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FORWARD COMPATIBILITY: ENSURING FITNESS FOR THE FUTURE

Tomas Kindler, Strategy Implementation

At Sibos, it’s clear that the buzz is around partnership and blockchain (again!). With our announcement of a potential tie-up with Clearstream and partnership with blockchain powerhouse Digital Asset, SIX Securities Services is at the very heart of these hot topics. Consequently, it’s hardly surprising that financial institutions are looking at the world through new innovative lenses.

However, firms that form part of the global financial market infrastructure need to bear in mind that their role is to maintain stability and continuity. They are not cast in the role of disruptors, but innovators through evolution – rather than revolution. With this in mind, how can these organisations ensure that they are planning ahead in line with likely future business models?

One key way in which organisations can embrace new approaches is through considering utility-based models. In our recent industry wide research conducted by Vanson Bourne, we found that 30% of financial institutions are looking to this approach due to competitive pressure from disruptive business models. Smart collaboration is becoming increasingly relevant as organisations look to cover off the whole value chain. It’s promising to see that institutions recognise that to innovate safely, the technological and regulatory expertise they require might lie outside the boundaries of the business.

Collaboration is also an option. By cooperating with a more agile business, in a specific business area, like blockchain, institutions are able to maintain a low risk profile whilst still allowing itself the opportunity to take risk with a company that is able to do so. For example, at SIX, we have partnered with Digital Asset to develop a prototype for post-trade securities processing.

However, many of the breakthrough technologies we are seeing are being viewed from a tech perspective, rather than in the context of the business problem that they can solve. Whilst IT inevitably plays a role, the primary focus should be on the application of the technology, and the business challenge that it solves.

In the case of blockchain for example, we should not only ask what is feasible, but what is desirable from a business standpoint. Blockchain has the potential to make a number of business models and intermediaries obsolete, which isn’t necessarily a bad thing. It is however important to question the changes that this would bring to the ecosystem. If settlement could happen instantly via blockchain, we wouldn’t have to worry about clearing.

In the same breath however, we would have to acknowledge that instant settlement would require the industry to find a new way of achieving the cost savings, efficiency and risk mitigation that netting brings. Trades would require pre-financing, short selling wouldn’t be possible anymore, and securities lending would be significantly impacted. It wouldn’t just be a new settlement process, it would change the whole way institutions interact in the trading, clearing and settlement spaces. Stakeholders would also have to be able to deliver both cash and securities in real-time – which is not possible even in today’s T2S model.

Some industries have taken great strides with their approaches to innovation, and whilst the financial industry may be an evolutionary sector, this doesn’t mean that disruptive elements have to be excluded. There are ways in which innovation can flourish, but it’s a question of how to we employ these technologies for best use, and ensure that there is a smooth transition from current processes to new processes.

Originally published on Post Trade Views here.