Cash & Inventory Management within Capital Markets Market ...€¦ · •30 year career in IT at Investment banks -Morgan Stanley, Credit Suisse, ABNAmro, Lehman Brothers, Nomura

Banks and post trade - the challenge for FintechPresentation to BCS

Jan 27th 2020

Cash & Inventory Management within Capital Markets

Market Landscaping for NatWest Markets

Agenda

§ Intros

§ What is post trade?

§ Why are banks’ back office systems such a mess?§ Why do banks and fintechs struggle to be successful together?

§ What can be done to address these issues?

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About Alastair Rutherford

• M. Eng Electronic Engineering

• 30 year career in IT at Investment banks - Morgan Stanley, Credit Suisse, ABNAmro, Lehman Brothers, Nomura

• Co-founder of Post Trade Consultancy Ascendant Strategy

• Track record of working with C-suite to shape, drive and deliver large-scale ($250m-$500m) transformation programmes across middle and back office areas, spanning products and entities

• Extensive experience managing large global IT organisations (1500+ headcount), utilising onshore, offshore and vendor delivery models

• Global experience having been based in London, New York, Tokyo and Singapore

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About Ascendant Strategy

• ASL are a capital markets consulting practice, focussing on strategic transformation and enablement of the post-trade infrastructure and process.

• We are a content-led consulting business based on skills and experiences that have been developed through leadership of successful outcomes internally within financial services organisations.

• We recognise that each organisation is unique, as are its challenges and so our practitioners focus on providing solutions to your challenges, not finding a challenge for their solutions.

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Introduction – what is post trade?

§ Post-trade processes comprise the services that are performed subsequent to the execution of a trade

§ These include operational tasks such as:§ validation of trade details§ exchange of securities and cash§ custody and asset servicing§ related activities such as collateralisation

§ And other corporate functions:§ Financial processing§ Risk management

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Introduction – capital markets application architecture

Historically application architectures have evolved around siloed organisational functions…

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Front Office

Operations

Risk

Finance


Historically application architectures have evolved around siloed organisational functions…

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Front Office

Operations

Risk

Finance

• Market Data• Analysis• Order/Execution• Transaction capture

• Transaction Capture• Confirmation/Allocation• Settlement• Corporate actions

• Transaction Capture• Market risk• Credit risk• Analyses • Transaction capture

• Financial reporting• Product Control


…. And in the early days data transfer used humans as API’s

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Front Office

Operations

Risk

Finance


Typical architecture – 1980/90s – Data ‘cascades’ through architecture…..

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FO system

Ops system

GL Risk system


…. But limitations spawn an ecosystem of spreadsheets…..

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FO system

Ops system

GL Risk system

Spreadsheets


… and various reasons have driven the creation of multiple systems in each layer

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FO (EQ cash)

Ops EQ cash

Finance (GL)

Market Risk

FO (FI cash) FO (EQ Derivs)FO (FI Derivs)

Ops FI cash Ops (EQ Derivs)Ops (FI Derivs)

Credit Risk

Product Control


… and interconnections become less sequential (1990/2000’s)

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FO (EQ cash)

Ops EQ cash

Finance (GL)

Market Risk



Credit Risk

Product Control


… and the ‘EUC’ ecosystem became significantly pervasive

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FO (EQ cash)

Ops EQ cash

Finance (GL)

Market Risk



Credit Risk

Product Control

Spreadsheets


…. And we haven’t even started on reference data

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FO (EQ cash)

Ops EQ cash

Finance(GL)

Market Risk

FO (FI cash)

FO (EQ Derivs)

FO (FI Derivs)

Ops FI cash

Ops (EQ Derivs)

Ops (FI Derivs)

Credit Risk

ProductControl

Spreadsheets


…. Let alone the ‘global’ picture

14

US EU Asia ex Japan

Japan


So why did all this happen?

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Pre-2008 Post-2008

‘Consolidate’‘Grow Revenue’ ‘Regroup’ ‘Restructure’ ‘Rationalise’

Industry Focus

Business & Corporate Focus

- Business Integration- Rationalisation

- People- Platforms

- Enter New Markets- Product Innovation- Business Facilitation- Infrastructure Siloed

- Stabilise/Stay Alive- Exit non-core business- Cost a Focus (1st time)

- Cost a Priority- Offshore/Outsource- Comply with New Reg- Fixed vs Variable Cost

- Business Exits/Merge- Reduce Capacity- Sustainable C/I ratio- Cost Mutualisation

Corporate Levers

- In-house Solutions - In-House Solutions - Delayering- F2B Vendor Packages

- FinTech- Managed Services

2019 & beyond

- Offshoring- Utilities

Some of it derives from what was going on in the industry….

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…but other factors contributed

§ Functions and their IT development groups were siloed

§ Evolving market – system “time to market” key

§ Investment not centrally controlled§ No (or toothless) architecture function

§ Regulatory focus relatively weak§ Human nature

§ Compensation structure

§ Downside small vs large upside….

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The 2008 crisis drove regulators to act…..

§ Regulators were already aware of the issues with the poor quality data coming out of banks

§ Issues with system stability were also starting to worry them§ So as well as addressing market infrastructure (eg central clearing for

OTC derivatives), directives emerged forcing banks to improve data quality and IT controls

§ To comply with the regulations, banks had to undertake massive development efforts, and create new organisational structures

§ Some of these efforts improved the architecture, but many added further layers of bureaucracy

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… and deteriorating market conditions forced cost reductions

§ With revenues declining, banks explored many ways of saving cost, and IT departments were typically one of the main focal points§ Offshoring§ Outsourcing§ Vendor applications§ Headcount cuts (including key subject matter experts)

Between these two drivers, there was almost no bandwidth available to drive innovation for the best part of a decade…..

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Why do banks and fintechs struggle to be successful together?

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§ Risk

§ Cost

§ Language§ Budget Lifecycles

§ Implementation lifecycles

It’s common to hear accusations about ‘lack of innovation’ at banks but in reality they are highly innovative organisations that have been constrained in several dimensions. So the key factors that drive difficulties in banks and fintechs working together are:

And in post trade as we’ve seen…..

§ Complexity of integration

§ Lack of available expertise internally

What can be done to address these issues?

We need to think differently about the problem

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The Real Post Trade Challenge – IT Fails To Deliver Industrialisation

Human‘API’

Information Transfer

Core Back Office Applications 40

35

25

40

60

% of workload allocation

% of TCO*

22*Total Cost Of Ownership of people and IT

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• Fintech is increasingly emerging as an enabler of post-trade transformation, with it being viewed as a catalyst towards industrialisation of traditional operations processes.

• Maturity of products driving credible business outcomes if integrated into the right solution –significant portability of solutions that have supported front office electronification within post-trade.

• And simplistic process automation of the past will not deliver transformative outcomes.

• The maturity of the FinTech landscape creates opportunities for automation of complex, legacy processes within capital markets. But will succeed only if blended alongside the legacy architecture that supports it.

• And affordability becomes a critical factor in linking solutioning to impact on cost income ratios.

• And to leverage the benefits technology can bring, the target operating model has to be designed to lead this transformation. Not follow it.

Thinking differently about the problem….

‘As Is’• ‘What do you do ?’• ‘How do you do it ?’• Starting TCO

‘To Be’• Target value chain• IT demand• Target TCO

Design• Solution mix• Buy vs Build• EVM / KPI’s

Path To Industrialisation

Transformation journey……conceptually simple

24….but execution made complex by legacy business behaviours

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Value chain driven approach drives transformation solution(s)

API- Exception

processors


- Smaller applications, supporting data transformation, workflow

automation or information exchange

Core Components- Services that provide the core processing engines for

the organisation- Standardised & commoditised processing

-

API- Exception

processors

Core Applications

Messaging layer/APIs

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Steps to TCO transformation…. 1

“Open up” core platforms using messaging or APIs- allows timely access to data

”Componentise” core applications and facilitate usage of managed service offerings and new market infrastructure


API- Exception

processors

Core Applications


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Automate internal data transfer- use “workflow++” tools

API- Exception

processors

Core Applications


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Automate external data transfer - using same tools as step 2

API- Exception

processors

Core Applications


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Move core applications to the cloud

Core applications

ü Alignment with business objective……not a personal one!

ü End-to-end focus on process definition – business flow rather than a broken process automation exercise

ü Value chain has to be clear around current & future state

ü Technology the enabler, not the driver of transformation

ü No silver bullets – solution will be a blend of products, not one size fits all

ü Recognise complexity – don’t underestimate the time & detail required for success

ü Change management governance and discipline is fundamental to success

Success Factors For Transformation

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Thank Youwww.ascendant-strategy.com

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@Ascendant Strategy Ltd @Ascendant_Strat

Cash & Inventory Management within Capital Markets Market ...€¦ · •30 year career in IT at Investment banks -Morgan Stanley, Credit Suisse, ABNAmro, Lehman Brothers, Nomura

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