulation (CSDR) is a central regulation that was adopted post the financial crisis and is part of the wider EU regulatory reforms, which encompass SFTR, EMIR and MiFID. As a group, these regulations spread across the entire capital markets and securities financing infrastructure.
CSDR’s main aim is to harmonise the different rules applicable to CSDs in Europe and establish a level playing field effectively increases efficiency. The biggest impact for financial institutions will be the mandatory buy-ins regime, which comes into effect when a buyer of a security or bond does not receive delivery from the seller within four business days for liquid securities, and within seven business days for illiquid securities, and will therefore be liable for a cash penalty.
Last but not least, there is Brexit—which we at Pirum are monitoring very closely to ensure we support our clients as they amend their operating models to a post-Brexit ecosystem.
Do you think DLT will help to transform the industry in the next decade or so? Or do you think it is more of a distraction, specifically in the securities lending sphere?
Distributed ledger technologies (DLTs) will continue to create headlines whether they are a new start-up attracting investment, or a new digital currency emerging. What is clear is that DLT is likely to be around for a long time to come. What isn’t so clear is just how they will fit within financial services. Securities lending has some obvious use cases such as digitising collateral schedules, but most of the use cases that we have seen so far require a significant number of market participants to adopt the technology for any single party to obtain a material benefit unless of course the industry is able to support a bridge between old and new operating paradigms.
The unprecedented levels of regulation within the industry are likely to continue to absorb many resources in the coming years. It is therefore difficult to see how disruptive technologies will be adopted unless they are either mandated by regulators, or a number of key institutions within the market have a truly compelling business case at the same time. What we believe will be most likely is that regulations such as the SFTR will actually be a driver for firms to adopt technology and automation that already exists and isn’t always widely in use.
What do you think are the key areas of securities finance that could face further automation processes in the future?
There are still quite a few areas in the securities finance ecosystem that could be enhanced. Fixed income businesses are under utilising the existing opportunities within automation and this is an area of focus for Pirum and our clients. Furthermore, there is the demand for automation in time critical trade lifecycle management and market connectivity areas.
Current process inefficiencies can be eroded by exploiting Pirum’s time critical automation, covering processing of daily re-price, unwinds of open term loans, tri-party collateralisation and reconciliation across month-end fee accruals.
Repo can benefit from real-time exception management with the daily systematic comparison of contractual details on all open positions. The improved workflow with tZero controls from the start of the lifecycle will optimise the post-trade flow for repo in advance of the looming SFTR regime, as well as prevent fails with pre-settlement matching. In addition to linking together borrowers and lenders, our clients are looking to enhance connectivity to tri party agents including the systematic calculation and posting of daily required values (RQVs). Our clients are now looking to further exploit intraday lifecycle management capabilities with the consolidation of their collateral management process by providing a centralised view of real-time margin calls across multiple collateral venues and loan release controls.
Other key areas, of focus include improving the management of corporate events, for on loan and collateral positions covering voluntary corporate actions and dividend entitlements. Also, recalls management for lenders with notifications and bookings remains subject to inefficiencies.
You have recently made hires in North America, what is the driver for this activity?
As we all know securities finance is increasingly a global market, so it made sense for Pirum to reflect this by offering a truly global product. Pirum has established a strong footprint internationally and is looking to work with clients to further expand into the Americas. The strategically important US and Canadian markets face similar challenges to their international counterparts, and we are consistently seeing client demand for post-trade solutions on a global scale.
We opened an office in New York one year ago and this has gone from strength to strength. We have recently made a series of new hires in New York including Kristen Dove, who will lead business development, Edward Sharpe, who will spearhead product development and Jim Malgieri as strategic advisor in region. With these new additions, Pirum is ready to build off our proven success in Europe and bridge and solve the operational and efficiency gaps that currently exist for firms in the Americas.
How do you see interoperability between vendors and infrastructure providers evolving?
It’s always been part of Pirum’s ethos to work with other parts of the securities finance system, as is evident through our extensive connections with CCPs, tri-party agents, trading systems and venues and most recently our work in delivering an interoperable SFTR solution in partnership with IHS Markit. In broader terms, there’s been a noticeable and increasing trend for different vendors cooperating to provide greater access to a range of services for their mutual client bases. This trend is something we would expect to continue and are happy to support especially with the upcoming SFTR through which market participants will ultimately be looking to their vendors to enable them to achieve regulatory compliance as seamlessly as possible.
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