Securities Services firms must embrace technology to enhance transparency
Asset managers are turning to the securities services industry to help them comply with transparency regulations. Providers must invest in innovation to deliver smarter services at a lower cost.
The asset management industry has faced myriad regulations with direct and indirect implications for its business model in recent years. The Markets in Financial Instruments Directive (MiFID) II, Solvency II, the Shareholders Rights Directive and numerous other initiatives have sought to enhance transparency, both to regulators and to underlying investors. Their goal is to reduce fraud, systemic risk and the possibility of a recurrence of the global financial crisis of 2008-2009.
Increased regulation is a global phenomenon. But in Europe, regulators have been especially active in seeking to reduce post-trade risks and build a stronger European capital market, through initiatives such as the European Market Infrastructure Regulation (EMIR). Inevitably, these measures have increased the regulatory burden and costs for asset managers.
Service providers come to the fore
Increased transparency is a common hallmark of regulation over the past decade; in practise, this means asset managers must become savvier with data and more flexible in how data is reported. How is this being achieved?
To date, asset managers have largely delegated responsibility for fulfilling their obligations to security services providers. Some asset owners have built their own solutions but the clear majority outsource to third-party service providers. Asset managers would argue their job is to manage money and talk to clients: they are happy to provide email wrappers to send information to clients but would rather leave data handling to others.
In many instances, this makes sense. For example, asset lenders already hold the necessary data to meet the requirements of the Securities Financing Transactions Regulation (SFTR), while a trade reporting partner already has the necessary file required to comply with MiFID II.
Moreover, the growth of private or alternative asset markets, such as private debt, infrastructure and real estate has increased the challenges associated with data management for asset managers, given the absence of easily available information about such assets (in contrast to publicly-traded bonds, for example). Similarly, as asset managers expand into new geographies, the data associated with reporting requirements becomes more complex, in relation to onshore and offshore holding of data, for example.
Delegating responsibility for key compliance requirements around transparency is also a straightforward way to reduce asset managers’ operational risks.
These have increased significantly in recent years as a result of greater scrutiny and the introduction of higher penalties for non-compliance.
The role of technology
Using data more effectively can be easier said than done. While regulations such as the Packaged Retail Investment Products Initiative have encouraged standardisation of data – and much has been learnt from the implementation of Solvency II, for example – there are currently no industry standards in many areas. Secure FTP (file transfer protocol) and even email formats are often used for data transfer, for instance.
However, innovation is poised to overcome this challenge. Application programming interfaces (APIs) could be the next stage in the evolution of post-trade services. They allow different systems to integrate seamlessly, linking a fragmented systems environment where legacy technology remains commonplace, making infrastructure more cost effective, and accelerating implementation times. APIs pull rather than push data, making real-time visibility feasible.
Technological innovation is also delivering relatively low-cost solutions in the form of cloud computing and data lakes, which facilitate the use of open infrastructure. The advantages offered by open architecture are considerable. They allow asset managers to look across their exposure in a holistic way. Even if asset managers choose to work with different custodians based on geography and asset classes, reporting can still be easily aggregated.
New regulations such as Institutions for Occupational Retirement Provision (IORP) II, which seeks improved workplace pensions governance and accountability, are expected to accelerate the adoption of open architecture to help both asset owners and managers to meet their regulatory requirements.
Service providers must deliver
With asset managers largely choosing to outsource many of the key elements of regulatory requirements that demand greater transparency and better protection of investors, the onus is on security services providers to take full advantage of new technological developments.
However, securities services providers are, in many cases, being asked to do more for less. Asset managers are putting downward pressure on prices in the securities services industry; asset managers need to cut costs in the middle and back office as fees are eroded by increased competition and margins come under pressure from volatile markets, Squaring the circle will be difficult.
But the application of innovative cost-saving technologies such as APIs, partnerships with asset managers and technology companies, and new data management services such as cloud computing and data lakes, could transform securities services.
They could help to deliver improved solutions, more efficiently in ways that benefit the entire ecosystem, including asset managers and end clients.