By Satvinder Singh, head of Institutional Cash & Securities Services, Global Transaction Banking, Deutsche Bank
Editor’s note: This post is an extract from Deutsche Bank Global Transaction Banking’s guide to the Sibos 2014 agenda.
Engagement and collaboration lead to opportunity
Sibos is a benchmark conference and an important date on the calendar for Deutsche Bank’s Global Transaction Banking business. It allows us the opportunity to litmus test the health of the industry, see what’s on the horizon, share ideas and solutions as well as discuss the challenges and opportunities facing us all.
A year ago, we reflected on five years of turmoil and seismic change across the banking industry. We are now faced with a complex environment characterized by high regulatory activity, margin compression, increased client requirements and a business paradigm that is so competitive that if you wish to succeed, you must differentiate yourself.
Banking has always been a competitive industry. That has not changed. We believe that, in some instances, the key to putting clients at the heart of what we do, to uncovering opportunity—our own and that of our clients—lies in engagement and collaboration. When it makes sense to do so, banks will cast aside their differences and co-operate with each other (on industry utilities, for example) rather than compete.
We have seen that when banks face industry-wide challenges, they frequently develop solutions jointly or come together as a negotiating body. This has brought material benefits that banks would otherwise have been unable to achieve independently. And it has been very evident when tackling regulatory issues across a broad range of topics.
Likewise, partnerships have also proven successful – one such example in the banking sector is the joint use of Automated Teller Machine (ATM) networks. In fact, technology is a prime area for cross-industry cooperation. Although it is true there are practical problems and strategic concerns around collaborations and partnerships, in general, working together fosters innovation and helps to protect the integrity of the sector.
This was exemplified in the SEPA initiative, which was a significant undertaking that entailed banks working together to define the rule books in terms of agreed standards, technical requirements and a common legal base. The result of that is a harmonized, standardized Single Euro Payments Area.
The spirit of collaboration has been evident in other sectors for many years. It should not be seen as something that blunts an organization’s competitive edge – far from it, in fact. Competition drives innovation and business growth, but as car manufacturers, airlines, banks and other firms have discovered, better results can be obtained when competition goes alongside cooperation. In relative terms, we have only just started on this journey.
Engagement and collaboration are not always easy. They require information sharing, debate and consensus amongst firms that are often clients, competitors and peers at the same time. It’s a challenge, but one well worth rising to. And that’s why we gather each year at Sibos.
Utilities: Let’s connect, let’s protect
Over the past 20-plus years, the utility model has been the basis on which the financial industry has approached payments, clearing and standards. But with financial crime on the increase, banks and other institutions must have the tools to protect themselves.
It is not just illegal activity that is confronting our industry, however. Ingenuity and innovation is also making for an uneasy relationship between groundbreaking and establishment-challenging developments like virtual currencies. Tuesday’s session on virtual currencies (Technology Forum, 16:00-17:00) asks if they are a disruptive trend or a high-risk bubble. While instruments like bitcoin have the potential to be both, the technology backing virtual currencies brings a new level of sophistication to more established methods. At this stage, it is difficult to predict how they will develop, but the industry cannot afford to ignore the rise of virtual currencies or the implications they may have for a mature sector.
We believe a collective approach may reap big benefits. It is visibly evident that competition is greater than ever before: margins are shrinking, the macroeconomic environment, while improving, is still uncertain and shackled to low interest rate regimes, and new players are entering the transaction banking landscape. In an age when banks are grappling with the challenge of adapting to reconfigured business models, collaboration is almost a pre-requisite to lower costs, create greater efficiencies, mitigate risks and also set new industry standards. This will not only build a healthier industry, but also deliver benefits for the clients of today and tomorrow.
Regulation: Repairing and resolving
As in the past few Sibos conferences, regulation will be at the forefront of almost every discussion. Given the wave of regulatory changes from across the spectrum of business, it is no surprise that some regulations may be revised in the coming months.
The collective agenda to reduce risk and protect investors has made for a heady mixture of political debate, economic uncertainty and, to some extent, uncertainty among market participants and their clients. Many have found the plethora of changes facing the financial markets difficult to digest. Each region, after all, has very different characteristics.
The suitability of the rules and regulations being proposed and implemented will be discussed in Wednesday’s “Rating regulation: an assessment” (Big Issue Debate/Plenary, 11:00-12:30).
Securities services: The stopwatch is ticking
Time is something that does not stand still for the securities services industry. It is a sector that has already undergone dramatic transition over the past quarter century, but it is still transforming itself.
Some of the changes have been driven by regulatory demands. In Thursday’s session on the Milestones in Securities Services (Change Day, 14:00-15:00), organized by Global Custodian, the panel will look back on the past 25 years and the changes that have taken place, while discussing the challenges ahead of the industry.
TARGET2-Securities (T2S), for example, is one imminent milestone that is very much at the forefront, given the timeline is already underway. Prior to the financial crisis, T2S was seen as something that would take costs out of the system, but as financial institutions have surveyed the landscape and dug deeper, they have realized it will help to address regulatory requirements.
T2S is not the only initiative to harmonize the post-trade process. In South East Asia, the ASEAN Exchange Link has been launched, bringing together the exchanges of six countries in the ASEAN region. And on the other side of the world, in Latin America, the MILA project, bringing together the stock markets of Chile, Colombia and Peru, is in full swing.
Globally, there is a tendency to reduce settlement cycles to bring the remaining counterparty risk down to a more reasonable level. In October, all European markets will switch to a new settlement cycle, which has reignited discussions in the U.S. to bring the settlement cycle down to T+2 in the next few years. Asia will also follow suit.
The dilemma is that securities market infrastructures have a high degree of interdependency and therefore unless there is consistency and common purpose across various markets, the risk of dislocation will always prevail. And it is not unreasonable to suggest that what provides safety and security today may not be fit for purpose tomorrow in a rapidly changing market. Just take the example of the CCPs, which appear to be taking on more risk with the mandatory clearing requirements of both the European Market Infrastructure Regulation (EMIR) and Dodd-Frank. CCPs are structures with limited resources, so it is hoped that the margins provided will be sufficient should one or even two big players fail. Only time will tell if these hopes are justified.
Technology: A case of the tortoise and the hare?
Equally important is the need to ensure that an organization’s technology platform is suitable for current needs and scalable enough for future requirements.
Banks and other financial institutions have to strike a fine balance between day-to-day operations and evolving their model to remain competitive and at the forefront of the industry. It’s a case of “mission critical” versus innovation, both are vital to the organization but neither can obstruct the other. At the same time, both aspects of a technology platform have to be strategically aligned, as Tuesday’s “IT on two tracks” (Technology Forum, 9:30-10:30) will discuss.
It would be rather short-sighted to assume that all “mission critical” aspects of a technology platform are legacy installations. But by their sheer nature, systems that have been in operation for any length of time, representing a core part of any platform, are difficult to change while in motion. To use a well-worn analogy, it is difficult to switch the engine on an airplane when it is in full flight. However, technology moves on and the need to innovate while running has seen the evolution of component development, whereby the whole comprises several components that can be changed, modified and enhanced while the engine is still in motion.
The financial services industry, to a large degree, champions and rewards the entrepreneur and runs at considerable speed. Legacy infrastructure may seem pedestrian and lacking in excitement to some people, but it is not difficult to imagine the entrepreneurial spirit being turned in the direction of infrastructure, however challenging that may appear to get started. The results could be dramatic, but while considerable investment is made in legacy infrastructure, unleashing innovation has to be carefully managed. We believe that banks—and their processes (and the part each play in the global economy not to mention society)—are protected, stable, reliable and above all, resilient.
Heads in the clouds
Opinion can be divided on the subject, but one thing is clear: cloud computing is here to stay and the industry has to evaluate how it can use, or not use it, to gain the best advantages. A session on Monday, “Cloud computing: dark clouds on the horizon” (Technology Forum, 16:00-17:00), asks if the cloud has met its match, given varying degrees of regulatory requirements and concerns over safety. We prefer to think of this as not so much a case of “meeting its match”, but that cloud computing is merely being confronted with obstacles.
While small businesses may benefit from the bandwidth and scale that cloud computing could deliver for them, larger multinational organizations have greater concerns, and one would argue, more to lose from a “disaster in the atmosphere”.
Technical issues, security and threat of cyber attack are all concerns for any company considering the cloud as part of its operation.
Cloud computing still has a number of hurdles to negotiate before the comfort level is satisfactory for many banks and financial institutions. Whoever manages to balance its benefits with privacy, sovereignty and security will possibly reap significant benefits.
Similar concerns exist about the exponential growth and availability of both structured and unstructured data—so-called Big Data—is a topic which fosters great debate. Monday’s “Big Data is still hungry session” (Technology Forum, 9:30-10:30) will look at how we have moved from terabytes to petabytes and now exabytes, and the issues around a growing dilemma.
Big Data is not a new concept, by any means. It started over 40 years ago and today, we are bombarded with data from every conceivable direction. When the volume, velocity and variety of data exceed an organization’s storage capacity for accurate and timely decision-making, that is Big Data. The accumulation of Big Data is not the key component, it is how key data is processed and acted upon that truly counts.
Big Data also has a significant opportunity attached to it in the form of client analysis and greater, more in-depth management information services. Harnessed properly and aggressively, Big Data can deliver market differentiators for an organization, in much the way that some consumer companies have become prolific at predictive marketing. We may have to wait for financial services companies to become true exponents, but the banks that embrace Big Data will not only build a competitive edge, but also better mitigate risks. It is only a matter of time.
Navigating the Sibos 2014 agenda: Optimizing every opportunity
Sibos is a benchmark conference and an important date on the calendar...It allows us the opportunity to litmus test the health of the industry, see what’s on the horizon, share ideas and solutions as well as discuss the challenges and opportunities facing us all.