The increasing pace of the digital transformation of the financial services industry—and the evolution of financial market infrastructures (FMI) globally—are being driven by accelerated innovation, disruptive technologies, evolving regulations and growth in new digital asset classes, said Frank La Salla, DTCC’s President and CEO, during a recent panel discussion.
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“The rapid and disruptive developments in the past few years not only allowed us to operate in a way that we could never have envisioned before but also propelled us to look at long term trends and transform from within to survive in the new world,” La Salla said. “Systematically Important Financial Market Utilities (SIFMU) like DTCC have to lead—not react—by driving innovation with a purpose to improve the client experience but, more important, protect the stability and integrity of the global financial system.”
La Salla’s comments came during, "Building a Sustainable Capital Markets Infrastructure in the New Digital World," at DTCC’s 2022 APAC Executive Council meeting in Singapore. The panel also included Vikram Kothari, Managing Director, NSE Clearing Ltd and Anutosh Banerjee, Partner, McKinsey, who exchanged views on the factors driving the digital transformation of the industry. Nellie Dagdag, DTCC Managing Director, Marketing and Communications APAC, moderated the panel.
Addressing key macro trends shaping the global and Asian capital markets infrastructure, as well as a business model for cryptocurrency exchanges where risk can be concentrated in a single distributed ledger technology (DLT) platform, La Salla noted that the industry will be pushed by investors who are demanding new ideas. As a result, FMIs must continually deliver value to the financial ecosystem by leveraging technology and innovating.
Garnering Broad Support
While Kothari acknowledged that change is inevitable, particularly regarding digital assets, he said FMIs in India have always been more cautious on their approach to innovation, tending to take the lead from regulators.
“When reviewing or implementing new technologies, the role of national market infrastructures in India is more of an enabler,” he said. “The market must be willing to embrace and adopt new technology to ensure industry-wide implementation. Today, we rely on traditional technologies to provide required market and operational efficiencies for the industry. With that being said, we see greater traction in cases where we could create linkages between the existing technologies with new ones, such as through the use of application programming interfaces (APIs).”
La Salla added that while FMIs need commitment from the industry to move forward with new technology, support from regulators also is essential.
Banerjee noted that “there are three design principles that we should keep in mind when considering change. One, the new technology will not switch overnight. The most realistic scenario may be for the new technology stack to be integrated with existing technologies. This essentially requires enterprise-wide integration where financial market infrastructures like DTCC and NSE Clearing come in to support that transition. Two, there must be irresistible monetary incentives for existing market players to go into a new space, such as transforming to a pure-play, public permissionless world to provide value-added services. And three, there must be a product-market fit for the new technology to take off.”
Envisioning the Future Ledger
Because investor protection is a key focus area for regulators, La Salla does not anticipate change in the depository book entry ledger, regardless of the type of asset, as public markets in the U.S. continue to remain highly regulated. He said that opportunities may exist for a new “super ledger” connecting various central securities depositories and/or custodians to manage and optimize the instant movement of high-quality liquid assets to provide greater liquidity and enable cross-margining of assets.
“In a high interest rate environment, the ability to free up liquidity into the financial system will help to curb inflationary pressures and reduce cost and risk,” he said. “There are also opportunities for digital solutions, like distributed ledger technology, to bring automation, standardization and market efficiency to private markets.”
Kothari agreed, saying the ledger will not change but evolve with time. Based on his experience in India, with its huge concentration of retail investors, the ledger will be more than a record-keeping tool for the safekeeping of securities. It will eventually be a portal of sorts for retail investors in India to manage digital and traditional asset classes.
Leveraging Technology and Winning the Innovation Race
While existing technology will help to facilitate the US moving to T+1 settlement cycle in 2024, there are behavioral and operational changes required, La Salla noted, including managing trade exceptions, fixing failed trades and deconstructing the risk profile of the post-trade life cycle.
Looking toward the future, La Salla said additional interoperability will promote consolidating of middle-and back offices to provide economies of scale and cost saving. Market participants will rely on FMIs to continue to innovate to ensure connectivity between participants while using technology to improve the client experience and market efficiency while reducing cost.
"When I think about who wins here, ultimately, I believe in the power of the platform," La Salla said. "If you have the platform with all the major players plugged in, and you have regulatory confidence and an enterprise risk framework that people are comfortable with, you have an advantage. It's not a guarantee, but you have an advantage."