We need to talk about standards – viewpoint from Kevin Houston.
Kevin is chairman of Rapid Addition, director of FIX Protocol Limited (FPL), and a visiting researcher at the London School of Economics’ Systemic Risk Centre.
ISO 20022 is seen by many as a key standard for achieving industry harmonisation for electronic data interchange between financial organisations in areas such as payments and settlement.
However, parts of the industry, notably the buy-side, have been slow to engage, hindering widespread adoption.
While not ideal, neither is it surprising. There are multiple constraints and competing priorities that limit an organisation’s capacity to adopt new standards, no matter how beneficial they may be. Let me share a couple of anecdotes that illustrate why this is the case.
Resource is trapped delivering non-discretionary regulatory and compliance projects
I recently caught up with a friend who is the CTO at one of the world’s largest financial services groups. We were discussing how Rapid Addition might help his organisation when I mentioned that his firm typically seemed to take a ‘build not buy’ approach.
His response was that while his organisation has hundreds of man-years of development capacity, they also have over five times that in man-years of projects to complete. So, naturally, he was very open to the idea of leveraging our technology to enhance their electronic trading capabilities.
With all his firm’s resource tied up delivering non-discretionary regulatory and compliance projects, working with a vendor would give him the opportunity to deliver on business initiatives that, despite their importance, would not make the cut if they relied on internal development teams.
The reality is that while the need to respond to new regulatory requirements may be tapering off from its post credit crisis peak, it continues to restrict many financial organisations capacity to react to emerging opportunities or challenges from new entrants.
It’s not surprising, therefore, that non-mandatory initiatives, such as migrating to new standards, struggle for oxygen. This is particularly true given that it’s always hard to define the exact business benefits on day one for this type of project
Shrinking margins across the financial industry
In a separate dinner with the CEO of a mid-size private bank, we discussed the outlook for private banking, which is seeing margins squeezed in the competition for high and ultra-high net worth clients.
Gone are the days of low digit percentage point fees, with the industry trending towards something closer to 20 basis points.
Automation will be an important tool in transitioning private banks if they want to remain competitive, with humans still owning the client relationship, but empowered with tools and analytics that deliver a compelling and cost-effective service.
Costs need to come down and any investment will be focused on improving competitiveness.
How to grow the adoption of new standards in the financial industry
It’s not difficult to see why the adoption of new standards face serious headwinds when considering the financial industry’s shrinking margins, oversubscribed IT budgets, and low capacity to take on discretionary projects.
For adoption to grow, standards bodies and their champions will need to more clearly demonstrate how they contribute to increased efficiency and sustainable cost reduction.
Looking specifically at the buy-side, they are having to deal with a challenging combination of regulatory and investor driven forces.
Currently there is a massive focus on ESG (Environmental, Social, and Corporate Governance), and SFDR (Sustainable Finance Disclosure Regulation). Social trends have pushed ESG to the fore and it’s become a major issue for the C suite at asset managers.
Firms caught on the wrong side of an increasingly aware and activist investor base can quickly find their businesses in trouble as money is diverted from firms associated with perceived ‘non-ethical’ investments.
New financial regulations on the horizon
More broadly across financial services, I see the FCA’s policy statement 21/3 as another issue keeping executives awake at night. This initiative examines not just the resiliency of a bank’s systems and operations, but also the robustness of their supply chain.
Firms are having to work closely with their vendors to fully understand how they interact with bank infrastructure, particularly when it comes to managed services and cloud hosted solutions.
The list goes on, with the MiFID 2 update coming into force on the 28th of February next year, and ESMA’s recent call for evidence on digital finance suggesting new regulation for this emerging asset class.
We can all agree that standards and interoperability are important in the securities industry, whether for reference data, real-time information, or transactional messages.
How does the financial industry improve in the current climate?
The question is how do new standards achieve traction and the necessary critical mass to truly deliver efficiencies given the challenges mentioned above?
I think the answer partly lies in the shift in mentality we see taking place at larger firms, which I referred to at the beginning of this article. The major players in our industry have typically been predicated towards running massive development teams and building technology in-house.
However, we are now beginning to see many moving to a strategy of buying best-of-breed trading technologies that can interoperate with the organisation’s existing infrastructure and applications.
This can provide a more modular approach, assembling solutions to meet their specific business needs and avoiding large-scale rip and replace projects.
By adopting interoperable, configurable technology firms can respond more rapidly, but still deliver competitively differentiated services to their clients. In a cost constrained world, the right vendors provide economies of scale as well as the design flexibility offered by modern, open-API platforms.
If this is true, then the adoption of 3rd party technology can be a vehicle for injecting standards into the capital markets ecosystem.
Message transformation through high-performance middleware, such as the RA Platform, can normalise multiple protocols (whether competing standards or proprietary formats) to offer the near-term interoperability the industry needs, while also helping organisations more quickly onboard and work with new standards.
Standards are important and key to removing friction from financial markets. But the challenges of widespread adoption are high, and their benefits often viewed as too far away or hard to quantify.
This encourages a ‘wait and see attitude’ as firms focus on more pressing priorities.
For standards bodies and their champions to accelerate adoption they need to get better at clearly articulating meaningful benefits (significant cost reduction), demonstrating incremental gain (not just future potential efficiencies), and removing as many barriers to implementation as possible.
Core to that strategy is collaboration with solutions and technology providers that will drive momentum and help achieve the ultimate goal of a more efficiently functioning and lower cost industry.
About the author
Kevin was previously a lead expert for the UK Foresight Report into “The Future of Computer Based Trading” back in October 2012. Research at the time struggled to find evidence of the role of standards in financial markets. Kevin was commissioned to perform a literature review of the available evidence and has an intimate knowledge of this topic. He is currently Chairman of Rapid Addition, director of FIX Protocol Limited (FPL), and a visiting researcher at the London School of Economics’ Systemic Risk Centre.
Rapid Addition works with leading global liquidity venues and emerging digital exchanges to provide highly scalable, low latency, secondary market trading platform solutions.
With robustness and throughput proven at tier-1 customers in extreme market conditions, Rapid Addition’s asset-class and message protocol agnostic technology underpins a broad range of trading models and business processes.
To find out more about how our modular technology can solve your needs for client onboarding and connectivity, risk management, matching and auctions, or any other key component of your electronic trading workflow, then please get in touch through firstname.lastname@example.org.