With the securities services industry facing seismic shifts, driven by a raft of market reform and technological evolution, providers and clients are refocusing on their securities products and engagement models. In response to such a dynamic environment, how can the industry use technology and data in a smarter way to drive sustainable value, asks flow's Janet Du Chenne
“The future ain’t what it used to be.” This famous quote from baseball legend Yogi Berra was used by John Gibbons, Deutsche Bank’s Head of Global Transaction Banking, in his opening remarks at the Transaction Bankers’ Forum 2018 to describe the state of play for the industry. Declining margins, regulatory and pricing pressure and competition from fintechs are rapidly changing its dynamics. However, the richness of data within transaction banking means that the traditional metrics will no longer measure the future value that the industry brings. Instead, new technological innovations, such as APIs and artificial intelligence (AI), combined with the rich data held by, and the substantial market knowledge of, transaction banks will empower these providers, their clients and, ultimately, investors.
In a March 2018 report, ‘A calm surface belies transformation in securities services,’1 consulting firm McKinsey identifies that the structure of markets and new technological innovations will mean that the securities services industry faces more change in the next five years than it faced during the preceding 10 or even 20, as it adapts to dramatic shifts in the structure of markets and incorporates new technologies.
Two important trends can be identified in this changing landscape:
- A shift in client priorities, driven mainly by infrastructure change, regulation and business strategies, has introduced new operating models with increased opportunity for closer collaboration between industry participants and investors; and
- Rapid changes in technology are leading to an increased use of peer-to-peer connectivity, robotics and data analytics to enable functional re-engineering and business decisions.
Potential cost of savings to the industry from automation and robotics (McKinsey, 2018)
A shift in client priorities
Large regional infrastructure changes and a developing regulatory agenda have impacted how markets operate and how users of those markets deliver products and services.
In Europe, with Target2-Securities (T2S)2 harmonising post-trade settlement processes, this has created the flexibility to manage settlement directly on the T2S platform infrastructure or via the central securities depository (CSD). It has also created an opportunity to manage asset servicing and tax services via an independent connectivity channel. This channel can also offer the pipework to enable the linking of collateral solutions at both central securities depositories and international central securities depositories. In addition, due to this harmonisation, access to the region can be simplified by providing a single central cash account structure for settlement in both central bank money and/or commercial bank money from a securities services provider. This development allows for greater value to be realised from the optimisation of both liquidity and collateral.
At the same time, multiple regulations such as the Central Securities Depository Regulation, the European Market Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Directive II (MiFID II)3 have brought many challenges, as well as complementing factors to redesign business strategies.
In Asia, financial reforms across the region are also facilitating easier access for investors across markets. Examples of this have been the launch of Stock Connect and Bond Connect in China to support on-shore and offshore access, and the 2025 ASEAN Economic Community Blueprint and Capital Markets vision, which aim to facilitate more seamless international investments by harmonising access to the ASEAN region.
Such seismic change has driven collaborative thinking and the delivery of tangible market account structures and operating models; these are driving a value-based financial structure and creating investor opportunities to optimise both securities assets and cash optimisation. This is leading to a move from the traditional “bundled” custody product towards an implementation of new “component-based” solutions.
Tailoring these solutions to an individual client’s business strategy allows greater choice of services across a community of providers, promoting industry collaboration within a service-oriented architecture.
“The flexibility of component-based solutions enables the separation of product modules to deliver data transparency and tangible financial value. The adoption of such an approach also embeds the foundation framework for technological and data innovation,” says Graham Ray, Global Head of Product Management, Securities Services at Deutsche Bank.
Rapid changes in technology
It is imperative that, given the accelerating pace of market and technology change, incremental benefit is delivered to a business via a more agile implementation approach than has traditionally been the case. This involves using the correct technology to solve each business opportunity, and building upon the foundation of the component-based solutions that are now deployed. By looking at each component, providers and clients can look at driving efficiency through delivering against a roadmap of process automation, via the use of robotic technology, peer-to-peer connectivity and leveraging common data elements that can derive mutual analytical insights to facilitate clear, actionable goals.
Deutsche Bank’s Securities Services business is currently working on a number of key initiatives that illustrate both the business benefits and the agile implementation of new technologies.
Two specific project examples are:
- Using peer-to-peer connectivity via APIs and robotic automation to provide improved client experience and functional re-engineering; and
- Using securities and cash data analytics to provide intraday transparency and insights to optimise financial benefit.
Improved client experience
First, by partnering with a large client, Deutsche Bank used robotic process automation (RPA) to deliver operational integration, with the aim of improving day-to-day client service. The solution allows the client’s client to directly access real-time, consistent data regarding the settlement lifecycle and provides them with optionality to take a targeted set of follow-up actions.
The delivery of these solutions can have great value to the industry. The March 2018 McKinsey report highlights that the use of process automation and robotics has the potential to raise the industry’s efficiency to the next bend on the cost curve. If applied at scale by securities services firms, these tools could, says the report, reduce the industry’s costs by an estimated US$20bn or more.
Fiona Gallagher, Global Head of Securities Services at Deutsche Bank, believes API access and the ability to take immediate actions will be transformative to how peers and investors interact across the securities services value chain: “Only by providing quicker access to common cleansed data can we provide clients with the experience that they have come to expect in today’s instant response environment.”
The second project leverages the Deutsche Bank Data Analytics centre of excellence and innovation labs in Dublin and uses analytics applied to the cash component of securities services products. The resulting data analytics are providing quicker intraday insights that allow more efficient usage of liquidity by treasury departments.
In her dual role as Chief Country Officer in Ireland on a site of 750 people, which includes Deutsche Bank’s Data Analytics centre of excellence, Gallagher believes timely access to cash data that is an integrated part of a custody solution can improve a firm’s understanding of the overall cost of business and, therefore, facilitate opportunities to drive cost efficiency.
" A partnership with clients allows us to explore
and understand the data together, rather than simply reacting"
- Fiona Gallagher, Global Head of Securities Services at Deutsche Bank
Client case study
Northern Trust uses a component approach to migrate assets in the French market post-T2S
Global custodian Northern Trust has successfully partnered with Deutsche Bank and Euroclear in an innovative solution for T2S, enabling it to achieve efficiency benefits for its clients.
Northern Trust’s strategic vision for T2S reached its first milestone with the migration of the French market to Deutsche Bank’s asset servicing only solution.
The global custodian’s strategy for T2S, the platform that harmonises the cross-border settlement of securities for select markets in Europe, is built on a strategic five-year multi-market mandate for custody in Western Europe. It follows the launch of T2S in 2012, which Northern Trust saw as an opportunity to review its business model and challenge the status quo of how global providers connect to Europe.
In devising a fresh, strategic view of its custody model for the post-T2S world, Northern Trust established that most of its T2S flows will be concentrated in five markets in Europe: Germany, France, the Netherlands, Belgium and Spain. With the platform, they had the opportunity to access Europe through a single point of entry, taking advantage of aspects of process harmonisation while still being aware of the need to maintain a provider for local market proximity and expertise in non-harmonised processes.
At the same time, Deutsche Bank also saw the opportunity and began to review its own platform and operating model, unbundling its offering into component parts of the value chain, across asset services, collateral mobility and settlement, to help clients to address the unique challenges they faced given the changing regulatory, infrastructure and technology landscape.
Northern Trust worked with Deutsche Bank on a solution that enables it to achieve efficiency benefits for clients through a consolidated settlement platform and central bank funding accounts across European securities markets.
The T2S solution also enables Northern Trust to hold investors’ assets directly at single central securities depositories (CSDs), enhancing the range of asset holding structures it is able to support. Such a collaboration is made possible by Deutsche Bank’s ability to partner with either issuer or investor CSDs, which allows clients to utilise the flexibility of the component structure to achieve their aims. For example, this particular model allows Deutsche Bank to operate Northern Trust accounts at Euroclear as an investor CSD, which is directly connected to other CSDs via T2S. In addition to having a central point of entry for settlement in Europe, Deutsche Bank provides Northern Trust with connectivity, asset services and tax solutions for all securities settled in Europe, which offers the opportunity to mobilise collateral through tri-party programmes.
Justin Chapman, Head of Innovation and Market Advocacy at Northern Trust, comments, “This collaborative solution bodes well for the future, not just for the success of Northern Trust and our clients, but also for the way we can effectively partner with our providers. T2S provided the opportunity to enhance our existing model and is part of our wider commitment to harnessing opportunities to offer our clients next-generation capabilities and products.”
Migration of French market
The migration of the French market is the first to a new operating model within the industry and sees Deutsche Bank Frankfurt providing the asset servicing that enables clients to self-settle with a direct account at the Euroclear CSD in France. Northern Trust was previously serviced in the French market via Deutsche Bank’s Amsterdam location.
"This collaborative solution bodes well for the future, not just for the success of Northern Trust
and our clients, but also for the way we can effectively partner with our providers"
- Justin Chapman, Head of Innovation and Market Advocacy at Northern Trust
Head of Securities Services and Chief Country Officer | Deutsche Bank Ireland
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