1. Where is LegacyTech today?
Legacy Technology is a universal problem. Each of us face the challenges of ageing and isolated platforms every day across the investment cycle - in our customer interactions, in our operations and in our strategic planning.
But not every legacy platform is equal. Across the global capital markets, the risks that legacy systems create - and the urgency of their replacement - varies based on a range of factors.
So where are the industry 'hot-spots' today and where is the most acute pressure to drive transformational change as we seek to address cost, customer and regulatory concerns?
““Most of the banking systems we use today are older than the iPhone”
(Head of Product Development, Global Custodian bank)
27% of sell-side systems are over 20 years old
The sell-side back office stands out strongly as a leading area of legacy risk and pressure. Faced with systems that are up to 12 years older than their buy-side counterparts (on average), banks and brokers have to deal with reduced system flexibility, higher processing costs, increased manual interactions and potentially increased security risks every day - to a significantly higher degree.
Across the trade cycle, clearing and settlements stand out as the most acute area of legacy risk today. Whilst all profiles of participant have invested heavily in corporate action transformation since 2018 (in the face of regulatory and customer pressures above all), innovation in the settlements space appears to be almost static, meaning that we're still compounding the legacy problem every day.
“The front of the house might look beautiful but the (back office) plumbing is a mess”
(Global Head of Operations, leading Custodian bank)
Buy-side vs Sell-side: a generational legacy gap?
At first glance, there appears to be a generational difference in the age of systems between investors and their intermediary providers. But can the differences really be this stark? Has the buy-side really solved the legacy problem?
Given the huge growth in middle office outsourcing amongst investors over the last 10 years, it is unlikely that most fund managers will be able to accurately gauge the age of their providers' systems. It is likely that the buy-side statistics here are more likely to indicate 'when the systems were outsourced' more than the systems' true ages - highlighting a hidden risk across the buy-side. With many custodians and outsourcing providers operating technology platforms today that are older than the systems they replace, the gap between perceived system ages and the reality underlines a need for deeper due diligence by investors when they come to outsource. Are their providers' technology platforms really more future proof than their own?
Equally brokers and custodians are not necessarily asleep at the wheel. Given their need to connect directly to local exchange and depository platforms in every key market, it is no surprise that 52% of sell-side systems are run locally. Banks and brokers have a uniquely complex spider's web of market connections to manage every day.
And these connections are not only localised, they are also mission-critical - with the risk and sensitivity of change in this area extremely high. In the face of intense risk and regulatory pressures, sell-side houses are mostly unwilling to trigger meaningful change in their clearing and settlement infrastructures unless driven to do so by the market (such as with T2S in Europe or with the CDP replacement in Singapore).
As a result, sell-side houses are today faced with the growing, combined challenges of ageing settlement technologies and imminent market change on a large scale (such as in Australia or the US).
Trade stack vs Client stack
Our research highlights that post-trade technology itself is a legacy hotspot - when compared with client-facing or bank-wide platforms.
The last five years have seen extensive investments into client-centric systems (such as client onboarding, client reporting and billing systems) to the point where 29% of bank-wide systems are less than 5 years old today.
By contrast, the post-trade stack (across clearing, settlements, position keeping and corporate actions) has seen almost no investment in the last 5 years - leaving us with a striking contrast. Today, 17% of post-trade systems are over 20 years old whereas only 7% of banking systems are of a similar age on average.
Whilst this focus is entirely understandable (given increased regulatory enforcement around CDD / AML; and the need to optimise the customer experience throughout the relationship lifecycle), there is a hidden risk in this focus. In our rush to optimise the (direct) customer experience, we risk creating new, less obvious risks as our trading technology continues to stagnate.
Legacy silos abound...
Across our industry, siloed technology platforms are evident in numerous pockets and segments - not just amongst brokers.
In an era of margining and collateral efficiency, perhaps one of the most surprising areas of isolated technology is in listed derivatives - where 97% of systems are unable to process other asset classes. Whilst around one-third of equities systems are capable of managing other asset classes (bonds, for example), the isolation of futures and options systems stands out as an area for significant potential efficiencies. Integrate the systems and you can integrate your visibility and management of contracts, underlyings and margins across the entire trading book.
Geographically, Asia-Pacific's diverse markets present practitioners with the most challenges around silo-management, with 70% of systems run locally or regionally. With countless requirements for onshore processing and management across the region (in markets such as India, China, Japan, etc.), the problems faced by fund managers, brokers and banks in driving scale are very real. Not surprisingly, the significant size and scale of the US and Canadian markets make North America the least siloed regionally.
Beyond visibility, the cost of this isolation also has a hidden cost - in staff mobility and transferability. In an era of increased competition for quality resources (driven by post-pandemic staff turnover and ageing workforces), siloed systems create a major obstacle to staff mobility. If a staff member only know how to use one, single-asset system then they can only support the narrow activity that that system covers - and people-risks remain high. Consolidation, on the other hand, can facilitate cross-training and hence reduce staff exposures.
“We have a lego-framework today for our systems”
(Head of Change Management, global investment bank)
In-house development: a core competency or short-termism?
Our survey also highlights large volumes of in-house developed platforms across the trade cycle, notable in areas such as clearing and settlements (where 67% of systems are built and managed in-house)
The extensive use of in-house development resources does raise some concerns - particularly in the longer-term value of these developments and then also in their scale and sophistication.
Whilst mission-critical areas may necessitate continual development of existing platforms (as a core competency), the decision to evolve systems internally can cause problems later on. Aside from obvious roadmap issues (i.e. 'who will maintain the changes?'), the use of often-local development teams to make incremental platform changes can often end up proving to be a false economy. One leading international investment bank opted to replace their core systems with a vendor platform solely on the basis that it would be more cost- and risk-efficient than 'running a global series of piecemeal projects in each market' over and over again.
From a sophistication perspective, the use of Excel / Excel macros and EUCs (End-user computing) also falls under the broad banner of 'in-house development' and can be seen as much more problematic.
Whilst not all Excel is inherently bad, the use of personal productivity platforms to support large parts of industry workflows does mean that we carry in-built risks of inflexibility and critical person dependencies in our daily operations.
Worryingly, the use of this 'in house' technology (in the good and bad meanings of the term) grows with the size of organisations - with firms managing >USD10bn up to 40% more likely to use their own resources to maintain their platforms than their smaller peers. While in theory, larger firms with correspondingly larger AUMs likely have more FTEs to support sophisticated inhouse development, in reality, a focus on in-housing risks perpetuating the use of single asset class tools and other silos - adding to firms inflexibility and inertia.
