Top trends to watch out for in 2025….

Written by

Fraser Wikner

Published on

January 21, 2025
Insights

The migration to T+1 in North America, the importance of attracting and retaining top talent in the Custody Industry, and the impact of digitalisation, most notably Artificial Intelligence (AI) and Asset Tokenisation, on Securities Markets were among some of the biggest talking points in 2024.

Cost management to take centre stage

Unsurprisingly, during SIBOS and at the regional TNFs, a lot of our Clients told us that cost optimisation will be a strategic priority for them in 2025.

While the Industry has rationalised its operations and obtained meaningful savings over the last few years, I believe there is still more room for manoeuvre.

One activity which Custodians and Brokers could streamline is their in-house invoice management. Performing invoice management internally is another layer of cost and intermediation, requiring major infrastructure and technology investment.

We often see Firms not updating their infrastructure, leading to inefficiencies and errors. This is an issue, especially as Regulators globally have taken a much greater interest in cost management and transparency at Financial Institutions post-2008.

With costs increasing exponentially, we are seeing more Firms turning to software providers to help them with their invoice management, and we expect this trend will only accelerate in 2025.

Market reforms and Regulation keeps piling on

T+1 dominated discussions in 2024, and I fully anticipate it will be a recurrent theme next year too. While T+1 may have gone live in North America, that transition was only the first phase in what is going to be a multi-year change journey.

During SIBOS, I listened to a panel where a speaker predicted that 70% of Swift flows would be settling on T+1 after 2030. I suspect a large number of our Clients will be spending 2025 readying their businesses for the various T+1 deadlines, an undertaking which will undoubtedly consume a significant amount of budget and resources.

On the regulatory front, the US Securities and Exchange Commission (SEC) has said it wants certain cash US Treasury security transactions to be centrally cleared by the end of 2025, and the same goes for US Treasury repos from 2026. This is going to be a massive compliance exercise for Financial Institutions.

Again, the impact of these market reforms and regulations comes as Custodians and Brokers continue to see their margins shrink amid challenging market headwinds and downward pressure from Clients on fees.

The long wait for DORA is almost over

Operational resilience has been an area of intense focus ever since Covid, but I believe it will become even more so in 2025, following the passage of the EU’s Digital Operational Resilience Act (DORA) and the release of the International Securities Services Association’s (ISSA) ORQ.

DORA, which came into effect on January 17 and applies to nearly all Financial Institutions, creates a harmonised framework around ICT resilience in the EU. The rules also impose stringent requirements on Firms in terms of how they manage any ICT related incidents, i.e. cyber-attacks.

A failure to comply with DORA could result in Firms paying steep fines.

The good news is that most of the Organisations we speak to have completed their DORA preparations. Given the sheer volume of cyber-attacks our Industry is currently facing, I do not believe it will be that long before a Financial Institution has to activate its DORA planning.

DORA’s rollout coincides with the publication of ISSA’s ORQ, an operational resilience questionnaire based on the Basel Committee on Banking Supervision’s (BCBS) Operational Resilience Principles. A number of my colleagues were closely involved in the ISSA ORQ Working Group (WG), and we will continue to play an active role in developing Industry best practices around operational resilience in 2025, and beyond.

Expect Network Managers to make progress on Reverse KYCs

During TNF in Warsaw, a number of Network Managers reported that their Agent Banks were sending them incredibly detailed Client KYCs. The main driver behind the sudden spike in reverse KYCs is regulation, e.g. Anti-Money Laundering, Counter-Terrorist Financing rules, etc.

Unfortunately, the reverse KYCs being sent out by Agent Banks are not harmonised, with some incorporating the Wolfsberg Guidelines or ISSA’s Financial Crime Compliance Questionnaire, while others are highly bespoke.

In certain Emerging Markets, I heard that some Agent Banks are asking Global Custodians and Brokers for the passport details of C-suite Executives and Board Members, which opens Firms up to all sorts of data and privacy risks.

In response, Network Managers have formed a dedicated WG to explore the merits of creating a standardised reverse KYC template, similar to what the Industry did almost a decade ago in NEMA Athens when it laid the foundations for the Association for Financial Markets in Europe’s (AFME) Due Diligence Questionnaire (DDQ).

I am fairly optimistic that Custodians and Brokers will make good progress on this matter next year by developing a homogenous reverse KYC questionnaire.

Longer term, I believe that DDQs generally will eventually run their course, with a much greater emphasis being placed on continuous monitoring and ongoing due diligence. As a result, I anticipate that Clients, i.e. Network Managers, will expect their Vendors to volunteer information about operational issues, i.e. risk or SLA-related problems, much more dynamically, and this is something we are actively promoting.