David Ostojitsch, director of technology and operations at the Association for Financial Markets in Europe (AFME), talks about the challenges that utilities face and where there's opportunity, specifically for post-trade operations and asset servicing, compliance and regulatory reporting, and client onboarding requirements, for emerging technologies to assist.
Over the years there have been numerous pushes to create industry utilities in the capital markets. There have been the relative successes: Omgeo, Euroclear, Clearstream and the Depository Trust & Clearing Corporation (DTCC). There are those that are still trying to figure it out: Project Neptune and the Plato Partnership. And, of course, there have been the failures: margining utility Project Colin, BNY Mellon’s Central Securities Depository (CSD) and the cybersecurity outfit Soltra.
When done well, utilities offer a way for firms to cut down on costs, add transparency and even improve risk management standards. But while industry participants have expressed interest in utility structures in the past, they’ve been exceedingly hard to get off the ground.
A new report produced by AFME found that there’s still great industry interest in setting up utilities for post-trade operations and asset servicing. Specific areas include reconciliations, repo agreements, settlement instructions and reference data, compliance and regulatory reporting, legal requirements around tax requirements, and onboarding new clients, specifically around Know-Your-Customer/Anti-Money-Laundering (KYC/AML) requirements. The report was created with the feedback from 15 financial institutions. (See below for a list.)
Some barriers that exist, according to AFME, include a lack of commitment by participants and funding over a long time horizon, worries of first-mover regret, a lack of existing standards, the inability to switch off legacy platforms, the forfeit of control, cybersecurity concerns, changes in regulatory demands, and market fragmentation, among other reasons.
Additionally, the vision for the end result rarely stays intact as the project moves ahead, David Ostojitsch, director of technology and operations at AFME, tells WatersTechnology.
“Whatever the project is for a utility, its journey—be that bank- or third-party led—the vision over time can change and it’s very difficult to achieve the outcome for lots of different reasons,” he says. “From a third-party perspective, it’s because they may have to go down some kind of specialist route; or, they don’t have the longevity to invest and keep improving; or, you don’t have enough participants to start with at the beginning. It’s difficult to say what the main overall reason is—we identified quite a few of them—but I would say that the vision that starts off, for a lot of different reasons, over time never really materializes as intended.”
The problems that utilities are looking to tackle in the capital markets are hardly new, Ostojitsch says, but one thing that might help push their efforts forward is the emergence of new technologies, specifically in the fields of artificial intelligence (AI), advanced robotics and distributed-ledger technologies (DLT) like blockchain.
“This is a unique time where you can take some of the challenges facing utilities and emerging technology like advanced robotics, AI and DLT, and you’ve probably got a better chance now to solve them,” he says.
In areas such as reconciliations, KYC, regulatory reporting and reference data standards, AI and machine learning are increasingly being deployed—such as IBM’s Watson suite of RegTech tools or Nice Actimize’s suite of fraud deterrent platforms—and blockchain consortiums have been popping up to address these needs, as well, such as R3 and SETL.
Ostojitsch warns, though, that it will take more than advanced technology to answer for the highly complex market problems.
“The key, however, is to not get blinded by the technology but realize that some of the problems that we’re trying to solve still come down to some of the more basic things, such as getting the right stakeholders together, understanding what the problem is, and putting investment behind it and taking the time to plan it through,” he says.
And while the utilities such as the aforementioned Soltra automated cybersecurity intelligence sharing utility may have failed, Ostojitsch believes that there could be other ventures in the cyber space in the future.
“If we look at regulatory reporting at a very high level, for example, the reporting required for a cyber incident and what that might look like, I think there’s definitely a use-case to be made in that area,” he says. “Certainly, collecting and sharing threat intelligence is something that a utility could lend itself to quite well.”
In order for utilities to succeed, AFME’s report says that it’s vital to create industry standards—such as what the International Swaps and Derivatives Association (Isda) is developing with its digital version of its Common Domain Model (CDM)—the need to work collectively, placing greater emphasis on the long-term benefits for the wider industry than short-term needs, and continued dialogue from policymakers and regulators.
See below for AFME’s eight principals for utilities to adhere to.
Members of AFME’s Technology and Operations Utilities Working Group Include:
Bank of America Merrill Lynch
Lloyds Banking Group
The 8 Utility Principles:
1. Governance: Participants can apply appropriate governance and influence on the utility. This includes the engagement process, roles and responsibilities of management, performance measured against defined indicators and management of risk.
2. Transparency: The commercial models and services provided are transparent to all involved participants, with relevant rules and data disclosed to authorities as required, for decision-making purposes.
3. Compliance: All applicable compliance obligations, in all jurisdictions that the utility and participants operate, are satisfied. This includes disclosure to reduce risk, increase service confidence, and for the performance of participant control function.
4. Standards: Standard terms, processes and methods are applied for all participants. Standards should make use of existing industry frameworks and information where available or lead to the creation of additional and recognized standards.
5. Interoperability: The exchange and interpretation of information between similar utilities is supported (through standards and common interfaces), to maintain a competitive and open utilities market.
6. Scale: The utility can scale and adapt, where relevant, for increased participation. The utility allows for increased onboarding of participants through a consistent and objective set of requirements.
7. Economic Sustainability: There is commitment to investment and service improvement as part of an ongoing strategy. This will support increased scale, participation and response to market changes (such as regulation).
8. Market Efficiency: The utility allows for individual participant and wider market efficiencies to be achieved. The utility considers the practical cost and technical implications of its solution to determine the greatest benefit.
Bryan Cross, who heads UBS Asset Management's QED group, joins to discuss alternative data and AI.Subscribe to Weekly Wrap emails