The fact that debt capital markets have been able to function as they have over the past six months of Covid-19-induced disruptions, and amid one of the busiest periods in their history, is a testament to the remarkable degree of ingenuity and endeavour of the people working across the deal-making value chain and to the resilience of in-house and market systems.
Of course, the technology that market participants used to make all of this happen was the same technology they were using before the pandemic. Fintech providers focusing on the primary capital market say conversations have sped up in recent months, which is probably not that surprising. But it’s not as if participants suddenly took off the wrappers in March and plugged in a suite of new digitalization and automation tools and started operating in a new plane of augmented reality. That remains some ways off, though it’s worth noting the investment banking industry is diligently pushing the technology agenda.
There are many moving parts to the primary capital markets tech story. There will certainly be winners and losers in the race to provide solutions, tools and products. But there are some big open questions: what are solutions, tools and products actually going to be based on? And how is the emerging ecosystem going to be policed? I’m no technologist but you’d assume that end-to-end digitalization and automation can only really happen on the basis of structured data that is shared industry-wide and framed within regulated standards and with full inter-operability between providers. Each participant having their own dataset or data view will just lead down lots of dead ends.
The fact that a smorgasbord of mainly London-based capital markets trade bodies and lobby groups have in recent weeks published papers and letters to policy makers and regulators about digitalization highlights both how important this is and how many missing pieces there still are. The primary bond market is hardly broken; it might be cumbersome in places and unnecessarily labour-intensive but making sure that regulators address some of the key underlying drivers that will facilitate the shift to digitalization and automation is critical. Calls for a fit-for-purpose regulatory framework in Europe are growing louder.
Acknowledging the importance of digitalization and innovative activities in European capital markets, the Association for Financial Markets in Europe (AFME) called recently in a report for globally consistent regulation based on global standards that aim to meet several goals: mitigate risks, support EU competitiveness, avoid gaps in regulation, reduce fragmentation, maintain a competitive-level playing field and promote financial stability.
The lobby group wants a clear strategic vision from the European Commission that promotes the uptake of innovative technologies in the financial sector in a way that provides clarity and supports co-ordination between European authorities, market participants and member states. It wants a technology-neutral, principles-based and proportionate regulatory framework that provides flexibility for firms to implement appropriate controls for activities they are conducting in a risk-based and proportionate manner. All firms involved in capital markets, AFME says, must adhere to the principle of "same activity, same risk, same regulation".
AFME’s paper also issued recommendations to European supervisors across three priority areas: cybersecurity and operational resilience; new technologies and innovation; and European data-sharing initiatives.
A couple of weeks before AFME published its paper, a whole host of trade associations* wrote a joint open letter to the Financial Stability Board, the International Organization of Securities Commissions (IOSCO) and the Basel Committee on Banking Supervision underlining their commitment to promoting a digital future for financial markets and setting out principles and objectives around standardization, digitalization and distribution. The end-game: to increase efficiencies, reduce complexity and lower costs.
The letter noted that post-global financial crisis regulation has led to the creation of significant amounts of unstructured data and the proliferation of bespoke paper-based contracts. Market participants, they said, are now turning their attention to how they can use new technology to optimize systems, processes and data, and accelerating plans for more digitalization and automation in their operating models.
Rather than taking the path of incremental change, tactical investments in existing technology infrastructure, and reacting to specific issues and challenges as they arise with a “patchwork of bespoke, duplicative and manually intensive technologies and processes”, the trade bodies want to see transformational change and an ambitious strategy for defining a digital future for financial markets, “fostering an environment for technological innovation and building a safer, more robust global financial system”.
At the heart of this, there have to be common data and process standards that allow consistent aggregation of financial data and more comprehensive risk assessment of supervised firms. Increased digitalization, the letter said, will improve risk management and allow for real-time regulatory oversight. Increased automation, meanwhile, will promote more efficient and cost-effective operational processes, reduce complexity, and allow firms to deliver better services and lower costs for businesses and consumers.
The regulatory part of the primary capital markets tech discussion sounds like it’s still in its early stages. But getting in early and influencing potential future outcomes is certainly a lot easier than trying to get policy makers and regulators to back-pedal from a path they’ve already started jogging down.
* The International Capital Market Association (ICMA), the International Swaps and Derivatives Association (ISDA), the International Securities Lending Association (ISLA), the London Bullion Market Association (LBMA), UK Finance (a merger between the British Bankers’ Association and other organizations), the Association of German Banks, the Australian Financial Markets Authority (AFMA) and the International Islamic Financial Market (IIFM).