Reporting and Governance

The past decade and a half have been challenging years for financial institutions around the world. After periods of deregulation, market growth, prosperity and exceptional returns, the industry was sent reeling by the 2007-09 global financial crisis, and is still striving to recover. By Francesco Margini, head of product management for cleared derivatives at ION Markets.

The period up to the Great Recession saw the genesis of electronic trading and automation, which signified a leap from traders shouting orders across an exchange floor to an all-electronic exchange. This progress dramatically cut the cost of trading and paved the way for a new level of efficiency. Markets were now able to handle increased demands while globalisation drove trading volumes higher. The industry rode an unprecedented wave of expansion both in terms of revenue and scale. But the 2010s saw a contraction as markets faced a perfect storm of tighter regulation, rising costs, and reduced revenue channels. 

However, as Albert Einstein once said: “In the midst of every crisis, lies great opportunity.” And, in the aftermath of the financial crisis, rose a unique opportunity for technology to take centre stage – and it did. But several financial institutions have been slow to adopt and adapt, preferring to add layer upon layer to legacy systems, increasing complexity rather than reducing it. 

Now that the wave of regulations is nearing its end (Basel III, for instance, is scheduled to be implemented on January 1, 2023), banks need to start employing streamlined technology to take advantage of available data to identify and tackle risks – something legacy systems do not offer. This might seem complex, but in fact it lays the path for greater simplicity, and results can be achieved in real time. 

Prioritising risks 

The industry has changed dramatically over the past two decades. For one, risk management is now at the forefront of the agenda, which was not the case when the stock market crashed in 2008. Now, regulations such as Basel III are designed to ensure banks can absorb such shocks and handle economic stress. The ultimate aim is to strengthen capital requirements, supervision and risk management for the banking sector, while creating a level playing field from an international standpoint.

These changes are demanding and add greater complexity, but represent important steps forward as investment banks enter a new era of technology-driven innovation and face a new set of associated risks.

The challenge: complexities 

Over the years, the complexities across front office and post-trade have grown exponentially, and have resulted in the increased use of sophisticated execution tools, electronification of workflows, and proliferation of valuation methodologies due to the growing number of products. 

Additionally, electronification of the order flow has accelerated, putting the sell-side under greater scrutiny from the buy side as well as regulators. Poor interoperability between front-office and post-trade still persists largely due the disconnect between Exchange and Central Clearing Parties (CCP) workflows and systems. 

And last, new regulations such as the Dodd Frank Act, European Market Infrastructure Regulation, the Markets in Financial Instruments Directive and Basel III, combined with low interest rates, have restrained innovation and further investment in products – with the industry fixing old systems rather than re-thinking its operating models and technology architecture.

Meeting the challenge

While these developments have created a challenging environment, they have also given rise to a unique opportunity for technology to play a central role: one, in modernising legacy platforms that have been in place since the 1980s, and two, naturalising the complex regulatory landscape. 

For those firms still running legacy systems, maintenance alone can account for a significant proportion of any IT budget and the cost of inflexibility can stifle innovation. Running operations on legacy systems does not just increase costs and inefficiencies but also welcomes unnecessary risk.

As financial institutions meet these challenges, it has become increasingly important to be able to quickly adapt to the changing environment. There is no easy answer to updating a core trading platform: it is a large technological lift. But it is needed to help develop an agile, customer-centric strategy, and will soon reap rewards.

The door to simplicity 

Banks and trading firms cannot compete effectively by relying on complex, outdated and inefficient infrastructures built up over decades. With a regulatory focus on company-wide governance and risk management, getting a holistic view of trading position exposure as well as counterparty risk is critical. 

The key to staying competitive is not just adopting technology but adopting resilient technology that can withstand the changing regulatory landscape as well as evolving customer preferences. Financial institutions need to focus on automating overly complex and human-intensive workflows. Legacy systems do not support analytics, but intelligent technology can. Most importantly, it can optimise risk, which is a huge priority for the industry, and promote efficient use of capital while meeting higher levels of operational compliance with regulatory complexity. 

To fully implement new regulations, financial institutions will need to have a holistic view of the risks they are exposed to, and legacy systems cannot offer this level of granularity. If banks do not place modernisation at the top of their business agendas, they will eventually be replaced by new entrants – companies that are more agile, that put technology first, and that offer their clients attractive propositions while being able to manage capital and risk more effectively.

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