I have been challenged on the realism of my proposition, in a recent blog, that costs in our industry could be reduced by 30-40%. My riposte is that I feel this is the minimum for the industry to survive and, importantly, will drive it to digital efficiency. Over and above the need for a consolidation of post trade infrastructures and the imperative for firms to rationalise their fragmented Group wide processes, there are a series of key initiatives that need to be considered.
I would first stress the need for the industry to solve the challenge of a surfeit of CSDs and CCPs as well as an emerging like situation on trade repositories. I have no issue with local entities in this field but they need to look to consolidate their platforms and avoid the duplicative cost excesses the industry bears from their mirror or near mirror developments. These are typified by the common adoption of T+2 across the EU or the move to CSDR milestones in settlement discipline for I would guess those two initiatives have cost CSDs north of a billion dollars that will have been picked up by their direct participants and their client base. Similar profligacy exists in the world of CCPs or trade repositories and is emerging in SWAP and other facilities.
And most intermediaries operate multiple platforms for the industry survivors tend to be predators. Revenue acquisition is simple but process rationalisation is much slower. I have seen firms that operate broadly similar applications, independent of each other, to cater for the post trade needs of their custodian, fund administrator, broker, asset manager and private client divisions. And I know of one organisation which has more fund administration platforms than it has locations!
There are a number of processes that the industry could rationalise without impairing their competitive differentiation. The major industry unnecessary cost item is the duplication of records across firms and their client populations. This is part of the current Blockchain debate but the issue goes further than the value of a single and irrefutable book of records. And much progress can be made with shared databases which can be built on legacy applications if that is preferred. But the database design needs to move out of the myopic silos of the different parties to a transaction life cycle and accommodate their diverse needs, be it for traded or settlement records, a need to accommodate hedging instruments, collateral and similar functions.
And then there are a series of zero value added duplicative activities that firms need to shunt from their silos to a common group utility, and, if they can grasp the nettle, on to a common utility with like users. Typical of such functions is KYC, where SWIFT especially has made critical advances, but the process needs to be extended further into a broader range of client static data. Pricing and price discovery is another such activity. Corporate actions, be it data capture from corporate fund raising, corporate governance and basic M and A activity also falls within this category. In the past, any idea of utilities or shared services in these areas has been resisted as possible suppliers could or would not agree on liability in the event of error. However, in the past decade, we have made major steps down the path of digitalisation. We have moved ahead, albeit hesitatingly, on industry and information standardisation. And we can use automation and artificial intelligence to risk assess the output of any new collective service provider. I suspect that 95% of activity would be low risk; that categorised as high risk should be scrutinised in each client office. Paradoxically this is not unlike the classic approach adopted in the last decade as activities were outsourced to offshore offices.
Concerted user action is needed in other areas of huge cost and little value added. A map is needed, assuming the logical solution of a single securities’ identifier cannot be achieved, between the BIC, RIC or ISIN. And fresh momentum may be needed behind the LEI initiative. As standard messages cover more activities, action is needed to force all parties into adopting these standards and we need an independent adjudicator with the power to overrule local cannibalisation of message formats. Users also need to force the pen and ink brigade to digitalise their output, be it in new issue documentation or governmental and quasi-governmental data demands for tax reclamation or ownership monitoring. And the industry needs to question how it approaches market advocacy for my experience is that all local players proclaim their commitment to global standards and most global players have a uniform priority list. The slow and tortuous progress, typified by the lapsed time to achieve the simple concept of T+2, shows something is not working in this area despite the millions thrown at it.
The cost to the industry of their current inefficiencies tallies to several billion. It is there that economies can be found. And while people review their processes and decide if they wish to move out of the morass of their current process environment, they should also query some old Spanish customs. How many firms still pilfer stock intraday to accommodate settlement ebbs and flows? How many firms fail to manage their intraday credit offering effectively, despite the new cost of liquidity, and how many have a real time measure of that product? Are contractual and actual policies logical given the settlement success rate in most markets by volume? And is the move from management decision making to the ambivalence of stakeholder democracy a mechanism to ensure efficient process or a tool to alleviate the risks of individual management responsibility?
Regulators in their search for the risk free world, management in their paranoia about control, firms in our business who cannot see the writing on the wall are responsible for the billions we waste each year. If we could get agreement on the use of shared technologies and the creation of common utilities across organisations as well as moves in some of the areas I have mentioned, the 30-40% cost cutting target I suggested would appear conservative. The issue is who will be the catalysts for such changes and how do we make it an achievable objective within a sensible timeframe, rather than a futuristic vision that fear pushes into the long grass.