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Securities Services: The search for the next big product

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The potential of data has been seriously underestimated by securities services providers and the race is on to find more innovative ways of using it

KEY POINTS

  • Data technology is starting to play a transformational role, adding new securities services.
  • Regulatory reporting requirements and demand for greater transparency are also driving change.
  • The emergence of blockchain and artificial intelligence adds an additional layer of complexity.

What will be the next important product to join the ever-lengthening custody value-added chain? This has been the perennial question asked of securities services providers down the decades. Securities services have already changed beyond recognition since the days of simple custody and safekeeping, but the world, it seems, can never have enough of more services for the same money.

For Sarbjit Panesar, global head of business development, asset managers and insurance, at Société Générale Securities Services (SGSS), the answer is obvious. The next big thing, he says, will be data. 

“If you look at asset managers, the big issues affecting them are price pressures and regulatory reporting requirements,” he says.

In respect of the first, passively managed exchange-traded funds are being squeezed and the effect is trickling down to securities service providers. As a result, everyone involved has to find ways to be smarter and more cost-effective. With regard to the second issue, whoever can find the best way for clients to access and forward the data required to be regulatory-compliant will be in the industry’s vanguard.

A feeling exists that the potential of data has been seriously underestimated and that ways will be found of using it that no-one has yet even suspected. There has been much talk of big data and there is a lot of data, says Panesar. The key now is to aggregate and align it so people can understand any messages that previously dumb data might be trying to communicate. What is needed, in essence, is a Rosetta Stone for data.

SGSS is working on projects to deliver data in the manner that Panesar envisages, using a data  warehouse depositary. The technology is there to make data accessible and align it with needs that clients might not yet even perceive to exist. 

securities services data

But, everything comes back to the imperative of doing business more efficiently and cost-effectively in terms of time, effort and cold, hard cash. Aggregation of a different kind – almost harking back to simpler times – features prominently in the future in the view of Penelope Biggs, chief strategy officer for corporate and institutional services at Northern Trust

She says that Northern Trust has worked on building a holistic capital markets solution for clients who want to outsource many, if not all, of their non-core requirements to an external one-stop provider, combining foreign exchange, brokerage, securities lending and transition management. 

She describes this as a variation of full middle-office outsourcing, before almost accidentally referencing Northern Trust’s development of a blockchain solution for private equity.

The core services of custody, investment accounting, performance assessment and securities lending are all mature, notes Sid Newby, head of asset manager and asset owner sales at BNP Paribas Securities Services. There is a new generation of clients and services, and the time is right for data technology to play a transformational role in adding new services or enhancing existing ones. 

“We are at a nascent stage in that, but one which is developing extremely quickly,” he says.

The range and volume of data have expanded and new challenges are emerging. In this changing world, securities services providers will become technology providers, he says. 

It does seem churlish to point out that one large US-based securities services provider was already claiming to have made this transition more than two decades ago, but it is  historical fact. The difference today, though, is the sheer scale of the modern industry and the vast sums of money involved.

Newby points to several underlying driving forces, including the greater diversification of investment strategies as managers seek to demonstrate the value they add, and owners seek new sources of return. 

Regulatory reporting requirements and the ever-increasing demand for greater transparency are  driving forces too. The emergence of technologies such as blockchain and artificial intelligence adds further complexity to the equation and yet they are also part of the solution. 

“Investment managers will need help and our technical infrastructure is evolving accordingly,” says Newby. 

“What used to be labour-intensive and painfully slow can now be automated, accelerated and streamlined. In short, we have been talking about big data for years. Now it’s becoming a reality.”

For Alex Lawton, head of securities finance, Europe, Middle East and Africa at State Street, the next big thing is in effect going back to the future. Enhanced custody is the product he identifies as a means of addressing issues that have emerged in recent times in the securities finance market.

“We are seeing a real change in market dynamics,” he says. “As regulation bites, it has reduced financing capacity in the system and changed what institutions can do. We are trying to add capacity back to the street, with products like our enhanced custody offering, and new players, such as Canadian institutions, also stepping in to make their financing available.”

If this trend continues, he argues, there will be a rise of new ways of lending securities. Rather than the traditional owner-to-custodian-to-agent lender-to-prime broker-to end user path, direct lending could become a factor in the market. He acknowledges that peer-to-peer lending is not for everyone, as many asset owners prefer to outsource the entire process to their custodian, but says that the market is witnessing a change in long-defined roles.

It is the more highly sophisticated asset managers and sovereign owners who are giving consideration to the peer-to-peer route, he observes. This reflects at a macro level what is happening at the micro level – cutting costs, increasing revenues and matching needs and wants.

BNP Paribas Securities Services points to the development of a next-generation digital fund distribution platform as an example of how the creation of new products and services has evolved. 

Long gone are the days of creating solutions blind on a unilateral basis and attempting to sell the results to bemused clients. 

The emphasis in the modern era is firmly on partnership, working with clients to discuss their needs and then tailor products and services to meet those needs more precisely.

In this context, it is partnering with AXA Investment Managers in the co-design phase of the project. BNP Paribas Fund Link aims to make the fund distribution process easier and more efficient, by facilitating the flow of information between fund buyers and sellers thanks to blockchain and smart contract technology.

One of the main objectives of the platform is to speed up the onboarding process for both fund buyers and asset managers. 

Fund buyers using BNP Paribas Fund Link will only have to upload their profile and investor onboarding documents once. This information will then be shared with the various management companies on the platform.

Joseph Pinto, chief operating officer at AXA Investment Managers, says: “Operational efficiency is a key area for us in an increasingly competitive market environment where pressure on fees keeps rising. 

“We believe that the new technologies used by this platform can significantly enhance our fund distribution process and ensure we are well placed to meet the continued regulatory demand for increased transparency.”

BNP Paribas Securities Services adds that it will open the project to other clients in the near future. The first functionalities of the platform will be released from this year onwards. 

Further details about the capabilities included in the platform and the underlying technology will be released in due course.

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