The early adopter’s early adopter

It is probably fair to say that as far as the securities services industry is concerned, John Gubert has seen it all
By Editorial
John Gubert

It is probably fair to say that as far as the securities services industry is concerned, John Gubert has seen it all

It is somewhat humbling, as Global Custodian celebrates its 25th anniversary, that the most memorable date in John Gubert’s custody diary predates the existence of the magazine by a year. “It is 1988, when the Group of 30 produced their iconic recommendations,” says Gubert.

While the nine recommendations became the foundation of the modern securities infrastructure, two in particular stand out for him: the call for delivery versus payment (DvP), with its related requirement for same-day funds, and the plea for the industry to adopt messaging standards. “The former has taken decades to gain real traction, but the latter is now a cornerstone of the industry,” he says. “It is a major reason why securities messaging now accounts for around half of SWIFT’s annual throughput.”

In some ways, says Gubert, his experience typifies much of the industry. “In the 1980s, custody was emerging from the operational bowels of the major banks and slowly becoming a business,” he says. “In the 1990s, consolidation started and the focus was on economies of scale through market share and major relationships.”

Over that period and in the years since, Gubert has witnessed first hand the industry’s successes and failures in moving towards automation and rationalization. Among the failures, two—TAURUS (Transfer and Automated Registration of Uncertificated Stock) and GSTPA (Global Straight Through Processing Association)—come immediately to mind. “I was present for the latter days of the fatal gestation period of the London Stock Exchange’s abortive TAURUS development,” says Gubert. “That precursor of the current CREST system fell to the destructive forces of scope creep, political power play and technological arrogance.”

GSTPA, meanwhile, has somewhat faded from the collective memory, but, Gubert points out, it was a costly failure. “If one includes the jettisoned internal developments across its planned user community, it cost hundreds of millions of dollars,” he says. “It was an example of ambition and aspiration exceeding budget and reality. It failed for similar reasons to the TAURUS development. It was over-engineered.”

These two negatives are, however, vastly outweighed by the overall progress in industry efficiency that Gubert was directly involved in promoting. Much of this stems from his involvement in the International Securities Services Association (ISSA). “ISSA, on whose executive board I sat for 16 years, was a key influence on the original G30 recommendations and, later, the preferred independent assessor of market compliance,” he says. “ISSA and its sponsors always believed that working to reduce risk and improve efficiency in markets was in the interest of all.”

Some 12 years after the G30 recommendations, Gubert chaired an ISSA project assessing the market’s future needs. This culminated in the ISSA 2000 recommendations. “Just as much of the groundwork for the 1988 G30 roadmap was sourced from ISSA, so was that of the subsequent 2002 G30 report on clearing and settlement,” he says.

He stresses, however, that production of reports and recommendations is not the same as progress on the ground. “G30 highlighted a problem that markets still face,” he says. “Recommendations are produced. Unworkable global timetables for their adoption are suggested. A one-size-fits-all approach is usually adopted. Then investors call for action. The end result is progress, more in form than substance. And, as can be seen in the ongoing debate about security of assets or message standards, the gaps are either still there or someone has merely moved the goal posts.”

Although many of these reports have been filed away, there have been winners from the process. “ICSD performance over the last two decades has been spectacular both in terms of the robustness of their infrastructures, richness of their product and improved client service ethic,” says Gubert. Asset servicing is also now cheaper in absolute terms though by no means commensurate with the volume increases. “With all the muscle and billions of dollars of annual budgets among custodians, it is surprising that a substantial part of the plumbing remains in such poor shape,” says Gubert. “The plumbing of the market unfortunately still leaves much scope for improvement.” He points to a surfeit of costly infrastructure globally and the need for more convergence. In addition, he notes, “There are conflicting laws and regulations in different jurisdictions, which is anathema to a global business. There are too many process breaks, process fails and manual processes. These need to be harmonized, standardized and automated.”

He acknowledges that in the present climate available resources are being absorbed by the need to comply with a growing array of regulations. “The regulatory burden is ratcheted up every year,” he says. “The market, trapped in the ‘bad bankers’ syndrome, appears scared to challenge some of the sweeping powers being accorded to the regulators. Yet there is little proof that more regulation is needed or that absolute regulatory power is the barrier to further crises.”

–Richard Schwartz