Speaking during the TNF Americas Conference (23 September 2021), network managers highlighted the need for greater consistency in the account opening processes across different markets. Right now, a number of markets adopt their own bespoke rules around account openings, especially in areas such as know your client (KYC) and anti-money laundering (AML) checks, which can create inefficiencies for global investors.

Network managers also noted that there continues to be disparities in local tax requirements and account structures (i.e. beneficial ownership model vs omnibus account model) in the markets which they oversee. These different facets can make accessing new markets expensive and complex for investors with regional or global portfolios. However, providers said the pandemic has impelled some markets to digitalise their manual processes in activities such as account openings and corporate actions, in what is generating major cost synergies for investors.

“Brazil is considered to be one of the markets that has made significant progress, having automated its voting processes to facilitate remote voting, after previously requiring investors to physically attend shareholder meetings,” said Henrique Santos, Head of Securities Services, Brazil at Deutsche Bank. Experts stressed that it is vital these markets do not retreat away from automation once the pandemic's impact lessens.

“US regulators are taking a pragmatic approach to digital assets and are rightly assessing the implications”
Kamalita Abdool, Head of Securities Services, Americas, Deutsche Bank

On due diligences, participants largely concur that the Association for Financial Markets in Europe's (AFME) due diligence questionnaire (DDQ)¹ has been positive for the industry, although some network managers are inserting supplementary questions into the template. “Clients are adding their own proprietary questions into the AFME DDQ, focusing on enterprise level resiliency. We add value by giving context and guidance to clients on which risks and concerns they should address in each local market. Our team is more than happy to run through the answers to these additional questions with our clients to mitigate risk and enhance their due diligence efforts,” said Kamalita Abdool, Head of Securities Services, Americas at Deutsche Bank.  However, some experts have advised network managers against putting too many insertions into the DDQ, arguing that it creates downstream inefficiencies for agent banks and undermines AFME’s goal of delivering greater standardisation in the due diligence process. To optimise due diligences for all parties, one expert suggested that agent banks should allow multiple clients to perform on-site visits simultaneously, with the option to have individual follow-up meetings.

The pandemic has forced network managers to rethink their due diligence approach. With network managers unable to travel to key markets for on-site evaluations and due diligences for more than 18 months now, many have since successfully embraced virtual communication platforms to conduct their agent bank assessments, said Abdool. There is also a greater emphasis being placed on operational resiliency and cyber-security. Cyber threats are becoming increasingly sophisticated, so it is critical that reviews of agent banks’ cyber security processes be led by IT experts − which can enhance the coverage of existing network teams. Santos noted the pandemic has prompted custodians and brokers to pay closer attention to concentration risk. For example, some agent banks will provide multi-market coverage or operational support from a single regional hub, which can expose clients to serious risks should something go wrong in that location.  The pandemic is also altering the way in which network managers oversee their agent banks, with clients shifting towards near real-time or real-time risk and performance monitoring, having previously adopted a static approach.

If technologies such as distributed ledger technology (DLT) and application programming interfaces (APIs) are to become more ubiquitous, then they need to be underpinned by robust, industry-wide standards. For example, network managers at TNF urged market participants to develop common standards around APIs. This is because the absence of API standards is leading to growing fragmentation and client challenges when communicating with multiple counterparties.

Known for its deep-rooted expertise in driving standardisation in payment messaging, one speaker urged SWIFT to develop comprehensive API standards. The same rings true for DLT. An expert stressed that there was an abundance of different DLT infrastructures supporting activities including issuances; clearing and settlement, but he added they were not interoperating with each other. This lack of interoperability, among DLT solutions, he continued, ultimately impedes their ability to solve industry-wide problems. Similarly, it is equally essential that market participants, especially fintechs, engage with established providers if they are to increase their chances of success. Another speaker said the majority of fintechs that partnered with financial market infrastructures have survived, whereas those start-ups which chose not to collaborate or spoke extensively about disintermediating the existing incumbents largely failed.

“Custodians are starting to develop digital asset servicing solutions – such as safekeeping”
Christopher Ravn, US Head of Sales, Securities Services, Deutsche Bank

On digital assets, TNF participants stressed the need for market users to educate regulators about the virtues of these instruments. This comes as US regulators (in particular) adopt an increasingly sceptical view of digital assets such stable coin, non-fungible tokens and crypto-currencies. Despite this, Abdool is optimistic that US regulators will address the complexity and growth around digital assets. “US regulators are taking a pragmatic approach to digital assets and are rightly assessing the implications. In time, I anticipate the US will provide a framework for investing and transacting in this space,” she said.

Beyond the US, digital assets are gathering momentum in leading Latin American markets. “Digital assets are gaining traction in Brazil, although the size of the digital asset market is smaller than in the US and Europe. Brazil’s Securities and Exchange Commission [CVM], the domestic regulator, is monitoring developments around digital assets closely and it has even developed a sandbox to support innovation,” said Santos. In terms of investors into digital assets, Christopher Ravn, Americas Head of Sales, Securities Services at Deutsche Bank, said activity was overwhelmingly dominated by hedge funds, although he added more institutions are taking an interest. “With more buy-side institutions getting involved in digital asset trading, custodians are starting to develop digital asset servicing solutions – such as safekeeping – to support them,” he said.

Despite the US having only transitioned from T+3 to a T+2 rolling settlement cycle in 2017,² the Depository Trust & Clearing Corporation [DTCC] – in coalition with a number of industry groups such as the Securities Industry and Financial Markets Association [SIFMA] and the Investment Company Institute [ICI] – is  pushing for a further shortening to T+1. Fuelled by Covid-19 volatility and some of the meme stock trading activity earlier in 2021, T+1 proponents argued that a shorter settlement cycle would bring about cost savings; reduce market risk; and lower margin requirements. Beyond the US, there appears to be very limited appetite for T+1 in the rest of the Americas.

First, countries such as Brazil and Colombia have only just migrated their cash equities markets to T+2 from T+3. A TNF survey found 73% of the audience believed Latin America would move to T+1, but only after the US has implemented it first.³  A shift to T+1 means FX (foreign exchange) transactions would need to booked on a same-day basis or T+1, forcing intermediaries in the settlement chain to confirm trades on trade date.  Should T+1 be adopted, Santos noted that some post-trading processes would have to be reviewed considering the time zone differences between the various markets in the world. Beyond T+1, a handful of market participants are advocating a further transition to T+0. Similar to the arguments being made for T+1, T+0’s supporters say it can reduce counterparty risk and will provide capital and liquidity benefits.

Irrespective of the volatility which has swept through the Americas, the region is flourishing. Through ambitious market infrastructure reforms, such as the move to T+1 in the US, and a willingness to adopt digitalisation and innovation, markets in the Americas are setting themselves up for continued growth.  

The Network Forum Americas virtual event took place on 23 September

Sources

¹ See https://bit.ly/3pw9KWn at afme.eu
² See https://bit.ly/2ZcCIQ1 at sec.gov
³ See https://bit.ly/3lTeu5P at swoogo.com