SIX Securities Services’ JAVIER HERNANI, AsiaNext’s NEIL THOMAS and SDX’s DAVID NEWNS speak to BEST EXECUTION about the potential opportunities – and challenges – facing financial market infrastructures (FMIs) such as central securities depositories (CSDs) – especially the ever-accelerating transformation in settlements and digital assets, and the transition away from legacy infrastructure, as highlighted in Citi’s latest Securities Services Evolution white paper, Disruption and transformation in financial market infrastructures.
The white paper outlines how FMIs are facing pressures globally to manage growth while undergoing transformation; preparing for accelerated settlements in North America; and handling the rise of distributed ledger technology (DLT), digital assets and wider tokenisation.
Building on last year’s survey, which saw digitisation and accelerated settlement top of the agenda, the 483 respondents and 12 FMIs and industry participants highlighted the likelihood of T+1 in major markets and the “significant impact” this is likely to have on legacy technology and global operating models, with 89% expecting their local settlement cycles to shorten to T+0 or T+1 within the next five years.
On the impact of T+1, Javier Hernani, head of SIX Securities Services, told BEST EXECUTION: “Securities lending is the beating heart of any hedge fund business – which is why no firm can afford to take T+1 lightly. These findings show that having a shorter timeframe to settle securities will directly impact how quickly securities can be lent out.
“One of the key parts of the rules for hedge funds is around margin lending. The shortening of the settlement cycle means prime brokers will have less time to report specific information surrounding their margin lending to a hedge fund, including intricate details such as what percentage of assets in their portfolio is used as collateral.
“Investment managers should take heart from the fact that certain post trade technology is now already on a level to adapt smoothly to T+1. There has been a significant amount of risk reduction that has already taken place over the last years – thanks in large part to technology improving post-trade processes from an efficiency point of view.”
After India’s T+1 move in early 2023, the ability to depend on real-time communications, feeding a real time view of inventory is “increasingly critical”, the report emphasises. “With each market move increasing dislocation risks between different global settlement cycles, the likelihood of the T+1 domino effect continuing is high,” the report warns. Additionally, atomic settlement, near-instant settlement, is on the horizon, with the expectation that it will be reality in five years.
Regarding DLT, industry knowledge around the operational benefits of the technology is “maturing quickly”, the report says, and now needs to evolve to include the benefits for the buy-side.
Neil Thomas, chief commercial officer of AsiaNext, a digital assets exchange for financial institutions, told BEST EXECUTION the Citi findings reinforce the desire among market participants to engage in digital asset infrastructure which will further drive innovation and efficiency for the financial services industry.
“Tokenisation, and the potential of a digital-based infrastructure will soon help to reduce settlement times, increase traceability, and lower costs – but, more broadly, this will all help to increase financial security.”
As a result of these perceived benefits, 2023 has seen 74% of respondents engaging in DLT and digital asset initiatives (that figure was 47% in 2022). With central bank digital currencies (CBDCs) on the horizon, respondents say the focus is increasingly on those whose role it is to govern the infrastructures — not just regulators but also risk, compliance and finance teams.
Looking ahead, the respondents believe continued momentum of DLT and digital assets depends on two factors; the sell-side’s ability to engage the buy side, using a narrative that is built around the needs of a portfolio manager, and the ability to change industry processes to realise the benefits that DLT offers.
David Newns, head of SDX at SIX Group, told BEST EXECUTION that when using DLT infrastructure, there is a significant reduction in capital allocation and overall costs associated with trading.
“That is incredibly attractive as a benefit, along with the eliminated risk associated with the settlement cycle – because it happens instantaneously. There are clear efficiencies, risk reductions, and cost savings associated with leveraging DLT infrastructure.”
©Markets Media Europe 2023
