With the year drawing to a close, ERI’s Alan Goodrich takes a look back over some of the hottest topics of 2021, what impact they are having, and speculates a little as to what 2022 may bring – apart from a new 007.
The perfect storm of new data, information flows, processes, formats, investment vehicles and instruments, as well as accompanying regulations, is making landfall rapidly and posing both a threat and an opportunity for participants in the value chain. As a result, we have witnessed a wave of corporate transactions. Areas of post-trade activity have either been sold off or outsourced to former competitors, as the viability of certain operations, using existing legacy systems and processes, is called into question by some notable names in the market.
The drive towards even greater efficiency in conventional trade settlement processes, potentially moving from T+2 to T+1, combined with the latest digital asset DLT and Blockchain innovation, which effectively implies T+0 settlement, has created a limbo-dancing scenario, testing how low settlement times can really go, given the current systems, processes, networks and market infrastructure.
As we have seen in other industries, digitalisation has the power to transform the way assets are stored and distributed. The analogy to music is an interesting and useful one. Just as with music, there will likely be an extended period of time where we must cater for hybrid scenarios. Our post-trade systems, processes, networks and infrastructure will somehow need to be like those music centres that are able to play all the formats, from vinyl, tapes and CDs through to digital MPEG files.
Participants are looking to manage this hybrid phase, either by integrating specialist system components together, which raises the challenges and costs of managing a heterogeneous landscape of applications or by adopting a modern, integrated core system built on a uniform, open, service-oriented architecture that facilitates an orchestrated approach to managing processes that support the different sources and formats of information.
Just like for James Bond, a hybrid mix is needed combining some old-school aspects together with a more modern approach in order to attract a new generation of fans. Organisations are not only looking at their technology but also the way they organise themselves internally to innovate and deliver new products and services in an environment of shifting expectations and consumer behaviour. The great generational wealth transfer is underway. It is estimated that Generations X and Y (millennials) will inherit EU€8 trillion from their baby-boomer parents over the next five to ten years. Many incumbent participants are seeing their position and relevance being challenged by the big techs and neo-banks. Somehow, they need to safely navigate the waterfall of change with an agile approach.
Last, but not least, there is the green elephant in the room, called ESG. Blackrock CEO, Larry Fink, has famously written that “climate risk is investment risk”. He has also framed the climate transition as a “historic investment opportunity.” It is estimated in the market that over US£40 trillion has already been committed to funds and companies in the ESG space and is projected, by some, to reach US£140 trillion by 2025, i.e. 1/3 of all AUM. This is a shift in the sand that cannot be ignored, even if the impact has yet to materialise. Failure to integrate ESG is not an option and technology is going to play a pivotal role. New processes and data will need to be embraced throughout the investment life cycle in order to support this transformation and enable competitive advantage.
2022 is looking like it is going to be an interesting, exciting and challenging year for post-trade participants and their systems! But who will be the next (green) Bond?
