Our starting point
The world’s capital markets are reaching a critical juncture.
The (manual) processes and infrastructure that have got us here today are undoubtedly not what is going to sustain us for the coming decades – as we struggle to deal with human, regulatory and technical challenges across the trade cycle.
So what are the key challenges that we need to bear in mind? What are the problems that tokenisation is going to help us solve and what obstacles are we likely to face along the way?
What do we know?
Despite decades of evolution, our capital markets remain highly inefficient – designed as they are on a tactical basis. At every step of the trade cycle we see inefficiencies that are not only costly – but that are now escalating rapidly.
It takes us longer to issue a security than it does to sail around the world. Our trades pass through countless systems every day – each one slightly distorting the trade ticket and creating a reconciliation that has to be managed by hand. When these trades reach the market, up to one in ten of them fail – again requiring people to take up the trade and fix it.
By the time we come to manage a corporate event on the stocks we hold, most of us face error costs of up to USD2m each year. It is no surprise then that the average investor has to wait nearly a month to receive a dividend payment from the shares they own.
What is the case for change and what is holding us back?
As scary as they may be, none of these issues is easily resolved – dependent as they are on people, processes and platforms across multiple firms and markets. So what is holding us back?
27% of our settlement systems are over 20 years old
From front to back, our trillions of dollars in daily market turnover are passing through technology is older than the iPhone. Most acute in the settlements space, the age and inflexibility of our technology infrastructures is fast becoming a critical issue.
As each wave of regulation passes (from EMIR or MIFID to CSDR), 52% of the market continues to opt for tactical fixes or workarounds that enable firms to survive – meaning that our platforms are not only old and inflexible but that they are getting older.
As we strive to reduce trade fails and improve transparency across the trade cycle, our legacy technology platforms present a growing obstacle to transformation.
Manual processing is not an option any more
Historically the shortcomings of our platforms have been covered over by successive waves of human intervention – but no more.
For decades, we have survived by first building manual processes and then offshoring those same processes – with little pressure to truly automate large parts of our trade flows.
In recent research however, market participants cite “retaining specialists with over 10 years of experience” as a critical issue for them in their post trade processing. After the ‘Great Resignation”, costs of onshore and offshore resources have more than tripled in 2022 – creating vast shortages of “human APIs” and triggering new risks to our daily trading.
Our reliance on human talent to manage the inefficiencies of our ageing technology is worryingly flawed today. We need to find new answers.
50% of us are missing 22% of the costs of a trade
That half the market is failing to track one-fifth of our costs per trade (and two-thirds of the cost of a corporate action) today is also a great concern. Structural and departmental obstacles mean that most organisations and people struggle to form a complete view of their costs – ignoring the burden of exception handling, the cost of operational risk and allocated costs most of all.
As customer and regulatory pressures continue to re-shape our business models, our ability to make the right case for change is heavily impaired by this oversight.
If we are part-blind to the costs that are driving our P&L, how can we act to properly address them?
The cost of our errors is growing
Our in-built inflexibility (based on ageing systems and thinning talent) is not just a business-as-usual problem, it is escalating fast.
Following the introduction of CSDR in Europe, post-trade costs have risen by over 15% as we have begun to put a price on our historic failure rates in the market. Beyond the simple cost of penalties, firms are now struggling to control the very costs that they had been overlooking until recently. With the cost of risk for European firms growing by over 20% in 2022, or example, our inefficiencies are costing us in Operations, in Treasury and even in Sales.
Equally, our inefficiencies in corporate actions are now costing 48% of brokers over USD1m per year – attracting the attention of regulators around the world who question the true cost to the shareholder of our shortcomings.
…and we’re looking at doubling the speed of our major markets
How best to handle these challenges? By racing twice as fast. Following significant market pressures in 2019, regulators and banks around the world are now actively preparing for a doubling of settlement speeds in the USA and Canada.
As the SEC considers a move to T+1 settlement cycles for US equities in 2024, the pressures on our industry look set to spiral. If we are struggling to keep up today, how will we run twice as fast tomorrow?
What can tokenisation do to address this?
The problems of today’s capital markets are highly nuanced and dependent on each asset class and ecosystem.
Yet the core challenges remain consistent: how to reduce risk, drive cost efficiencies and improve returns for investors across the world.
Based on extensive interviews with leading exchanges, depositories, brokers, custodians and service providers, this report is designed to describe our collective, industry experience as we deploy digital assets in every-greater quantities today. It is designed to showcase the lessons we have learned so far on the role of tokenisation in our markets – and to explain the journey that we can all be taking towards tokenised capital markets tomorrow.