Successful innovation programmes require more than just cutting edge technology, but senior management buy-in together with an intelligent and thoughtful implementation process. At Citi’s recent annual Asia Pacific Securities Leadership Forum (APSLF), we explored some of the tectonic transformations currently underway in the financial services industry.
Moderated by Ryan Marsh, Global Head of Distributed Ledger Technology and Digital Innovation at Citi, our panellists from Six Digital Exchange (SDX), Northern Trust and BondEvalue discussed some of the technological innovations which are reshaping securities markets.
Change is culture-driven
Irrespective of whether the technology is readily available to make something happen, innovation will only thrive at organisations if their cultures allow it to. Oftentimes, this cultural tone is set from the top-down, making it vital for senior management to take a positive long-term view on innovation and its merits. Justin Chapman, Global Executive Securities Services and Global Head Market Advocacy and Innovation at Northern Trust, shared that the bank’s leadership had adopted a proactive approach to innovation by setting up an independent group back in 2014 called the Market Advocacy and Innovation Research team. “With C-level support, a culture of innovation can permeate throughout an institution allowing for businesses to develop exciting new products to meet clients’ evolving needs. Over the last few years, the culture of innovation at our organisation has spread significantly,” said Chapman.
Change is also being accelerated at financial market infrastructures (FMIs). The Swiss Stock Exchange (SIX) was the first stock exchange to transition to electronic trading in the 1990s and is widely seen as being a technology leader. In 2018, SIX established the Six Digital Exchange (SDX), a digital FMI which can support the issuance, trading, custody and settlement of digital assets. “It is important that organisations break down the silos between technologists and the business so that they can become more agile. Our CEO made a big call to set up SDX as a separate entity to the main exchange, which we believe will eventually converge with SIX itself,” explained Alistair Duff, head of APAC at SDX. “When launching SDX, we were essentially setting out to disrupt ourselves.“
Culture also plays a key role in promoting innovation and product development. A number of technology companies, for example, accept that many projects will end in failure, but caveat that this should not deter employees from pursuing innovation altogether. A similar approach needs to be taken in financial services. “Psychological safety is essential — we support team members to take calculated risks, even if they fail, as this can help drive innovation. At SDX, we take a bottom-up approach towards culture whereby our clients are engaged in shaping our values and culture,” added Duff.
Patience is a virtue
The methods of benchmarking success at businesses — regardless of industry — have historically been dictated by short-term metrics, such as quarterly P&L results. This approach should not be applied to disruptive technologies, mainly because their success cannot be judged on a quarterly basis but instead needs to be measured in years or even decades. “With SDX, we are taking a 10-15 year view of capital markets. We believe it will be that long before a full transition to a digital asset marketplace fully takes place,” said Duff. As a result, it is crucial that senior leadership weigh up the long-term opportunities against the short-term costs when determining innovation budgets. Take investment into digital custody R&D, for example. While this market is illiquid and nascent today, it is plausible that revenues from digital custody could surpass that of traditional custody in a decade or so.
“Investment into innovation is a hedge but the potential upside is huge. It is critical that business streams evidence that innovation programmes are moving in the right direction even if it is not having an impact on overall P&L,” acknowledged Chapman. Duff agreed that some innovation programmes may not be beneficial for the company but will have a net positive impact on the wider market.
Regulators as an enabler for disruption
Disruptive technologies can pose challenges for capital market integrity and investor protection, and these are risks which regulators need to be mindful of. Conversely, those same regulators also do not want to overstep their remit by imposing rules that deter or restrict innovation. “Regulation can be a challenge and an enabler for innovation. In the case of Singapore, the regulators are widely seen as an enabler, although people do complain in other markets that regulations are a hindrance. If an industry is to grow, then it needs to be properly regulated,” said Rahul Banerjee, founder at BondEvalue. He added that most regulators seem to agree that the underlying transactional activities being facilitated by disruptive technology should be subject to securities laws and not the technology itself. However, there are exceptions. Chapman noted the authorities should only look at the regulations if the technology changes the dynamics of who is accountable in the market ecosystem.
Identifying the assets of the future
The transition towards digital assets is gathering momentum, evidenced by the growing number of service providers launching or developing digital asset custody products. Right now, Duff indicated that a lot of attention was being paid to crypto-currencies, especially following some highprofile endorsements. There is debate, however, about which tangible assets will eventually be tokenised. “On the token side, we believe that private market assets will be tokenised within 24 months. We are planning to launch a digital native bond next year too,” said Duff. Tokenisation of private assets such as real estate or art would bring widespread efficiencies to a market, which has historically been illiquid, manual intensive, difficult to access, opaque and costly. “In contrast, blue chip equities, owing to the fact that the market is already liquid and highly efficient would be among the last instruments to be tokenised,” added Duff.
Banerjee remained bullish on digital assets more broadly, but expressed doubts about the virtues of tokenising vanity assets. “Sometimes the narrative at technology and distributed ledger technology [DLT] forums is that private assets such as art and cars will be digitised, but mainstream investors do not seem to be that interested in them,” said Banerjee. Some experts have warned that tokenisation of private assets could result in liquidity mismatches, while others argue that accurately valuing tokens might be difficult in certain instances.
However, Banerjee was optimistic about digitalising fixed income, real estate and equity securities. “In the medium term over the next 24-36 months, I believe mainstream capital markets like fixed income and equities will realise huge efficiencies as a result of digitisation. Just as the Internet delivered initial advantages, it has only been very recently that we have realised its true benefits in areas such as e-commerce and video conferencing. Just as we stopped discussing the electronification of the stock market, in the longer-term, I believe we will stop talking about digital assets as they will simply be known collectively as assets,” added Banerjee.
Digitalisation could also usher in a number of operational benefits for the securities industry. Chapman believes that in the future, various downstream operational activities such as reconciliations could be augmented through self-executing smart contracts, facilitating greater transparency and efficiencies in previously opaque asset classes such as private equity.
Getting to the next level
Simply having access to sophisticated technology is not enough if firms are to digitalise their business models properly. If the securities services industry is to future proof itself for the new digital age, its management and culture will need to fully embrace innovation and all its benefits. This digitalisation will be driven primarily by industry-wide cooperation, a point emphasised by Marsh. “Key organisations will need to collaborate and partner with each other in order to drive digitalisation. It is incumbent on larger market participants to lead on these changes and educate the wider industry about the value which innovation can bring,” Marsh concluded.