Ryan Cuthbertson Global Head, Custody & Funds Products, Financial Markets
Whether they are global investment banks, custodians, broker-dealers, asset managers or institutional investors, clients face unique challenges.
To stand out, many are leveraging data solutions to augment investment returns and obtain operational alpha – namely, extracting value through operational efficiencies.
In this process, it is the sub-custodian banks that facilitate the smooth delivery of meaningful and useful data insights to clients. However, dissemination is not always straightforward.
One consequence of the difficult market environment is growing buy-side compression on the fees paid to global custodians and broker-dealers. Another is that the securities services industry has struggled to grow revenues.
As the sell-side looks to counter margin pressures, many are rationalising operational processes. By working with custodians, some intermediary clients have found innovative uses for data to, for example, reduce the intermediation lag, which brings efficiencies and cost synergies.
Some sub-custodians provide insightful data analytics and extra settlement-related data like transaction statuses, fail updates and counterparty updates. In this way, global custodians and broker-dealers can offer more detailed information to their asset manager and asset-owner client base.
However, while data provision brings tangible rewards, it is not without its challenges.
Sub-custodians sit on enormous volumes of data, including settlement data, cash projection and forecasting information, liquidity management details, corporate actions data and operational data for predictive analysis.
Much of this data is unstructured. The first step, then, is to organise data and store it in data lakes. Ideally sub-custodians should then use an omnichannel approach so all clients can access it, irrespective of their technological sophistication or data-strategy maturity. In practice, this means giving access through a mix of online portals, SWIFT, bespoke or standardised application programming interfaces (APIs), XML or via MQ.
This channel-agnostic approach to data-sharing provides a flexible, enhanced end-user experience by reducing operational friction to ensure clients and their customers get information as and when they need it.
Advances in technology offer sub-custodians a competitive advantage by helping them to harness solutions that add value for clients who increasingly want enhanced settlement data to reduce settlement risk. With technology, data lakes and analytics, sub-custodians can share data in a frictionless, user-friendly fashion instead of via traditional channels like email or telephone.
This also ensures market participants can identify trends around settlement failure, and that firms can then put measures in place to mitigate those risks. This reduces operational and credit risk during the trade lifecycle, optimises collateral management and brings other benefits – including helping them to comply with the EU’s Central Securities Depositories Regulation (CSDR), which legislates significant fines and mandatory buy-ins for trade fails.
Providing bespoke settlement data can also drive efficiencies at clients. Enhanced settlement information – like tailored data which cannot be transmitted using existing methods – can assist custodians and brokers when supplying information to their customers.
One benefit of this approach is fewer client inquiries about settlement status updates – as one of Standard Chartered’s sub-custodians found. After strengthening its core settlement platform to permit the semi-automated capture of enhanced settlement narratives across multiple markets in Africa and Asia, the number of inquiries received dropped 85%.
The investment process is well known for its inefficiencies, with each intermediary, for instance, having its own books of record and reconciliation processes. However, new technologies like distributed ledger technology (DLT) promise greater data transparency and limit the need for reconciliation, cutting duplication.
Ultimately, DLT could see the establishment of a single book of record, which would dramatically streamline the investment and trade settlement process. Not surprisingly, sub-custodians are actively exploring DLT, although adopting it would require market-wide changes: intermediaries across the settlement and payment chain would need to re-engineer their IT infrastructure, and DLT standards are needed to ensure interoperability.
Away from DLT, sub-custodians are leveraging data solutions to enhance onboarding and improve market entry time for international investors. Account openings are being automated through various data and digitalisation initiatives – including the adoption of APIs – with Standard Chartered advancing here. In 2020 we went live with an internal account opening API which automated manual processes and reduced overall processing time by 79%.
Providing data, however, poses challenges. First, providers must ensure sourced data is accurate and has a legitimate lineage. The risks of breaching data privacy regulations are serious, while circulating inaccurate data could result in inadvertent losses and errors.
A second challenge is cyber-crime, whose scale is evidenced in a study by BAE Systems: it found 74% of financial institutions reported an increase in cyber-attacks during the pandemic.1 As a result, clients are scrutinising whether service providers have adequate cyber-hygiene measures in place.2 The consequences of getting hacked or suffering client data leakage could be severe, so sub-custodians must implement stringent data governance and cyber-security measures.
A third challenge is not to overwhelm clients with information. Sub-custodians must understand clients’ data strategies, capabilities and objectives, and provide a tailored approach.
A fourth, more fundamental, challenge is whether sub-custodians can monetise “Data as a Service”, which can boost core revenues. To date, most have opted not to charge clients, viewing data-provision as a complementary service that reinforces customer relationships.3 But, as data strategies evolve, sub-custodians will eventually need to levy fees.4 Similarly, bespoke communications channels or APIs might warrant charging.
1 The Times (May 10, 2021) Three quarters of finance firms report rise in cyber-attacks. 2 Global Custodian (June 10, 2021) Network managers look to future proof against technological advancements and cyber-threats. 3 Global Custodian (January 9, 2020) Custodians play the waiting game in monetising data services. 4 Ibid.
Data standards are a divisive issue. Proponents like SWIFT hold that standards for data and data communication channels (e.g., APIs) are crucial as these will encourage interoperability and promote common best practices.
This would address the challenge that clients face in receiving data from multiple service providers that is often similar but provided in different formats and structures – an unavoidable consequence of having sub-custodians operating across diverse markets.
However, the heterogenous nature of data and underlying markets complicates the search for solutions. One option is that clients limit the number of sub-custodians they work with to ensure more consistent data across multiple markets. Another is for fintechs to play a role in bridging data inconsistencies.
Alternatively, we could see a shift towards standards for more commoditised data sets as opposed to bespoke insights. As is often the case with innovation, standards tend to develop organically through market consensus in working groups. It is hoped data will follow this path.
Sub-custodians are embracing innovation, especially as it relates to data-sharing, as they look to future-proof their business models and drive client success via an effective end-to-end flow of data.
Ultimately, the success of data solutions will depend on how effectively intermediaries in the investment chain can identify and access the data they need with their own underlying clients.
Consequently, a well-organised data strategy and a willingness to adopt transformative technologies are imperative if sub-custodian providers are to navigate some of the challenges.
An intelligent and thoughtful approach to data management and delivery will benefit global custodians and end-investors by cutting manual intervention and providing value through greater transparency. In return, firms will spend less time seeking information from counterparties, and be free to focus more on revenue-generating and value-accretive activities.
Regardless, sub-custodians must be flexible when pursuing their data strategies and factor in clients’ needs. In this way, they will position themselves strongly to capitalise on some of the market-wide changes underway.
The article upon which this edited version is based was written for the original publisher and copyright holder, The Journal of Securities Operations & Custody of Henry Stewart Publications LLP.
