I have avidly followed the reports on many of the Sibos Sydney sessions and recently also attended an excellent series of presentations focusing on the future and sponsored by DTCC. An issue that struck me on both occasions was the modularised nature of the debate around IT and operational developments. I struggled to place many of the initiatives into a coherent and efficient market or business architecture.
API solutions appear to me to be a series of competing modules in a congested and ever more micro component based structure. The blending of the FinTech culture with that of our industry is a real value but the desire for instant or fast development, fuelled by a hunger for more information and ever more diagnostics, may be happening without enough consideration on two fundamental realities that appear to be a prerequisite for its long-term success. First, most of us operate out of a data jungle rather than anything as pure as a data lake and the sheer scale of translating and sanitising legacy data into coherence means it will be costly, needs a more disciplined use of standards and is a multi-year exercise. Second, given the move to multiple suppliers to avoid concentration risk and enhance contingency, the risk is users could be drowned in a tidal wave of new APIs from different suppliers, all offering approximately the same solution in their own unique way. And to be honest, I am somewhat sceptical about the pot of gold that many expect from their data mountain; my biggest concern is data overload and over-analysis where real valuable messages are lost in the plethora of facts thrown at users.
Robotic process automation (RPA), on the other hand, is being applied to better effect. It is a grown-up version of artificial intelligence (AI) and focuses more on cognitive intelligence and can thus be used for more complex situations. We have recently seen firms’ successful use of RPA in several operational areas. This is an intelligent use of technology, taking out cost and risk from processes that suffer from human error and delays. Such application of new technologies will hopefully lead to a serious reduction in time to completion of trade to settlement, corporate actions and other aspects of our high cost and slow transaction life cycle. Logically trades should settle in real-time, a corporate event such as a rights issue should be completed in days rather than weeks, shareholder activism should be much more transparent and timely with digital communication from corporate to investor. New issues should be digitalised using uniformly agreed standards. In all these ways, and others, credit costs and exposures would be sharply reduced, collateral demand would cease to challenge supply and market practices would cease to inhibit market activity.
Markets also need to take greater advantage of common cloud based solutions. Cloud solutions, though, have their downside as multiple globally systemically important or nationally important entities using the same solution creates concentration risk and, despite best efforts to reduce the risk of a single point of failure, cloud solutions are not immune to that risk. A balance needs to be made between the benefits of economies of scale and concentration risk. Just as we now appreciate the challenges, as well as the many benefits, of the Googles, Facebooks and Microsofts of this world, we also need to be wary of any Amazonisation of the cloud computing space.
There are many other initiatives around and the markets have a serious case of technology fever. I am sure that the industry will be transformed; currently it still looks too much like an electronic version of the old 1960’s manual process flows with basic electronic delivery reflecting our entry into the digital age. We have too many intermediaries and too many duplicative records. I doubt we will see less intermediaries but their roles will change. Custodians will be primarily risk managers and risk mitigators, CSDs will become the core processors across a wider range of activities, stock exchanges will see more instruments traded and more order driven transactions, CCPs will move more into term risk management on term based exposures.
But there are initiatives where I have fundamental issues. I hear talk of quantum computing as the future, but I question if it really adds value as lack of speed in processing is less of a technical issue and more a human one, whilst capacity is no major technical challenge. I suspect blockchain or golden source solutions will become critical elements in our business in the future, with many collaborative ventures by deep pocket major institutions leading the way. The FinTechs will find it difficult, outside the collaborative space, quite simply because they may be able to create the technological tools but will need a central body for the governance and standards piece; and that is always the longest to market and the hardest to achieve. And we still all need capital to oil the wheels during the development phase and especially into production. And finally I understand the concept of tokenisation but question if it is likely, other than in areas such as base metals or goods held in storage, to be a substitute for financial instruments if markets achieve their logical technological potential and become real-time environments.
Sibos had plenty to say about global cash availability partly thanks to SWIFT Gpi solutions. I suspect the functionality could have been created in the past on legacy platforms if there had been the will. Indeed, many of the new initiatives we see use modern technology to provide a low cost solution to problems we could have solved some years ago, but where markets or special interest groups lacked the will. Key to all developments though is the need for a universal approach to standards, both messaging, operating and technological. That is getting harder with the mood of nations swinging against globalisation, cooperation and open borders.
Within the frenetic market change agenda, across the vibrant technological world and with the massive improvement in the quality of people in the industry, we have a chance to make real progress and transform our industry from a mirror of the last century into one fit for the future. It will not happen by osmosis, by fractured development or conflicting initiatives. Some body, perhaps like the old G30 in the 1970s, needs to be empowered to put intellectual capital into the likely future market scenarios and thus give everyone a better and more coherent framework for the future.