Market participants, central bankers, and regulators have all weighed in over the years on the challenges in post-trade operations. Whether from a risk or cost perspective, the main culprit is legacy technology, followed by the associated operational, data, and manual processes that levy a massive tax on global financial services. That impact has been estimated at $24 billion per annum[i].
The Post Trade Task Force was convened in 2020 by the FCA and the Bank of England to address industry coordination challenges, with participation from investment banks, exchanges, asset managers, market makers, and utilities. The Task Force released its findings last quarter. Among the many insights and recommendations in this highly informative report, they highlighted that the need for digitalization is crucial:
“Digitize and integrate across lifecycle: The industry needs to move from legacy paper based, manual processes which are typically functionally siloed, to fully digital processes, integrated across the transactional lifecycle.”
To professionals in the capital markets, these findings are not new. The real surprise is how little has been done to modernize despite the well-known risks, frictions, and costs of not doing so. It remains difficult for financial services and modern capital markets to operate when the state-of-the art is paperwork, outdated technology, faxes, and mainframes.
The first-order challenge is that antiquated technology creates unavailable, unusable, or fragmented, disparate, and siloed data. This scenario yields slow, risky, and costly operations. A modern technology platform creates a situation where data is usable and accessible. Automation and tools like machine learning and AI can be used to replace redundant processes. This is the case across asset classes, functions, and types of firms.
We know that legacy technology is the problem with the post-trade, and we know how to solve it.
The volatile market of the last few years has put a focus on the performance of legacy market infrastructure. Moreover, such market conditions highlight older systems’ shortcomings and, in turn, catch the attention of investors looking to make a bet on creating a better market infrastructure for the future.
PEs, VCs and other strategic investors recognize the opportunity to rebuild the front-to-back value chain in the financial markets.
Recent investments include our own focus on finally solving difficult, nearly intractable problems for the next generation of markets. An amazing UI/UX does wonders for the client experience, but updating the rails, the infrastructure, and the front-to-back flow of data will be the innovation that drives real change.
When you think about segments of the financial industry that have benefited from the modernization of legacy technology, the first that comes to mind is payments. Before new players like Stripe or Block entered the market, payment processing ran on 1990s-era infrastructure that caused longer transaction times and other frustrations for the end user. Fintechs renewed payments processing with APIs, microservices, and the cloud, providing a vastly better experience for all users and opening up new ways for customers and small businesses to engage.
These companies’ successes derive from their contemporary tech stack. Payment processing tools built on modern tech have made it easier for businesses to integrate using an API and elevated customer experience, resulting in more purchases made through their systems.
The next wave of investments and efforts will be holistic modernization of the front, middle, and back offices, and the crucial feedback loop that exists between them. The fact is, stop-gap solutions or abstraction layers above antiquated systems will no longer solve the pain points and bottlenecks in the back office. The challenge requires creative reinvention, grit, and a culture of daring.
Clear Street is building the platform that reimagines the legacy workflows and silos that are essential to increasing access in the financial markets, all while transparently decreasing risks and costs[ii]. We constantly iterate on feedback from our clients and the market to transform crucial yet clunky problems in a way that works for them.
In the end, a single-source platform will bring considerable value by optimizing workflows, from the post-trade to trading, margin, and collateral. It’s time to bring post-trade into the future.
i. Artificial Intelligence in Post-Trade Processing
ii. For instance read our recent engineering blog series, where we discuss BK
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