A new study reveals that 78% of financial market infrastructure (FMI) investment budgets are spent largely on maintaining legacy infrastructure – and this “technology debt” is acting as a drag on potential growth.
The findings come from ValueExchange, in partnership with Nasdaq, in a study which surveyed more than 300 players in the post-trade ecosystem, including exchange groups, custodians and brokers.
The study – Financial Market Transition – Legacy, Growth and Collaboration – found that maintaining day-to-day processes – simply keeping the lights on – is taking up 44% of infrastructures’ investment capacity, while a further 34% is allocated to the transition and replacement of these systems.
Alongside intense regulatory oversight and mandated change, operating models are being pulled in multiple directions, the study suggests, leaving very little room for spending on growth initiatives.
Roland Chai, executive vice president and head of marketplace technology at Nasdaq, said: “Over decades technology debt has built up amongst infrastructure providers across financial markets. With more than a third of firms planning a major system overhaul over the next five years, alongside responding to an unprecedented wave of regulation, the need for refreshing core technology is a challenge that is core to most industry participants. As the backbone of the industry and global economy, operators must differentiate themselves and remain relevant for the next generation of investors.”
This spending constraint is leading to a substantial difference in investment allocations between FMIs and their participants. For example, for more than ten years Robotic Process Automation (RPA) has been proving highly effective in facilitating the quick and tactical automation of core processes and yet today only 4% of FMI spend is on RPA and AI initiatives, compared with over 28% by market participants.
A third of firms surveyed operate with legacy platforms more than ten years old, with 37% of respondents planning a major system overhaul in the next five years. The need to undertake significant projects is particularly prevalent in the post-trade space where 47% of clearing firms expect to trigger an upgrade, while in settlements 44% of firms see a transition as imminent. This comes at the same time as they look to remove time from their processing and increase their settlement efficiency, meaning an inevitable ‘distraction effect’ at a critical time.
The study finds the reach of mandatory regulatory change is the central concern for 64% of respondents. As the global securities industry continues to contend with the impact of the Shareholder Rights Directive II and Central Securities Depositories Regulation, project teams are now faced with the added complexities of the transition to T+1 settlement cycles in North America in May 2024.
The UK Securities Financing Transactions Regulation has forced the securities finance firms to accelerate their data reporting capabilities – as will the Securities Lending Transparency: Rule 10c-1 in the USA. Considered in the context of multiple local market regulations centered on client asset segregation, client monies and other areas, the regulatory agenda is increasingly requiring enterprise-wide change across the entire trade cycle.
Magnus Haglind, senior vice president and head of products, marketplace technology, Nasdaq, said: “Across our client base there is an increasing recognition of the need to undertake major change programs, having adopted a patchwork approach for decades.
“The need to respond to regulatory change is also seen as a significant factor, which increasingly demands re-engineering entire platforms, rather than tactical initiatives. This underscores the importance of modernisation initiatives across infrastructure operators, where growth should form a key part of legacy upgrades.”
