DTCC President & CEO Mike Bodson
DTCC President & CEO Mike Bodson and chief executives from three other prominent securities market infrastructures (SMIs) outlined challenges facing the global markets—including how fintech is transforming market infrastructure, new approaches for managing risk and the war for talent—at the Sibos 2019 conference in London.
Bodson joined Javier Hernani Burzako, CEO, BME; Valerie Urbain CEO, Euroclear Bank; and Philip Brown, CEO, Clearstream, for the panel discussion, “Getting Ready for The New World?,” as the group focused on the potential impact of new technologies, evolving business models and regulation.
Market infrastructure firms “have a unique responsibility to work collaboratively with the industry while protecting market stability and mitigating risk,” Bodson said.
DLT Has Transformational Potential But Needs Time
Acknowledging the early hype about how blockchain would transform financial market structure, the panel members agreed that the technology, while still young, may be years away from having a widespread impact on the market.
Noting the difficulties of transitioning to a new technology, firms may need to reconfigure their existing systems—likely costing hundreds of millions of dollars—to realize the benefit, Bodson noted.
“It could take years to recover the costs, which will be significant," he said. "Many firms may be reluctant to adopt these platforms if there isn’t an immediate payback in six or 12 months."
He cited the Australian Stock Exchange (ASX) project to replace its existing CHESS post-trade system with DLT as a project that makes sense since ASX already had plans in place to upgrade that platform.
The immaturity of DLT and lack of widespread adoption makes it difficult to determine a price tag for transitioning existing systems—which continue to work well—onto a blockchain. It is also unclear how many firms will be early blockchain adopters and how many will remain on legacy systems.
Saying that, there is a longer term need in the industry for strategic solutions to deal with unending cost pressures. For example, a McKinsey study estimated that annual revenues in the U.S. equities markets will decrease by about $17 billion in the next decade, or almost 25%. This will increase the need to drive down expenses beyond the annual 5% to 10% cuts seen in financial services.
The industry must make a significant commitment to realize the full potential of DLT, and
much of the technology’s value will come from changing business process, not the technology itself. "DLT’s success will be defined by implementation timing, participants’ ability to adopt and the business value it brings, which will vary greatly by region and use case," Bodson said.
Despite these challenges, the panelists agreed that blockchain and other new technologies, such as artificial intelligence and robotics process automation, will ultimately will help transform the industry’s infrastructure and successfully navigate a balance between cost containment and risk management.
Address Key Issues Now
While regulators have given the industry freedom to experiment and test new technologies, the speed of change means it is critical to address issues like fragmentation, lack of standardization and interoperability as well as inefficiencies in the marketplace from the outset.
Bodson highlighted the fine line the regulatory community must manage. “If they regulate early, they can be seen as stifling innovation. If, however, a crisis, bubble or fraud happens, they will be asked, ‘where were you?’” He stressed the need for continuous and transparent dialogue with regulators.
While standards and industry collaboration will be key drivers to the widespread adoption of DLT, Bodson added that the transformation also creates an opportunity to reimagine market infrastructure and change back office processing and models. There is a growing consensus that post-trade in the future should be a platform with a common set of services, communication protocols for users and trade completion standards.
“It’s very timely that we’re discussing this at Sibos. SWIFT has done a great job with standards for messaging,” Bodson said. Ultimately, any processes can be made redundant. It is a journey to get there and these efforts will benefit from standardization.”
He also cautioned against defaulting to DLT and other fintech as “a solution to solve every problem.” He referred to a recent Greenwich Associates white paper, Steampunk Settlement: Deploying Futuristic Technology to Achieve an Anachronistic Result, which outlined the history of the clearing and settlement process and explained that DLT advocates supporting real-time settlement were arguing for an "expensive deployment of futuristic technology in order to achieve a medieval result.” Blockchain can be a useful and powerful tool, but only when addressing the right problem.
In summing up the dialogue, there was consensus among the panel that the next five years would be a period of significant change for post-trade as tools such as DLT, AI and cloud are used to help the industry cope with new demands and economic realities. The most complex and thorny issue will be in how we transition from our legacy technology to the brave new world of modern technology.