**Respond, recover, learn, improve, repeat**
The year ended with a consideration of what such a regulatory and supervisory shift would mean in practice. How would financial services firms expand their enterprise disaster recovery and business continuity disciplines to incorporate the obligation to – as a firm and as part of the financial system – ‘absorb and adapt to shocks, rather than contribute to them’?3
Business leaders and strategists did not have long to consider these issues before the 2020 global health and economic crisis generated by the COVID-19 pandemic required them to launch an operational resilience response of global and historic proportions.
1 https://www.bankofengland.co.uk/paper/2019/operational-resilience-of-fmis 2 https://www.fca.org.uk/publications/consultation-papers/cp-19-32-building-operational-resilience-impact-tolerances-important-business-services 3 https://www.bankofengland.co.uk/financial-stability/financial-sector-continuity
From our observations of the post trade environment across our footprint markets, we share some perspectives on the industry’s resilience in its response to an evolving situation, lessons learnt from its early experiences in navigating the global disruption, and how this might determine how the industry moves forward.
Banking intermediaries in the global post-trade industry have been bracing for a global influenza pandemic for some time. Following the 2008 global financial crisis, for instance, the enhanced sub-custodian performance monitoring standards required sub-custodians to evidence a measure of pandemic preparedness.
As the COVID-19 pandemic took hold, sub-custodians along with other post-trade service providers, regulators and market infrastructures worldwide responded rapidly to collectively safeguard the welfare of their workforce, clients, and communities while continuing to deliver services that are vital to clients and economies in the region.
What has proven critical is a well-coordinated response in markets. During the initial stages of lockdown and market disruption across Africa and the Middle East, the disparate manner in which some exchanges and depositories responded threatened the end-to-end continuity of market processes. Several capital market authorities stepped up to coordinate a synchronised industry response and communicate evolving industry plans, helping market participants adapt to the changing conditions. This need for proactive and synchronised information-sharing reflects the integrated nature of market operations across infrastructures and allows for the sustained stability of the ecosystem.
The magnitude of the COVID-19 disruption has highlighted vulnerabilities in common industry processes, with the health and safety risks associated with the requirements for physical meeting attendance and physical documentation coming to the fore. Globally, we see regulations being relaxed to adapt to current challenges, allowing shareholder meetings and voting practices to be conducted remotely and extending deadlines for submission of statutory disclosures.
Consequently, the demand for secure virtual connectivity has been fast-tracked, and the adoption of digital solutions for voting and documentation – already at implementation stage in some markets pre-COVID-19 – has taken on a new urgency.
The COVID-19 pandemic is testing the resilience of market infrastructure providers and the effectiveness of business continuity plans across the board, with the need to manage increased volatility and transaction volumes as well as implementing split-team and remote working arrangements due to lockdown requirements. To manage the surge in market volatility, market safety mechanisms were triggered across markets in Greater China and North Asia, putting to the test the safety mechanisms already in place such as the Price Limit mechanism in China, Volatility Control Mechanism in Hong Kong, Sidecar and Circuit Breaker in South Korea, and Intra-Day Volatility Interruption mechanism in Taiwan.
With contingency plans in motion, most market infrastructure providers were able to provide much-needed stability and resilience in the financial markets. In China, for example, the State Council of China extended the Chinese Lunar New Year holiday to contain the spread of COVID-19, and the China Securities Regulatory Commission stepped up supervision and guidance to the exchanges and market participants to ensure smooth operation of the markets. For the Shanghai Stock Exchange, the Waigaoqiao Disaster Recovery Centre was activated and changes were made to 28 systems including the trading system, the business system and the mid-end service system, to ensure smooth trading on the first day after the delayed opening of the market.
In other markets, however, the pandemic led to extended stock market closures and trading halts. In March 2020, the Sri Lanka and Bangladesh exchanges were among a handful of stock markets that halted trading as the economy shut down and equity prices plunged. Sri Lanka’s stock market saw a seven-week trading halt while Bangladesh’s stock exchanges were closed for nine weeks. The Colombo Stock Exchange re-opened on 11 May 2020 only to shut within minutes following a drop of over 10% in a gauge of blue-chip shares, highlighting the risks of a long hiatus.
Responding effectively to disruption in Africa and the Middle East has required adaptive solutions. While the extensive investments in more robust infrastructure over the years have been invaluable, limitations still exist in the power and communications infrastructure that present its own set of challenges to post-trade operations and the move to a fully remote workforce.
As such, market infrastructures and firms have had to quickly implement a broad spectrum of strategies to achieve operational resilience. These include ensuring uninterrupted power supply with the installation of solar panels at staff residences to ensure reliable internet connectivity for essential staff in a work-from-home setup.
A successful response to disruptions of any scale necessarily entails meaningful iteration of the respond, recover, learn and improve cycle of operational resilience. The efforts of industry groups and market associations such as the Association of Global Custodians and International Securities Services Association – working with policy makers, infrastructures and local custodian associations in markets – are key to the process. While international efforts are underway to develop operational resilience policies and standards to guide the industry response to disruption, these are currently a collation of guiding principles drawn in broad strokes by financial sector authorities. The post trade industry will need to come together as a collective to share learnings and refine the approach to setting standards. This will help ensure that it can rebuild better and address specific issues like issuer regulation, physical asset servicing, wet signature and physical documentation requirements as well as e-voting and e-proxy voting.
A successful response to disruptions of any scale necessarily entails meaningful iteration of the respond, recover, learn and improve cycle of operational resilience. The efforts of industry groups and market associations such as the Association of Global Custodians and International Securities Services Association – working with policy makers, infrastructures and local custodian associations in markets – are key to the process.
