2. The case for change

Reframing legacy tech replacement

The average LegacyTech transformation delivers up to USD1.5 million in benefits. But is it just a question of managing system end-of-lifes?

Our research underlines the huge role of LegacyTech in facilitating growth and new revenues

The case for LegacyTech optimisation touches both sides of the P&L

The average LegacyTech replacement project delivers benefits of approximately USD1.5 million - well beyond what most firms anecdotally expect - and impacts both the cost and revenue sides of the balance sheet.

That LegacyTech optimisation can drive headcount efficiencies and reductions in operational investments is no surprise. Our research indicates that an average LegacyTech project can deliver efficiencies equaling USD833k in spend and 16 full-time equivalents (FTE) - highest of all in Clearing and Settlements and in Corporate Actions(where the LegacyTech challenge is most acute).

These savings are most eagerly expected amongst custodian banks especially -whose volumes make even the slightest technological inefficiencies acutely felt.

40 % of the P&L of LegacyTech replacement is in new revenue facilitation

More unexpected though is the fact that these cost efficiencies make up only 60% of the benefits for an average LegacyTech transformation, with the remainder (USD695k on average) derived from new, revenues.

With many banks and brokers looking to expand their business activities today into new client activities (such as prime brokerage and wealth management); and new markets (such as private assets, emerging markets and even crypto currencies) the pressure on systems to seamlessly scale into these new activities is huge. But faced with ageing, localised systems that are unable to process multiple asset classes, many organisations are struggling to make the leap without major system transformation.

This challenge is especially acute in organisations that fall into the 'hiring first, infrastructure second' trap - where new, front office sales resources can be brought into firms ahead of any preparation of an operating model to support these new activities. One leading wealth manager described having to 'look around for any system that can process some client transactions' for new asset classes - essentially managing repeated fire-drills to accommodate client demand, on the basis of sub-standard technologies.

On the positive side, the revenue benefits of LegacyTech transformation extend well beyond simply accommodating the last client trade. Some respondents cite their transformation projects at the centre of their customer pitches, channeling their significant investments into a competitive, relationship advantage.

Others focus on co-creation and joint development to create new partnership opportunities as firms attack problems from both sides. Through collaborative transformation projects, clients and providers can deepen relationships, accelerate legacy system change and optimise costs and risks for both parties.

Revenues or risk? The case for change depends on size

Within our survey we see a key distinction between larger and smaller firms in their approach to managing LegacyTech.

As highly focused organisations, smaller firms (with <USD100m in AUM) are clear in the value of LegacyTech transformation as a facilitator of revenues from new activities and markets.

Larger firms, however, risk missing the revenue driver in their LegacyTech transformations - focusing instead on cost savings and risk optimisation as leading drivers of change. Faced with larger, more complex (and often older) technology platforms. large investors or intermediaries risk experiencing diseconomies of scale as their legacy infrastructures move from sources of scale to sources of risk.

“The fear of falling behind our peers was a major trigger for our system change”

(Head of Change Strategy, leading custodian bank)

'Doing data better' is driving legacy renewal for investors

Data is the central theme of our age, as all participants in the investment cycle strive to harness the power of new technologies to provide faster, cleaner and more deeply analytical data to their colleagues and clients.

At the top end of the investment cycle, today's asset owners are demanding better oversight, governance and reporting from their own departments, from their fund managers and from their custodians.

As they contend with ESG and investment governance pressures (not to mention new asset classes and increased trading volumes) the world's pension funds are expecting accelerated, sharper and more flexible access to portfolio and operational performance data, turning to automated channels such as APIs to replace highly manual, slow-to-produce reporting.

This not only leaves service providers (such as fund managers and custodians) with an urgent transformation challenge, but it also creates a major competitive downside risk for those providers that fail to transform in step with their asset owner clients.

Regulation: the compelling event for banks and brokers

Whilst new revenues and data transformation are headline themes for many, regulations are proving to be the clinching factor in driving LegacyTech transformation today for many brokers and custodians especially.

Since the advent of MIFID, our research has consistently underlined the shock-impact of regulation on banks and brokers - and this theme continues to dominate the sell-side transformation agenda today. The Shareholder Rights Directive II has forced intermediaries to radically re-shape their proxy voting and corporate action processes (with many firms still struggling to keep up today). For those in the securities financing space SFTR has added further complexity to reporting requirements. Uncleared Margin Reform (UMR) is impacting derivatives and so the list goes on - with each regulation driving a profound re-evaluation of operational processes and, of course, the technology that supports those processes.

Nowhere is the impact of regulation more acutely felt today though than in the clearing and settlement space. This year, the implementation of CSDR (and the associated penalties for failing trades) is proving to be an existential challenge for many brokers. As new data on participants' settlement discipline becomes available, an estimated 10 million transactions per month are subject to penalties - a volume so large that European CSDs have been forced to reschedule their processing schedules simply to accommodate this huge volume.

In parallel, preparations for T+1 (notably in India and the US) are also raising new questions about the viability of legacy platforms in world where the speed of settlements will double. As markets such as China (which is T+0) have shown, increased settlement speeds can only be achieved through fundamental revisions to the methods and technologies used to interact across the market - causing firms to now question how much faster their existing tech stacks can run in a new world.

For these reasons, the expected P&L impact of LegacyTech transformation in clearing and settlements is more than USD2m on average (30% higher than the global average). Of this, USD1.2m is derived from cost reductions (notably the cost of buy-ins and the associated resources required to prevent or address them every day) and over USD830k from new revenues (to be gained by those whose settlement performance can form a competitive edge). Faced with the oldest technology in the investment cycle, banks and brokers' siloed and manual infrastructure is simply not keeping up with accelerated settlement cycles and increased settlement disciplines - meaning that system change is increasingly inevitable.

Looking ahead, there is also a growing recognition that new regulations can not continue to be addressed through tactical work-arounds. As each change stretches old platforms further from their core, and introduces new work-arounds, and temporary fixes, it ultimately piles more risk into the system with the potential for catastrophic system failure increasing.

“LegacyTech survives because of sticking plasters put in place, however, these plasters will need to come off”

Resiliency: lessons learned

Against a backdrop of ageing technology, the experiences of 2020/2021 have brought resiliency to the fore.

In an industry where up to 60% of tasks are fulfilled by manual processing (such as re-keying data, data capture, data transformation and manual exception handling), the pressures of supporting working from home, staffing shortages and an accelerated brain-drain across the industry have all exposed serious (and often unexpected) weaknesses in our overall business resilience. Whilst our systems rarely catastrophically failed during the pandemic, there is little doubt that many of us were working harder, across longer hours, to support our current activities. Anecdotal evidence highlights cases where entire markets failed to close out for up to two days; or where staff were working to process error queues well into the night - amongst many others.

Returning business processes to business-as-usual levels of risk is a key priority for many organisations - particularly for Financial Market Infrastructures, who face strict regulatory requirements around market availability and performance.

But this theme is also rising up the regulatory agenda today for the other market participants

The Digital Operational Resilience Act (DORA), proposed by the EU, seeks to embed common resiliency standards across the industry - in light of the lessons learned from the pandemic. Beyond just standards, firms' operation heads will need to have systems and safeguards in place that guard against system threats such as cyberattacks, or major events which could impact normal practice.

How can S&P Global Market Intelligence help to transform your securities processing? Watch our short video here