Technology, MiFID II and 2027: The changing face of the post-trade industry

By Thomas Zeeb, Head Securities & Exchanges, Member of the Executive Board, SIX

17 April 2018

The Markets in Financial Instruments Directive (MiFID) II is the largest regulatory change to hit the financial services industry since the crisis. Although the legislation has been in effect since January 2018, the industry is still scrambling to put the infrastructure in place to meet the new transparency requirements. The far-reaching nature of MiFID II has meant mammoth overhauls for even the most basic back-office functions. This is particularly true in the data-heavy post-trade area, where buyers and sellers of securities have trades approved, compare and exchange ownership details, and arrange for the transfer of securities and cash.

Innovation in post-trade has grown tired. Investment has typically been low as businesses have found themselves pressured into allocating funds to service “flavor of the month” regulations and compliance demands. But MiFID II puts real pressure on the post-trade industry to step up. The data that this function holds, manages, and must now account for is critical to a business’ ability to cope with the regulation. Neglecting the post-trade function could prove disastrous. This is not only true from a regulatory standpoint but also from a cost perspective. Those who try to comply with the regulation stand to be overwhelmed by the future of post-trade and the scale of the reporting task at hand. But technology is paving a way for new efficiencies and innovation, both directly and through partnerships with smaller, more agile firms.

Me, myself and (A)I

Ahead of our Post-Trade Forum in London in December 2017, SIX carried out some research into innovation opportunities as viewed by decision makers at financial institutions. The research highlighted the consensus that new technologies will play a major role in helping the post-trade industry overcome issues of transparency in regulation such as MiFID II. 63% expect that Robotic Process Automation (RPA) and Artificial Intelligence (AI) will be in mainstream use for at least one post-trade function by 2027. In the context of MiFID II, respondents expressed the view that RPA and AI could help introduce much faster and more cost-effective reporting in settlements and payments, as well as confirmations and reconciliations. Such innovation will likely be the savior of the post-trade function, freeing up companies’ time in the face of greater reporting responsibilities, to focus on performance building and value-creating activities for their clients.

Post-trade partnerships

With MiFID II already underway, finding a solution internally to better automate the post-trade function and meet regulatory demands may seem a steep mountain to climb. With this in mind, companies would be wise to look outside their own business to new fintech players that are already streamlining processes such as client onboarding. Traditional banks and asset management companies have previously shunned partnerships with fintechs for competition and security issues. But the fintech community has grown more established and safer over the years, presenting a significant opportunity for traditional players to work with these smaller companies to get an edge, fast.

Despite this need to collaborate, 53% of respondents feel that regulation is restricting their organization’s ability to be innovative, as their time is focused on achieving regulatory compliance as opposed to thinking about ways to innovate. However, there is a growing appetite for fintech partnerships: 37% of respondents say their organization will likely turn to a new, more agile business for at least one service by 2027. Perceived advantages of these smaller companies are that they can react more quickly to issues, and with novel approaches, as they are unconstrained by legacy systems and cultures. More importantly, 43% of respondents expressed their belief that collaboration will be essential to remaining at the forefront of the industry.

Talent pools

Greater reliance on fintech and innovation will mean dramatic process changes within the post-trade function, making it more efficient than ever before. However, if banks and asset managers are to continue benefitting from such innovation, a shift must also take place in the workforce to ensure its longevity and to avoid running into the same challenges again. 53% of respondents forecast the need to hire from a more innovative pool of talent. However, a quarter pointed to the need to strike a balance with a mix of technological and financial knowledge to ensure fresh opportunities are created, against a backdrop of vital industry knowledge.

Getting it right

Technology is going to be a critical aspect of helping the post-trade function dig itself out from underneath MiFID II's strict reporting and transparency requirements. But with broader issues such as the Securities Financing Transactions Regulation (SFTR) and the General Data Protection Regulation (GDPR) coming into play soon, and with Brexit still influencing how the European Union executes its business, changes are to be felt for some time yet. To remain current and competitive in the face of this regulatory storm, technology cannot be overlooked, nor can the talent that underpins it.

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