Bankable Insights_The Custodian Edition_Oct 2022
Bankable Insights – Our third edition of The Custodian for 2022 shares insights on shaping the securities services for tomorrow's world.
*Bankable Insights* The Custodian Edition
Shaping securities services
for tomorrow's world
After three arduous years, Sibos – one of our industry’s biggest occasions – returns to an in-person event this month. During that time, the world and our industry have changed in ways none of us could have imagined.
For my colleagues and I, this feels like a prominent moment, and we’re excited to finally catch up with many of you face to face. While of course there will be plenty of reflection, I trust we can also share ideas and ambitions for the securities services industry of tomorrow.
Perhaps our biggest challenge going forward will be how to balance these ambitions. We want to embrace the best of technology and innovation, and we’re committed to doing so in a way that keeps ESG front and centre. We must also all take care to embrace change at a pace that maintains the appropriate levels of risk management.
This edition of The Custodian will explore ways to strike the optimum balance across investment hotspots, technology, talent management, and more.
In looking to shape tomorrow’s securities services world, ESG cuts across everything. As a bank, we’re committed to increasing sustainable investment across our footprint – which comprises of regions conventionally considered ESG-laggards.
In Asia, we’re encouraged to see this assumption proving outdated. Our first piece, Asia zeroes in on ESG, considers how the region is catching up on Europe. Huge ESG-asset growth is expected over the next few years, thanks partly to positive regulatory changes at country and regional levels. And while data quality is still a limitation
on growth, the advancement of technologies such as AI are expected to drive industry maturation.
Another area attracting attention in our unique footprint is the gulf region - Qatar and the UAE in particular. In GCC markets power on, we explore the factors driving foreign investor interest, despite muted broader EM sentiment and certain persistent access barriers.
With steady recent IPO activity, the emergence of new products and marketplaces, and promising new post-trade infrastructure on the horizon, we’re only seeing the beginning of GCC potential.
Our third article turns to a very different region, but one also on the cusp of enabling accelerated foreign investor inflows. East Africa finds its feet explains that while the region is experiencing economic highs and lows, industry maturation and associated investment opportunities are imminent. A technology-savvy, youth-heavy population coupled with emerging regulatory plans - such as regional stock exchange consolidation and post-trade infrastructure changes - are boosting regional prospects.
Turning to data – a topic we’ll all be debating at length at Sibos – we seek the answer to the title of our next piece, Cumulo-nimble: why custodian banks have shifted to cloud computing. While cloud technology is more ESG-aligned and more cost effective - than the conventional data-centre approach, market fragmentation and cyber risks cannot be ignored. Here, my colleague Ian Donald discusses a balanced approach to adopting cloud technology – and how it has a broader role to play in our industry.
All the themes discussed so far – especially the pandemic as a background driver in many cases – have an important impact at human level too. In our last piece, The great workplace reset, I share the Bank’s approach to managing talent during ‘The Great Resignation’. Rather than a crisis, we see this as an excellent opportunity to embrace more flexibility, greater diversity, and innovation.
We hope this mix of content inspires you to explore the new opportunities we have at this salient industry moment. I hope to discuss these topics with you soon, at Sibos and beyond.
Global Head, Financing and Securities Services, Financial Markets
Disregarded by many initially as being a tick-box exercise, environmental, social and governance (ESG) criteria is now firmly embedded into the investment and operational processes at asset managers and global banks. Although adoption of ESG is most advanced in Europe, Asia is not
Reports suggest that global ESG assets under management (AuM) could triple to $6.5 trillion between 2020 and 2025, with Asia accounting for $500 billion of that, corresponding to a quintupling of ESG AuM in the region since Q3 2021.1 So what is driving investor demand for ESG, and how are service providers responding to it?
1 Invesco – April 8, 2022 – ESG opportunities and challenges in Asia
Asian regulators address ESG
Asian markets are often disparaged for being laggards – relative to Europe and North America – on ESG, but this criticism is without merit. The region is committed to achieving net zero, which is why a number of local regulators are imposing ESG disclosure requirements on investors and issuers alike.
The Monetary Authority of Singapore (MAS), for example, subjects retail ESG funds to additional reporting obligations while Singapore Exchange (SGX) recently instructed listed companies to provide climate reports from 2023. Similarly, Hong Kong’s Securities and Futures Commission (SFC) strengthened its own disclosure rules for ESG funds back in 2021, while the local stock exchange – Hong Kong Exchanges and Clearing Limited (HKEX) - has insisted that publicly traded companies publish information about their ESG policies. In addition, China has introduced a set of voluntary ESG guidelines for domestic companies, using metrics which are broadly aligned with draft rules issued by the International Sustainability Standards Board.
Elsewhere, Malaysia’s Central Bank is prioritising climate change risk too, with plans to subject financial institutions – including banks and insurers – to added climate reporting requirements, climate stress testing and climate risk weighted capital requirements.
At a regional-level, efforts are underway to encourage greater standardisation around ESG. For instance, ASEAN established its own sustainability taxonomy, which seeks to provide a common framework around the financing of sustainable activities. Following on from the taxonomy, ASEAN has also published its Sustainable and Responsible Fund Standards (SFRS), a consultation document focusing on issues, such as disclosure and reporting of sustainability objectives, ESG investment processes, the use of reference benchmarks and naming conventions.2 Regulators in the region - including the Philippines Securities and Exchange Commission (SEC) - are already consulting on the document’s contents.
All these initiatives throughout Asia are ultimately fuelling increased investor interest in ESG products.
2 Responsible Investor – February 16, 2022 – Philippines reveals first look at proposed ASEAN sustainability funds standard
Data and ESG – the gargantuan elephant in the room
Although regulators in Asia - and globally - are looking to create a semblance of order and standardisation in the rapidly growing ESG market, progress continues to be hampered by ongoing issues around data quality and clarity.
One of the biggest problems is that ESG data is highly fragmented, especially in Emerging Markets, which can make it difficult for issuers and investors to report on ESG. While regulators and industry standard setters in the region are introducing ESG reporting rules, this is happening at different paces and with local market nuances. This lack of a joined-up approach is creating inefficiencies and complexities.
The same is true of ratings agencies, many of whom adopt their own methodologies and frameworks when dispensing ESG scores. In some instances, a single company might receive different scores from multiple ratings agencies. For example, Tesla was recently excluded from the S&P 500 ESG Index following claims of racial bias and crashes linked to its autopilot vehicles3, yet MSCI gives the electric vehicle manufacturer an ‘A’ rating.4
However, service providers are working on ways to better systematise the vast troves of ESG data. Some fin-techs are leveraging artificial intelligence (AI) tools to organise ESG data more effectively. Others – including STACS in Singapore – are using Blockchain technology to aggregate, record, and store ESG certifications and corporate data from verified sources on a single registry.5 This information can then be used by financial institutions for various ESG purposes.
Within Securities Services, there is certainly a role for banks to act as aggregators – providing a consolidated view of ESG data for institutional clients. There is an opportunity here to facilitate client needs in terms of ESG reporting – whether it’s internal reporting requirements or external reporting for their regulators and end-investors. As the ESG market matures, aggregators will become increasingly important.
3 Reuters – May 19, 2022 – Tesla cut from S&P 500 Index and Elon Musk tweets his fury
4Barron’s – May 20, 2022 – Tesla got dumped from an ESG index. One critic calls the move ‘a true indictment of sustainability ratings’
5Fin Tech Singapore – STACS officially launches ESGpedia powering MAS’ ESG registry
Becoming a driving force
Clients – including asset managers, asset owners, global custodians and brokers – are all collectively taking ESG seriously. Many are now inserting questions on ESG into their respective vendor due diligences. Those providers with compelling ESG strategies will be the ones who attract mandates moving forward.
Inside its Securities Services arm, Standard Chartered is actively engaged on matters related to ESG. At an industry level, the bank is a signatory to the Global Principles for Sustainable Securities Lending and is a member of the International Securities Services Association’s ESG Working Group, where it is looking at ways to better share information and educate people on the topic of ESG.
ESG is becoming more ubiquitous in Asia, as a more investors take sustainability issues into account. It is also being enabled by the introduction of new regulations and pan-Asian standardisation initiatives. However, ESG does face challenges around its data, and these do need resolving if the market is to reach its true potential.
As GCC economies such as Qatar and UAE establish new investment products and post-trade infrastructure, find out why investors are excited about the opportunities.
Owing to the ongoing geo-political tensions, surging inflation, rising interest rates and global economic slowdown, investors have mostly been downbeat about Emerging Markets’ prospects. Despite this bearishness on Emerging Markets, the Gulf Co-operation Council (GCC) region is doing well - largely because it has been insulated from the wider volatility by soaring oil & gas prices and healthy foreign investor inflows. Within the GCC itself, investors are incredibly excited about some of the opportunities available in the UAE and Qatar. So what is driving this interest?
Healthy economies prevail in the GCC region
Growth indicators for Qatar and the UAE are broadly positive. In the case of Qatar, Standard Chartered is projecting GDP growth of 4.7 per cent in 2022, as more energy consumers diversify away from Russian gas, while the country is also expected to reap the rewards of hosting the FIFA World Cup. In the UAE, Standard Chartered is forecasting GDP growth of 6.9 per cent in 2022 as structural reforms – including the planned corporate income tax and liberalisation of residency rules – put the country on a stable macro and fiscal footing.
Initial public offering (IPO) activity in the Middle East has also been robust in 2022, with Bloomberg data indicating listings in the region raised $11.4 billion in the first half of the year.1 In the 12 months leading up to June 2022, IPOs in Dubai and Abu Dhabi totalled $11.9 billion.2 Notable IPOs in the UAE included the $2 billion listing of Borouge, a petrochemical company, which listed on Abu Dhabi Exchange (ADX) in an offering that was x42 oversubscribed,3 together with Dubai Electricity and Water Authority (DEWA), which made its $6.1 billion stock market debut on Dubai Financial Market (DFM).
Although its main market is smaller than that of the UAE, there are 47 companies presently listed on the Qatar Stock Exchange (QSE), two of which went public this year.
Broadening investment horizons
A number of measures are being adopted to stimulate inward investor flows into the UAE and Qatar, including the introduction of new investment products. For example, Dubai is rapidly becoming one of the biggest listing destinations in the world for Sukuks – a rapidly growing asset class - with $80.9 billion of Sukuks currently listed in the market.4 Qatar is steadily pushing its liberalisation agenda, having abolished all limits on foreign ownership of companies in 2021, the market has since launched QE Venture Market (QEVM) providing a listing and trading venue for SMEs. Qatar’s recently launched MSCI QSE 20 ESG Index aims to meet the growing demand responsible portfolio
Inroads are also being made in both markets around derivatives, in what will help support diversification and provide investors with proper hedging facilities. Last year, ADX launched a derivatives market enabling investors to trade single equity futures and single index futures, while Qatar is expected to unveil its own derivatives market in 2024.
Looking ahead, Dubai is already trying to position itself as a regional hub for digital asset trading, having introduced the Regulation of Virtual Assets (DVAL), an ambitious piece of legislation establishing Dubai Virtual Assets Regulatory Authority (VARA), a body entrusted with overseeing digital assets - together with a framework governing digital asset activities.
Recalibrating post-trade in the region
With all eyes currently fixated on Saudi Arabia’s liberalisation programme, it is easy to forget that both the UAE and Qatar have made enormous progress too by enhancing their respective post-trade processes.
Coinciding with the launch of its derivatives markets, the UAE has said it will create domestic central counterparty clearing houses (CCPs). CCPs are a mechanism for improving market stability and efficiency. In fact, some institutional investors argue CCPs are essential if countries are to successfully demonstrate that they are adhering to industry best practices.
Elsewhere, Qatar has made a number of other substantive changes to its post-trade regime. Most significantly, Qatar is in the process of reducing its trade settlement cycle for securities from T+3 to T+2, bringing it into line with Europe and the US. Although the US, Canada and India are now in the process of compressing their settlement cycles even further to T+1, there is no indication this will be happening in Qatar - or the UAE - just yet.
Other major post-trade ambitions in Qatar have included its planned adoption of a single account settlement model; the introduction of positive affirmations and the establishment of new trade fail management procedures.
Navigating barriers in the region
Although the UAE and Qatar have made notable improvements to their capital markets, the GCC region – more generally - still has a lot of work
While omnibus account structures are now more prevalent, opening up accounts in different GCC markets can be challenging for foreign investors owing to the laborious documentation requirements it entails. The lack of harmonisation of depository account opening requirements within the GCC is problematic, and harmful to cross-border investment. This is typified by the absence of transferable national investor numbers (NINs) in the GCC, which makes it difficult for allocators to build up positions across multiple markets.
There is also growing trepidation that certain GCC economies are rolling back on some of the progress they made around digitalisation during COVID. Just as countless markets digitalised their account opening processes at the start of the pandemic, the GCC was no different, and the efficiency benefits were immediately realised by investors. With the pandemic now running its course, concerns are mounting that some GCC markets are once again reverting to manual processing, much to the frustration of investors.
Moving in the right direction
Amid the wider sell-off underway in emerging markets, GCC economies such as Qatar and the UAE offer some glimmers of hope. Strong macro fundamentals and a willingness to implement far-reaching reforms – including the establishment of new investment products and post-trade infrastructure - have put both markets in an excellent position to attract institutional investment moving forward.
East Africa finds its feet
East Africa finds its feet
With their strong economic growth potential, find out why East African markets are generating a lot of interest among global investors.
Despite their strong economic growth in Q1 2022, highly favourable demographics, and predilection towards embracing innovation, East African markets are likely to face some challenging times ahead. Monetary tightening by the region’s Central Banks coupled with rising food and energy prices will put serious pressure on a number of East Africa’s economies. Although the region is facing tough headwinds, several countries are looking to counteract these problems by spearheading capital market reform efforts, which will help accelerate foreign investor inflows even further.
A region bristling with opportunity
East Africa’s economic expansion over the last decade has been facilitated by a combination of political stability; robust infrastructure spending; favourable regulatory environments; and healthy exports.
However, the region is expected to suffer a slowdown over the next two years, with Standard Chartered revising down its GDP growth forecasts for several markets. For example, Standard Chartered anticipates that GDP growth1 in Kenya will be at 5.5 per cent in 2022, before falling to 5.0 per cent in 2023. In the case of Tanzania, Standard Chartered expects GDP growth of 4.6 per cent in 2022 and 5.3 per cent in 2023, which is lower than previous estimates.
However, East Africa is also endowed with a youthful population, with a median age of just 18.7 years, suggesting the region will benefit from an enormous demographic dividend, propelled by the strong labour force, its large purchasing power and latent potential for investments.
At the same time, East Africa has an excellent reputation for embracing innovation, which has been made possible by the proliferation of mobile phone technology. For instance, Kenya’s mobile penetration rate currently stands at 109%, which is above average in SSA (Sub-Saharan Africa), and this is expected to grow as previously unconnected people and regions get access to mobile services, including 5G networks.
The ubiquity of mobile phones has empowered large swathes of the once underbanked or unbanked populations of East Africa by giving them access to mobile money services. This financial inclusion is likely to spur investments into pension schemes and collective investment funds moving forward, thereby stimulating growth in the domestic capital markets.
1 These forecasts reflect a downward revision due to rising inflation in H2. Please refer to Standard Chartered Global Focus – Economic Outlook Q3-2022 Near the tipping point at https://research.sc.com
Capital markets continue to deepen
Right now, there are 110 companies listed on the four main stock exchanges in East Africa - namely Nairobi Stock Exchange (home to 62 listed companies); Rwanda Stock Exchange (9); the Dar es Salaam Stock Exchange (21); and Uganda Stock Exchange (18) – and these include several well-known brands such as Safaricom; Vodacom Tanzania; Equity Bank; and Tanzanian Breweries.
Although IPO (initial public offering) activity in East Africa has been slightly flaccid recently, regulators are looking for ways to boost the number of listings in the region.
Take Kenya, where the authorities are reportedly assessing whether to allow SPACS (special purpose acquisition companies) – an investment vehicle which raises money through an IPO with funds then being used to purchase a private company – to list on the Nairobi Stock Exchange.
Elsewhere, regional stock exchange consolidation is also being pursued so as to encourage greater cross border listing and trading across the continent, which in turn will deepen liquidity – particularly in some of the more thinly traded or exotic markets.
While past efforts to integrate East (and West) Africa’s stock exchanges have yielded little success, there is greater optimism about the prospects for the Africa Exchanges Linkage Project (AELP). The AELP is an Africa-wide initiative which launched in 2016 with the participation of 7 stock exchanges including the Johannesburg Stock Exchange, the Nairobi Stock Exchange, the Nigerian Stock Exchange, the Egyptian Exchange, the Casablanca Stock Exchange, the Stock Exchange of Mauritius and the BRVM of the eight West African markets.
The project aims to support easier cross-border trading, listing and settlement across the participating financial market infrastructures (FMIs). More recently, the Botswana Stock Exchange and Ghana Stock Exchange were added to the list of participating exchanges onto the scheme.
Aside from making it easier for investors in these countries to gain exposure to more than 1000 listed companies in African capital markets, the AELP will also facilitate cross-border trading in government bonds, corporate bonds, exchange traded funds (ETFs) and derivatives. Again, this will simplify trading in the region and potentially accelerate portfolio investment inflows into East Africa.
Market reforms continue to gather momentum
Inflows into East Africa are also being enabled through the development and launch of new investment products, a move which is helping to generate deeper regional liquidity. Kenya, for example, has introduced a wider gamut of products including ETFs, REITs (real estate investment trusts), derivatives and green bonds, as it looks to attract more foreign investment.
The Capital Markets Authority (CMA), Kenya’s regulator, also gave approval to the Central Depository and Settlement Corporation (CSDC) to offer securities lending and securities borrowing. In addition, Kenya has permitted market participants to engage in short-selling, in what will help ensure proper price discovery and shore up liquidity. In contrast with other major African markets which adopted restrictive FX practices during the pandemic, regulators in Kenya, Tanzania and Uganda have all liberalised their respective FOREX markets, making it easier for foreign investors to repatriate funds offshore.
At a post-trade level, East Africa has implemented a number of positive reforms as well. Kenya’s Central Bank recently installed a SWIFT enabled CSD (central securities depository) system which will support auto-reconciliations of holdings.
Meanwhile, Tanzania is starting to open up the Capital Account to non-residents for investments into government securities, although this is currently limited to East Africa and Southern African Development Community (SADC) markets. Uganda has also made notable improvements. The country is working on ways to use Central Bank funds for settlements, while hybrid annual general meetings are now practiced extensively.
All of these initiatives will be integral in helping East African markets attract investment in the future.
A path to success
While growth projections have dipped, the region’s demographic dividend and widespread adoption by the local population of innovative technologies makes East Africa a very compelling market for investors to participate in. Efforts to augment liquidity through regional stock exchange consolidation, the launch of new trading products and enhancements to post-trade processes are turning the region into an attractive destination for global investors.
The great workplace reset
The great workplace reset
Over the last three years, people’s working habits have been totally revolutionised by the pandemic, and it is looking increasingly likely that many of these changes will become permanent features. Simultaneously, financial institutions are also thinking more laterally about how they nurture and retain talent. Margaret Harwood-Jones, Managing Director, Global Head, Financing and Securities Services at Standard Chartered, explores some of the transformations happening in today’s workplace.
The pandemic upends working practices
The pandemic has had an acute impact on labour markets, as record numbers of people voluntarily leave their jobs. In March 2022, 4.5 million Americans quit their jobs, while data from the US Labor Department suggests there are currently 11.2 million vacancies still waiting to be filled.1
Asian markets have not been immune from the “Great Resignation” either, with a study by Mercer revealing there had been a 69 per cent increase in turnover in Singapore during 1H 2021.2
1 Bloomberg – August 30, 2022 – US job openings unexpectedly rise to 11.2 million, near a record
2 Mercer – September 20, 2021 – Compensation matters, but may not solve talent troubles of Singapore companies, says Mercer
A lot of this change is being fuelled by mid-level staff seeking employment opportunities elsewhere, as the gradual easing of pandemic restrictions across Asia fuels pent-up demand for change. As with the rest of the world, many companies in Asia are struggling to fill the openings left by departing staff.
Labour shortfalls are a growing problem in the Middle East too. According to a PwC study, 46 per cent of workers in the UAE said there was a shortage of people with specialised skills in the country, rising to 58 per cent in Saudi Arabia and 75 per cent in Kuwait.3
3 PwC – June 21, 2022 – PwC Middle East Workforce Hopes and Fears survey 2022
As normality resumes, flexible or hybridised working practices are becoming increasingly ubiquitous. In Asia, Africa and the Middle East, this is a radical departure from the norm, as working from home never really took off in these regions pre-pandemic, like it did in Europe and North America.
Organisations have adapted accordingly. In 2020, Standard Chartered unveiled its Future of Work concept – building on the bank’s existing flexible working practices and introducing flexi-working in its offices globally. It also provides a framework allowing for staff and leadership to negotiate and agree on new working arrangements, in a way that strikes a sensible balance between working from home and being in the office.
Although remote working has its benefits, time spent in the office is also important as it allows staff to familiarise themselves with the bank’s culture; build networks; and forge meaningful business relationships.
Maximising staff potential
Banks are looking at new and innovative ways by which to maximise staff potential.
Standard Chartered, for instance, recently scrapped its performance ratings system for staff, by moving to a continuous feedback loop throughout the year. Line managers have a vital role to play here, so it is critical that they are supported during the whole process.
As such, Standard Chartered has introduced new tools to help managers identify the performance and potential of their teams; provide a framework for succession planning and expand the performance process to enable them to focus more on discussions around career development.
If financial institutions are to thrive, then they also need to embed a culture of strong and continuous learning habits among staff - a practice which is prevalent across some of the leading technology companies.
In a report by PWC, 74 per cent of people surveyed indicated that they are ready to learn new skills or re-train to remain employable in the future.
This is something which Standard Chartered is looking to facilitate among its vibrant workforce.
There has been significant investment in technology by Standard Chartered to ensure all staff have access to tools which can help them build upon their existing skills. In 2020, Standard Chartered launched diSCover – an internal learning platform which provides a single point of access to all of the bank’s online educational materials, and this is currently being used by more than 80 percent of staff.
Elsewhere, Standard Chartered’s Future Skills Academies covers topics such as Data and Analytics, Digital and Sustainable Finance, delivered to colleagues in bite sized chunks based on their individual growth plans. In contrast to conventional internal trainings and certifications, HR and subject matter experts will source cutting edge content and training courses that can help teams learn more about the key trends shaping the banking industry.
Standard Chartered also operates Global Learning Weeks, whereby senior managers share with staff some of their unique insights into the dynamics influencing the industry. The theme of upskilling, education and development is also very much in line with the bank’s sustainability pillars.
Technology is also being leveraged in order to help upskill staff Standard Chartered recently introduced Talent Marketplace, an AI (artificial intelligence)-enabled platform where employees can be matched with suitable short-term project opportunities across the bank globally according to their interests, skills and experiences.
Through technology, big data and innovation, the banking space is evolving, as new products and business models that serve customers better and more nimbly, can be developed much faster. This is illustrated by the rapid growth in data analytics solutions, distributed ledger technology and digital assets reshaping banking operations. For example, markets in Asia and the Middle East are among the leaders in terms of digital asset development and adoption.
A suitably skilled workforce which embraces the innovation mindset and is capable of utilising and understanding these disruptive technologies is urgently needed to support this new banking environment. Existing talent therefore needs to be upskilled to harness these tools.
This is why Standard Chartered has made investments in its workforce by setting up the digital asset COE and engaging with external experts to help current employees become more familiar with blockchain technology and how to build use cases around it.
Historically, there has been a serious imbalance in terms of gender representation and diversity at the leadership levels in financial services. Despite women comprising 58 per cent of the total workforce at a junior level at finance companies, this is not replicated in the higher echelons of management. (See table).4
However, this inequality appears to be slowly changing. Since 2018, McKinsey notes that the share of women at a senior vice president level at financial institutions has increased by 40 per cent - and 50 per cent among the C-suite.
Women, particularly women of colour, continue to be underrepresented in financial-services roles above entry level.
4 McKinsey – October 21, 2021 – Closing the gender and race gaps in North American financial services
This is partly being enabled through COVID, as hybrid work models are now considered to be an acceptable practice – and such flexibility is helping convince some people to stay in the workforce who might otherwise not have.
Retaining mature, qualified, and experienced women is critical to the success of any company, as is recognising and educating leaders on the reasons that may contribute to them leaving the workplace, together with the provision of tools to help prevent such exoduses from happening.
Standard Chartered is widely considered to be a trailblazer when it comes to promoting gender diversity, with more than 35 per cent of the FSS Management team being women, in what is testament to the bank’s excellent diversity and inclusion (D&I) policy.
Getting the most out of people
Amid the ‘Great Resignation’, retaining talent is
proving difficult. However, the organisations which embrace flexibility, diversity, and an innovative approach to people management and education, will be the ones who lead the way, and attract the best talent moving forward.
Cumulo-nimble: why custodian banks
have shifted to cloud computing
Cumulo-nimble: why custodian banks have shifted to cloud computing
Head, Prime & Securities Services Technology, Standard Chartered
Custodian banking finds itself in the midst of rapid technological change. The industry needs the most advanced security and powerful computation, but it also wants those things to consume less energy and emit less greenhouse gasses, while still allowing it to innovate in a nimble and cost-effective way. Cloud computing looks like the only way forward.
Traditionally, custodian banks have maintained their own data centres, in which they house their clients’ data - as they would store physical objects of value in bank vaults. Custodians install third-party software into those data centres and if the bank needs more servers, for instance to create a test environment for a new application, they buy and install them, often with a lead-time running into months.
Now, however, things are changing. Cloud computing allows custodian banks to migrate their systems to data centres run by companies that specialise in information technology. In 2018, 33 percent of bank respondents told Accenture that they had a high share of their workloads in the cloud; just two years later the figure had risen to 47 percent. What is driving this shift?
Rather than operating their own data centres, many custodian banks increasingly prefer a cloud-based arrangement in which the vendor provides software-as-a-service and is responsible for managing the platform. That way, the vendor applies their expertise and knowledge of the system to the best effect. This makes more sense than the bank retaining an army of technology experts who understand the vendor’s platform and administrate it.
The vendor’s intimate knowledge of their own systems has advantages for data security. Banks like Standard Chartered are attacked every day by criminals attempting to breach networks and steal information. Cloud providers guarantee a baseline level of security around a bank’s infrastructure, upon which greater security can be applied at the application level.
The cloud also has advantages in terms of environmental, social and governance (ESG) sustainability. Cloud providers are aware that ESG has risen to the forefront of many banks’ corporate strategies, and that their data centres must conform to the highest sustainability standards in terms of energy use, efficient cooling and sourcing renewable energy. From the banks’ point of view, if they need servers for a limited period, such as when testing a new application, it makes more sense financially and environmentally to use them for a few weeks on the cloud rather than installing permanent hardware sufficient for all possible current and
However, reaching the cloud end-point carries its own challenges for custodian banks. First and foremost, custodians are responsible for their clients’ data. They cannot offload that responsibility to a cloud provider. Custodian banks’ customers perform due diligence on their security arrangements not just from an operational perspective but on the network side too. As a result, the bank and the cloud vendor must forge a close relationship that establishes clear boundaries for where the responsibilities of each side lie.
Secondly, many national governments and regulators have their own strong convictions about appropriate security precautions, and these can extend to insisting that national data is held onshore. Countries like South Korea have long required this, but the idea has spread more widely in Asia and beyond, abetted by recent geopolitical frictions around the nature of globalisation itself. Such frictions cut multiple ways: a data centre located in the US, for instance, may encounter more scrutiny than one in the UK or Singapore.
This can mean that not all client data can be centralised, and that a custodian bank finds itself owning and managing different instances of the same application in different locations, which means securing that data separately in each one. This adds further complexity when it comes to analysing and reporting the data: such fragmentation requires workarounds to ensure that the information can be offered up to clients in a nimble, responsive manner.
Finally, it makes little sense simply to lift legacy systems from a data centre and deposit them into a cloud setting. To achieve the full benefits of the migration, the engineering and architecture of the systems need to change. For example, a large conventional “big box” application can be separated in the cloud into microservices, allowing them to be developed and modified separately without needing extensive testing across a whole gamut of other functions. Such
re-engineering, however, has cost and time implications.
The cloud is not the only avenue through which the future is arriving quickly for custodian banks. Artificial intelligence and machine learning are already assisting with predictive analytics and data quality, for instance around settlement failures. They can be further enhanced by pulling in other streams such as macroeconomic data, but this requires scale in terms of data storage and computation power. The cloud can quickly provide this scale in a way that traditional solutions cannot.
Another key innovation for custodian banks are cryptocurrencies and blockchain-based tokenisation, which again have logical linkages to cloud computing. There is, for example, an increasing focus on how such technologies can be used to eliminate settlement risk. But while such technologies have arrived before the use-cases have fully matured, in the case of the cloud the advantages are already clear.
Ultimately, success for a custodian bank comes down to ensuring that data is in the right place at the right time and is of the requisite quality. Cloud computing is fast becoming the bedrock of custodian banking: its computational power and flexibility with stronger security and a lighter ecological footprint aligns with banks’ central strategies, while it offers the sandbox spaces needed to test and incorporate the other new technologies that will shape the sector in the years to come.