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A sliding doors moment: How Covid-19 set capital markets firms on a new path for risk operations
Regulatory Technology
RegTech in the midst of COVID-19
September 21, 2020
Cometh the hour, cometh the machine: Time for leaner growth models in capital markets
Tony Warren, EVP head of Strategy and Solutions Management, FIS
Capital markets firms are facing tough choices as they prioritize technology spending in the wake of Covid-19. But in a world of strained budgets and resources, implementing advanced automation and machine learning is increasingly vital to supporting growth.
Capital markets executives are no strangers to navigating their organizations through choppy waters. But as they rebuild their firms in the wake of COVID-19, ‘cometh the hour, cometh the machine’ may be the recovery rhetoric ringing around industry boardrooms.
Our latest research, which surveyed 250 industry executives post-pandemic, finds that heightened pressure on capital expenditure will have the second-biggest impact on growth models post-COVID-19, with 46 percent citing this, behind concerns over prolonged market uncertainty (47 percent).
Amid the strain on budgets and resources, advanced technologies such as robotic process automation (RPA) and machine learning – which have, in recent years, moved from promising nascent solutions to delivering tangible returns – offer a business case that is hard to ignore.
Now, more than ever, capital markets firms need to automate non-differentiating activities in the middle and back office to free up precious talent for strategic issues. Meanwhile, delivering growth in today’s conditions demands an ability to onboard new asset classes or launch new products without requiring huge amounts of resources.
Unlike in previous crises, these advanced technologies are now readily available and are delivering measurable return on investment for early adopters.
For instance, we recently deployed a machine learning solution within a reconciliation platform for a private equity house that has enabled substantial cost savings and efficiency improvements. By digesting historical data showing the reconciliations that had fallen through the cracks of rules-based processing, and had required manual interventions, the machine learning tool is able to suggest the appropriate matches itself when similar exceptions arise in future.
Through automating what is often one of the most time-consuming pieces of reconciliation, the firm was able to able to enhance productivity and make cost savings. This has important implications for growth strategy too, as it reduces the extra resourcing capacity required to support the launch of a new fund or, in the case of a fund administrator, to onboard a new client.
Artificial intelligence (AI) and machine-learning solutions are enhancing efficiency and stripping out cost for sell-side firms too. For instance, in securities financing, optimization algorithms are being used to improve the matching of borrowers and lenders to improve financial outcomes. And in commercial lending, natural language processing (NLP) is being applied alongside optical character recognition (OCR) to consume and interpret documents to streamline loan applications.
Meanwhile, within auto finance, AI is playing a critical role in stripping out the need for physical, in-person customer support in some areas. Image recognition technology is enabling remote, self-service assessments of vehicle damage at the end of lease contracts, which is critical during the pandemic and cost effective going forward.
Sophisticated automation can play an integral role as buy- and sell-side firms pivot their product and service offerings too. For instance, it can help enable the mass customization of the client experience in areas such as onboarding and service support for new products, without the need to hire an army of people.
For asset owners, meanwhile, this infrastructure can help support growth ambitions by enabling the onboarding of new asset classes amid resource pressures. We recently completed a transformation project with a sovereign wealth fund – whose global portfolio contained a mix of liquid and illiquid asset classes – with ambitions to further diversify its portfolio. By applying advanced automation to reconciliation and exception management services to support cash, total equity and margin/collateral reconciliation and net asset value (NAV), the fund is positioned to achieve leaner growth of its portfolio.
Covid-19 has amplified the challenges facing an industry that was already facing huge pressures on its margins and routes to growth. The firms that succeed will be those that master the art of doing more with less as they support growth initiatives — and that is only possible with the aid of advanced technologies.
September 14, 2020
A sliding doors moment: How Covid-19 set capital markets firms on a new path for risk operations
Tony Warren, EVP head of Strategy and Solutions Management, FIS
The COVID-19 pandemic has been the ultimate test of resilience for capital markets firms. New research from FIS, surveying 250 industry executives, reveals how it has accelerated the race towards a new operating model for risk management.
At the height of the market disruption triggered by COVID-19, capital markets firms were dealing with 3x trading volumes, 5x post-trade volumes, and extreme volatility — all while transitioning to a remote working model.
Despite this pressure, the industry was able to respond, quickly expanding capacity by drawing on new technologies and an ecosystem of partners. For many buy- and sell-side firms, this will represent a sliding doors moment for their approach to operations.
In our latest research, we found that 62 percent of the capital markets companies we surveyed have increased their appetite for cloud as a result of the business disruption caused by COVID-19. And 43 percent have increased their demand for managed services.
Given increased cost and capacity pressures, and the proven efficacy of cloud and managed services models at the height of the market disruption, more firms are now exploring these operating models in areas that were previously less attractive, such as risk management.
At an aggregate level, firms in our research struggled most to adapt to new demands on their risk functions. But some fared better than others.
Those that were using managed services models for risk management found it easier to adapt their risk processes and operations when Covid-19 struck: half (49 percent) of those managing risk systems in-house said it was highly challenging to respond to the new pressures on the function, while only 38 percent of those using managed services models experienced the same difficulty.
This has contributed to a change in mindset about the future operating model for risk management, with managed services and cloud coming to the fore.
Our pre- and post-COVID-19 survey results highlight this shift: in our pre-COVID-19 Readiness survey, the most widespread reluctance to adopt a cloud-based model was in relation to risk management systems, where 42 percent were hesitant. Yet post-Covid-19, half of respondents say appetite to manage risk systems in the cloud has increased, which is higher than for any other business function.
The case is hard to ignore. As complexity mounts across market, credit and liquidity risk, the risk function must increasingly be integrated into front office decision-making, drawing on a single source of data and providing visibility across asset classes. Organizations must be capable of running complex risk calculations at scale and of providing real-time analytics to those making trading and investment decisions.
The use of cloud-based systems with open microservices makes all of this more easily achievable, as well as providing the agility to rapidly adapt to fast changing business needs, at a time of prolonged uncertainty.
Further, by outsourcing the management of non-differentiating, newly commoditized risk calculation processes, firms are realizing opportunities to achieve economies of scale, and to enable stretched risk teams to perform complex calculations with greater efficiency.
In many areas of capital markets activity, the COVID-19 pandemic has either reinforced executives’ convictions about technology models for the future — or urged them to accelerate existing plans. For the risk management function, where modernization plans were perhaps less radical for many firms, the pandemic has been a real Janus moment. It has helped to demonstrate that moving to cloud and outsourcing the management of commoditized risk processes is not just a viable option, it is fast-becoming integral for future success.
August 31, 2020
RegTech in the midst of COVID-19
Harry Stahl, Director Business and Solution Strategy, FIS
In a world that’s shifting beneath our feet, one thing seems to be constant: regulatory change. And we can see this clearly in FIS’ annual research into capital markets: the Readiness Report.
With the spread of COVID-19, we ran our research survey twice this year, once in January 2020 and a shorter version in June. Looking at both sets of data reveals three interesting trends around regulatory change and RegTech in particular.
1. The industry is coping, but automation is far from complete.
For the moment, at least, the industry appears to be coping with current regulatory burdens. According to our January survey, two-thirds of respondents rate their capabilities to manage regulatory and compliance risk as at least somewhat strong.
But there are significant technology gaps. The level of automation of client and regulatory reporting is low across the industry. Meanwhile, commercial banks report low automation of risk management and compliance processes.
2. RegTech spend will rise across the board.
As respondents assessed their compliance budgets at the start of the year, 53 percent expected to spend more on RegTech in the coming 12 months than last year. Expected spend was broadly distributed across a range of RegTech solutions – transaction monitoring such as trade and eComms surveillance, identity management and control, risk management, regulatory reporting, compliance process monitoring and, of course, accounting and tax changes.
Of these, transaction monitoring and identity management and control lead the pack, followed by data privacy. Within identity management and control, there is a clear opportunity for banks to improve Anti-Money Laundering processes, where they currently report very little automation.
And even after the COVID-19 pandemic was declared, that remained broadly true: 43 percent of respondents are now prioritizing investment in RegTech in this next twelve months.
3. Vendors will be important to solve RegTech issues.
According to our June research, 46 percent of firms are more likely to invest in outsourced IT systems, and 43 percent are more interested in managed services.
One of the benefits of using third party vendors is to begin to leverage more advanced technologies in RegTech, including distributed ledger as well as artificial intelligence (AI) and machine learning. This move is not just a fad for new tech. In January, more than half of respondents said their investment in AI was already beginning to show a return on investment. This is typically by speeding up compliance processes.
So, what conclusions can we draw?
First, the industry’s compliance processes appear to have weathered the onset of the pandemic reasonably well. But firms expect to focus even more attention and spend on RegTech going forward. Planned spending looks balanced across the RegTech spectrum, with shrewd players looking not just to automate, but to reap economic benefits from AI and machine learning.
See the full 2020 Readiness Report for even more insights into what lies ahead.
