The agenda for Dubai Sibos is filled with securities themes – many of them are starting to look like aged retainers and some have the potential to unleash genuine debate on key market issues. There is nothing wrong with the aged retainers, but the challenge for the moderators and panellists remains their ability to say something new rather than regurgitate old and trusted themes time and again. The sessions with potential include “Movers and Shakers”, which looks at the changing footprints of infrastructures and commercial service providers, or another questioning if regulatory costs create concentration risk.
So what are the issues of 2013 and do they differ from those of 2012? Over the last year, better index levels and therefore more management and custodial fees have buoyed markets. However, the buy side, throughout the value chain, has been trying hard to ensure they counter that trend by encouraging ferocious competition and margin decimation. We have seen an acceptance of risks that, just a few years ago, were castigated as unacceptable at Sibos. These include the AIFMD, and likely UCITS V, the dramatic extension of depository liability, as regulators drill into every deep pocket to ensure they never pay out of the compensation funds for any loss however incurred. We have seen lip service being paid to cost management. Barriers to cost reduction remain a silo-centric approach to IT architecture as well as a false belief in the enduring, competitive value of scale in IT spend. We have seen ebbs and flows in assessments of the amount of available collateral.
There have been improvements in the infrastructure collateral management space. But there has been little clarity on the conundrum of declining prime collateral pools and rising prime collateral demand. Standards remain brilliant in theory but challenging to adopt. ISO 202022 is our latest salvation. Yet I can remember that tag being attributed to ISO15022 at another, earlier Sibos. And technical standards are perhaps crowding out the critical need for improved operational standards as a prerequisite for progress. At least we have a session on harmonization, the preferred solution of most in the market place, but unfortunately often only as long as it results in little change to their environments.
So what is it that we would really like to hear at Sibos in Dubai? It would be good to hear more honesty and less political speak. We have a dangerous risk environment and yet few appear willing to discuss the boundaries. On infrastructure, we have the challenge of government belief in the superiority of the public or quasi-public (often also known as the monopolistic) over the private sector. And we have a dysfunctional denial of the reality of falling returns in a riskier environment.
The risk environment has changed dramatically. The main focus is on bank capital adequacy with the Basel III targets being replaced by higher capital requirements, especially across SIFIs, and a debate on the need for an absolute equity to capital ratio for all banking institutions irrespective of the risk profile of their assets. On the custody side, we are almost ring-fenced away from any capital need as if revenues can happily meet the changes in risk allocation across our value chain without ever having recourse to bank capital.
From time to time there are marginal debates, such as the potential impact of treating indemnified stock lending as a guarantee process, which it surely is. But generally, in the minds of many, custody or securities services, like a great swathe of activities across the transaction banking world, are off balance sheet and therefore off risk. Has nobody heard of the enormous intraday risks implicit in making large value payments or settling trades? Are Madoff and Lehman a distant memory, impossible now as a result of the strictures of Dodd Frank or EMIR? Are assets so well segregated that an MF Global could never happen again? The reality is we struggle with AIFMD and the precise meaning of its requirements for a high standard of care, the exact methodology to oversee fund cash management and the scope of the liability provisions over and beyond the liability for sub custodians. The fact is, as banks, we struggle to place a capital allocation on operational risk, mainly due to the scarcity of operational risk events and the divergent nature of the few big hits that the industry has taken. And, on the asset side of banks, there are more ways to evaluate risk than there are risk managers and none of them are a science; a gentle commentator would assign them the credibility of intelligent guesswork clothed in tendentious mathematical theory.
Market infrastructure is a good thing but hardly the saintly animal suggested by regulators. At a CCP level, risk arbitrage is still a factor. At a CSD level, the protection offered for fraud and other risks varies from a zero liability to a modest capped liability, which pretty well implies such fraud, or other risks are impossible. At a time when regulators have heaped liability onto the private sector, be it for failing to take account of the financial illiteracy of the retail market or the growing absence of “buyer beware” in the wholesale market, it is strange that infrastructure is allowed so much freedom from accountability. CCPs are high risk because they carry high collateral redeployment risk and their exposure to margin ratio is vulnerable to event risk style market volatility. CSDs carry risk, although they manage this primarily by allocating it to their users. However they do this by the risky mechanism of a cap on their maximum loss and an often-unclear rulebook as far as allocation of excesses is concerned. Even the new trade repositories incur risk, as records are never inviolate in this era of hacking and criminally related computer fraud.
In the commercial sector, the alternative sector appears to be able to hold on to premium fees irrespective of performance over time. But, that is a micro-component of the wealth management industry. Fees are under pressure across the value chain from investment management down to the sub custodian. Costs are cut at the margin mainly by managing headcount, which is around 60% of the average industry cost base. This carries a risk of de-skilling in the industry as well as under resourcing in a control environment and increasingly complex business reach that demands more people rather than fewer. The solution has to be greater automation, more intelligent use of technology and industry harmonisation and consolidation.
Sibos attendees should give some thought to this. Is the old IT architecture with its component-based silos really valid for the future? Are the process breaks impairing business growth and increasing business risk? Do we need to all run the same core technology and spend the bulk of our IT budget emulating our peers? Does the industry just talk of harmonization or is there an agenda they could follow? And how do we eliminate the surfeit of infrastructure we are developing in each country silo or do we want to continue to pick up the cost of duplication, the risk of legacy practices and the horrendous plethora of identifiers, messages and often unstable technical environments?
If there is a purpose to Sibos, beyond networking and presenting to declining audiences, let us have some meaningful debate on these issues. They will dictate whether the industry can continue as a dynamic and competitive force in the future. And they offer SWIFT a future where a few core messages are not the true driver of the business.