With over 30 years’ experience in the financial markets, Andrew Powell, COO of Softek, has a wealth of experience running Technology and Operations functions in a range of businesses. He previously spent 11 years at Merrill Lynch where he held a number of roles including being the Head of Technology in Australia, the Head of Prime Brokerage Technology in Asia and the Head of Wealth Management Technology for Merrill Lynch in Europe and Asia. Before joining Merrill Lynch, Andrew ran the Analytics Development Group at Dow Jones and spent his early years as one of the founding members of Giltnet, a software house servicing the financial markets in Australia. He is currently Softek’s COO whilst being responsible for Softek’s European business.
Bobsguide discussed Softek’s business strategy, the impact of regulations on the market and industry predictions for 2017.
Can you tell us about Softek?
Softek provides Capital and Credit Management services with a focus on regulatory capital, margin lending, security finance and risk reporting. We operate as a full service utility which means we handle all the data management, any risk and capital calculations and generate reports for our clients. This, in itself, creates significant operational efficiency as our clients don't have to worry about the infrastructural or data management aspects which translates into real cost savings for them.
We service the regulatory capital needs for FINRA, SEC, IIROC, OCC, FCA and PRA regulated institutions. Over the last 5 years we have digitised credit policies from all the major global prime brokers and at the same time we have built up a significant pool of high quality reference data. Add to this a focused, experienced and passionate team of experts and we get the ingredients to deliver a complete service to our clients.
In terms of client types, it’s a pretty diverse list which includes; Banks, Prime Broker, Broker-Dealers, Proprietary Trading, Clearing Brokers, Hedge Funds and Wealth Management.
Risk management was a pivotal focus when Brexit happened. Clients used our intraday stress reporting capabilities to understand the impact on client credit limits under various market and liquidity scenarios. The results were presented to bank management so they understand “what’s going to happen in terms of credit and capital on this day.”
What’s the impact of regulation on different markets?
Softek’s operates across the globe. Whilst there are similarities in regulatory requirements, we find the implementation of specific rules to be very different. In general, the North American regulatory environment is more prescriptive than Europe or Asia. This makes it easier for firms to comply. In Europe, the regulators provide a framework from which firms come up with their policies and controls. Once these are approved, regulators will keep track to see if the policies are being followed to the letter. This creates a much more bespoke approach to regulatory controls, something Softek’s utility service provides.
What do you predict will happen with Brexit?
In a nutshell, financial services firms want to be able to operate in both Europe and London. Pre-Brexit passporting made that possible by operating in London. Post Brexit, it is very unclear if that will be possible. Banks are therefor spending a lot of money trying to understand what their approach should be and what the possibilities are. Central to the discussions is the question of moving to a new jurisdiction. Businesses are approaching the local regulators to understand what the new regimes will be, and how companies can operate in that environment. The problem is no-one fully understands the new trading environment, how long it will take and how much it will cost these businesses to move their operations. Underlying any understanding will be the conclusion of the UK / EU trade negotiations that haven’t happened and the reaction of the regulators on either side.
Frankfurt is one of the top choices; however it is not clear whether any alternative jurisdiction would have the capability to support the wholesale migration of capital markets from London. The planning process throughout 2017 will have to be reactive which creates uncertainty. Something the financial markets do not like. What is clear is that if a bank decides they need to go to new country where they’re not registered, they must start the approval process now.
We’ll see a change in London. As it currently stands, some head offices will relocate to Europe. When, where and how much of their business moves will depend on the Brexit negotiations.
What about cloud solutions and migrating to the cloud?
Financial service firms are concerned about their regulatory compliance, the complexity of functional replacement, security and control. We know that the FCA does not prohibit the use of the cloud, clearly stating that the firm’s fiduciary duties and liabilities remain internal. In relation to other regulatory jurisdictions, similar guidelines can be found on this matter.
Despite this, control and security remain a key concern for firms. Given the regulatory compliance obligations, there is an understandable nervousness around using the cloud to store client and internally sensitive data. It is true a number of cloud providers are meeting this challenge, through audited controls. But, convincing the risk managers at financial institutions is an issue in itself.
It’s also important to consider that institutions already have systems integrated into their infrastructure. Allowing trades to be captured, sent to settlement systems, added to risk platforms, booked into the firm’s records, and so forth. In short, firms have an abundance of technology platforms and services on hand. This makes it very difficult to replace any functional component. The downstream impact alone is often unknown and poses a very real threat to the business. So far, we have seen the larger firms continue to run internal systems, despite the higher costs.
Despite this, Softek has had a modicum of success in providing a service utility on a ‘private cloud’. We are independently audited to satisfy both the needs of our clients and their regulators.
Any outsourcing solution will need to minimise the pain of adoption. In practice, this means light touch, fast time to market and scalable solutions operating in a controlled and auditable environment. Cloud services that support and augment, rather than replace existing in-house systems/processes, are likely to be embraced more readily. This is a more evolutionary rather than revolutionary approach. As long as the services are offering real business value, there should be uptake.
What are the biggest challenges facing Softek in 2017?
Brand awareness is crucial. We’re a small company offering value through a compelling business model that a lot of firms have taken up. Our ambition is to continue to grow with a focus on US and Europe.
Firms are wary of sharing data. Our service utility business model creates a challenge that firms need to accept. Conversely that model means we have a light touch with our clients, no software or hardware deployment, no complex integration project and no long term data management costs.
It’s a difficult time for firms in Europe. Add Brexit to the amount of regulatory change that firms must comply with and the constant demand by shareholders for return on capital, you get ‘planning’ and ‘delivery’ challenges. This all takes time, in our case, time away from chatting to FinTech innovators like ourselves. Getting the attention of the business is an ongoing challenge.
What are your industry trends and predictions for 2017?
Let’s look at this from two viewpoints: firstly the capital markets. As banks come to understand the regulatory regime around capital, I think they will be deciding about future businesses more critically. For example, historically, Prime Brokerage (PB) was not a capital intensive business but with the new rules, it is. To support PB a bank will now have to allocate a larger amount of capital that may only yield a small return. We’ve already seen a number of banks withdraw or scale back their PB operations as they strategically allocate their capital elsewhere.
This pressure to efficiently use capital will continue across the board. We’ve seen security finance businesses needing to understand the true cost of financing under Basel III generated capital and liquidity charges. These elements must combine an understanding of the client, the asset type, the strategy type and the business capital structure. Firms must also take into account that they will have assessed asset quality (HQLA) differently to competitors. So not only do they have internal costs to take into account but also how these could affect the ability to transact at a competitive level. As a consequence desks may be tempted to go to the street for funding rather than approaching internal treasury.
Inevitably some security finance businesses will endeavour to build in house very complex systems to manage this process. Others have come to Softek for a solution.
Secondly, from a FinTech viewpoint, I think there’s also going to be a lot of great tech evolution, as there already is, such as AI and the cloud and even blockchain. But how this is all going to fit inside the regulatory environment that a bank provides is hard to say.