Hiro Hamada, the global head of service delivery at Nomura Research Institute Europe Ltd., spoke to FTF News about siloed IT systems and other post-trade infrastructure problems.
(Editor’s note: Nomura Research Institute (NRI) won two major honors — Best Collateral Management Solution for NRI GX Margins, and Best OTC Derivatives Solutions for NRI GX Derivatives — as a result of the 2019 FTF News Technology Innovation awards competition. FTF News was able to get time with Hiro Hamada, the global head of service delivery at Nomura Research Institute Europe Ltd., and ask him about a wide range of post-trade operations issues. Hamada, who has more than 20 years of financial IT service experience, recently relocated to London where he leads NRI initiatives in capital markets solutions. He previously served as general manager at NRI Tokyo. He is a graduate of Carnegie Mellon University.)
Q: Why do some financial services firms still have manual
systems and manual interventions for post-trade operations?
A: The range and complexity of products that most financial services trade are very diverse, making process standardization and automation challenging.
Processing of a security or OTC [over-the-counter] derivative transaction is much more complicated than a transaction you may see within a retail financial institution (such as a payment).
So, building a platform that can cater to all of these process variations is extremely complex — and expensive — to achieve. As a result, this leads to manual interventions being required within operations to support processing for parts of the trade lifecycle that can’t or are too expensive to be automated.
Q: Why are legacy technology infrastructures so costly?
A: The technology itself is often quite cheap to operate — given that due to its age the initial investment will often have already been depreciated some time ago — which can often make benefit cases challenging when justifying investment on system replacement.
The true cost, however, lies in the lack of flexibility inherent in these infrastructures, where the cost of making changes or adopting new technologies is often prohibitively expensive.
As an example, many critical processes (such as regulatory reporting) are often hardwired into the systems due to the speed of compliance that has been required in the past. Making changes to this type of environment becomes expensive due to the amount of testing and user acceptance that is often required — which often involves the whole system, not just the area where changes are made.
“Legacy” as a label also means that the technology is part of the organization’s history, which means it is also quite unique to how that organization has evolved.
Integrating standardized or “off the shelf” software into this environment — to modernize it or make it more flexible to change — then becomes challenging to achieve due to its bespoke nature. Which again, makes cost of change expensive
Q: Why is it important for financial services firms to consolidate their siloed systems?
A: Operating multiple systems essentially causes duplication — in system change efforts, in areas such as reference data and in processes such as reconciliation — all of which increases the costs of processing. Second order effects are around areas such as client service quality and operational risk, which can also have a significant impact on a financial services firm.
The silos within a firm often want to retain oversight and control of their own systems, but in doing so, don’t solve the inefficiency created by duplication. And as a result, the organisations incur higher costs that this lack of efficiency creates.
So, the consolidation of siloed platforms becomes essential for an organization to move forward with its post-trade infrastructure. Without this, they never truly achieve the economies of scale that are available to them
Q: What are the benefits of a centralized platform for margin and collateral management that supports all asset classes?
A: Collateral management has become an increasing critical function since the crisis of 2008, as regulators recognized the importance of collateralization as a risk management tool.
Historically, many firms have operated collateral management within their functional siloes. But, given it’s increasing usage, process consolidation of margin management and the collateral that supports it has become important.
Bringing together exposure management for collateral increases efficiency (and potentially optimization) of collateral while also streamlining the operational process flow. This latter part is increasingly critical in a world where margin agreement and collateral exchange must be completed on a T+1 basis — for products such as OTC derivatives — so bringing all client exposure management onto a single platform is key to satisfying regulatory obligations.
Not only does this bring economies of scale in terms of process, it also centralizes risk oversight and enables a bank to view exposures all in one place.
Being able to consolidate this view of risk into a single place has obvious benefits, even more so in times of volatility or market stress.
Q: How does NRI view the potential of emerging disruptive technologies and their impacts upon the post-trade landscape?
A: I think that there is a lot of potential disruption within the industry which over the coming decade will be transformational for the post-trade landscape.
Some of the emerging themes within AI, as an example, have the capability to significantly enrich management decision-making (around areas such as fails management) when applied properly. Which when implemented successfully can transform risk management oversight, which is currently still heavily reliant upon a human being to exercise discretion over.
But the post-trade landscape is still dominated by legacy challenges — such as data or system fragmentation — which need to be solved before this technology can truly achieve its benefits.
Deploying disruptive technology on poorly understood or unstandardized processes will not deliver positive outcomes and, if anything, will add risk and ultimately costs to the process.
So, the potential is significant around post-trade disruption, but this technology must be viewed as an enabler to solving the legacy architecture challenge — it is not a silver bullet.
Q: What are clients telling NRI about their need? How are those discussions impacting the future of NRI’s offerings?
A: Our client base continues to be challenged by the fact that their legacy infrastructure has a key role to play in their future state, but they need to be able to introduce innovation alongside it to drive their business forward.
This is making us think about deploying technology that may need to interact, for example, with a core books-and-records system but can also bring some of the benefits of modern or emerging technology.
Quality, reliability and robustness are central to any NRI offering but we are also focussing on recognizing our need to be flexible to support our clients and that not every client is the same.
Some of our clients look for specific functionality that can integrate quickly and seamlessly into an incumbent solution, while others are looking for something that can perhaps displace an in-house solution in its entirety. And, so, our offerings need to be able meet what our clients want, not what we think they may need.
Q: How does NRI view the evolution of managed services within
the post-trade landscape?
A: The utility concept has gained a lot of interest over the decade within capital markets, but collaboration by banks toward a common set of standardized processes is challenging to achieve.
This is often because what may conceptually work for one organization, doesn’t for another due to the bespoke nature of their business model and process.
So, brokering consensus among these groups is difficult to achieve and that is why the collaborative-utility style model among banks has not really progressed widely.
Our view is that delivering managed services — where a vendor offers a combination of products such as SaaS [Software-as-a-Service], BPO [business process outsourcing] or hosting — creates choice for a customer who may or may not need a full service.
NRI has the capability to offer BPO alongside its GX margin platform but this is optional — you can just take the software.
So, rather than being tied to an all-or-nothing model across IT and Ops, clients choose what components they need to satisfy their goals.
We see this model as gaining increasing traction across the industry and see this trending continuing to expand within post-trade over time.
Q: What does NRI foresee as the key regulatory drivers for the next two to three years?
A: I read that the pressure of regulatory change is reducing in certain areas, but we continue to see it dominating agendas for most of our clients.
SFTR [Securities Financing Transactions Regulation] and CSDR [Central Securities Depositories Regulation] are occupying a lot of focus within Europe right now, while the ongoing rollout of UMR [Uncleared Margin Rules] for wave 4 and 5 will also take a lot of resource and time within the collateral management space. The 4210 rules within the U.S. around TBA margining is also a key focus for some of our clients as well — which will also impact the same area of collateral management.