Do androids dream of SFTR?
30 April 2019
As technology continues to advance, securities finance experts share views on how technology is impacting the industry and how it is changing approaches to regulations such as SFTR
Image: Shutterstock
Technology has come a long way since the days of Alan Turing, although it is largely thanks to him that the computer exists today. Today, technology can recognise your face to unlock your smartphone, it can save your grocery list and order groceries to your house, it can also help you park your car. Technology can perform a variety of advanced tasks across many industries and it is almost always under constant development, with the US taking the lead in the technology space.
However, something that technology lacks is common sense. Imagine a robot being given the task of frying Quorn burgers all day long. It could do this well without tiring or getting bored, it would consistently fry each burger for the same amount of time to perfection. But if you swapped the quorn burger with a beef burger, a piece of lamb, or a chicken burger, for example, the robot would lack the common sense to recognise that it is no longer frying a Quorn burger and boom your robot has just served your vegetarian friends meat and they’re not speaking to you anymore. When thinking about this concept in relation to large amounts of money in the securities finance industry, it is perhaps not surprising that some are still wary of technologies such as artificial intelligence (AI).
Philippe Seyll, CEO of Clearstream Banking S.A, asserted earlier this year that technology will not disintermediate the whole financial industry. He pointed out that we are dealing with large amounts of money in a highly regulated environment and that everything has to be bulletproof and robust. This is why there will be radical changes but no complete disintermediation.
Phil Morgan, COO at Pirum, says that for technology to be a major disruptor, it also needs market participants and regulators to adopt the behavioural changes required for disruption.
He noted: “Most technology solutions that have come to market and been successful in recent years have been more evolutionary to the markets. I think you have to question for what value is revolution. We believe in most cases processes are not completely broken and therefore do not need a revolution but rather enhancement and evolution.”
Technology transformations
Discussing some of the opportunities that technology can provide, Morgan said that more than ever, market participants are looking to utilise technology solutions not just to meet regulatory and capital requirements but also to create efficiencies and manage risk.
He comments: “In the past, technology was viewed as a way to do things faster and with more efficiency. While in some cases this still remains the case, participants are now looking for technology to change how the industry as a larger system operates as well as how things are processed. This improves not only human efficiency but also financial resource efficiency, allowing firms to do more with less capital and balance sheet utilisation.”
“Technology therefore increasingly plays a huge part in reducing the friction associated with bringing real-time essential data to decision makers quickly, but also improving overall decision making be it suggesting a more efficient use of collateral, or identifying a failing trade that is creating a significant profit and loss impact.”
Matt Wolfe, vice president of product development at OCC, adds: “Even in the face of the constant evolution and advancement of technology, the right investments and resources can enable firms to increase their revenue, decrease their costs, improve their compliance, efficiency and client experience.”
Do androids dream of SFTR?
Not all superheroes wear capes—and technology is set to help overcome regulatory challenges but, as Morgan notes, it has been widely reported recently that existing tools in the market are not always fully utilised. Real-time contract compares with SSI matching is one example.
Francesco D’Agnese, global head of securities finance technology at State Street, says: “Technology is allowing the industry to approach regulation not just as a compliance requirement, but as an opportunity to create efficiencies through rationalisation of legacy infrastructure as well as the potential to create new products to drive growth. For example, many firms are using the implementation of Basel’s Fundamental Review of the Trading Book (FRTB) to drive an overhaul of their market risk analytics capabilities broadly.”
Morgan advises that the first approach from the industry should be to collectively agree, adopt and utilise best practices for avoiding fails by using existing solutions. He says: “Vendors should then engage with their clients and industry associations to ensure that enhancements can be delivered before the September 2020 go live. But there should be no doubt that Central Securities Depositaries Regulation (CSDR) will absolutely present a significant challenge for elements of the industry.”
As well as CSDR, firms need to be ready to tackle the complexities of SFTR, which is due to come into force on 11 April next year. Discussing technology and its relationship with the industry’s approaches to regulation, Wolfe remarks: “The industry has always taken compliance with regulations very seriously, regardless of technology. I do think there is an interesting relationship, though. Both regulators and technologists are continually looking to improve upon their individual missions and often influence each other.”
“For example, the growth in algorithmic trading led regulators to implement new requirements to ensure that those algorithms were not harming investors or disrupting markets. In this case, new regulation was the result of technology changes.”
Wolfe continues: “In other cases, regulation drives technology change. The Markets in Financial Instrument Directive (MiFID) and SFTR are good examples where change was initiated by regulation and then technology had to adapt to achieve compliance.”
“This dynamic has led to safer, more secure, and robust markets. It also highlights the importance of an open dialog between regulators and market participants, so that regulations and technology advances stay in sync. Otherwise, you may have situations where technology can have harmful impacts upon the users of the markets, or where regulatory changes result in unintended negative outcomes.”
Fran Garritt, director of securities lending and market risk of the Risk Managament Association, highlights that SFTR is requiring all market participants to analyse and update their trade reporting capabilities. He affirms: “This regulation has effectively forced agent lenders to develop SFTR reporting capabilities to continue to continue operating its business because both borrowers and lenders must rely on agent lenders, as the intermediary, to provide much (if not all) of the trade reporting data to complete their respective reporting obligations.”
“Agent lenders must also build systems to assist clients with their specific reporting and oversight responsibilities. SFTR’s impact is vast given the volume of reporting requirements, timing deadlines and potential costs to the industry to comply with these reporting obligations. On a positive note, this regulation has also created opportunities for vendors to develop products to alleviate much of the operational burdens to satisfy these trade reporting requirements.”
D’Agnese explains: “As far as SFTR’s impact on technology goes, it is all about the data. In preparation for the go-live date of SFTR reporting, firms have been focused on ensuring they are able to access and enrich the 153 fields of data required by the regulators. The regular production and distribution of this data is resulting in some firms reevaluating their data and reporting strategies, both for internal as well as external consumption. This reevaluation goes to the most foundational aspects of each firm’s systems infrastructure, with much discussion of streaming data capabilities, data lakes and a focus on open source technologies that facilitate these big data tools.”
According to Morgan, many industry participants are also being proactive and looking to enhance legacy systems to not only meet upcoming regulations, but also to become more efficient and reduce costs in the process.
So in this regard, Morgan continues, it could be argued that regulation has been a positive catalyst for change in the industry and technology is the facilitator of greater efficiency.
Challenges
In an ever-changing ecosystem that is becoming more complex and fragmented, connectivity is more important than ever and the industry is looking for low touch, easy-to-integrate solutions, Morgan explains.
He comments: “Software as a service (SaaS) based platforms are becoming increasingly popular with clients as they are easier to integrate without the need to install, upgrade and maintain a software asset. Service providers that are agile and evolving will be best able to support the constantly changing industry landscape.”
In terms of whether there needs to be more education around technology, Morgan says: “I think there is a widespread appreciation of the benefits of adopting new technologies, so education is not necessary, what is challenging for firms is understanding how best to utilise and implement solutions to ensure the intended benefits are achieved.”
Nick Delikaris, global head of algorithmic trading for securities finance, says: “One of the biggest challenges firms face is talent acquisition. Identifying, attracting and retaining workers with the necessary skills in our technology-enabled world is a much different proposition than in the relationship-driven world of the past. And emerging technologies like machine learning and natural language processing are being used in sectors outside of finance which takes away skilled talent from the candidate pool.”
D’Agnese adds: “Governance is also a challenge. Talent must be brought in that can understand and audit the systems. It is not good enough for models that leverage these techniques to produce results if they cannot be understood by humans. There must be a framework to define how the results are derived and help people interpret these results so that controls can be installed and ensure risks are mitigated.”
Rise of the machines
Looking to the future and how technology will shape the industry over the next five to ten years, Morgan states that it will certainly change for the better.
He summarises: “Accurate, timely data will be critical as regulations go live and firms are required to be more efficient and accurate with their reporting obligations, collateral management, and trade executions.”
“Connectivity will also be essential for firms that have a diverse client base and diverse requirements to move assets and fulfill collateral obligations. Hopefully in addition, within ten years the use of fax machines will truly be a thing of the past.”
Delikaris highlights that with the increase in computing power, abundance of data and new technologies, innovation is taking place at a pace never before seen. They added that new products are being designed and implemented faster and traditional products and operations are becoming more efficient.
He reflects: “There are many places where firms can create operating leverage by creating a wheel and spoke model to share technology resources. Sharing the cost over a bigger base allows business units to try out new concepts and ideas quicker while also improving the monitoring, maintenance and governance of the implementation.”
Indeed, technology has the potential to create opportunities especially in efficiency, and it will undoubtedly remain a hot topic in the industry due to its ongoing developments.
It also attracts a mixed bag of opinions; some say it is a major disruptor, others disagree. The majority of industry participants suggest to embrace technology while others approach it with a somewhat reluctance. But as Alan Turing asked, consider the question: “Can machines think?”
However, something that technology lacks is common sense. Imagine a robot being given the task of frying Quorn burgers all day long. It could do this well without tiring or getting bored, it would consistently fry each burger for the same amount of time to perfection. But if you swapped the quorn burger with a beef burger, a piece of lamb, or a chicken burger, for example, the robot would lack the common sense to recognise that it is no longer frying a Quorn burger and boom your robot has just served your vegetarian friends meat and they’re not speaking to you anymore. When thinking about this concept in relation to large amounts of money in the securities finance industry, it is perhaps not surprising that some are still wary of technologies such as artificial intelligence (AI).
Philippe Seyll, CEO of Clearstream Banking S.A, asserted earlier this year that technology will not disintermediate the whole financial industry. He pointed out that we are dealing with large amounts of money in a highly regulated environment and that everything has to be bulletproof and robust. This is why there will be radical changes but no complete disintermediation.
Phil Morgan, COO at Pirum, says that for technology to be a major disruptor, it also needs market participants and regulators to adopt the behavioural changes required for disruption.
He noted: “Most technology solutions that have come to market and been successful in recent years have been more evolutionary to the markets. I think you have to question for what value is revolution. We believe in most cases processes are not completely broken and therefore do not need a revolution but rather enhancement and evolution.”
Technology transformations
Discussing some of the opportunities that technology can provide, Morgan said that more than ever, market participants are looking to utilise technology solutions not just to meet regulatory and capital requirements but also to create efficiencies and manage risk.
He comments: “In the past, technology was viewed as a way to do things faster and with more efficiency. While in some cases this still remains the case, participants are now looking for technology to change how the industry as a larger system operates as well as how things are processed. This improves not only human efficiency but also financial resource efficiency, allowing firms to do more with less capital and balance sheet utilisation.”
“Technology therefore increasingly plays a huge part in reducing the friction associated with bringing real-time essential data to decision makers quickly, but also improving overall decision making be it suggesting a more efficient use of collateral, or identifying a failing trade that is creating a significant profit and loss impact.”
Matt Wolfe, vice president of product development at OCC, adds: “Even in the face of the constant evolution and advancement of technology, the right investments and resources can enable firms to increase their revenue, decrease their costs, improve their compliance, efficiency and client experience.”
Do androids dream of SFTR?
Not all superheroes wear capes—and technology is set to help overcome regulatory challenges but, as Morgan notes, it has been widely reported recently that existing tools in the market are not always fully utilised. Real-time contract compares with SSI matching is one example.
Francesco D’Agnese, global head of securities finance technology at State Street, says: “Technology is allowing the industry to approach regulation not just as a compliance requirement, but as an opportunity to create efficiencies through rationalisation of legacy infrastructure as well as the potential to create new products to drive growth. For example, many firms are using the implementation of Basel’s Fundamental Review of the Trading Book (FRTB) to drive an overhaul of their market risk analytics capabilities broadly.”
Morgan advises that the first approach from the industry should be to collectively agree, adopt and utilise best practices for avoiding fails by using existing solutions. He says: “Vendors should then engage with their clients and industry associations to ensure that enhancements can be delivered before the September 2020 go live. But there should be no doubt that Central Securities Depositaries Regulation (CSDR) will absolutely present a significant challenge for elements of the industry.”
As well as CSDR, firms need to be ready to tackle the complexities of SFTR, which is due to come into force on 11 April next year. Discussing technology and its relationship with the industry’s approaches to regulation, Wolfe remarks: “The industry has always taken compliance with regulations very seriously, regardless of technology. I do think there is an interesting relationship, though. Both regulators and technologists are continually looking to improve upon their individual missions and often influence each other.”
“For example, the growth in algorithmic trading led regulators to implement new requirements to ensure that those algorithms were not harming investors or disrupting markets. In this case, new regulation was the result of technology changes.”
Wolfe continues: “In other cases, regulation drives technology change. The Markets in Financial Instrument Directive (MiFID) and SFTR are good examples where change was initiated by regulation and then technology had to adapt to achieve compliance.”
“This dynamic has led to safer, more secure, and robust markets. It also highlights the importance of an open dialog between regulators and market participants, so that regulations and technology advances stay in sync. Otherwise, you may have situations where technology can have harmful impacts upon the users of the markets, or where regulatory changes result in unintended negative outcomes.”
Fran Garritt, director of securities lending and market risk of the Risk Managament Association, highlights that SFTR is requiring all market participants to analyse and update their trade reporting capabilities. He affirms: “This regulation has effectively forced agent lenders to develop SFTR reporting capabilities to continue to continue operating its business because both borrowers and lenders must rely on agent lenders, as the intermediary, to provide much (if not all) of the trade reporting data to complete their respective reporting obligations.”
“Agent lenders must also build systems to assist clients with their specific reporting and oversight responsibilities. SFTR’s impact is vast given the volume of reporting requirements, timing deadlines and potential costs to the industry to comply with these reporting obligations. On a positive note, this regulation has also created opportunities for vendors to develop products to alleviate much of the operational burdens to satisfy these trade reporting requirements.”
D’Agnese explains: “As far as SFTR’s impact on technology goes, it is all about the data. In preparation for the go-live date of SFTR reporting, firms have been focused on ensuring they are able to access and enrich the 153 fields of data required by the regulators. The regular production and distribution of this data is resulting in some firms reevaluating their data and reporting strategies, both for internal as well as external consumption. This reevaluation goes to the most foundational aspects of each firm’s systems infrastructure, with much discussion of streaming data capabilities, data lakes and a focus on open source technologies that facilitate these big data tools.”
According to Morgan, many industry participants are also being proactive and looking to enhance legacy systems to not only meet upcoming regulations, but also to become more efficient and reduce costs in the process.
So in this regard, Morgan continues, it could be argued that regulation has been a positive catalyst for change in the industry and technology is the facilitator of greater efficiency.
Challenges
In an ever-changing ecosystem that is becoming more complex and fragmented, connectivity is more important than ever and the industry is looking for low touch, easy-to-integrate solutions, Morgan explains.
He comments: “Software as a service (SaaS) based platforms are becoming increasingly popular with clients as they are easier to integrate without the need to install, upgrade and maintain a software asset. Service providers that are agile and evolving will be best able to support the constantly changing industry landscape.”
In terms of whether there needs to be more education around technology, Morgan says: “I think there is a widespread appreciation of the benefits of adopting new technologies, so education is not necessary, what is challenging for firms is understanding how best to utilise and implement solutions to ensure the intended benefits are achieved.”
Nick Delikaris, global head of algorithmic trading for securities finance, says: “One of the biggest challenges firms face is talent acquisition. Identifying, attracting and retaining workers with the necessary skills in our technology-enabled world is a much different proposition than in the relationship-driven world of the past. And emerging technologies like machine learning and natural language processing are being used in sectors outside of finance which takes away skilled talent from the candidate pool.”
D’Agnese adds: “Governance is also a challenge. Talent must be brought in that can understand and audit the systems. It is not good enough for models that leverage these techniques to produce results if they cannot be understood by humans. There must be a framework to define how the results are derived and help people interpret these results so that controls can be installed and ensure risks are mitigated.”
Rise of the machines
Looking to the future and how technology will shape the industry over the next five to ten years, Morgan states that it will certainly change for the better.
He summarises: “Accurate, timely data will be critical as regulations go live and firms are required to be more efficient and accurate with their reporting obligations, collateral management, and trade executions.”
“Connectivity will also be essential for firms that have a diverse client base and diverse requirements to move assets and fulfill collateral obligations. Hopefully in addition, within ten years the use of fax machines will truly be a thing of the past.”
Delikaris highlights that with the increase in computing power, abundance of data and new technologies, innovation is taking place at a pace never before seen. They added that new products are being designed and implemented faster and traditional products and operations are becoming more efficient.
He reflects: “There are many places where firms can create operating leverage by creating a wheel and spoke model to share technology resources. Sharing the cost over a bigger base allows business units to try out new concepts and ideas quicker while also improving the monitoring, maintenance and governance of the implementation.”
Indeed, technology has the potential to create opportunities especially in efficiency, and it will undoubtedly remain a hot topic in the industry due to its ongoing developments.
It also attracts a mixed bag of opinions; some say it is a major disruptor, others disagree. The majority of industry participants suggest to embrace technology while others approach it with a somewhat reluctance. But as Alan Turing asked, consider the question: “Can machines think?”
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