Custodians Facing Uncertainty - VERMEG

Custodians Facing Uncertainty Boujemaa Khaldi, Head of Product, VERMEG

Today, custodians like any other financial institution are facing rapid changes in regulation and technology. Revenues are shrinking and the competition between custodians is getting harder where transparency on fees is mandated by regulation. Even though these changes already existed for the last few years, no clear answer or trend was invoked. Therefore, the pressure still lays with the custodians to find their way into the future while the fear of making the wrong decision drives the behavior of the decision makers.   

The pressure is also generated from the consolidation of market infrastructure and harmonization movements which spread across all markets. Custodians should continue investing in the adaptation of their processes and systems in the continuous changes of the financial infrastructure platforms.  

New competitors with completely different profiles are knocking at the door, and they are preparing to take action in one way or another. For example, CSDs are also reviewing their business model while looking to extend their services directly to investors. FinTechs are more dynamic and creative; they may introduce new disruptive models and technology such as DLT. Innovation in technology occurs in shorter cycles and it is unlikely to determine The Technology adopted as standard.

These are not all the challenges the custodians’ management has to deal with. External events are indirectly impacting the business. The geopolitical upheaval with its unexpected nature requires close follow up and immediate action.    

All these frequently occurring challenges, expected or unexpected, along with  the risky nature of the custodian survival, can be described as Uncertainty. Today, custodians must face and deal with Uncertainty on a regular basis. So, how can they manage this Uncertainty?

The answer to this question is obviously not easy. Therefore, the approach should be different. Instead of only looking for the new business model or betting on the right technology, the optimal approach will be  for the custodians to be always prepared to adjust their models,  systems and procedures in a very short time. It sounds like the custodians should be Agile. They have to react quickly and adjust their evolution in a time-to-market frame. Losing the momentum is no option for them.

The first and mandatory change so custodians can operate with flexibility and agility is to transform their information system. The latency of existing systems and their resistance to changes can be a major obstacle towards the flexibility of the custodian. It is mandatory to transform the architecture of their existing systems to Micro-Services architecture, with open API. Services can be modified, as a result of change in technology or functional specifications, in a very short time without changing the full services. New services can be easily added to extend the business new functions. Obsolete services can be decommissioned with no impact on the continuity of operations.

Being prepared and properly equipped to be flexible and agile, ensures a vantage point position for any custodian that plans for it. What is valid here for custodians, is applicable also for all financial institutions willing to continue their existing operations, while improving their overall business.