For those operating in the financial services sector, the regulators continue to pile on the pressure with a wave of new challenges in the pipeline to add to those already implemented. Institutions, already struggling with less-than-optimal legacy technology platforms, must begin to feel like they have become recipients of the proverbial (uninvited) gift that just keeps on giving (but not in a good way). A new, modern, open, integrated core system could be the one item on the wish-list this festive season that would change the narrative and transform the challenges into opportunities.

The acronymous (sounds a bit too much like “acrimonious”) list of regulations; AIFMD II, CSRD, DORA, ELTIF II, EMIR, FIDA, MiCA, MiFID II, PSD2, SFDR (to name a few), with which the financial services industry is already required to comply, or to which it is going to be subject, continues to grow. Many market participants feel, if not overwhelmed, then at least preocuppied with projects to keep pace with complying to existing obligations and avoiding any form of sanction. In addition, market initiatives and customer expectations are pushing the digital transformation agenda and a shortening of payments and securities settlement cycles.

Two of the newly mooted regulations and the most recent market initiatives, respectively; DORA, FIDA, Instant Payments and T+1, present some unique, but many common, challenges to those institutions that are stubbornly clinging on to legacy core systems.

DORA, Digital Operational Resilience Act, expects organisations in the EU to shift from a reactive, ex-post philosophy of recovery from disruption, to a proactive, ex-ante approach to resilience, where risks are identified and mitigated (not only internally, but also externally within 3rd party critical service providers) before they become disruptive. This level of resilience and associated incidence reporting to the regulator implies the ability to constantly monitor processes, and address and mitigate potential risks.

FIDA, Financial Data Access, is the evolution of open banking, under PSD2 in the EU, to open finance. Under FIDA, financial institutions will be required to share a broad set of accurate, up-to-date customer data with authorised third parties via APIs (including savings, loans, mortgages, investments, insurance, etc.). Therefore, the provision of real-time positions and balances across all product types, via APIs, will be necessary.

Instant Payments is effectively a modernisation of the 2012 Single Euro Payments Area (SEPA) regulation. The key features of SEPA instant credit transfers include the service being consistently available (24 hours a day, 365 days a year) and it taking no more than ten seconds for the recipient’s payment service provider (PSP) to inform the payer’s PSP whether the money has been received and, in the case of a successful transaction, to make the funds available to the recipient.

T+1 is the next step in the shortening of securities settlement cycles from 2 days to 1 day. The USA and Canada plan to transition to T+1 in May 2024. India already moved to T+1 in January 2023. The US move, especially, will have huge global ramifications, for both industry participants and other markets. AFME estimates the time between the end of the trading window and the start of the settlement window will go from approximately 12 business hours down to just two hours, an 83% reduction. Many processes will need to take place on the trade date - as a result, risking a significant increase in settlement failures.

Operations based on siloed systems, some probably built based on a concept of batch processing cycles, or reliant on periodic extractions of information to data warehouses, will no longer be a sustainable option. Processes that are currently manual, where information is not seamlessly flowing digitally from one stage to the next, in real life on an integrated platform that can provide a single version of the truth, will compromise the ability to comply with DORA and FIDA and meet the SEPA Instant Payments and T+1 settlement deadlines. For some institutions, this could result in a significant increase in operating costs, fines from the regulator or even the withdrawal of certain products and services from the market with the risk of losing customers and revenue streams.

Implementing a modern, integrated, real-time platform based on a service-oriented architecure (SOA) offering high levels of process automation and a suite of open APIs allowing instant, up-to-date, access to accurate information, will facilitate (amongst many other benefits):

• The proactive, ex-ante identification of risks and mitigation of disruptions that are required in order to comply with DORA and, in so doing, the improved management of costs and operational risks;
• The sharing of customer data with authorised third parties, necessary for compliance with FIDA, and the generation of new revenue streams from the provision of the information;
• The capacity to offer instant SEPA credit transfers while remaining compliant with anti-money laundering (AML) regulations. For example, embedding processes to verify the match between the bank account number (IBAN) and the name of the beneficiary, provided by the payer, in order to flag a possible mistake or fraud before the payment is made;
• The ability to process high volumes of trades, across different custodians, with reduced risks of settlement failure, within the T+1 timelines (and even T+0, if the conversation turns to the atomic settlement of tokenised assets on blockchain), needed to retain clients wishing to trade in T+1 markets and attracting new clients from institutions that can no longer offer it.

As the saying goes: “One person’s misfortune is another person’s joy”. Institutions that enjoy a platform offering the above benefits will be in a position to attract new business and generate additional revenue, while also lowering their compliance and operation costs and risks. Sounds like the kind of gift that just keeps on giving that we should all wish for!

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