The financial services conference circuit: a whirlwind of non-stop information propagation. While the back-to-back PowerPoints, continental breakfasts, and business card exchanges can fatigue the heartiest corporate road warrior, there is simply no substitute to being ‘in the room where it happened.’ The forums nurture the exchange of ideas and perspectives, and may be the only way to truly make sense of the breakneck pace of developments in the global financial services sector.
By attending autumnal events targeted to participants up and down the custody chain — asset allocators, depositories, custodians, and market infrastructures—the GlobeTax team sought to understand the challenges and opportunities that each group is facing. We summarise our major takeaways from these forums below.
The universal dilemma: Balancing technology and risk
If one made a word-cloud by analysing the audio at each conference session, two general visualizations would emerge. In both maps, words like “Big Data,” “Artificial Intelligence,” and “Blockchain” would likely serve as centerpieces. However, one version would include terms like “widespread applicability” and “universal optimization,” whereas ominous statements like “asymmetric risk” and “identity theft 3.0” would dominate the other.
Both ends of this spectrum were visible at Sibos 2017, a conference often heralded as the world’s premier banking and custody forum. Optimistic panelists painted a utopian vision of next-gen technologies, promising instantaneous trade settlement and the end of duplicate record keeping. Participants exited these sessions with dreams of disintermediation-driven service improvements and lower costs to end users. Audiences leaving other presentations were less upbeat, bemoaning a Sisyphean nightmare of inadequate risk management and ever-increasing information security costs.
Those who synthesise these varied insights find reason for optimism; they understand that technology and risk need not sit in opposition. Banking has always involved risk, though today it entails keystrokes rather than masks and quick-witted getaway drivers. Technology is necessary not only to manage the risk, but also to maintain and improve the efficiency of the global financial system. A centralized, Blockchain-dominated future will not manifest overnight, leaving market players time to experiment with robotics and AI while simultaneously pioneering new risk control frameworks.
Network managers: Choosing a sub-custodian
Similar themes of digital innovation and risk management were introduced to the network managers, custodians, CSDs, and technology providers gathered at The Network Forum conferences in both New York and Hong Kong. While Sibos offered information applicable to all FinOps players, The Network Forum events concentrated on the evolution of custody network management.
As the people who oversee sub-custodial relationships, network managers must keep abreast of changing regulatory and infrastructural standards. MiFID II is among the most substantial challenges, and firms continue to scramble to understand if and how they fall within the regulation’s expansive purview. To be sure, regulatory compliance is not the only concern; economics, too, plays a driving role. As service purchasers, network managers must balance internal and client pressures to minimize costs while providing the most comprehensive and least risky service possible.
In this fast-changing, resource-scarce environment, it becomes more important than ever for network providers to choose the correct local partners for complex processes such as withholding tax relief. While sub-custodians are typically required to offer the service to fulfill their transfer agent responsibilities, other tasks often take priority. Thus, to help network managers find the best provider, we presented several questions they should consider during the DDQ process to quickly glean quality.
1) Account structures: Do you support omnibus and sub-omnibus accounts? Rate pool versus segregated accounts?
2) Responsiveness: Describe your process for keeping your market tax handbook up-to-date.
3) Scale: Is your proof-and-control process manual or automated?
4) Reporting: Do you deliver online reporting in real-time?
5) Efficiency: Define your relief at source to standard reclaim (volume) ratio.
CSDs: Evolving profit models
As with network managers, Central Securities Depositories (CSDs) are contending with a fast-changing landscape. They not only face encroachment from opportunistic competitors and technology providers, but also see margins shrinking from fee compression, system upgrades, and regulatory compliance.
Although the depositories have historically served as a somewhat profit-neutral market infrastructure, there is increasing movement toward developing explicit for-profit business lines atop the utility platform.
To compete in the new environment, panelists suggested that depositories expand their mandates into asset servicing, allowing the institutions to remain market-friendly utility providers while simultaneously pleasing shareholders.
According to a survey of fifty-three CSDs represented at the recent World Forum of CSDs conference in Hong Kong, withholding tax, transaction taxes, and capital gains reporting represent promising opportunities. As universal nodes in custody chains, CSDs are well-situated to promote asset servicing solutions, particularly surrounding withholding tax. After all, they hold all assets in their local market and mediate the majority of transactions. Should CSDs decide to expand their servicing offerings, network providers like custodians could benefit as well. They could fulfill fiduciary responsibilities and streamline operations, subsequently passing cost savings to end investors.
Pension fund trustees: Ensuring fiduciary responsibility
Improving market-wide efficiencies is critical not only to infrastructure providers, but investors as well - particularly pension funds. There is no shortage of challenges facing these asset pools: shrinking workforces and increased longevity on the one hand, high return targets, record stock prices, and historically low interest rates on the other.
The Texas Local Firefighter’s Pension Conference gathered a range of retirement industry experts to brief pension trustees on managing these challenges. Although trustees have a fiduciary duty, many serve in a part-time, volunteer capacity. They thus require training on best practices across a wide range of plan functions - plan accounting, portfolio management, compliance, custody and settlement - to ensure they are acting in the best interest of plan participants and beneficiaries at all times.
To contend with the estimated $3.85 trillion of unfunded pension liabilities in the United States (as of FY 2015), it was recommended that trustees investigate strategies to recover withholding tax on foreign investments. As tax exempt institutions, pensions are eligible to recover 100% of withholdings in many markets, boosting investment performance and upholding fiduciary responsibility.
Looking ahead to the 2018 conference circuit
Judging by the volume of information presented across the various “what’s next?” summary slides, 2018 will be a very busy year. Long-awaited regulations like MiFID II will finally take effect, the impact of Brexit remains a major question mark, new tax regulations and procedures will continue to proliferate, and information risks and best practices will keep management and technology teams awake many an evening.
Despite the widespread uncertainty in an environment of ever-shrinking margins, one thing holds true for all audiences: Client demands will continue to increase. As technology continues to commoditise financial services, clients are more willing than ever to jump ship to a competitor or emerging FinTech provider.
So, how does an intermediary compete in this new landscape? Although technology does not hold all of the answers - there is no silver bullet “killer app”—it does hold some. After all, complex instruments are settling faster than ever, and corporate actions and withholding tax processes are being automated to a degree only imagined in the past. By focusing on innovating this type of supplementary, value-added service, intermediaries across the custody chain can hedge risk while diversifying revenue lines.
Of course, applications of these technologies are myriad, and the challenges that constrain their implementation—policy changes, cyber-risk, global tax reform, and FinTech providers —will continue to serve as agenda items on the 2018 conference circuit. The GlobeTax team looks forward to turning nametag-adorned strangers into friends while navigating this complex environment at events both next year and beyond.