Yesterday’s Global Custodian Leaders’ Panel in London was a thought provoking event, bringing together four eminences from the industry and moderated ably by buy side “A” lister, Markus Ruetimann.
The panel’s vision of the opportunities and challenges for the market was not that different from the one their predecessors would have espoused a couple of decades ago. The market today is, though, more multi- dimensional and hence complex than in the past. Asset classes, fund structures, geographical reach, technological dependencies and regulatory hold are just some areas that have moved the industry from a back office function to a core operating business. And those factors are all changing at a hitherto unknown speed and that change is creating fluidity in demand, opportunity and threats. Change was always in focus during the debate but its impact on the survival of all but the fittest was not really examined. However, two fundamental areas arising from that tsunami of change were discussed in detail.
First, the need for a changing talent pool. The millennial population demand career progression rather than institutional stability. The major organisations can give this by structuring their talent pools for cross business mobility. Perhaps more attention should be given to the need to blend that mobility to the change factor in the industry, which in turn offers new challenges to talent able to grow and develop in new or radically changed environments.
The second area mentioned related to the industry operating model and focused, quite correctly, on the management of data and the need for providers to migrate to a more solution based and client specific or integrated operating model. This allowed the panel to voice their enthusiasm for outsourcing across the value chain and the debate on collateral management with its separation of the investment decision and process management as well as processing environment highlighted the complexity of the market and the willingness of the sell side to present clients with a range of options. The KYC utility was mentioned as a shining example of industry collaboration through SWIFT to better manage a process that adds little value to any supply side offering. Support for other utilities, perhaps through industry infrastructures or multi-bank limited membership cooperatives, was also clear. But the truth is that the industry has a flawed operating model and it will be hard to take the first step to migrate core processes, on which there is little competitive differentiation, to utilities. Who can be the catalyst to identify a new model that eliminates the huge amount of duplicative activity across data, operating environments and technology structures? At a guess the prize is in the billions of dollars in savings and could start to repair the destructive impact of the race to the bottom on pricing over the last decade or so.
The pricing question was raised by many and competition law makes it a difficult issue to discuss openly. I operated mainly under the benign environment where price attrition was lower than asset accumulation. It is amazing how many failed in that benevolent environment and it is testimony to the quality of management in the industry today that so many still remain. As a doubter about the sustainability of the current model, I have to add, but for how long?
No panel is complete without mention of T2S and Blockchain. The former is a catastrophe if measured against its original targets for delivery, savings and risk management. The attribution of liquidity and collateral benefits to it appears to me, and was implied by at least one member of the panel, to be ingenuous. Liquidity management, by operating off a single Euro account, has been feasible for a decade or so since the launch of the single currency. It was never chased as an opportunity as banks gave away intraday liquidity and large users such as broker dealers preferred operating multiple pools rather than face added concentration risks. Collateral management is a phenomenon driven by EMIR and Dodd Frank and, although the T2S auto collateral function is valuable, T2S is a settlement engine that facilitates the final leg of the process but in no way is a prerequisite for its success.
On Blockchain, the panel quite reasonably stressed where it stood rather than where it was hyped. I had hoped that we would not hear the words disruptive technology but we did. When we agreed to move my old firm from heavy duty IBM mainframes to a component based architecture, it was disruptive. When we decided to be a lead introducer of CREST in the UK, it was disruptive. When we moved from paper to internet communication with clients or adopted SWIFT, it was disruptive. Change is disruptive. The important issue is whether it is progressive and reduces cost or risk or both. One issue I would raise is that the industry, as evidenced by several new initiatives, may have to consider fast amortisation of its IT platforms for the old ten to twenty year life cycle of pieces of kit with occasional software upgrades is not the way forward. After all, there are questions on the viability of T2S, which will not have completed its migration till 2017, as the industry considers new technologies but also new operating models with designation potentially down the entire holding structure. That is an area where the concept of a single distributed ledger starts to make a lot of sense!
The final challenge was to look forward 25 years and one panellists “don’t know” was the most honest answer if you believe in the dynamic model the panel were portraying. 25 years ago, UK settlement was paper based, fast communication was mainly fax based, a minority of staff and an even smaller minority of management were technologically literate and I have already mentioned the narrow operating model of the 1990’s. As change accelerates, all I can say is that it seems the next 25 years is going to be really exciting.