The event focused on the role of technology in developing Capital Markets Operations in Europe and considered whether the underpinning legislative framework across the continent is set up to support and promote innovation.
The Capital Markets Post Trade landscape is at the forefront of change, with the industry striving for greater operational and technology efficiencies. At the centre of this change, however, is the need for collaboration across the market. Participants and governing bodies alike to come together and understand, shape and design innovative solutions to common business problems.
Outlined below are just six of the key themes emerging from the event which require consideration from those across the industry in the immediate term:
The ongoing drive for an accelerated settlement cycle
The transition to T+1 settlement represents a significant market structure evolution aimed at delivering processing efficiencies and risk reduction. With the US (and Canada) now set to implement this shortened settlement cycle in May 2024, market participants are continuing to invest heavily in the automation and system enhancements required to support the compressed settlement timeframe.
The attention will, in parallel, now turn to Europe and the UK and whether there will be alignment with other developed Capital Markets. Such a move would represent significant challenges in the region. In the past decade, we have seen the Central Securities Depositories Regulation (“CSDR”) mandate the move to T+2 settlement with a first line of defence mechanism established to penalise settlement fails on the continent. This punitive measure has triggered an ongoing focus on process improvement across the industry and whilst that long-term objective remains, there is a concern that further legislation to accelerate the timeframe to T+1 could have an adverse impact in the short term on the number of settlement fails.
Europe does not benefit from a single governing legal framework and furthermore is exposed to multiple different exchanges, Central Counterparty Clearing House (“CCPs”), Central Securities Depositories (“CSDs”) and multiple currencies. While Target2-Securities (“T2S”) provides a common platform for cross-border settlement procedures, further mandates will continue to pressure that infrastructure to deliver. Governing authorities need to weigh up the cost-benefit of an accelerated cycle against the practicalities associated with this fragmented Post Trade infrastructure and ensure that they can maintain a stable, efficient, and competitive European Capital Market.
Should Corporate Actions be next?
The announcement and processing of Corporate Actions remains one of the most manual and complex activities performed in the back office. Corporate Actions can have a material impact on the valuation of security and as such, accessing comprehensive, accurate and timely announcements is critical to financial institutions. Processing efficiency is further challenged with the move to T+1 settlement shortening the Post Trade lifecycle.
The current landscape for Corporate Action processing remains subject to manual intervention, customer service concerns and high costs caused by having to access legacy unstructured data sources. An absence of market standards can often result in the inconsistent dissemination of event information to impacted stakeholders, be that broker-dealers, depositories, exchanges, regulators, or investors.
There remains significant appetite across the industry to drive further automation and best practices for Corporate Action processing. Discussions are ongoing around the feasibility of automating the dissemination of announcements or the exchange of instructions which could help simplify the model and reduce associated cost and risk. Similarly, considerations on data format and whether an agreed data standard (such as ISO 20022) could help with the introduction of a more structured, digitised and centralised method.
Understanding the possibilities afforded by AI:
At the outset of this event, an audience poll was taken as to which technology advancement participants felt would go farthest in shaping the future of the Post Trade landscape. An overwhelming majority expected Artificial Intelligence (“AI”) to lead the way in the next five years, building on the successful disruption seen in some repetitive core Capital Markets activities such as client onboarding and compliance checks.
There is a widespread expectation that AI can bring about improved capital efficiency and better risk management to the industry, whether that be in document management, intelligent workflows, back-office automation of errors or omissions or indeed providing actionable insight through big data.
Regulatory scrutiny will be key to helping address ethical concerns and investor trust and as such, the pending EU Artificial Intelligence Act represents a key milestone. Collaboration between such legislation and market participants will be critical if we see more firms moving away from legacy systems and adopting more agile business models encompassing AI.
The ever-evolving importance of Data:
Access to accurate, complete, and timely data is fundamental to efficient and functioning Capital Markets. New technology advancements are changing the way in which we store and share data across banks, regulatory bodies and market infrastructures. There remains an intrinsic focus from governing authorities on how they can provide access to financial data for the wider market.
ESMA have outlined their five-year Data Strategy which is focused on facilitating the adoption of new data-based technologies as well as improving both the quality and communication of data. Furthermore, is the enhancement of the role of ESMA as a consistent data hub for supervision – providing National Competent Authorities (“NCAs” with access to a central ESMA data pool.
We know firms will continue to invest in robust data management strategies to support new data and AI. However, having the right data and ensuring that data can be accessed by all to drive actionable insights is fundamental if new data-based technologies are able to deliver maximum impact.
Tokenisation has the potential to transform the market….
Whilst Tokenisation adoption may have had a slow start, there remains significant interest and focus across the UK and Europe for providing a roadmap for such digital representations of securitised assets. The industry remains in a mindset of “learning by doing” but there is a strong emphasis now on being able to demonstrate the commercial benefits associated with Tokenisation beyond the proof-of-concept phase.
Whilst initiatives have been undertaken in other global jurisdictions, the level of issuance in UK markets has been minimal. Whilst efforts are currently centred around siloed ledgers to promote regulatory and consumer confidence, the key hurdle will be achieving the requisite level of interoperability between institutions to unlock the full operational benefits.
….But is there a path to coexistence for DeFi and TradFi?
Traditional Finance (“TradFi”) refers to the traditional banking and financial systems upon which the industry has been built. TradFire relies on centralised authorities to facilitate transactions, enforce regulations, and maintain market stability but continues to face ongoing pressures to provide a more accessible, transparent, and efficient financial system.
Decentralised Finance (“DeFi”) represents a paradigm shift in the financial services industry. DeFi introduces decentralised networks which provide easier access and peer-to-peer transactions on open blockchain technology. TradFi and fiat currencies may still be the leading financial systems in the current market, DeFi continues to grow in popularity and attractiveness to market participants and investors alike. There however remains an open question as to how these two distinct domains will coexist to deliver a more inclusive and efficient financial system for all.
Regulation and governing bodies will clearly be key to establishing a framework that encourages innovation while protecting consumers and maintaining financial stability. Markets in Crypto-Assets Regulation (“MiCA”) represent a key step towards this, as do initiatives like the EU DLT Pilot Regime and UK Digital Securities Sandbox which further embrace blockchain technology.
This push for ongoing collaboration across the industry and a concerted focus on education and awareness will be crucial to help forge a path of convergence between the two economies.
Central to the theme of this event was the sharing of real-world examples of organisations from both private and public sectors coming together to consider how innovation can solve shared business problems.
This theme squarely aligns with the strategy and vision of Delta Capita – the financial service division of Prytek– where we want to partner with market participants to Reinvent the FinancialServices Value Chain.
Our mission is to help the industry in identifying and creating mutualised managed services. Delta Capita can bring a combination of deep Capital Markets process knowledge, access to cutting-edge, stable and resilient technology, and an intrinsic focus on operational performance improvement. This helps our clients realise a reduction in operational running costs and provides global scale.
To understand how Delta Capita can help the industry respond to these challenges and more, please contact us today.
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