As Sibos approaches, I have browsed the agenda to identify sessions I would like to attend. The trouble with all conferences is that sessions can be turgid, with speakers or panelists voicing carefully scripted corporate speak interspersed by at least one smart sound bite carefully nurtured with their public affairs office. Alternatively, some sessions are truly informative with subject matter experts imparting genuine knowledge and insight. And, occasionally, they are fascinating, either due to inadvertent or even intentional breaches of the zero controversy culture in those few cases where, perhaps, the speakers do not depend on the body corporate for their livelihoods.
As usual, many of the headlines of the different sessions allow leeway for lateral thought. We will hear about demystifying regulation while the perennial regulatory tsunami has, this year, been transformed into an avalanche. TARGET2-Securities (T2S) takes a stand, as does collateral and both appear to have Sibosian longevity that threatens Methuselah. Unsurprisingly, innovation is an imperative, while resilience remains mandatory.
But what should be covered? Which issues do keep us awake at night? Although they could be covered by the broad nature of the Sibos agenda, I wonder if we will really tackle my top five issues for 2014. These are data security, infrastructure reach, regulatory powers, liquidity management and intermediary liability.
Data security is a natural for SWIFT, and we all recognize the value of its robust infrastructure. But the world of hacking has moved, over the last decade or so, from the adventurous amateur youth to the criminal world and even perhaps to State-funded organizations. Data security is an issue for infrastructures, and several take no real responsibility for the integrity of their core platform or communication network. We are moving ever more to dependence on electronic communication and core infrastructures. The OTC market is moving to either an exchange traded or over-the-counter but centrally cleared structure. Data reporting is moving to trade repositories. Trading has moved from open outcry or similar physical processes to electronic medium. Outages of major infrastructure can cause chaos as we learned from 9/11. A successful hacking could cause gridlock if it led to uncertainty around ownership of assets, let alone loss of them. A serious and more open debate is needed around infrastructure security and technical security. What hot and warm standby is needed? What network support and contingency is needed, and how secure can it be for many networks, in our interrelated world, have similar single points of potential failure? And what liability should be assumed by infrastructure for the integrity of their platforms, networks and links?
We also need a debate about where infrastructure is heading. T2S is a case in point. I have always criticized the rationale behind T2S, as I believe the billion or so euros it will have cost the industry could have been far better deployed elsewhere. T2S, as a settlement platform, is interesting. T2S, as a pan-European central securities depository, would have been far more beneficial. And it may have had the power to allow for a genuine reengineering of the functional split between the commercial and collective sectors. The commercial sector still operates, on a company-by-company basis, too many functions that would be best placed in the collective sector. There is no differentiation in those functions between suppliers, and they are a source of risk and cost for their owners. It is illogical for commercial companies to operate in areas where they duplicate each other unnecessarily, provide little, if any, client added value and compound costs. Who is going to take a leadership role on data? Is this an area for regulatory mandate? It is not only the world of LEIs, but also the need for approved golden copies of information such as stock prices, stock identifiers, corporate event operational data, Know Your Customer (KYC) information and a range of other critical data elements. But that is not the only area for consideration. We should also look at the world of trade and settlement matches. Too many markets still use telephone matching and most markets retain the illogical bifurcation of the trade and settlement match. The logic of promoting a new age market matching engine is further supported by the link between these and the reporting requirements of regulators. And they too have a role to play to ensure that we turn away from the current path of different regulators demanding the same or similar information in multiple formats and multiple forms from the same people.
And we do need to discuss ways of reuniting the regulators with the regulated. Both have faults and both have failed over the last decade. There is a cultural challenge across our industry and we need to expunge the unethical from our systems, both in terms of people and products. But some regulators are acting like the proverbial Masters of the Universe with unlimited powers to be judge, jury and prosecutor at the same time. Criminality needs to be punished and not negotiated away in financial penalties. And regulators need to understand the difference between operational errors and intentional misdemeanors. Both may need to be punished, but they are not synonymous.
Liquidity does appear on the Sibos agenda, but we have to understand, above all, how to handle intraday liquidity demand. There has to be a reconciliation between the inappropriateness of the historic on demand, zero capital based and low cost of liquidity and the future more risk-based approach that is emerging under Basel III. The potential is gridlock, which a paucity of liquidity could easily create. If liquidity becomes costly in capital terms for supplier and taker, will securities settlement become less efficient with the specter of an increasing number of fails due to the lack of availability of immediate cash? Most securities settlement systems are securities availability driven rather than cash and securities availability driven. We need to look carefully at the liquidity needs of batches, the potential to net off transactions, the maximum size of each settlement lot and the required timeliness of settlement for each direct market participant. We need to revisit the concept of broker liens for settlement agents to ensure that they are exposed to market volatility risk, in the event of client failure to settle, rather than capital risk.
And finally we also need to re-examine the question of intermediary liability. This is not a plea to overturn the increased obligations of custodians and administrators, not because such a plea would not be fully justified but because the industry has lost that battle. But intermediary liability is still too opaque and clarity is needed on areas that are beyond the control of the different parties. This is especially relevant in areas of data security across infrastructure which, after all, if not mandatory in a legal sense will almost always be mandatory from an operational perspective. And regulators need to take a second look at buyer responsibility, for the concept of caveat emptor appears to have been totally abandoned.
If this, and many of the other issues I have mentioned are not tackled, there will inevitably be an unexpected and truly major loss in one or another parts of the market. We have already experienced the outcry when some banks withdrew certain services from some segments of the market. A major loss in the securities markets would impact more people and change the dynamics of the market beyond recognition. Without a saner approach to liability, that risk is extremely high.