4. What is the change?
LegacyTech transformation is clearly an urgent priority - but where is the transformation happening right now? And who risks being left behind?
Equities are at the epicentre of market change
In the context of the key drivers highlighted above, it is no surprise that equities are at the epicentre of market change. Historic market volatility over the last few years has combined with regulation and market change (including T+1) to create significant change pressures for all profiles of market participant. With more transactions running through the system at up to twice the speed, fewer people available to manage those transactions and new, mandatory penalties for poor performance, the role of technology in facilitating a step change in efficiency is clearly understood.
Interestingly, custodians stand out as being almost as focused on fixed income as they are on equities. Given low yields in many traditional markets, investors' recent forays into private debt and emerging market debt has no doubt created new pressures for custodians in settling, valuing and safe-keeping these securities for their institutional clients. In parallel, fixed income has also come to the fore of DLT-based innovation in recent years as new blockchain providers radically simplified bond issuance and the management of bonds as collateral - giving more firms more choice than ever around transformational technologies for their operations.
Unfortunately though, one key silo looks set to remain. With only around 20% of market participants looking to make changes in the listed derivatives space in the next 3 years, challenges around margin efficiency and multi-asset visibility look set to remain for many years to come.
"We never saw corporate action automation as a big deal – until our $6 million dollar loss."
(Deputy CEO, Asian commercial bank)
Urgent change in corporate actions
In 2020, market volatility, event changes, new regulation and workforce shortages all combined to bring the historically dark art of corporate actions into the spotlight. After decades of building highly manual processes to source and process events, the industry very quickly became aware of the critical importance (and risk) of their corporate action desks.
Two years later, it is clear that the business cases written in reaction to these challenges have been approved in large numbers - with 47% of the market now planning on running transformation projects in this space in 2022. Not only is corporate action change the largest area of industry transformation today - it is also the most urgent.
Not all firms are looking in the rear-view mirror when planning their corporate action change though. Whilst automation and the removal of spreadsheets, macros and PDFs are a central theme in transformation projects today, major custodians are looking to leverage the growing availability of ISO 20022 in order to proactively improve their straight-through-processing (STP) rates in key markets. Equally, investors and brokers (who often lack the critical scale to connect to multiple source feeds) are also outsourcing their corporate event management in an effort to reduce cost and risk exposures across their portfolios.
Transformational or incremental change?
Whilst the market seems to be strongly aligned on where to drive LegacyTech transformation, there is much less consensus when it comes to how to drive the right kind of change - and this is a potential cause for concern.
In a context of antiquated systems across the trade cycle, it is worrying that almost half of our respondents plan to address their LegacyTech challenges through incremental changes - notably through more in-house builds or by adding increased pressures to existing platforms.
This risks tinkering with already overstretched systems, heightening the potential for wholesale failure, as well as missing the opportunity to use transformative change as a genuine point of differentiation for firms' outward facing sales teams - who can point to the technology underpinning their systems as part of their overall pitches. A missed opportunity without doubt.
Equally, 'stretching' existing systems through incremental developments is simply not possible in the face of many new customer and market requirements. A legacy platform can not hold a crypto- or tokenised security simply with a little extra coding. Nor can customers' needs for flexible, real-time data visibility 24/7 be easily met by ageing, batch-based systems. As our markets and our customers transform, so must our technologies to support them.
Different activities, different approaches
Despite 27% of clearing and settlement systems being over 20 years old and despite a projected USD2m P&L impact of system change in that space, it is surprising to see that the most common approach to managing LegacyTech in the settlements space is through incremental or in-house change. This is perhaps driven by the high sensitivity to risk in this space or by the highly interconnected nature of these systems (making any system extremely complicated to replace). In either case, the contrast between need and solutions is striking.
Corporate actions, on the other hand, appear much better suited to vendor solutions. Similarly to tax processing, corporate action platforms offer more significant automation benefits (replacing spreadsheets more often than not) and they are more easily ring-fenced than in settlements. Given the urgency of change in this space, there is also little doubt that the speed and cost of deployment (versus in-house builds) is also a key factor in using market vendors to solve for this.
