DerivSource Podcast Transcript (Listen Now)
Julia Schieffer:
Hello, and welcome to this DerivSource podcast. I’m Julia Schieffer, the Founder and Editor of derivsource.com. The digitalisation of post-trade processing has accelerated in recent years, driven by the rise of newer technologies like AI and DLT, as well as the increase in remote working because of the ongoing pandemic. However, the primary drivers remain the same – to automate processes, increase efficiency, and support innovations such as tokenization and digital assets, as they arise.
In this podcast, which is episode one of our Post-trade Digitalisation Podcast Series, we are looking at the top trends driving the evolution of post-trade processing today, and what might revolutionise this space in the coming months and years from a digital perspective.
Joining me today are three industry experts; Matthias Voelkel, Partner, and Stefan Schorsch, Associate Partner at Global Management Consultancy Firm, McKinsey and Co. Also, Gordon Russell, Head of Asia for Torstone Technology, a SaaS platform for post-trade securities and derivatives processing. Torstone Technology is this podcast series’ sponsor. Welcome all.
Stefan Schorsch:
Super. Thank you very much for having me today.
Matthias Voelkel:
Thank you. Great to be here today.
Gordon Russell:
Great. Thanks so much indeed, for taking the time today.
Julia Schieffer:
So can you all introduce yourself individually, starting with you Matthias Voelkel please?
Matthias Voelkel:
Sure. Matthias Voelkel, Partner with McKinsey. And I lead McKinsey’s work in capital markets infrastructure and securities services.
Stefan Schorsch:
My name is Stefan Schorsch. I’m an associate partner with McKinsey and Company based out of Zurich, specialising in advising and supporting capital market infrastructure and sell-side clients.
Gordon Russell:
I’m Gordon Russell, head of Torstone Technology in Asia-Pacific, responsible for both the business development and our existing customers in the region.
Julia Schieffer:
Digitalisation for post-trade is not new, but let’s frame the definition first. Stefan Schorsch, how would you define digitalisation? What’s your definition?
Stefan Schorsch:
Yeah, you’re right. Digitalisation certainly is not a new trend. I think it started really with the electronification of trading years ago. And then the question arises, why would we turn something that is already digital and electronic back into paper-based forms?
I think this definition really applies to the entire industry, but in a broad context specifically to the different segments. So it is probably a different challenge for sell-side banks. It is a different challenge for buy-side, asset managers and the traditional buy-side, and also the capital market and infrastructure providers that quite naturally have a very high interest in digitising and proofing their scalability.
Matthias Voelkel:
Building on what Stefan said, I think there is one important differentiation to make, and that is there is, if you will, ‘classic digitisation’ – electronication oftrading,all the things we associate when it comes to digitisation of processes. And then there is ‘new digitisation’, if you will. And that centers around tokenization, DLT, so the blockchain technology.
And this new digitisation goes beyond just capturing efficiency gains. This is also a whole new world or universe, emerging when it comes to tokenization. So tokenized assets will not be in the same universe as classic digital assets. It will be based on a blockchain, and also the infrastructure around these assets will be new.
Gordon Russell:
Yeah, I think Matthias, those are great points. I certainly think as far as digitalisation in the capital markets is concerned we’re now seeing a wider adoption. The capital markets has been watching the retail side of the finance industry for some number of years, leverage digitalisation to take the economies of scales that Stefan was talking about and take the cost benefits.
I think you’re also now touching upon some really interesting areas around tokenization and how capital markets organisations are looking to use this technology to solve some of the problems they have in their evolving business models.
So we’re seeing a much bigger uptake in terms of leveraging digitalisation in a capital markets models and we are seeing a much bigger understanding of how they are used within banks and securities houses on the buy-side who are coming together to see how they leverage this and enhance business models to improve the profitability and efficiency that they are working with today.
Julia Schieffer:
We’ve already touched somewhat on the drivers behind a digital transformation project for a financial firm, such as economies of scale, for instance. Focusing on this a little bit more, what are the most important drivers behind a firm’s decision to actively digitalise elements of their post-trade processes?
Stefan Schorsch:
Very good. If I may take this one, the cost element that we mentioned before is probably a very prominent driver, to be fair. I think for the traditional buy-side, for example, there’s a heavy pressure from the trend and move towards passive products and the margin compression that goes at hand with it, that you need to improve your efficiency in order just to preserve your own profitability.
Similarly, probably also for the sell-side, there’s a lot of margin pressure. I think we mentioned before the valuation of a lot of the capital markets infrastructure providers, proving scalability is important. And all of that is basically a cost game.
The other important angle, of course, is also compliance – that the digital process is usually much more resilient and not so easily subject to people errors. And then finally, I think is probably the nicer aspect of digitalisation is also the enablement of new services that was mentioned before; entire new products, entire client interaction models that simply were not possible in the past.
Gordon Russell:
I think whilst there are clear drivers, certainly many that Stefan has mentioned for why capital markets are embracing this, we know that capital market space, also doesn’t like to be on the bleeding edge of technology – it likes to be able to seen the situation and has other organisation or other industries try these out and make sure they have ironed out some of the problems. There are now more people who understand it and therefore there are more people who can understand how to adopt and how to adopt it within a capital market space. So, I think seeing the consumer side of digitalisation is now becoming more day-to-day, capital markets are now looking to leverage that and understand how they can deal with it in a variety of manners. As well as the regulators are understanding the space and how it can be applied. I think all of this is coming together to create some focus for making this a reality I suppose within the more traditional and conservative capital markets space.
Julia Schieffer:
I understand all the general drivers mentioned, but we have seen a significant shift this year with the pandemic. And frankly, I would be remiss not to ask if this pandemic and largely having workforces work remotely, if this has impacted the drivers or pushed digital transformation plans to the top of firms’ to-do lists. What’s the view on this? Matthias Voelkel, what’s your view?
Matthias Voelkel:
Great question, Julia. I think it hasn’t changed, these drivers. Actually, I think the trend towards digitisation has been even accelerated by the crisis and also the following implications and what was going on in capital markets.
First of all, I think the industry has shown remarkable resilience. Platforms are stable, significant loads could be processed. I think also regulators are looking at the entire industry quite favourably when it comes to business continuity, when it comes to risk management. That is something very positive.
So then we have the very practical effects. Teams learn to work together across geographies. Firms realise that remote work settings actually do function. Of course, you have to take care of certain kinds of security concerns and the likes, but overall, the industry has done a very good job. And I think this, if not remote, but then hybrid working model is here to stay at least in parts of the industry.
And also in my observation, some of these firms operating globally, they have grown closer together because now the exchange is virtual and it is on the same level independent of whether you’re in the US and Europe, or in Asia. So that’s also something positive.
On the other hand also to mention that, of course it needs to be managed day to day. People sitting just in front of a screen, zooming in, zooming out, that is also at some point tiresome. So hence I and we believe we will move to a hybrid model going forward.
And let me add one point, which I think is also important. Crisis has also been a catalyst when it comes to structural changes in the industry, for instance, in banks, but also the buy side. And firms are much more open to take structural measures when it comes to efficiency and cost reduction. And structural measures almost always entail embracing new technologies, be it cloud, be it automation, be it digitisation of processes. So the crisis has been a catalyst for the adoption of this new digital, if you will, technologies.
Gordon Russell:
Yes, thanks again, Matthias, I think there’s some great points. And I think the whole crisis/current situation has forced a lot of preconceived ideas and scariness about moving to remote working, removing traditional barriers to being able to clear and settle and trade from home, both from a regulatory point of view and from a business point of view and an infrastructure point of view. Until we had this year, many senior executives, and businesses and regulators would never have let this happen or even think it was possible and now we have regulators pushing the forefront of what should be adopted in this new digital age.
With the increase volumes we have been seeing this year because of a number of events and with very few businesses falling over it means that the move to a digital remote approach within capital markets space is becoming more accepted. And it means that people are investing more in technology, it means that the flexible approach to how people are working both remote and with technology and with colleagues and counterparties and regulators. But, sometimes the mother of invention is sometimes a hardship. And this year we certainly have had to be more inventive and adopt things quicker potentially than we may have done. It’s not going back to the old ways, as Matthias said, it’s a hybrid model going forward. It’s just a matter of defining what that hybrid is. I don’t know what you’re thinking, Stefan, whether that’s sort of what you are hearing and getting from people.
Stefan Schorsch:
Yeah, I would agree. I think post-trade however, is this one area where relationships, not only within the company, but especially between market participants is really important. I think what you’ve seen is that a lot of the institutions can work off the existing relationships. What we also experienced, I think is that to form new relationships in a purely remote setup is difficult. So I think getting the new networks’ digitisation up and running outside of the established, is really a challenge. I think we’re also probably looking really forward to say, some end to the crisis in terms of free-enabling, getting to meet at least in the first time to set up the initial. And then from there on probably it will be much more digital. And I fully agree to this.
Julia Schieffer:
Excellent points. The benefits for a digitalisation strategy for post-trade operations are pretty obvious given the drivers behind such initiatives and the classic and newer digitalisation trends at play. Gordon, how do you see digitalisation evolving amongst your buy-side clients and the infrastructure and service providers that support them?
Gordon Russell:
Again, it goes back to that breaking down of traditional thought processes and barriers from a buy-side point of view, whether we’re talking a traditional asset management or insurance, or some of the hedge fund customers that we are looking at now – what is their value proposition as an organisation? What do they need to have within their organisation that makes their business unique, and therefore obviously creating their value to their clients?
And through the pandemic, we’ve seen a lot of organisations thinking, what can I outsource? What can I give to a third party? What is not unique in the way that I operate my business?
And so we are seeing organisations looking to cooperative about the sharing of technology, working with their third parties, be it prime brokers, custodians or technology providers and their fund admins and looking at trying to slim down their organisation and so they can focus more on at what makes them unique.
These conversation aren’t new – we’ve been talking about this for some years in the industry of how we can move to this state. It’s just an unfortunate catalyst this year that’s accelerated all of that to make it faster for organisations to adopt new types of technology and new ways of thinking and the way that manage their business, the costs that are associated with managing their businesses. What are the costs they can outsource to a third party, what do they need to invest in themselves and how can they look at a new digital approach in their business or technology ecosystem.
Matthias Voelkel:
These are great points, Gordon. And the way our clients think about it is something of a strategic differentiator. So for instance, in high-frequency trading technology is, or is it not? And large parts of post-trade operations are usually not. And if something falls in the latter category, exactly,they think of industry utilities, outsourcing, et cetera.
Matthias Voelkel:
I think the industry has really now matured, and following actually the examples of other industries, which think very closely about where is actually, value created, and where is something where a utility, a supplier, a technology provider, a BPO provider is better set up to perform the respective task.
Julia Schieffer:
With every revolution comes risk. And despite the benefits that we’ve outlined already, cyber risk is one example of a risk that’s on the rise as a consequence of digitalisation, Stefan, how do you see the industry looking to address emerging risks such as cybersecurity, at this stage?
Stefan Schorsch:
That’s a very good question. I think in line with the digitalisation, of course, those risks get more prominent. They also move up on the list for regulators, what they look at in the first place. Probably at first nuance, I think a lot of really professional capital market infrastructure so far have been mostly secured also by firewalls and closed networks. There was this belief in the beginning when DLT emerged that now all the networks will be open and public. I think this is not so true. When we talk to a lot of say, buy side, sell side, or infrastructure private clients, they actually envision that a lot of that will stay on permissioned or even closed networks. And so I think in that aspect, there’s like a ring fencing move. But certainly, we also see that all the institutions continue to invest into cyber capabilities, into defence mechanisms, into being much more aware of defending those risks. And a particular element probably than if you mentioned smart contracts and DLT, is also then controlling what those contracts automatically executed at some point, will do.
Stefan Schorsch:
I think we have seen in the non-regulated space, some concerning elements happening. So typical fraudulent cases are on the ICO’s of the world. I think this is also now much more maturing, and hopefully we will see the first, large post-trade processing platforms making use of smart contracts as a means of a very efficient way of decentral handling of security operations.
Julia Schieffer:
The industry is clearly ready and already gearing up for digitalisation. But on a practical level for post-trade operations, what are the key elements of such a strategy? And are they viewed as being evolutionary or revolutionary?
Stefan Schorsch:
Good question. I think we have seen that there’s no typically hard-step change happening. I think, given also by the fact that this industry is a network industry adoption, kind of prohibiting that we had seen these massive steps that I don’t know you would have seen in the classic example of Blockbuster disappearing and Netflix is there. This is not going to happen, I think in the securities post-trade space.
Certainly over a lot of both from technology availability, regulatory, acceptance, client acceptance, things are happening. Certainly we see the first providers move to the cloud, have actually post-trade as a service type of offerings establishing. We see a lot of processes now being fully digitised. We see cognitive agents performing also legal contracts, natural language type of processing operations that we did not believe would be possible 10 years ago.
So I think the aspects are accelerating quite a lot. But still, I think it is more of a continuous journey where all the market participants deploy solution after solution, use case after use case. Certainly players have big visions. But is not that this is a cliff that we would jump off and then the world would look entirely different.
Gordon Russell:
Yeah, I think that’s exactly right,. I think revolution in the capital markets space when it comes to technology, digitalisation, asset creation and management is always going to be very closely scrutinised by regulators and market infrastructure.
I think the retail side of things, where we’ve absolutely seen the technology moving much, much faster, adoption far quicker. We may not see that within the capital markets space but we have seen an uptick in that as discussed earlier due to the current situation.
But as Stefan mentioned, some of the ICO, the initial coin offerings have been absolutely fortunate to have come along. And you’ve seen the SEC in the US focusing around how they can legislate these new digital areas within the economy and making sure that there is trust and transparency around how they are doing that. So there is not the boom and bust that we have potentially seen in the retail side, here we are looking at how capital markets can create sustainability around some of the digitalisation and tokenisation that has come in the market. Institutions have a duty of care to protect their customers and market infrastructure and regulators have a duty of care to police the industry and make sure end users, institutions have the infrastructure that they are looking for so this can move forward with greater pace. And I think that adoption of thinking now has certainly increased so that we should now see the pace pick up within the capital markets space.
So the protection is more paramount because the size and money we are talking about and the systemic risk of someone getting inside an institutional network and breaching it is much bigger than me simply losing my bitcoin or it getting stolen, which is tragic admittedly, and I’m sure we have seen instances where this has happened but given the interconnectivity and interoperability of the global financial markets, regulators and market providers must make sure that the system is very robust.
So I think this will lead to a more evolutionary approach to bringing post trade into a harmonised situation where economies of scale can benefit all participants and being able to offer more instruments in the market is going to be hugely important and the technology needs to be able to support these for the new digital assets – be it crypto currencies or tokenization alongside traditional assets as well as central books of record the regulators could have oversight and transparency of what is happening so that we get that length of sustainability and robustness that’s required in the financial services market.
So while it’s not as revolutionary I suppose as we’ve seen on the retail side, I think it is certainly evolutionary and I think we are now seeing as we’ve said before a situation where we are not going to go back and we are picking up the pace with more people understanding this space and therefore people looking to move quicker and quicker to take the benefits that are on offer.
And it certainly helps with you have big industry names such as Goldman Sachs, Nomura and Mizuho and regulators around the world spending more time and focusing on this area. It sort of legitimises it a little bit so as we see that happening I think that’s going to speed up the adoption and we are going to see people becoming looking to become early adopters and we are going to see people looking to see what is the first thing they can do to get experience and understanding of this space without necessarily committing everything that they would want to.
Matthias Voelkel:
Let me maybe build on thisevolutionary versus revolutionary. I fully agree with you Gordon. I mean, the core, classic capital market andsecurities services, we’re seeing an evolution. And by the way, an evolution, where it is very clear that there is not this one app, bot, technology that is the silver bullet. And so even if you apply very modern technologies, Stefan you’ve mentioned a couple around automation and robotics, actually, a step change in efficiency will only come if you also pull other levers. So you simplify your processes, you think very carefully around demand. Is that really required? And you also need to look at your workforce planning and how to actually set up work. So the roles of people active inpost-trade in the industries will be changing; less repetitive tasks, more monitoring, constant learning, et cetera. So, that also requires some management capabilities to move organisations ahead.
So, that is the evolutionary part. Now, when it comes to revolution, of course, if we’re talking about tokenization, those assets that are being tokenized, they enter a new world with less institutions active in the process. If you think of the current landscape, custodian, sub custodian, paying agent, transfer agent, CSDs and the likes, in the new world, there will probably be fewer of them, and processes will be automated because it will be thecontracts will execute themselves.
So the tokenization is the entry gate to a new universe, and that would be revolutionary. The question is here more the adoption rate. I think there has been a lot of enthusiasm when it comes to the industry will move to tokenization very soon. Now there is more realism. On the other hand, we see it happen. You see it happen in certain less liquid asset classes around fixed income, structured products. We also see it happen in assets that have not been financial assets before, but now become, if you will, financial assets, like real estate or art, for instance. And what is happening there is a revolution, albeit small still. But in its impact on the small asset universe for now, revolutionary.
Julia Schieffer:
With all this talk about revolution, Matthias, how might job profiles in post-trade operations and technology change as a result?
Matthias Voelkel:
So thinking of these role profiles and job profiles and how they emerge, I would actually look at it as a potential upside, because you could look at it in the sense of people are being made redundant. But I think the better way to look at it is repetitive tasks are going away, and more value add tasks are emerging when it comes to managing teams, programming the robots, thinking smart around process, and actually also having more time for client service. And that I think is a better way to look at it, to embrace this change, which can also have very positive implications when it comes to the workforce, and also, I think job satisfaction. This is not something however, which goes unmanaged. Organisations need to manage it.
Julia Schieffer:
I think that is an excellent point to end on. Thank you, Matthias. And thanks to all of you to all of our speakers for sharing your insight and views on this timely topic with our audience. To our listeners, we hope that you have enjoyed this podcast on post-trade digitalisation. A transcript can be found on the show notes page on derivsource.com. But please do stay tuned for further episodes where we take a deeper dive into the newer technologies, and we also offer a practical look at a digital transformation project. If you have any comments or questions, please feel free to send them to us at editor@derivsource.com. We welcome your feedback and we hope you enjoyed today. Thank you for listening. Join us next time.
