The coronavirus pandemic has disrupted almost every best-laid plan. For many financial services firms, that may mean pushing back major infrastructure overhauls scheduled for the coming year. What a lost opportunity that would be considering the pandemic further exposed the inefficiencies of patched together infrastructure and processes that have emerged after 10 years of repeatedly plugging gaps to address the continuous waves of post-financial crisis regulations.
It doesn’t need to be that way. Firms can still make progress by shifting their focus to automation and controls that can deliver immediate cost savings while serving as building blocks for longer-term transformation.
How We Got Here
First, it’s worth reviewing the evolution of financial services infrastructure since 2009. Regulations like Dodd-Frank and MiFID II that addressed the financial crisis required firms to invest enormous sums to build systems that could gather and deliver the data necessary for compliance. These regulations continued to evolve and expand, obligating firms to continue making piecemeal updates and enhancements without being sure the latest rules would be the final ones. And of course, new mandates like EMIR, SFTR, CSDR and uncleared margin requirements have been implemented along the way, necessitating further infrastructure buildouts.
The result in many cases: duplicative technology and patchworks of functionality that operate inefficiently and non-strategically, risking further fragmentation.
Spurred by the impending start of CSDR’s Settlement Discipline Regime (SDR) along with changes to CFTC and EMIR reporting, a number of firms in 2019 were poised to undertake fundamental reassessments and remodeling of their technology infrastructure and operating processes. Post-Covid, however, these initiatives are likely to be postponed. According to the August 2020 FIS Readiness Report, while the pandemic has reinforced their commitment to modernize their technology and operations, 56% of buy-side and sell-side firms plan to pause or delay major organizational transformation projects over the next 12 months.
How the Focus is Shifting
The FIS report, based on a poll of investors, fund managers and capital markets executives on the buy and sell sides, provides insights into firms’ reordered priorities.
The poll found that the two Covid challenges of highest concern are risk management & compliance (49%) and client & regulatory reporting (48%).
The report states that the pandemic has increased market uncertainty and pressure to reduce capital expenses, and thereby elevated the importance of scale and operational efficiency to ensure long-term growth. As a result, firms will be careful in prioritizing their technology spending. On both the buy and sell sides, firms say they will focus this spending on strengthening resilience, especially in the area of cybersecurity, and on RegTech.
Firms surveyed also report an increased appetite for fintech solutions – cloud storage in particular but also outsourced IT solutions and software applications.
How to Move Forward
The FIS findings suggest the kinds of concerns firms can tackle in the short term. Instead of complex systems overhauls, solutions to specific challenges in areas like reporting and risk assessment and mitigation are low risk and can deliver results quickly.
Given the ongoing demands of new and expanded regulatory mandates like SFTR and CSDR’s SDR, compliance-focused solutions can be especially cost effective. For SFTR, firms need a set of tools -- DTCC’s Report Hub, for example -- to simplify and manage the multiple tasks required for reporting securities finance transactions. For CSDR, solutions like DTCC Exception Manager (DXM) that facilitate the capture and resolution of trade exceptions are a key priority.
Targeted assistance can also come from offerings like DTCC’s Consulting Services, which we launched recently to help clients manage just the types of circumstances they confront today. Our insight and expertise can guide clients in making informed decisions and executing effective plans to enhance performance and reduce risks in their operations.
Over the longer term, to accommodate compliance with the new array of regulatory mandates and enable long-term growth, firms can be more strategic about right-sizing infrastructure that has become a patchwork of functionalities. But for now, most firms will find that targeted solutions and outsourcing to partners is the most feasible approach to managing costs, improving efficiencies and optimizing existing infrastructure.