The Emperor’s New Clothes
29 March, 2017
I think it is interesting to reflect on the European securities industry and the ongoing regulatory tsunami. There are parallels to HC Andersson’s famous fairy tale ‘The Emperor’s New Clothes’ – on the surface everything is logical, but we are all trying desperately to understand what the magic fabric looks like. A great number of resource-intensive mandatory regulatory projects are underway to stay in the business. But we are all thinking of what the little boy said in Andersson’s famous tale.
The key question is what positive effects on the European financial market will initiatives like MiFID II, MiFIR, EMIR, PRIP, CSDR etc have? Or are they not just a number of very costly projects that hinder the market without any clear benefits? To understand this the European market must be studied from a global perspective. To create a single regulatory framework will strengthen the European market and make it easier for investors throughout the world to do business here. This is of course easy to understand and positive. But will these regulations when fully implemented avoid future Lehman crashes or Madoff scandals? Absolutely not.
It’s clear that the Greek financial crisis, Russian activities in Ukraine and a future Brexit make Europe more uncertain and unpredictable. The US election clearly shows an increased mistrust of powerful elites, globalization, and concerns regarding the veracity of the news. The trends here in Europe are the same. Costly EU projects need to have some sort of positive effect for ordinary people. Otherwise, there is an absolute risk that we will see more countries choose to leave the EU. Information has become more than ever an important instrument in the battle of the truth. The new media landscape requires increased scrutiny of news sources. Being able to guarantee the accuracy of information will become an increasingly important competitive factor for companies, especially within the financial sector.
The main drivers for EU-regulations are to achieve lower risk, greater transparency and increased competition between the financial institutions. But it requires access to available human resources and financial strength to cope with all these costly projects. The cost of safekeeping and settling financial transactions has decreased considerably over the past 10 years. Meanwhile, the threshold to operate a financial institution has increased significantly. The decreased profitability in combination with costly regulatory projects has reduced the number of financial institutions. This development has limited the diversity and the securities industry’s willingness to develop. I believe that this is a serious problem and directly the opposite to the expected effects of agreed EU legislation.
General regulations, together with T2S, drive the introduction of harmonized settlement and corporate actions processes. This is of course positive. But still, for the corporate actions space, there is more talk than action. For the most part, financial institutions use the ISO15022 standard as a natural part of the processing of corporate actions. And surprisingly often manual processes are still also used.
It would be desirable if EU regulators could focus on supporting the securities industry with clear and concise guiding principles and technical standards. There are good initiatives through ESMA (European Securities and Markets Authority), but even here I find extreme volumes of complex texts where it is easy to get lost.
ISO20022 has advantages in relation to ISO15022, but it is not enough. The ISO20022 standard has been slow to gain acceptance in the corporate actions area because there are no binding measures. In short, there is no clear business case for the implementation of ISO20022. How strange that must sound, it would be refreshing if the EU set a date for a mandatory implementation of the ISO20022 format. It would encourage the securities industry to clean up outdated technology and build business models that are fully adapted to today’s digital society. Technology development is the only way forward and it is unstoppable. This development will change the financial landscape. Regardless of what the EU or the big financial institutions want. But it requires courage, sincerity and finally the majority’s acceptance to succeed. I predict that we will see a new generation of young economists and engineers who will clearly and perceptively analyse the outcomes from these EU regulations in the same spirit as the little boy in HC Andersson’s fairy tale: that he doesn’t have anything on!
CEO Brokerway AB
Brokerway’s system STX takes care of the complete workflow throughout corporate actions life cycle i.e. event capture, processing, reconciliation and messaging. Everything is based on market standards and the workflow processes to achieve the perfect balance between automation and the need to perform certain operations manually. This has resulted the most flexible, cost-effective corporate action system in the global securities market. Everything is packaged in proven modern technology built on Java, open standards and top performance.