Emma Johnson, Director, regulatory and market initiatives, securities services , Deutsche Bank
If we can order a washing machine from Amazon and have it delivered next day, then why can’t a purchased security be credited with similar levels of speed and efficiency? Deutsche Bank’s Emma Johnson explores how industry steps towards harmonisation and integration could create an Amazonised future for post-trade.
The influence of Amazon is felt keenly in many sectors and extends well beyond the retail sector. The reason is simple: it is held up as a paragon of how businesses can use technology to provide a world-class customer experience. Customers of Amazon can search, select, and purchase an item in minutes, with dispatch of the item swiftly confirmed. Often items will take just a day to arrive. This retail experience has fundamentally changed expectations of what can be delivered in virtually every field.
Treasurers, looking to manage their surplus cash efficiently by investing in securities, find however that there is a disparity between the slick, quick and advanced processes used in an Amazon transaction and those used in a securities transaction. Despite being transferred electronically, for instance, a purchased security does not arrive in the treasurer’s account until two days after the transaction is completed – a particular pain point.
To address these concerns, regulatory efforts, including the introduction of Target2-Securities (T2S), have attempted to harmonise and integrate the securities post-trade industry. While these measures have laid solid foundations, it is not clear that they will take us as far as might be expected. So what might an “Amazonised” post-trade landscape look like and what will it take to get there?
Imagining an Amazonised post-trade environment
While an online order of physical goods and a securities transaction are fundamentally different operations, aspects of the Amazon experience – including its single portal, guarantee of delivery and ancillary services – could be replicated in post-trade processes.
Going forward, for instance, it is not inconceivable that something analogous to the single portal could emerge. Central securities depositories (CSDs) could potentially outsource their settlement business to a single centralised system – such as a European CSD (ECSD), which would sit above the national CSDs to eliminate the processing-related barriers.
The ECSD could then provide a utility function, which would guarantee the quick and efficient delivery of securities to the relevant parties – much like Amazon’s delivery of products and services. Custodians, meanwhile, would continue to provide both connectivity to the platform and a number of additional products and services, including custody, asset servicing, lending, borrowing, asset optimisation and settlement, all offered as plug-and-play client services. The result would be a set-up with clear parallels to what Amazon does best, with concomitant improvements in terms of efficiency and user experience.
The good news is that the foundations are already in place. The introduction of T2S as the European Central Bank’s (ECB) new securities settlement engine has played a pivotal role in the creation of an integrated, low-risk and low-cost post-trade environment. The new platform, which is both standardised and interoperable, is driving the industry closer to harmonisation. In terms of securities processing, for instance, the common functionality provided to CSDs under T2S may lead to domestic and cross-CSD settlement via a single T2S CSD.
Regulatory changes have been hugely impactful, too. The introduction of the EU Shareholder Rights Directive (SRD II) has helped improve investor protection, timeliness, speed and efficiency, while the Central Securities Depositories Regulation (CSDR) has enhanced uniformity and standardised market practice.
In doing so, it is already bringing parts of the post-trade experience closer to the Amazon model. If goods on Amazon are not delivered by the anticipated date, the issue can be escalated to the retailer, leading the customer to cancel their order and purchase the goods elsewhere. Similarly, under CSDR, if a seller fails to deliver a security within four days the CSD can mandate a buy-in – enabling the buyer to repurchase the securities from a different source, with the original seller covering any difference in costs.
The next steps
While the new infrastructure and regulatory changes represent a positive step, there is still a long way to go. Uptake of T2S has been lower than expected, with an average of just 600,000 instructions processed each day and cross-CSD settlement volumes remaining below 1%. Challenges remain with SRD II and CSDR, too, which must still contend with extra-territoriality: foreign investors will need to be educated on these new European rules to ensure they make the necessary changes to their operations, keeping all participants on the same page.
Increasing T2S volumes is a vital next step in helping to lower the cost of settlement, while also incentivising investors to consolidate their assets in T2S markets. Regulatory work must also continue, with a particular focus on enhanced transparency throughout the entire chain. What’s more, new entrants to the securities market, such as fintechs or techfins, will need to be met with a robust regulatory framework. This will ensure that banks and the “next big thing” share a level playing field, which will help foster competition, collaboration and integration.
New technologies should also be embraced. Distributed ledger technology (DLT), artificial intelligence (AI) and cloud-based services, for example, can make the collection, management and distribution of information far more efficient and effective. Increasingly, non-bank entrants into the custody space are leveraging these technologies – making post-trade a far more competitive environment. Going forward, this competitive atmosphere should be welcomed and will help to provide investors with greater choice and cost transparency.
The post-trade industry has already taken its first steps towards an Amazonised future. However, although the foundations have been laid, the edifice is yet to be built and the industry has a way to go before it reaches the levels of efficiency that recent advances have led many to expect. Constructing a post-trade environment that meets these expectations will require an updated agenda, including a standardised interface and standardised set of rules laws and practices.
Emma Johnson is director, regulatory and market initiatives, securities services at Deutsche Bank
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