Reflections on the themes emerging from Sibos 2023

Written by

Fraser Wikner

Published on

Insights

Settlement discipline, T+1 and innovation were among some of the main talking points at this year’s Sibos, which took place in Toronto.

MYRIAD Group Technologies Ltd (MGTL) CEO Fraser Wikner takes a closer look at what this means for our Industry. We hope this overview will resonate with your outlook and experience.

Improving settlement discipline in an age of CSDR and T+1

During our time at Sibos, settlement discipline was a recurrent theme. This comes as the industry looks for ways to eliminate inefficiencies in the securities transaction lifecycle. But what is driving this?

In the EU, the threat of cash penalties for failed or late settlements weighs heavily on Financial Institutions, following the introduction of the Central Securities Depositories Regulation’s (CSDR) Settlement Discipline Regime (SDR).

We heard early reports suggesting fail rates are still higher than they should be, stoking fears that EU regulators may impose mandatory buy-ins under the CSDR Refit if improvements are not made, a point echoed by several speakers.

Meanwhile, the US, Canada and Mexico are shortening their settlement cycles from T+2 to T+1 in May 2024, while a handful of others – including the EU and UK – are talking about it.

With markedly fewer man hours (83% less according to the Association for Financial Markets in Europe) to actually process transactions under T+1, we anticipate that trade fails will increase in T+1 markets, together with the number of penalties.

T+1’s impact is far-reaching, with Sibos speakers flagging that plenty of other activities will also be affected, including FX trades, securities lending and securities borrowing, corporate actions, and cross-border settlement of Exchange-Traded Funds and global Depository Receipts.

Automation to the rescue

So, what is the industry to do as T+1 and even T+0 gathers steam? The first, and most obvious, is that Firms must automate their Middle and Back-Office systems.

Being a Swift-organised event, it was no surprise that there were extensive calls for increased adoption of the Unique Transaction Identifier (UTI), an ISO code that is assigned to a Securities trade, and which gives Firms better transparency into the trade lifecycle.

Already used for reporting under the European Market Infrastructure Regulation (EMIR) and the Securities Financing Transaction Regulation (SFTR), speakers said the UTI would help counterparties monitor their trades more easily, helping them to spot problems earlier, thereby reducing the likelihood of fails (plus fines).

We also participated in the Standards Forum at Sibos, with Simon Shepherd, MGTL MD, discussing ISO 20022, and the current levels of adoption in our industry. Again, a greater take-up of ISO20022 is required if automation is to become more entrenched in the Capital Markets.

Digitalisation is happening, but slowly…..

Over the last few years, we have attended plenty of Conferences where digitalisation and innovation featured prominently, with technologists repeatedly warning that our Industry is one that is on the brink of disruption, or worse, disintermediation.

The reality is our Industry is digitalising, but we believe the pace of change is not happening as quickly as many people thought it would. A key point is that to digitalise, you have to digitise first (i.e. you need to digitise your data first, as a pre-cursor to digitalisation). There are still significant gaps in digitising data at many Institutions.

Setting that aside, let’s take Blockchain and Digital Assets, for example.

After years of delays, the Australian Securities Exchange (ASX) finally confirmed in November 2022 that it would no longer be replacing its Clearing House Electronic Sub-register System with Blockchain amid concerns about the technology’s complexity and scalability, resulting in the organisation suffering a $165 million write-down.

Other Blockchain initiatives – launched to much fanfare have also been quietly shelved by providers over the years.

The absence of significant volumes of Digital Assets issued and traded on a Chain has meant that the Industry has veered into issuing tokenised assets, almost as an interim step. Relatively low levels of adoption here is hindering liquidity and this is further hampered by regulatory uncertainty and limited standardisation and interoperability. Although tokenising illiquid assets (Buildings, Works of Art Diamonds or thinly traded fixed income instruments, for example) could help unlock secondary market liquidity, we heard during Sibos that there is little point in digitalising equity market flows, as the market is already pretty efficient.

If DLT technology and Digital Assets are to take off, industry-wide collaboration will be needed, according to an interesting and timely paper published during Sibos by several leading Financial Market Infrastructures (FMIs).

While the Metaverse was a big talking point at Sibos 2022 in Amsterdam, artificial intelligence (AI) dominated conversations in Toronto.  Sparked by the rise of GenAI (generative artificial intelligence) tools such as GPT-4, speakers at Sibos said the technology would have major repercussions for Risk Management, data gathering and analysis and client communications.

Even so, regulatory concerns about the technology persist, with several speakers expressing alarm that generative AI could be mis-used to carry out fraud.

Next stop…Beijing

After a successful Sibos 2023 in Toronto, the Conference returns to Asia and Beijing for the first time ever.

The decision to hold the event in Beijing caused many conversations in light of the evolving geo-political situation.

Those supportive of Beijing argue that China simply cannot be ignored and I can confirm MGTL will be there. Not only is it the second largest economy in the World with an increasingly internationalised RMB, but the Country is also opening up its domestic Capital Markets to outside investors at breakneck speed.