As firms in the financial services industry continue to manage pandemic-driven disruption, COVID-19 did not necessarily identify any new business paradigms, commented DTCC’s Matt Stauffer, Managing Director and Head of Institutional Trade Processing, to an audience of buy-side, sell-side, outsourcing and custodian firms at the annual DTCC South East Asia Virtual Forum.
“The pandemic magnified many of the challenges that we have already been facing in the last few years,” he added.
Stauffer shared that DTCC recently partnered with consulting firm, Oliver Wyman, to “understand the impact and provide perspectives on the after-effect of the pandemic on our clients.” The analysis, Stauffer said, highlighted key areas of concern, which were further exacerbated by the pandemic. Among these were questions related to re-energizing and re-engineering business operations in the long term -- how do we address the challenges of managing legacy technology and infrastructure? And how do we assess and manage a demanding cost base while responding to an evolving set of regulatory priorities?
Stauffer elaborated, “We, as an industry, have continued to depend on manual processes and legacy infrastructures to operate our business. The operational risk in manual processing, especially during extended period of uncertainty and disruption, has propelled the trend to double down on digitalization and modernizing legacy technology. Because of the risk impact on labor-intensive activities, such as trade management reconciliation and processing margin calls in the first half of 2020, the shift to a fully automated operations model, including the use of application programming interfaces (APIs), is now top-of-mind. The mindset has also changed to taking a holistic view of the overall digitalization strategy and understanding that it takes time for return on investments to be realized.”
Managing Operational Costs
While the end date for the pandemic is still uncertain, DTCC’s purpose to serve the post-trade operational needs of clients is even more critical in times of market turmoil stressed Stauffer. In 2020, DTCC’s Institutional Trade Processing (ITP) business significantly greater volumes compared to 2019 and was also able to handle unexpected volume peaks across all services, including managing margin calls.
Stauffer noted that while assets under management and trading volumes continue to grow in the asset management community, operating cost to support increased trading activities has also increased proportionately -- while revenue for asset managers remains flat due to fee pressure. Greater focus is now placed on leveraging either automation or outsourcing services to manage and contain costs.
Stauffer observed, “Increasingly the role of traditional research is taking a backseat, in favor of sophisticated data-driven analysis to help generate greater alpha and revenue.”
He added, “Thanks to persistent high trading volumes and a comparatively stable operating environment, the broker-dealer community is in a strong position to ride out the crisis. On the contrary, downstream counterparties like custodian banks continue to face revenue challenges brought about by ongoing low interest rates and cost complexities. To sustain growth, the traditional custody model has since expanded to provide support for the back-office to the middle and all the way to the front.”
One key lesson from last year’s market disruption was that having pristine and accurate reference data, specifically standing settlement instructions (SSIs) included in the economics details of trades for downstream settlement processing is key to preventing trade exceptions and trade fails especially given upcoming regulatory mandates.
Pending Regulatory Impacts
Stauffer also noted one key lesson from last year’s market disruption was that having pristine and accurate reference data, specifically standing settlement instructions (SSIs) included in the economics details of trades for downstream settlement processing is key to preventing trade exceptions and trade fails especially given upcoming regulatory mandates.
“There is a growing sense of urgency to be operations-ready for the Settlement Discipline Regime (SDR) of the Central Securities Depositories Regulation (CSDR). The extra territorial impact of SDR when it comes into force on 1 February 2022 will affect any market participant – buy-side or sell-side – that trades with a European counterparty,” he said.
Removing Inefficiencies in Post-Trade Processing
To address gaps in post-trade processing, Stauffer shared that DTCC is enabling client access to the entire suite of ITP services via a single, integrated platform – to achieve no-touch processing from post-execution to settlement. It starts with capturing the golden record of key reference data elements like SSIs and the legal entity identifier (LEI), ensuring that trades are matched and enriched with the correct SSIs, creating an authoritative trade record for all parties involved, tracking that trade through settlement finality and allowing for identification and resolution of exception as it occurs.
Stauffer said, “Data plays a key role here in facilitating this end-to-end processing across the post-trade lifecycle – by delivering critical insights in real-time and identifying operational efficiencies or inefficiencies in the process.”
Elevating the Client Experience
In speaking with the virtual audience, Stauffer underscored that DTCC’s commitment to its clients and the industry does not stop at no-touch processing.
“To enhance the client experience, we are making strides to modernize our existing architecture turning it into a flexible, reliable 21st century digital infrastructure,” he said. “To eliminate complexities and redundancies in our architecture, next-generation resilience capability will be built into our technology and our processes to ensure that we are able to provide any required services on demand. Ultimately, what we do must be able to solve our clients’ pain points and the industry’s challenges.”