Mark Carney, UN Special Envoy for Climate Action and Finance (and former Governor of both the Bank of Canada and the Bank of England) speaks to Bloomberg‘s Haslinda Amin about “replumbing the financial system”, providing tools that help firms meet Net Zero commitments.
A queen and a former governor were among this year’s speakers, who urged financial institutions and fintechs to work together to improve the flow of digital services and data for better decision-making. Janet Du Chenne reports on their progress.
What do H.M. Queen Máxima of the Netherlands and SWIFT have in common? The answer may not be immediately obvious but as the United Nations Secretary-General’s Special Advocate for Inclusive Finance, the royal leveraged the financial messaging infrastructure that connects 11,000 banks in over 200 countries to deliver an important message. In an interview with The Banker magazine,1 streamed during SWIFT’s virtual Sibos event, she urged banks to improve access to finance via mobile tools to 63% of women in sub-Saharan Africa who do not have a mobile phone.
The message was about more than just mobile banking. With environmental, social and governance themes ascending the Sibos agenda2, Queen Máxima’s session was one of many at this year’s conference (11-14 October)3 calling for collaborative action on financial structures that employ digitalization and data to enable access and empower decision-making under the Sibos theme of ‘recharging global finance’.
Nothing happens in isolation, as Mark Carney, UN Special Envoy for Climate Action and Finance (and former Governor of both the Bank of Canada and the Bank of England) noted in his closing keynote. As asset managers of one third of global financial assets commit to Net Zero, he stressed the role of financial services in helping those assets reach that goal. “We are changing the plumbing of the financial system, to provide institutions with the tools, information and the new markets to move to Net Zero.”
Global payments already enjoy such ubiquity via real-time payments (which grew by 41% in 2020, according to McKinsey4), with data from those transactions being made more widely available for broader uses. As The Economist notes in Instant economics5, banks have opened-up treasure chests of data helping reveal whether people are spending cash or hoarding it. “The real-time revolution promises to make economic decisions more accurate, transparent and rules-based.”
In summary, as transformative technologies deliver on their promise of greater efficiencies, speed and transparency in securities and payments, this year’s Sibos highlighted how their potential to decentralize finance is spurring ecosystem participants to rethink their roles and to collaborate. The data sets that that interoperability could unlock from replumbing the financial system, could inform better decision making that is not only good for financial services but for society as a whole.
- Enabling faster and frictionless payments: interoperability is key to increasing efficiency and lowering costs cross-border payments. Customers want more transparency and they are not necessarily looking for traditional banks to process them.
- Making securities faster and trackable: progress is being made towards greater transparency, improved speed, and efficiency in a securities lifecycle. Financial market infrastructures can play their part by investigating the source of settlement fails
- Success in stopping settlement fails – what will it take? Mandatory buy-ins and penalties, greater transparency in data sharing, a decentralized settlement system and shorter settlement cycles could help stimulate further efficiencies in securities settlement
- Trending towards T+0: Traumatic or trouble-free? U.S. and certain EU markets have shortened settlement cycles without much difficulty but shortening them future would require a existing operational processes to be significantly tweaked.
- Decentralizing finance and the role of ecosystem participants: Central banks must future proof themselves and explore new roles in the new ecosystem. CBDCs in cross-border payments are being investigated. The enablement of instant atomic settlement of tokenized assets is a huge opportunity
- Leveraging new technologies in asset servicing: as firms build scale, the complexity of their operating models increase, and so they need to translate the heterogenous sets of data into homogenous sets. High quality data and analytics are also critical to the industry's progress
- Can data standardization accelerate progress? Standardization could enable the provision of seamless data to customers. The future vision is a land of shared data, where data privacy and anonymity are protected, and where data would be pooled centrally across banks.
The replumbing of global payments is well underway, with SWIFT having
upgraded its network towards providing faster and frictionless
transactions. Over the past year, SWIFT carried out US$140trn of
transactions and 92% of large transfers on its high-speed pipes happen
within a day.
Instant payments are the holy grail, however,
and with big tech firms such as Facebook providing them through digital
wallets, the SWIFT community is responding. Digital identity is one area
that could enhance payments, and standards would enable
interoperability across borders and platforms. Banks could also then
monetize their KYC investments by allowing clients to utilize the
extensive client identification performed on them for other purposes
such as private sector applications and government services (as is the
case in Norway).
A session with SWIFT’s Kalyania Bhatia, J.P. Morgan’s Sara Castelhano and Pagonxt’s Susana Delgado agreed that interoperability is key to further increasing efficiency and lowering costs in a very fragmented payment space. Customers want more transparency on their cross-border payments, and they are not necessarily looking for traditional banks to process them.
The need for transparency is prevalent in securities, where transactions are less real-time. In a session aptly titled Securities tracking: Lighting the path to increased efficiency, financial market infrastructures such as Russia’s National Securities Depository NSD, Euronext and SWIFT and global custodian Northern Trust discussed progress towards identifying and tracking a securities transaction across all intermediaries in the securities life cycle for greater transparency, improved speed, and efficiency.
SWIFT’s chief strategy officer Dave Watson explained the work the organization is doing with 6000 securities users is aimed at “reducing the pain of securities settlement fails, addressing the increasing costs, risks and attention coming from settlement discipline regimes all over the world.”6 Currently, payment transactions enjoy traceability through a unique transaction reference, which is ubiquitous in payment flows going over SWIFT. In securities, given the move towards T+1 settlement and the disruptive ability of fintechs to solve discrete problems in securities transactions, a “better” solution for the SWIFT community would be to re-use the existing Unique Transaction Identifier (or Unique Swaps Identifier) for individual transactions to track the whereabouts of the trade.
Financial market infrastructures (FMIs) such as exchanges and central securities depositories can play their part by investigating the sources of inefficiencies in settlement fails, and by supporting market participants by sharing data they possess due to their unique position in the market. NSD, Euronext and Northern Trust agreed that securities post-trade tracking improvements could enable transparency and improve communication among SWIFT users.
SWIFT’s chief strategy officer David Watson explains how the Unique Transaction Identifier can improve speed, transparency, and efficiency in securities transactions.
With settlement fails a pressing theme at this year’s Sibos, a session with Euroclear Bank, The Stock Exchange of Thailand Group, Clearstream Banking and BNY Mellon Direct Custody discussed what would help. Currently, an overwhelming majority of fails are caused by inventory issues (as it pertains to short selling) and process issues. Only 2% of settlements are due to incomplete Standard Settlement Instructions (SSIs), which proves that the industry is operating largely efficiently.
The CSDR’s Settlement Discipline Regime mandatory
buy-ins and penalties could stimulate settlement efficiencies but this
would achieve better results when combined with greater transparency in
data sharing amongst market participants – through transaction
management platforms and closer collaboration between market
Adopting a decentralized settlement system could also help; however, this would require each market participant to individually invest in their own respective system, which is a significant upfront cost. In addition, certain developed markets such as those in the U.S. and Europe have pioneered shortened settlement cycles, which might provide a boost of confidence in the broader market as it moves towards higher efficiency.
During a session titled on the road to T+0: The global trend towards shorter settlement cycles, the U.S. Depository Trust and Clearing Corporation (DTCC), Chicago Mercantile Exchange (CME) and Banco Bilbao Vizcaya Argentaria (BBVA) talked openly about their experiences of the most recent shortening and progress towards even shorter cycles. A shorter settlement cycle for securities provides many benefits: more efficient use of funds and collateral, capital requirement reduction for some broker-dealers, more accurate mark to market and corporate actions efficiencies.
BBVA’s head of global securities services Alexis Thompson reflected on the Spanish market’s change from a three-day to a two-day cycle in 2016: “Everyone was talking about it and it felt like the end of the world was coming and that nothing was going to work. While there were some IT issues with trades in flight for two or three days, once that was overcome it was a bit of an anti-climax.” He added that with things now working smoothly the market is questioning the possibility of moving to T+1: “It’s something that’s being discussed in the marketplace because there’s clear advantages of reducing the cycle that will outweigh the hardship,” he said.
For derivatives clearing house Chicago Mercantile Exchange, which has daily mark to market for most products on a twice a day basis and for cleared swaps on a once per day basis, the move to shorter cycles is to be welcomed. “For the most part the move of gains and losses between clearing members is T+0,” said Susanne Sprague in the credit and liquidity risk team. “For equities and bonds, which settle on T+2, we look forward to shorter cycles as its one less day less for clients to double fund their margin requirements before they get credit for those assets”.
Such a move has been on the DTCC’s mind since 2017, when it moved to a T+2 cycle7. Michelle Hillery, managing director in the Equity Clearing and Settlement team said it immediately turned its thoughts to what comes next. “Having learned from Europe, we saw the clear economic value in shortening settlement cycles in addition to reducing various other types of risks as well,” she said. However, other pressing concerns on the heels of T+2, meant that progress towards this had stalled.
In February 2020 the DTCC brought those discussions back on track by proposing T+1 cycle8.
The argument was that margin credit, or the amount traders needed to
meet margin requirements would be reduced and assets that would have
been used to post margin could be used for other purposes, thus reducing
margin spikes and volatility. From a risk perspective, this equated to a
41% reduction on VAR across the industry, said Hillery, by removing a
day from the settlement process and a flattening of the mark to market.”
Beyond T+1, the goal of same day settlement would require buy-in of all market participants and the custody value chain. Existing operational processes (such as reconciliations, custody, corporate actions, cash, funding, and margin calls) will need to be significantly tweaked to accommodate it considering the 98% of DTCC’s daily trade volume that is netted (due to what is an inefficient cash and securities market) so there’s efficiency in capital backing the trades. Technology for instant transaction is there but not the process, says Thompson.
the form of smart contracts and Central Bank Digital Currencies (CBDCs)
could facilitate this, but the decentralization of current workflow
needs to be with trusted participants and players. Session panellists
agreed that participants should think more broadly, using a combination
of AI, cloud and DLT and not only DLT. While these new technologies
could drive the decentralization of transactions (via a blockchain that
does not rely on central financial intermediaries), the clearing houses
will continue to play a vital role in providing security to the
(L-R) Global Custodian Editor Jon Watkins asked BBVA Alexis Thompson, DTCC’s Michelle Hillery and CME’s Susanne Sprague why the benefits of shorter settlement cycles outweigh the pain.
Amid this potential decentralization, other intermediaries such as central banks are working to future proof themselves. They are looking to play a larger role in enhancing the financial industry - in new capacities such as green financing, AI and fintech; they need to encourage financial innovation while ensuring adequate supervision of the financial sector and avoiding systemic risks associated with a fast-changing environment globally and focusing on local requirements.
A group of these intermediaries discussed What should a 21st century central bank look like? Ulrich Bindseil of ECB Europa and Howard Lee of the Hong Kong Monetary Authority (HKMA) joined HSBC’s Georges Elhedery in agreeing that collaboration will be key in facing these challenges as well as competition from the private sector.
Five central banks have already launched or piloted digital currencies (including China)9 while other central banks are collaborating to explore the use of CBDCs in cross-border payments. The ECB started investigating its Euro-coin uses in Q4 2021, while the HKMA has also been working on an HK Stable Coin. The consensus was that that there would be a coin for wholesale and retail in future and that such a CBDC would require collaboration with the financial industry and banking sector as the respective future targets are the same.
Reflecting on the session in a BBH Insights podcast, BBH’s Tim Bosco observed another huge opportunity that DLT-based, central bank money (as well as stablecoins) might offer - the enablement of instant atomic settlement of tokenized assets (or an instantaneous transfer of cash and tokens residing on the same ledger) especially in relation to hard to unlock access and illiquid assets such as private equity. Where that is not possible, to fulfill the cash transfers on a blockchain without introducing additional volatility associated with cryptocurrencies, the tokenization platforms of the future might look to take advantage of CDBCs, whose value and stability can be counted on, he said.
Another session comprising Philippe Benoit of BNP Paribas, Mike Demissie of BNY Mellon, Jennifer Peve of DTCC and Mark Smith of Symbiont.ID explored the role of non-fungible tokens (NFTs) which are gaining traction due to the developments of tokenised assets. The panelists agreed that tokenization and crypto are a foundation for future asset classes, which could change the entire ecosystem of players in the mid-term future.
However, this will require regulation to help make it a safe environment. With the potential of decentralized finance to disseminate layers and intermediaries, some tasks could become obsolete within three years, such as manual intervention in investment process (smart contracts), thus creating frictionless digital securities. This will be a continued evolution rather than a “big-bang” resulting in new roles and offerings being presented while legacy tasks and roles will disappear.
State Street is one of many asset servicing providers exploring what those roles and offerings could be with the view to providing digital and traditional solutions to crypto, CBDC, blockchain, and tokenization.
In a Sibos Spotlight session on transformative
technology, the company’s chief operating officer Lou Maiuri described
the change for financial services firms as “both exciting and
He noted how several industry shifts including the growth in ESG, alternatives, private and passive investment, and the need to accelerate time to market and develop new ways to process transactions more efficiently and accurately have forced financial services firms to rethink their operations. In addition, these firms are being held to higher standards by their clients and global regulators to demonstrate resiliency and they’re facing competition from a new breed of non-traditional players. “So as a result, financial services firms are increasingly looking to trusted partners to provide help to transform operating models, create scale and accelerate growth.”
He noted that as those firms build scale, the complexity of their operating models increase, and so they need to translate the heterogenous sets of data into homogenous sets so they could be leveraged by asset managers and asset owners.
High quality data and analytics are also critical to the industry's progress, said Maiuri. “What was missing was a front-to-back investment servicing platform to provide firms with operational, data, technology and liquidity services”.
Lou Maiuri, State Street COO explained how harnessing new technologies is about continuous learning, looking to the future and acting in the present and making bold moves.
A further session on the transformative power of data discussed how
standardization could enable the provision of seamless data to
customers. Participants of this session heard that increasingly, the
buy-side is looking to sell-side banks to provide a technology solution
to store, process and analyze data in line with industry standards. As
regulatory requirements eat away at other priorities the opportunities
to react to standards (ISO20022, ISO20015 FpML, FIX) will be lower down
the buy-side’s pecking order.
Collaboration is key to this as there is no competitive advantage of creating individual standards. Vicky Kyproglou at UBS added that “Our industry must act in a co-ordinated fashion – the magic question is: how do we create network effects for ISO20022 and quantify the cost of adopting the standard now versus future costs of not taking action? Standards are an enabler to avoid fragmentation”, she added. “We can all work on a business case where we see the most benefits, for example in corporate actions. For this to happen, firms need to start looking at industry standards internally with the same ambition.”
Another session looked at the
power of community to deploy AI at scale. Deutsche Bank, Societe
Generale and C3.AI shared thoughts: existing applications among banks
should include fraud detection in cross-border payments and document
recognition. Further afield exploiting CRM installations and
transforming data from a central repository to dynamic analytics and a
forecasting tool that is predictive, enabling precise revenue and
These applications are now being extensively used in banking operations. The future vision is a land of shared data but where data privacy and anonymity are protected, where data would be pooled centrally across banks. Commenting on this session in a BBH Insights podcast BBH’s Sinead McIntosh noted that centralization and partnerships between banks and fintechs are looking to deliver benefits in areas of fraud prevention. “Achieving milestones on that scale, while simultaneously protecting privacy and anonymity would be a massive leap forward for the industry in terms of fraud prevention that would radically address industry-wide challenges like AML, for example,” she said.
“BBH initially applied new technologies such as AI and machine learning to its own process but then progressed to partnerships with clients within the FI ecosystem offering access to shared infrastructure and our technologies, which are mutually beneficial without impacting either of our competitive advantage.”
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What should a 21st Century Financial Institution look like?
Sinead McIntosh on how traditional financial providers will evolve and partner.
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The future role of CBDCs in asset servicing
Tim Bosco on the roles CDBCs could play in the asset servicing ecosystem in the near future
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How should financial institutions adapt to a digital asset future?
Ingrid Mosquerra on the importance of collaboration among financial institutions and their engagement in the creation of global public policies.
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Digital Solutions, Investor Services, BBH
5 Instant economics, The Economist, 23-29 October 2021
6 The Settlement Discipline Regime of Central Securities Depository Regulation mandates buy ins and penalties for failed trades
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