Long reads

A new paradigm for capital markets

Paige McNamee

Paige McNamee

Senior Reporter, Finextra

Yue Malan, senior analyst at Aite Group, recently wrote of the ‘new normal’ for capital markets: “The pandemic has impacted every aspect of the daily workflow for employees in capital markets firms. Today, a new wave of digital transformation will happen in capital markets firms.”

From the perspective of Lisa O’ Connor, head of capital markets strategy at Swift, this statement couldn’t be more accurate. As capital markets players examine the lessons and surprises of 2020, they are also deciding how organisations will tackle the same old challenges within the new context of a pandemic that many had hoped we would have now left behind. 

Last year, at the first ‘fully digital’ Sibos, Swift explained its move to a platform model that will deliver instant, frictionless payments and securities as part of its evolution beyond sequential messaging. Though the conception of the platform model preceded the surprises that capital markets players faced in 2020, the timing couldn’t have been better in terms of addressing the challenges that these organisations will face into 2021 and beyond.

O’Connor believes that the new strategy has the power to provide capital markets players with the tools they need to remain competitive and stay ahead of the curve in an age of rapid transformation for the securities servicing industry.

To be rolled out over the next two years, it will expand Swift’s services beyond financial messaging to offer its financial institution members a raft of transaction management services over an evolved digital platform.

This strategy presents monumental opportunities for capital markets players currently using the Swift network, as well as future adopters. Crafted hand-in-hand with Swift’s community, the new platform strategy will assist and support Swift’s 11,000+ financial institution members on their own digital transformation journey.

Structural focus to drive change

“Even many industry participants aren’t fully aware that securities and FX traffic make up half of Swift’s business, with 65% of average daily volume on the network, and around 6,000 endpoints across our global user base,” O’Connor notes.

She adds, “Swift is the highly reliable and secure backbone of the financial services industry, and our new strategy is only going to build on that reputation while providing and strengthening the market position of our customers in the capital markets space.”

O’Connor explains that Swift’s unique position as a cooperative, working together with the vast and diverse membership that makes up the Swift community, gives the organisation a unique opportunity to create truly fit-for-purpose solutions that tackle the fundamental challenges facing the industry. According to O’Connor, within the context of the pandemic and the new challenges the industry is facing, the platform model is getting a lot of enthusiasm from Swift’s members.

That is because, as O’Connor notes, the new strategy is meant to target real, key challenges prevalent in capital markets transactions today, like settlement failures. “We want not only to address the challenges capital market players faced before the pandemic that have come into sharper focus as a result, but also to ensure that the solutions we build with the community are future-proof and create the foundation to prepare the industry for a more resilient and competitive future.”

Greater transparency in a complex world

One of the key areas that Swift will focus on with its community is improving overall transparency within the capital markets transaction lifecycle, looking at specific instances where a more holistic view of data could eliminate some of the recurring pain points for counterparties.

For example, O’Connor notes that while the vast majority of cross-border securities transactions settle on time, a small number still fail. In many cases, the root cause is incomplete data such as incorrect or missing counterparty Standard Settlement Instructions (SSIs).

“First and foremost, we propose that together with our community, we look at how we can pre-populate some of this information by increasing industry cooperation and developing mutualised tools. That way, if an instruction is incorrect, we can suggest enrichments and amendments to it and help prevent fails before they happen.”

Issues around settlement in Europe are coming into sharper focus as CSDR, which is set to go live in February 2022 (after having its implementation delayed as a result of the pandemic), looms large for the industry. O’Connor explains: “With CSDR, fines and fees will be enforced on settlement failures. In other words, settlement failures will no longer be accepted because the costs incurred could be significant. For this reason, one of the key use cases for the end-to-end approach will be to provide early visibility on exceptions so as to be able to fix them earlier in the chain.”

 “We’re seeking to provide early visibility in this process and a settlement status in the form of an API which can be easily integrated into other parts of the client servicing proposition within securities services.”

By providing additional visibility and full tracking, Swift as a trusted and neutral third party, will be able identify where failure has occurred in the chain so that fines and fees can be attributed to the correct participant.

“We also hope that by tracking these transactions, as the market evolves and as the value chain and settlement timelines compress, we’ll have the ability to flex and scale into the future by empowering the ecosystem to learn from that data.”

No financial institution is an island

For some segments of capital markets, such as custody, clearing and settlement, O’Connor sees an opportunity for the strategy to accelerate digital transformation. Standards is one such area – there are many proprietary standards that exist across organisations, regions and at a sub-process level, which must be navigated or translated throughout the securities transaction lifecycle.

O’Connor explains that a significant element of Swift’s strategy will seek to offer a solution for these back office, post-trade pain-points. Many issues boil down to inefficient, manual processing of transaction information and the consequent lack of straight-through-processing. However, Swift knows from experience that it takes the community coming together as a whole to tackle challenges of this magnitude.

“We can really help the core backbone of the industry evolve, but we can’t do this in isolation. In fact, our strategy centres on working with the best fintechs and consortiums out there to ensure we’re enabling solutions that can really solve industry pain points.”

For instance, in the case of preventing settlement failures by using additional reference data and the link to end-to-end tracking and visibility, Swift hopes to partner with best-in-class providers of real-time exception management tools. O’Connor explains, “We don’t believe it’s the best use of anyone’s time to re-invent the wheel, but instead we want to create a solution that integrates existing offerings in a way that will benefit the industry as a whole.”

“We’re already actively working in a few of these areas to develop and bring solutions to the market that fold in the right partners to relieve pain points together.”

Why the industry should set its own pace

By nature, competition among capital markets players is fierce and asset servicers and global custodians compete on some of the same turf to deliver solutions that bring greater efficiency to capital markets processing.

Despite all of this competition, there is a clear need, publicly recognised by industry leaders, for a concerted effort to work together to standardise and evolve capital markets.

O’Connor believes there is really no entity in the capital markets ecosystem that can match Swift’s neutrality as a non-competitive force working to bring key industry players together at the same table. In addition, holding both unique data sets and unparalleled global reach supports the case for Swift to lead the charge in addressing regulatory challenges, such as CSDR and others.

“The CSDR settlement discipline regime poses a significant issue for segments of the industry, yet, because the Swift community already touches every corner of the global financial services ecosystem, we have a unique ability to roll out changes to our members so they can adopt at their own pace,” says O’Connor.

As a neutral co-operative, Swift’s primary goal is to serve its member financial institutions. The network also securely maintains key information relating to certain aspects of members’ transactions.

“Having access to this data provides us with not only great insight but incredible responsibility. Like no other entity, our members provide us with the hard data to create an indicative, intraday view of where players sit in terms of their cash and their securities positions, which can be leveraged for their benefit.”

FIs operating in the context of ‘the new normal’ need to have a clear view of their positions in times of extreme market volatility and periods of tight liquidity.

“In order to serve the interests of our FI members, we aim to collect this information at a network level. The entire process will remain completely under the control of our members, and account owners will be able to request that the information is collected on their behalf. As firms allow this data to be collected, we will be in a position to provide an indicative intraday view of where that player sits vis-à-vis their assets in the form of a statement. This will be a huge benefit to that player and a big step towards injecting unprecedented transparency into the transaction lifecycle.”

Because security lies at the heart of what Swift does, the co-operative is also planning to build what it calls ‘consent management’. With a customer’s privacy and security front of mind, this tool will go a step beyond simply requesting data (as an asset owner), and instead allow the asset owner to direct this data to a third party.

For instance, an asset manager whose collateral management is handled by a third party can request that information be sent securely to the third party via Swift’s platform. To do this currently can prove to be an operational headache that takes time, a significant amount of paperwork and pushes up costs.

“In the future, we envision a customer doing this in just a few clicks.”

Setting the standard for standards

Swift has extensive experience with standards and continues to be well-positioned to lead the industry as a standard-setting body across both the payments and securities industries.

“Standards are part of the technical underpinning and we do have a lot of unique assets that we can bring to bear. With the new platform, we’re planning to allow institutions to use whichever mode of communication they want to use, so an API, an ISO 15022 message, an ISO 20022 message could all be used to interact with the platform, and we will manage the translation of that information into whatever format your counterparty needs.”

Adjustments to the ISO 20022 migration timeline have meant that financial institutions are carefully considering the pace at which to make the journey to the new standard. In a cost-competitive industry, O’Connor believes that providing backwards compatibility as part of the platform model will offer real support to Swift’s members.

In securities, the industry remains almost evenly split about whether it wants to move to ISO 20022 or continue using current standards.

And because of Swift’s approach, O’Connor doesn’t see this as a problem. “Our translation services allow the market to dictate the pace of transition. Using a public survey, we asked the community for their views on the move towards ISO 20022. While it was clear that there would be great benefits for payments, the securities industry was divided down the middle.”

She adds that at the end of the day, there needs to be a compelling business benefit in order for the industry to want to migrate to a new standard. O’Connor believes there are ample reasons why securities players will make the transition in the near future – such as machine-readable formats that enable greater interoperability and interfacing with AI and machine learning – but these concerns are addressed in the platform.

“We’re not unrealistic, we know there are competing priorities for technology investment, and we want to make it as straightforward for our community as possible. There are still firms out there using standards that predate MTs and ISO 15022.”

“But that’s what’s great about our platform, it assists the transition. That should be the role of a standards organisation and we’ll continue to support the industry with this move.”

Resilience is the new normal

Covid-19 has been blamed for multiple surges in trading volumes, with the “Robinhood” effect perhaps being the most striking reflection of this in the retail investor market. The pandemic has seen millions of inexperienced retail investors flocking to apps like Robinhood that offer no-commission trading. While the overall market impact of these new traders is disputed, trading volumes have undeniably jumped.

With volume spikes witnessed throughout the year and the possibility of continued volatility well into the future, there is no doubt that that the underlying market infrastructures must be able to withstand uncertainty.

O’Connor argues that while the need for business resiliency is very real and will persist into the future, resiliency should remain a core focus even if extreme volatility subsides.

“Given the pressures experienced in the capital markets, business resiliency is more in focus than ever before. I think that going forward we’re going to see an even greater emphasis on this type of planning by critical infrastructures and financial institutions.”

Projects like cloud migration and management are being elevated to higher priority because of remote working, and O’Connor adds that she believes Swift is actually well-equipped to help lead the industry on some of these projects and the challenges associated with this ‘new normal’.

Critical infrastructure is much more valued in times like this she concludes, “and more financial services players are going to have to prove their business resiliency going forward. Financial institutions may therefore tend to favour large, existing operators with a solid, proven track record of resilience demonstrated over time and throughout 2020.”

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