Comparing the Coronavirus problem with SARS underestimates the destructive potential of the former as a global outbreak versus SARS which really became a regional Asian challenge. But there are lessons to be learnt from SARS and mistakes to be avoided. The lessons to be learnt are primarily behavioural. Markets will be volatile, rife with rumour and trend sharply downwards until the pandemic subsides.
Unfortunately, the media hungers for sensationalism as it seeks to fill a 24-hour news cycle; that will only exacerbate market uncertainty. The mistakes to be avoided include any failure to adequately appreciate the need for sound contingency strategies in an interconnected world and the absolute need to ensure sound communication strategies internally, but, just as importantly, externally.
Profitability is going to be adversely affected. First of all, markets trending lower reduce the ad valorum endowment benefit. Second the volatility of markets will lead to lower liquidity and less activity and thus lower transaction fees. Third lower transaction fees will impact related activity such as asset finance. The only positive may come in new debt issuance, helped by lower interest rates but hindered by deteriorating corporate and government finances.
Cost reduction has still to be core to one’s strategy in a market burdened with heavy overhead, but costs will also now need to be managed in line with falling revenues but tempered by the increased need for adequate contingency cover. I have always stressed that the only true cost reduction strategy is around human resources; with lower activity that will happen either by natural wastage, targeted redundancy or final decisions on operational rationalisation.
Contingency is critical. In the worst case, a stricken location has inadequate people to allow it to complete its core tasks. Automation has reduced these risks. But there are in my mind three valid core questions we asked and one supplementary one at the time of SARS. The questions are whether disruption could be caused by other participants failing trades or other transactions; whether infrastructure is sufficiently robust to deal with unexpected peaks, sharp volatility meaning settlement values were far adrift from actual ones; and what contingency exists within each individual shop with the order of preference being the ability to move former staff members in from other parts of the firm, the ability to bring in support from outside the stricken location and the potential for relocating activities to a new location that is either not impacted by the crisis or which has adequate capacity to cope.
The supplementary issue is to examine historic fail or error rates and ensure that clients responsible will also have the appropriate contingency to continue timely repairs. All of that assumes that the automated infrastructure will not suffer long outages due to any issue from staff non availability through to power delinquencies.
Co-operation is vital. I have already noted the importance of ensuring that other market counterparts are robust; settlement liquidity has in the past caused crises if players accounting for 10-25% of total activity in any one market suffer severe failures in process. The second is the robustness of the securities and banking infrastructures. The most vulnerable are CSDs and payment systems which have few staff and restricted contingency barring hot or warm standby facilities. Markets where a failure of process can be overcome by manual intervention are few, small and far between as often the requisite understanding of process does not exist and the non-availability of knowledgeable manual environment trained staff prevent this.
The critical issue is to empower small cross-market groups who can take decisions for their peers with impunity to resolve any market-wide disruption. Such a group needs to be small and trusted as well as established within a framework that protects them against later potential litigation from aggrieved parties. The larger the infrastructure or market, the more complex this is. The ICSDs have a particular challenge in this area.
And most significantly, we need to consider client links. The issue of contingency at client level has already been mentioned. But in a pandemic, regular client communication is vital. Events still happen. Markets will still have developments pending or planned; and most likely delayed. Conference calls or webinars, whether video linked or voice only, need to be considered to ensure that clients are informed as they would be in less dramatic market conditions.
Content can be used as an alternative or supplement to such events. Change will not come to a halt because of the pandemic; implementation is likely to be delayed in many cases. But issues arise and surprises will not be welcome. Conference organisers have a role too with the option of, admittedly somewhat less effective, low cost conference calling to cover conference issues. Having spent hours on calls, the conference call equivalent of an external conference needs re-engineering into separate modules rather than being run over anything longer than around three-hour sessions. This will be demanding, but, with the pandemic likely to last months, alternatives are needed. And training sessions on markets or products should also be considered. Nobody wants a cliff edge and effective client communication helps avoid that.
Given my advanced years and pensioner status, I could find my movements soon restricted. I have a list of things to do, ways of replacing my gym visits and ideas to keep mentally alert. Those working remotely should do likewise and ensure that we come out of the pandemic, stronger than before. For there are different and better ways of working and perhaps this horrific infection will be the driver to getting that done.