DerivSource Podcast Transcript (Listen Now)
Julia:
Hello and welcome to this DerivSource podcast. I’m Julia Schieffer, the Founder and Editor of DerivSource.com
This is the final episode of our post-trade digitalisation podcast series. In this series, have already covered the top trends influencing this space, including the newer technologies being used today by financial institutions to support digital transformation projects.
In this episode, we explore what is happening more on the ground level by looking at the main components of a post-trade digitalisation project, some of the common challenges and unexpected benefits that firms can achieve.
With me to offer a practical look at digital transformation, is David Pearson, Product Owner at Torstone Technology, this podcast’s series sponsor. Welcome David.
David:
Thank you, Julia. Great to be here.
Julia:David, you’re an industry veteran and post-trade expert, but for those listeners who don’t know you, can you give us a little background about yourself?
David:
Yes. So, I work for Torstone Technology, product owner of their middle office product. And prior to joining Torstone, I worked for Fidessa for, for some 25 years in both front office and post-trade technology, both sell side and buy side. I’m also co-chair of the FIX trading community for their post-trade working groups. So I get involved in the industry standardisation for FIX for both the buy-side and sell-side firms that, that seek that standardisation to, to help digitise the workflows between firms globally.
Julia:
Thank you David. There are numerous drivers behind a firm’s decision to digitalise some of its post-trade processes. From your product view, what are the current drivers behind such a project and have these drivers changed recently?
David:
Well, the last two decades and, and more so since the 2008 financial meltdown, there has been a relentless focus by operations management on cost. And we have seen restructuring and rationalisation programs at brokers and banks, as they attempt to get a handle on the operational cost of running a capital markets business. What I’ve seen change in recent years, however, is the recognition that operations has to continue to support the business as it flexes, as it changes shape in the face of client requirements, regulation and jurisdictional changes. And therefore they, they need the operation to be able to grow and adapt to these requirements. So the focus is shifting to one where operations must have the flexibility and agility to change, but still retain the highest possible, maximum efficiency that it possibly can. And this means that brokers, big and small, are casting, a spotlight on the areas within their operation of greatest friction, or even distress under pressure and under stress of, of managing that business operation.
And so typically, really these are manual processes and we see the continued use of desktop computing software, especially spreadsheets – everyone uses spreadsheet of course, to help them facilitate data processing. And it’s often used to fill the voids in the technology that is used in the operation. And these are the places that get exposed because they don’t scale efficiently or at all. So then also historically we’ve seen a very siloed nature of many front office technology platforms reflected in the post-trade environment. And this means that IT and operations staff will be likewise siloed because of technology or the lack thereof. And a typical broker will have an equity trading platform that may have some middle-office confirmation processing built in, and then potentially a fixed income platform that will create its own confirmation workflow as well. And so the business will need to run two DTCC, CTM connections, two sets of client accounts data – when some of these clients will be trading both product sets, and two sets of commission rules and so on. So duplication and repetition are prevalent. And processes that are efficient in one asset class may be relatively inefficient through manual process and user interaction for another asset class. So breaking down the silos and the capability and be able to apply a common workflow and data processing solution across the operation is really a key driver – it has significant benefits to the business.
Julia:
Looking at a project in more detail, what would you say are the key components of a digital strategy for post-trade operations specifically?
David:
So, first of all, I think technology is absolutely at the core of the strategy and it would be easy to throw technology at manual processes. There are important criteria to investigate because today’s manual workflow may not be tomorrow’s issue. So the solution must both fit the operation for today, but also offer flexibility to adapt to the needs of what the future may hold. So a key feature when assessing the current status quo is to spot the processes are effective and therefore achieve good results for the business, but are not efficient on resources. It’s these processes that typically do not scale easily, and they may have some technology capability at their heart, but they don’t scale and they are unable to adapt quickly to the changes in the business requirement. So what appears to be sorted today can unravel very quickly in the face of a business change and client demand. Too many IT solutions in the past have been deployed to solve for a workflow, but they do not, or cannot be adapted as the landscape moves. And we see these pressures through regulation, business opportunity and as we’ve seen in the current pandemic, actually volumes have been markedly changing through days and weeks, and we’ve had significant peaks, so scale becomes principal is also a principle issue that can destabilise a current environment that a firm or broker thought was reasonably stable.
I think there’s another aspect to digitisation and that’s that many of the interfaces that affirm has to its clients and trading partners, counterparties, and suppliers vary hugely in their nature. Some that demand electronic data flow using FIX or SWIFT through to organisations that send a spreadsheet in an email once a day. So there’s very different requirements across the broad range of interfaces that an organisation or a firm need to have. The latter of these, where the spreadsheet and an email actually represent what I considered to be a long tail of typically smaller firms, that they may represent a relatively small portion of the flow and the earnings for a broker (maybe 10, 15%) but operationally because of the manual process and the manual human intervention required here, actually operationally absorbed 50, maybe more percent of the operational effort to manage that workflow.
So being able to apply a technology platform that is flexible and that can flex to meet these different types of interface capabilities and to deal with new interfaces and changing interfaces going forwards is very important. And I think that’s a key component here of the strategy that you have to be flexible at the technology level, as well as the kind of workflow level, in order to be able to manage the kind of change that will inevitably come.
Julia:
So, we have talked about the key components of a digital strategy for post-trade operations, but what are the challenges what are the challenges, either expected and unexpected, that a firm may encounter when undergoing such a digital transformation project?
David:
For certain, any business is going to find themselves facing the short term tactical fix required. And sometimes that is tangential or would appear at face value to be tangential to a long-term strategy – you have to get something sorted. And I’m always reminded of the old adage that ‘nothing lasts longer than a tactical fix,’ but sometimes they’re needed. However, where a firm has the ability through its technology and the agility to solve for these problems, then a quick fix, doesn’t have to leave the firm with an isolated or unscalable solution that needs bespoke maintenance going forward. And this is where I think firms have the ability to make the right technology choices, to use that technology platform, to ensure that even for the quick changes and the quick fixes that are required, they can use that platform to provide the agility and the flexibility to meet those requirements.
So the second challenge I think is always the cost of the technology. And you have to be certain here of the value that the change can bring. So in the previous podcast with Peter and Amrik, they mentioned the tipping point, the firms get to when faced with existing operational challenges and the potential for newer technologies. And that can be greater than continuing to bend older tech out of shape. There is a tipping point here where really you need to stop moving older technology around and look to the future and look to a newer technology in your platform to help you resolve those issues.
Julia:
Excellent points. In the previous podcast episodes, we had touched on legacy systems both from a position of defining what this term usually means and the challenges in addressing such legacy systems. David, do you see the replacement of legacy systems as a challenge in your day to day?
David:
So Amrik definition of legacy was really quite interesting. And I quite enjoyed quite enjoyed hearing this, that that legacy is defined as a system that you don’t want to touch. That’s a very interesting viewpoint. And you see it everywhere, that someone has got a solution in place that has been around for some time, that’s not necessarily old, however, the broker will consider that solution as expensive to touch and in particular can be fragile. So you don’t want to try bending it out of shape, but you’re now stuck with this solution because it’s solving a particular operational problem. So the firm has to rethink its approach around this because, because then you have got that legacy platform that you’re going to have to work around in some way.
Julia:
Part of any change to the post-trade process involves new technology and often a third party solution, so a big part of this process is selecting the right vendor. This is obviously a bigger task now that there are more players in the market. Do you have any advice for how firms can approach the vendor selection process?
David:
I think that I think the technology selection in its own right, is a really fascinating area because there are some genuinely agile and fantastically new technologies being offered by FinTechs, and you absolutely cannot ignore those capabilities. But I think at the scale of post-trade operational process for a typical sell-side broker, then you’re looking at a core platform that can operate and provide the workflow support across asset class, across multiple functions. So I think there’s space in the industry for both the FinTechs and you might say a much larger scale technology deployment, but, but at the core, it is going to be a significant investment in the right kind of technology platform.
And so that may well offer the opportunity for integration with a particular FinTech that offers something radical brand new. And I think we need to embrace that because some of these ideas are absolutely fantastic, but from Torstone point of view, where we are, you know, we seek to offer a platform that sits and underpins the post-trade workflow through a middle office through the back office. And that, that is a sizeable piece of technology in terms of the workflow it needs to support, the data model that needs to have and the accuracy and completeness of the process that it supports for our clients.
Julia:
Looking beyond the challenges and focusing on the positives, what are some of the advantages that a firm can achieve through digital transformation either in the short or long term?
David:
So I think first of all, you would expect that a digitalisation strategy is going to help you increase the level of straight-through processing (STP), that the firm can achieve by minimising human input, especially for the kind of business as usual data processing. So that really applies to greater levels of efficiency, but also reduces the errors that can be introduced into a process where you’ve got human intervention and data processing, data re-keying somewhere along the chain of that operational workflow. So this all then feeds into this broad idea of operational risk. And so lowering operational risk by digitising the workflow, digitalisation of the data flow and moving valued and stretched and very knowledgeable staff into a supervisory function and allowing them to get involved in solving genuinely difficult operational problems, because they are always going to come about, but you really want that business as usual straight-through process to be at the very highest percentage you possibly can across all of the things that you are trading. You don’t want exceptions in there, and you want your staff dealing with not the day-to-day issues, but the any operational challenges that, that come up unexpectedly.
But I think there’s more to it than just those particular advantages, because what we are seeing is that by pulling together and digitalisation of the workflow process onto a single technology platform actually starts to bear fruit in the way that you are actually pulling together data, both reference data and transactional data. And it all becomes a key part of that programme. And that is immensely valuable. And there’ve been many hours spoken at conferences about the quality of data, creation of data lakes and so on and so forth. But if you’ve got your workflow being pulled through a platform, then you’ve got this focus on achieving a consistent and accurate data set upon which all of this transactional flow is passing. So actually something that I have been looking at is building on that platform some of the data analysis tools to enable a much deeper insight into the data that was actually frankly, previously unobtainable, especially in a siloed workflow, different asset classes and such like then the data’s in different places. And as we’re able to bring this data flow together, the reference data and the transactional data, we have this opportunity to provide that insight. So we recognise that digitalisation of the data and the processes with flexible technology really is enabling this view. So, and that cuts across the entire post-trade operations. So from client accounts and sub account data through settlement instructions, and then market executions and client allocations and instructions, they all come together built on a consistent data model. And that’s a really powerful opportunity.
So some of the areas I’ve been looking at have been around workflow efficiency and timings through to trading values and earnings per market, and then slicing and dicing the data per client, per product, per currency and then looking at things like profitability. And the digitalisation of operations pro of those operational processes give really does give us that opportunity to really slice and dice the data, but that’s across multiple asset classes and across the entirety of that business. I think this can be a critical differentiator for the business – to the benefit of the client service you provide and to your clients, and to enhance the quality of that service that you provide.
Julia:
Thank you, David. Now we covered a lot of ground in terms of what a digital transformation project could look like and some of the challenges and benefits, but once a project is completed, what’s next for a firm?
David:
I think here then you’ve got the opportunity I described to really get to grips with and give greater insight into the data. I think the interesting question here is how can the back office, how can the post-trade operation help the front office, sales and the client service? How can you bring the power of that technology in that model and that data to actually really enhance the front office environment to, to give greater insight to the business itself, as well as potentially to the clients. I’ve talked about this previously with Amrik, but also, you know, Gordon who was in the part of the first podcast, with respect to this kind of idea of back to front because so often when you draw the technology architecture on a PowerPoint slide or equivalent, all the arrows go down the page and you say, but this is mad…you’re building this huge picture of trades and trading and the environment and the capability that you provide where’s the arrow, which goes from the bottom of the page to the top, back to front? How can I provide the value-added insight that really can help decision-making at the management level, at the trading desk level, at the sales and sales trading level. And I think this is really where this kind of starts to come together. And so I’m excited by that opportunity really to get to grips with that and really to turn what often is seen as an operational exhaust pipe, turn that around and say, well, I’ve got some real value here, how do I present that to you and how can I help you?
A decade ago, I think a number of firms sought to use and provide the data that they had available to them and put it out onto a web portal of some kind to enable their clients to log in view and potentially download data and reports about some of the data processing that they were able to do. I think the evolution here is that now firms are saying, well, I don’t want to have to log into a portal, I want an API. I want to be able to extract the data. And they’re looking at the standardisation that data flow so that the asset manager and the investment manager can pull data back into their own environments in order to potentially make that part of their potentially make that part of their investment decision-making process. So they understand what the brokers are doing for them and that may help them decide where to trade, how to trade, what is the most effective mechanisms of trading. And that could be a really key differentiator between brokers.
So I think there’s a lot of talk and Amrik has spoken previously about the evolution of APIs. And I think extending that through that back-office technology and the ability to provide that back to front data, through an API, to those firms who are able to take that – I mean, that’s not, that’s not broad global at the moment, but I think it’s an evolution that is happening. And those organisations that can take the data in that format, or are really willing participants in this evolution.
Julia:
Thank you David for sharing your insight and expertise with us today. This space will no doubt continue to evolve rapidly in the coming months and years as newer technologies emerge, existing ones are better applied to solve current processing problems and we, as an industry, get to grips with how a newly digitalised financial space – both in the classic and newer definitions of the term, can progress.
This concludes our post-trade digitalisation podcast series with Torstone Technology. Thank you to all of our contributors to this series. We will continue to cover this topic on DerivSource.com so if you have any feedback or comments in general, place contact us at editoratderivsource.com
And if you have missed our previous episodes, I encourage you to go back and listen to those to get the full picture of this topic. Listen now. Transcripts for all episodes are also available on theshow notes pages on derivsource.com. Listeners, we hope you have enjoyed this series. Thank you for listening, all the best for 2021 and join us next time.
