What immediate impact did COVID-19 have on the trend to digitized processing?
Aashish Mishra: Before the COVID-19 outbreak, the availability of new technology and the cost savings it could achieve drove digital adoption across the trade life cycle. Many of these savings were concentrated in the pre-trade environment rather than the post-trade environment, where we work. Post-trade, the main hurdle to wider digital adoption, and the benefits that follow, was encountered in the ‘last mile’. Here laws, rules or market practices imposed explicit constraints on digital adoption. In many cases and in many countries, these required, for example, the presence of a physical document or that a representative of an organization that was party to a transaction be physically present. These were hard, fast — often legal — barriers that could not be overcome. COVID-19 provided a compelling need for market participants and their regulators to overcome these last mile hurdles. Overnight the benefits of digitization moved from theoretical and nice to have, to practical and essential. Where regulators had justifiably taken the view that shifting to digital processes in many cases was principally a matter of improving convenience for market participants, it was now clear that these shifts were essential to keep markets accessible to investors and therefore continuing to function. Suddenly there was a degree of willingness — much greater than at any stage in the past — to drive wide scale change, quickly.
What specific risks arising from COVID were digitization initiatives designed to combat?
Mishra: Where physical market practices did not immediately allow for a digital alternative, COVID-19 revealed three groups of unique risks: tactical, financial and systemic. Tactically, during COVID there was genuine fear that participants may not be able to perform certain critical activities which are physical in nature — like obtaining IDs or licenses to operate in a market, account opening for investments, tax procedures etc. These tactical implications could have a material impact on individual investors, and potentially across the wider market when combined across multiple participants. In some cases, temporary relaxations and workarounds were implemented but the challenge will be to make these permanent.
The second group of risks entailed by physical processes was financial risk. For example, in companies’ shareholder meetings, holders of shares or their proxies must participate in votes on agenda items, such as capital raising whose outcomes have an immediate impact on those companies’ share prices. Where that process required physical paper work or individuals’ physical attendance, participants realized immediately the scale of this economic risk of being unable to carry it out.
The third group of risks was systemic and required participants to review their entire operating model. Suitable infrastructure and contingency planning was essential to support critical activities across the post-trade cycle. One reason this was so challenging was that previous plans had not anticipated widespread social distancing requirements. Typically these plans had been built around a single geographic relocation, when the failure of one site — arising from a terrorist attack, for example — triggered a plan to relocate the business processes, and those required to support them to a second, alternative site. Few participants had made provisions that allow for the truly distributed operational solution that would be required by having their entire workforce work from home.
How did these risks present to providers like Citi?
Bryan Murphy: Where participants supported large chunks of the market, their ability to respond to the systemic risks created by COVID-19 was critical for the smooth functioning of the market. In many markets, where Citi holds a large market share, our response was crucial for our local franchise and our clients. In such situations, failing to have in place an effective contingency for remote working could significantly impact not only our clients but also the overall market. The impact of a timely and effective response on the franchise in such cases could hardly be greater.
How has digitization preserve access to Asian markets by forewing investors during COVID-19?
Mishra: Several countries added a digital dimension to the processes supporting foreign investors’ registration. For example, Korea simplified the application process for the Investor Registration Certificate which registers each foreign investor as a separate independent beneficial owner, without which foreign investors are not able to keep securities or settle transactions under their name with local brokers and custodians. Previously requiring a physical notarised document, the regulator simplified the requirements to temporarily allow digitally scanned forms.
In India, the Securities and Exchange Board of India (SEBI) requires a similar process to grant of licenses to trade under its foreign portfolio investors (FPIs) regime. Again, scanned versions were accepted in place of physical documents.
Indonesia smoothed the tax requirements for foreign investors. Whereas investors previously had to provide original signed Certificate of Residence / DGT forms, authorities are now accepting scanned versions and / or documents with e-signatures from countries which recognise digital signatures.
How about cases like AGMs, which required people to be physically present?
Mishra: In Indonesia, for example, voter proxy and company meeting processes were digitized, through the introduction of eProxy and eVoting systems. Issuers could then use electronic platforms to accept voting submission from custodians and to host virtual AGMs, requiring this method of attendance for all participants who would otherwise have attended in person. Those shareholders voting by proxy could also communicate their intentions to proxy providers in turn.
How did digitization aid the enforcement of short-selling bans?
Mishra: One Asian market to impose new requirements around securities finance was Korea, following a six-month ban on short sales enacted by the Financial Services Commission in March. Citi had to put in place a framework that would support its clients, so that they did not break the ban inadvertently, specifically using host-to-host connectivity with the depository to facilitate real-time lending status reports to help clients manage their lending inventory.
What specific digitization initiatives did Citi prioritise with clients?
Mishra: Our Securities Services country heads across our 16 markets in Asia worked closely with regulators, infrastructures and local market participants to devise and implement market-wide responses to COVID-19. We have also been able to fast track digital agenda items with our clients, notably in two areas. The first has been the acceleration of the phased roll out of a digitized client on-boarding process. This process is supported by an electronic workflow platform where all on boarding activities will take place, and electronic signatures will be facilitated by DocuSign. Our workflow platform also features a fully digital storage system, where paperwork submitted by clients is stored and labeled centrally, eliminating the need to ever resubmit a form. We are rolling this out across our network in a phased manner.
The second has been the varying opportunities provided by Application Programming Interfaces (APIs) to improve integration between our and client systems, drive efficiency gains and act as a contingency mechanism which has allowed us to open new servicing models across our business. Potential deployments include online data dissemination, reporting and accepting trade instructions.
Did digitization suit some clients more than others?
Murphy: Part of the momentum for the shift to APIs came from the benefits around contingency mechanisms. These have been most fully embraced by those clients whose contingency processes did not lend themselves well to dealing with the initial phases of the COVID-19 crisis. To them, the benefits of APIs in creating genuinely robust firm-to-firm (F2F) connectivity, were particularly compelling. Most of our clients have realized significant productivity gains, in addition to substantive risk mitigation as we transitioned into a more digital environment. However some clients, markets and functions are clearly more advanced than others in terms of their digitization journey.
Many had previously underestimated those benefits, and the dramatic progress in recent months has demonstrated the return on investment of digitization initiatives and opened their eyes to other areas or key processes that may benefit from a focus on automation. Our clients have been able to optimize their own contingency and digitization processes by leveraging our investment in this area.
How will the COVID-19 crisis shape the future direction of travel for the sector?
Murphy: COVID-19 has dramatically changed all of our perceptions of what’s possible. A year ago, no-one would have believed that the entire industry would process its highest volume days, across multiple markets globally, during a period of unprecedented volatility while 80-90% of our staff were working from home.
We’ve made enormous and quick gains in the regulatory appreciation of the benefits of digitization in addition to a more practical understanding of how to deploy our teams in a massively distributed working environment. Regulatory changes that would have taken a much longer time to achieve were fast-tracked in days.
However it’s important that we don’t lose momentum or slip back into old habits or manual processes. Once we emerge from this crisis, there will be a natural inclination to revert to mean and that will reduce overall productivity and the efficiencies and risk mitigations we’ve gained.
The COVID-19 pandemic has also forced the industry to think more broadly about systemic risks. Historically we’ve viewed risk as being somewhat business or geography specific. Natural disasters and political turmoil tend to be market-specific. Increasingly we’ll need to think about risk and infrastructure on a genuinely global and systemic basis. For Citi that means taking a much more holistic approach to managing risk on a collaborative basis with our clients. It will be much more about how we manage risk on a firm-tofirm (F2F) basis then on a market by market basis and that will require a much more strategic level of engagement.
First published in Global Investor Magazine.