Market crashes, pandemics, competition, client demands, and new regulation are paving the way for digital transformations.
Although the coronavirus pandemic has loomed over global capital markets for much of 2020, the digital transformation of the securities industry is expected to continue into 2021 and beyond.
Asset managers embarked on the current technology upgrade path following the 2008 financial crisis. The shock to the system forced them to improve operations just to survive.
In addition, competitive pressures, client demands, and changing regulatory reporting requirements have all contributed to the reasons why so many market participants are investing in new technologies.
Brad Bailey
Several regulatory initiatives in the U.S. and overseas were implemented in response to the crisis to lessen the risk of another market collapse.
At the same time, asset managers’ clients — like pension funds, insurers, and endowments — have sought more and better information about asset managers’ returns and their ability to beat the market. Client demands have been a particularly important source of motivation to upgrade technology.
“They want more transparency; they’ve wanted more operational information; they want to look more into different things,” says Brad Bailey, a research director with Oliver Wyman’s Celent unit. “We’ve seen a lot of people making these platforms for efficiency. These are major forces.”
Gregory Fortuna
Bailey cites State Street Corp.’s 2018 acquisition of the investment management software and systems vendor Charles River Development. He said the deal is an example of the steps that providers of operational infrastructure, like global custodians, are taking to offer packaged solutions from the front to the back office. Service providers are telling asset managers that packaged solutions can improve their operational efficiency.
Gregory Fortuna, head of State Street’s GlobalLink Solutions electronic trading unit, says asset managers are making technology connectivity more of a priority.
As asset managers invested in each technology such as portfolio management systems, order management systems, and third-party processors’ back-office platforms for reconciliation and similar functions, they have also seen more value in improving the integration of these systems.
“That’s where I’ve really seen a lot of the focus as of late,” Fortuna says.
David Easthope, a senior analyst with Greenwich Associates in Stamford, Conn., says competitive pressures spur many buy-side firms to invest more in the use of data. Data analytics are being employed in the front office to improve investment strategies.
“They’re creating data science teams to comb through both fundamental and alternative data to find new signals for trading,” Easthope says. “They’re spending a lot on that area, particularly if it will provide them with a competitive advantage for their investment strategy.”
David Easthope
In the middle and back offices, technology investments are improving automation and efficiency for reference data, data governance, and reconciliation.
On another front, the regulatory changes that increased buy-side and sell-side firms’ reporting burden addressed a wide range of capital markets activity.
In 2010, the SEC adopted rules to improve the transparency for institutional money market funds. In 2018, the European Union’s MiFID II (Markets in Financial Instruments Directive) reporting regime went into effect and extended the original MiFID reporting requirements for equities to a broader range of investment assets. The EU’s Securities Financing Transaction Regulation (SFTR) to improve transparency in securities lending came into effect this year.
In addition, global regulators established the Uncleared Margin Rules (UMR) for the over-the-counter derivatives market to lessen the risk of a repeat of the collapse in derivatives trading that precipitated the 2008 crisis.
Dale Thompson
As much as the 2008 financial crisis created an impetus to revamp technology infrastructures, the COVID-19 pandemic is all but certain to leave its imprint on the industry and regulators’ oversight of it.
Dale Thompson, a partner with BDO USA in New York, says the pandemic has taught advisers and broker-dealers that they can operate almost exclusively in a remote environment. But the pandemic also exposed the cybersecurity risks firms face.
“Everyone is dispersed and not in a contained location,” Thompson says. “That increases the risk of penetration by a bad actor.”
Firms will need to ensure the system and connectivity integrity of everyone outside the office and how they are interconnected, he adds.
Kevin Bianchi
Kevin Bianchi, a BDO partner in San Francisco, said the SEC and other regulators are asking investment advisers and fund managers if they have reassessed their security procedures because of the COVID-19 pandemic.
Thompson says several risk alerts from the SEC’s Office of Compliance Inspections and Examinations (OCIE) this year for broker-dealers and investment advisers focused on cybersecurity and the challenges posed by the COVID-19 pandemic. An August 12 alert reminded securities firms that the changes to their normal operations in response to the pandemic did not lessen their obligations to safeguard client assets. In September, OCIE warned about credential stuffing, which hackers use to obtain client account information, including usernames and passwords, to gain unauthorized access.
The SEC focused on the securities industry’s cybersecurity well before COVID. Now that the pandemic seems all but certain to last into 2021, asset managers and regulators are considering the long-term security implications.
Because more employees will continue to work remotely, firms will continue to have many locations in their networks that are exposed to cyber-attacks.
“Most companies are already building, strengthening, and monitoring the places that they may be vulnerable from a cyber perspective,” Thompson says.
(This story originally ran as a news analysis feature to accompany SecOps Online, a virtual community specifically built for middle- and back-office operations, compliance, IT and technology professionals in capital markets along with companies that service them.
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