By Jeslyn Tan, global head of product management, securities services, at Deutsche Bank
As with many pockets of the financial services industry, securities services providers are facing increased competition, compressed fees and more stringent regulatory reform. Not surprisingly, firms are seeking innovative solutions, such as digital ledger technology (DLT) to reduce costs, mitigate risks and enhance post-trade processes. Although it has been on the radar for some time, this technology is beginning to realise its full potential in changing the landscape.
The challenges the global securities services industry is facing have been well documented. The industry has experienced single-digit growth rates over the past six years and the path will not be that easy over the next five, according to a recent report from consulting firm Bain & Co. The firm estimates that the global revenue pool for the traditional buy-side could decline by 20% by 2025, with the figure being slightly higher for the sell-side. This could mean a hefty 35% to 40% drop for the post-trade segment.
A separate report from McKinsey & Co last year also notes that the global securities services industry will face even more change than it has over the preceding 10 – or even 20 – years. This is mainly due to the dramatic shifts in the structure of markets as well as the incorporation of new technologies such as DLT, automation and robotics, and advanced data analytics.
As a result, the need to develop a more cost-effective processing model has never been more important. Those firms that can harness both the power of technology and human talent will be in a strong position; DLT applications need to be a major feature of that roadmap as they have the ability to generate greater efficiencies for investors, portfolio managers, global custodians and other clients. By being on the same platform to achieve concurrent processes, the securities services group would be able to serve and add value throughout the value chain instead of at the tail end, where much of the work typically takes place today.
Testing the waters
To that end, Deutsche Bank Securities Services has been testing the waters with different use cases within DLT that can be applied internally and then rolled out to clients once the industry is ready. One of the most recent initiatives has been the successful pilot of a DLT solution to further automate custodial services. It addresses different pain points such as the transparency requirements, including issues around the tax processing of asset holdings at an ultimate beneficial owner level. It also streamlines complex data and reconciliation processes for both the bank and its clients.
At the moment, this level of information is not generally disclosed to, or captured by, sub-custodians. Data is typically provided in spreadsheets as and when needed and across multiple levels of disclosure. This leads to inefficient manual collation of data and reconciliation hurdles for the counterparts up and down the value chain.
The DLT solution enables authorised counterparts not only to share the same information, thereby eliminating duplication, but also allows only the relevant party access to the beneficiary details. Equally as important, the effective omnibus structure is not disrupted, which is a significant benefit for global custodians and/or counterparts in the value chain. Moreover, it minimises the impact on the current infrastructure and operations.
The first implementation of the Deutsche Bank DLT solution will be targeted at the shareholder information disclosure in Europe for global and sub-custodians, a key requirement of the Shareholder Rights Directive II (SRD II). Whilst SRD II came into effect in June, EU member states have until September 2020 to fully implement the legislation.
DLT can be a valuable tool in helping market participants share data as the Directive’s main objective is to increase the accuracy and transparency of communications between issuers and investors. It also aims to facilitate more active shareholder engagement, making it easier for shareholders to exercise their rights, specifically through global shareholder voting.
The original SRD was developed in response to the financial crisis with investors demanding greater transparency and control over financial returns, and influence over how the companies they invest in are run. The second phase of the Deutsche Bank DLT solution will include tax processing automation and further product build-out. After initial implementation in Europe, it will subsequently be extended to other regions in which the group operates.
Looking farther into the future, the solution could also be used by broker-dealers to provide desk-level transparency and real-time access to trades. This will become an increasingly important once the settlement discipline framework ingrained in the Central Securities Depository Regulation (CSDR), which comes into force in September 2020. Under the new regime, market participants will be liable to pay penalties against each transaction that fails to settle along with corresponding mandatory buy-ins for transactions that fail after the prescribed number of days.
In order to drive innovation, Deutsche Bank is a strong advocate of collaboration and co-creation with clients in order to generate and deliver new value to them. This was illustrated through the partnership with BNY Mellon last year where they integrated their chatbots built on the Symphony messaging platform to replace the manual process for receiving, resolving and responding to trade status queries.
Deutsche Bank Securities Services will continue to leverage this approach to drive forward this journey with its clients, working with them to understand their needs and solve their pain points through co-created solutions that employ new technologies to deliver value to them.
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