December 9, 2020

This article was first published by LEO Magazine, December 2020

Complex front-, middle-, and back-office challenges within firms operating in the capital markets has led many in search of new technologies to ease burdens. These FinTech solutions often emerge in the form of technological advances such as Artificial Intelligence (AI), Robotic Process Automation (RPA), Distributed Ledger Technologies (DLT), Cloud Technologies, and a host of other acronyms, that assist in bringing innovation to value chains.

According to Raja Palaniappan, CEO of Origin, firms should not approach innovation from a technology-centric viewpoint, but rather from a user-centric view. “Blockchain, AI, digitisation, document automation, and OCR, all of these are just tools in a toolbox. When we think about their progress within the industry, we’re actually thinking more about the increased adoption of the technology, not the improvement of said technology.”

Overall, these tools, are looking to solve the twin problems of increasing regulation and persistent low interest rates that have, and continue to, put a cap on revenues. Increased costs relating to compliance and minimal revenue growth have created a squeeze on profits, one that continues to get tighter as costs increase. Guido Stroemer, CEO of HQLAᵡ,  notes that “both buy-side and sell-side market participants need to manage their balance sheets more effectively given increasing regulatory requirements.”

Across capital markets, every firm is in the process of examining existing core processes with the aim of increasing efficiency and removing possible redundancies and cost bases.

To Stroemer, there “is an overwhelming need to optimise” and a number of technologies can assist across the value chain, from “data analytics for an accurate view, artificial intelligence to heighten the efficiency of processes, and distributed ledger technologies to transfer the ownership of assets more efficiently.”

The innovation toolbox is clearly well stocked and has already led to some significant efficiencies across capital markets. Middle and back-office remain prime contenders for process automation, across the value chain from trade allocation to data reconciliation. Within front office, the costs can be higher, but the gains from digitalisation can also be significantly greater – including increased customisation for users and rapid onboarding.

This emphasis on efficiency and innovation has further been boosted by Covid and the realisation that capital markets cannot continue with the same infrastructure and processes. A recent Broadridge survey found that 53% of Financial Services firms are revisiting their operating models and are accelerating next-gen innovation strategies. According to Palaniappan, “firms have been able to re-evaluate their priorities, given the new world we’re in, and there is a sense that there is less tolerance or leeway for doing things inefficiently.” He notes that the requirements for digital have gone through the roof, such as documentation sign-off, digital records, among many others. While traditional firms across the capital markets ecosystem have often been hesitant in collaborating with new startups, Palaniappan emphasised that Covid clearly “increased the willingness of firms to engage with Origin across the fixed-income space.”

Stroemer reported that HQLAᵡ had seen a similar effect, with heightened market volatility resulting from Covid, seeing a number of new participants “both from the buy-side and sell-side wanting to understand, in more detail, how our platform could help them improve their collateral management activities, not only for liquidity management, but also for margin management.”

To both, the overwhelming message has been one of ‘we really could have used you in the beginning, how can we accelerate a partnership now?’

Going forward, while the capital markets are unlikely to lead innovation within the financial industry, they will continue to evolve in order to be relevant within a new world. Palaniappan sees “Capital markets as an industry that is always going to react to what the prevailing trend in the world is that day. It will, when it comes to technology, continue to progressively improve itself out of necessity.” Origin is a clear example of this, providing efficiency incrementally through digitising the production of documentation that’s required to define a bond. Belying the underlying complexity of the operation, Palaniappan describes Origin concisely as a “software that allows users to automatically produce bond documentation on a platform – bankers can produce the term sheets defining the first 30 to 40 characteristics of the bond, and the lawyers can then augment it with the next 40 to 50 characteristics. Downstream institutions have an API feed that feeds them with structured data concerning the bond.”

This platformisation is top of mind for Stroemer, who sees the interoperability across platforms as a key value proposition in capital markets going forward. Regarding distributed ledger technology he notes that as the ecosystem is further enhanced “many platforms, other than HQLAᵡ, are active in the space. As HQLAᵡ focuses on ownership transfers of securities, others are active in establishing ownership transfer for asset classes such as precious metals and cash – there is clearly a huge opportunity over time for different DLT platforms to interoperate.”

A long-term focus is clearly key for capital markets participants looking to delve into the innovation toolbox. It goes beyond simple adoption of new technologies; rather it requires many traditional participants to embed a new approach across their enterprise, from attracting new talent to embracing a partnership model with innovative start-ups. Across capital markets, firms such as Origin or HQLAᵡ stand as enablers for this transformation, but the traditional siloed model will no longer work. The toolbox must be applied to the organisation as a whole, not only given to one department at a time.