Heard at Ops: What’s Next for Operations

Dive into the 2024 edition of our Heard at Ops video series to discover how industry and operations leaders are responding to the dynamic shifts happening across the capital markets. Discussions include Treasury clearing, post-T+1 optimization, innovation, the use of AI, operational resiliency, and more. Explore by episode:

• The View from Operations Leadership
• Treasury Clearing
• Modernizing Wealth Management
• Innovation and Transformation

Introducing the 2024 Series with Steve Byron

I'm Steve Byron, head of technology, operations and business continuity at SIFMA.

Industry, operations and tech leaders from across the capital markets gathered at our 51^st Annual Operations Conference & Exhibition - lessons from T+1, Treasury Clearing, the use of AI, operational transformation and resiliency were among some of the key themes at the conference.

SIFMA plays a unique role, bringing together our industry and members to respond to the changes happening across financial services. It's my pleasure to bring you into just some of these conversations at SIFMA Ops. Let's dive in.

The View from Operations Leadership

What are some of the new realities emerging from US T+1?

Erin McCourt: One really great thing that came out of T+1 was the focus on metrics and how that drives decision making. It allows us to prioritize across different things, and really focus on inefficiencies in the process and increase STP across the T+1 space. It has really taught us to do that effectively for upcoming initiatives, such as Treasury clearing.

Lou Rosato: Shortening settlement is an 80% reduction in the amount of time to identify, resolve and clear transactions through to settlement. We saw immediately our investment in technology, our longer-term strategy to drive automation and real time processing and gold copy standards into the workflow. There was a shared investment in that with our custodians, our capital markets partners, our executing brokers, clearing brokers and prime brokers custodians - we all invested in it, to support T+1, to find better ways and methods to capture that data sooner and make sure it's accurate.

Describe your top priorities.

Debra Guarino: We're going to focus on Treasury central clearing, which will impact many of our teams. We're also focusing on FINRA's remote inspection pilot, as well as how do we supervise in the new residential supervisory allocation rules that FINRA put out. Additionally, we're going to be watching closely as the UK and Europe begin their path towards T+1, because while it's their work to do, they were impacted by our plans, and we will be impacted by theirs.

The other things that we're really focused on are other regulations that may not scream operations when you first hear them, but things like One-Minute Trade Reporting and there's a lot of chatter in the market about 24/5 or 24/6 trading. All those things will require us to deliver and operate in that world and are going to cause us to have to be more efficient and to leverage some of the skills that we used to get to the T+1 transition.

Erin McCourt: Additionally, the big focus is automation, and automation can be across different streams. For example, we are focused on our traditional automation, automating through our applications. We're also focused on no-code or low-code user development and that's been really successful for us and a really exciting shift in our strategy. Then, of course, we're exploring AI and other emerging technologies and how we can use those in our day-to-day.

Lou Rosato: Our priorities are client-focused - not just the end client, but our internal stakeholders, our partners and clients of our external partners. That focus puts us on a trajectory to grow the firm to offer the end client all the solutions that we create today. Operationally, we need to make sure that we have the capacity to support those solutions.

We look at operations as the driver for the firm, to help build those growth engines. How do we develop that capacity? We look at it through our investment in talent and platforms. A lot of what we do today is driving the technology further into the workflow or the process into the platform. Our top priorities are then about getting real-time data captured at the earliest point, to move that data at a high level of quality - not just capture it quickly - but also have it be the gold copy standard of a data, so we do not have to reconcile it or manage exceptions through the workflow.

We look at workflow starting with risk management for the internal client - the portfolio management teams, the investors who are creating new solutions for our end clients - and it's getting that information implemented into the market. After a trade is done, we move to post-trade, where our priority is making sure that data is accurate and it reaches its point of finality: it's settled, it's cleared and it's in the client portfolio.

Erin McCourt is Global Head of ISG Fixed Income Operations at Morgan Stanley.

Louis J. Rosato is Managing Director of the Investment Operations Group at BlackRock.

Debra Guarino is Managing Director in Operations for BNY Pershing.

Treasury Clearing

Nate Wuerffel: The SEC central clearing rule is really the most profound change to the Treasury market in decades, and it's going to reassemble the way that the Treasury market functions. The Treasury market has about $1 trillion a day in cash purchase and sale transactions, and maybe close to $5 trillion in financing repo transactions a day - and most of that volume will need to be centrally cleared under the rule. Eligible trades - those trades that require central clearing - will make up most of the market, most of the repo and about half of the cash market. What central clearing does is that it interposes a central counterparty between the two trading counterparties and, by doing that, it can help reduce counterparty credit risk.

Neal Ullman: There are three key dates to keep in mind with respect to the US Treasury clearing mandate:

• March 20, 2025 - The [DTCC] FICC rulebook will go into effect. In March, sell-side firms will be mandated to establish separate accounts with the FICC to separate their house and customer activities. Broker-dealers will be given the option to collect margin from clients, which they can then post into segregated accounts at the FICC, allowing them to take advantage of the 15c3 debit benefit.
• December 2025 - This is when the clearing of eligible cash transactions will become mandatory. There are some exclusions with respect to that date.
• June 30, 2026 - That will be the final date when mandatory clearing is required for all repo transactions. For a mandate like this, collaboration is going to be key.

How should market participants prepare?

Tom Wipf: Most market participants have looked across their business models - some folks may just trade only Treasuries every now and again, some may have a Treasury repo function - and really looking across the entire enterprise to ensure that all the components are there. If someday this could expand even further, not necessarily through more regulation but perhaps as people begin to see the benefits of this in real time, we could see people trying to encourage even more voluntary clearing in places where it's not regulated at this point.

Right now, looking across the entire enterprise is critical, and ensuring that people are working very, very closely with their counterparties. That clients are working very closely with their counterparties and to any degree there's any sort of synergy - whether it be with their derivatives clearers and others - to maximize that. There's no time like the present, and there's nothing like a deadline. The more we can do today, the more people can have those conversations, the better because as we approach the end, people's time gets consumed quickly and the ability to have those conversations gets pretty crowded. We've got 18 months to kick this thing off. And again, no time like the present.

Nate Wuerffel: There are four areas that market participants can be thinking about and preparing for:

1. Understand the scope of the rule - This is a 400-page rule. It's very important to know the scope of the rule, what transactions you conduct today that are eligible transactions (meaning they require central clearing). Doing that analysis is important on a firm-by-firm basis.
2. If you have an eligible transaction, understand how you can get that transaction centrally cleared - And that goes through an access model for clearing, either direct or indirect clearing.
3. Risk management and collateral management - A centrally cleared trade requires margin to be paid; it requires liquidity commitments. Market participants need to think about how to manage those margin payments, how to manage the collateral for those transactions.
4. Lastly, it requires a substantial change management program.

Are there open questions that need to be resolved?

Rob Toomey: I think there are significant questions that must be resolved, particularly around some of the interpretive questions that are still left open even after the final rule. Of note is the Inter-Affiliate Exemption - how that's going to work and what the impact is going to be - and the impact of the final rule on mixed CUSIPs and tri-party and whether or not we're going to get additional relief.

We've reached out to the U.S. Securities and Exchange Commission (SEC), and we continue to engage with them. We will file a comment letter on the FICC rules around these issues shortly, and then reengage directly with staff at the SEC. But one of the other things to make this go smoothly and to allow for the market to hit the policy goals that are really at the core of the Treasury clearing rule, is to understand and create workable "done-away" models that allow market participants to assess clearing in an easy and efficient way.

We think there are issues there. There is currently very little, if any, "done-away" clearing done in the Treasury space. There are models in the market that can be used to inform how to develop these, but I think each individual firm is going to have to look at the models, what they're going to offer by way of "done-away" and what they're going to access by way of "done-away". More to come on that. We're working with our groups at SIFMA and with market participants to develop ways that will allow market participants to make those choices.

Nathaniel Wuerffel is Head of Market Structure at BNY.

Neal Ullman is a Managing Director in the Capital Markets practice at EY.

Thomas Wipf is CEO of Credit Suisse US and Americas Integration Lead, UBS

Robert Toomey is Head of Capital Markets and Managing Director & Associate General Counsel at SIFMA.

Modernizing Wealth Management

Cindy Schreiner: It's a very exciting time, from a transformational perspective, in our industry. We've had moments like this in the past, but not as significant as now. You have operations and technology folks at the table with every decision that's made relative to technology, innovation and investment and what's going on with our client journeys, the experiences our clients have with our financial advisors and in the capital market space.

Now we're talking about the entire lifecycle, the client journey of the transaction. We're working cross-functionally with all our partners - including legal, risk, compliance, all those folks - to be successful with these newer tools and be more innovative and launch them a lot quicker. From a wealth management perspective, the digital enablement of our clients, and the ability for our financial advisors to leverage tools and customize how they interact with their clients is extremely important and very innovative. We've got a lot of client requests. Our clients have evolved as well, and they are asking for these capabilities. They want self-service tools.

What are the top trends to watch?

Don Henderson: We see early success around some of the automation work and some of the Gen AI capabilities that enable clients to do things faster - it's more about efficiency there. We also see that the market's going to change over time because there's going to be more AI. It's still in its infant stages and we tell customers to be patient about it because we don't know when the regulatory answers are going to come, and they could impact how you're allowed to use AI. That's an area we have to be very careful about.

In the last two years, we have seen cloud adoption go from slow to fast for customers. It's focused on taking cost out of their infrastructure and delivering more efficient solutions as they modernize their technical architecture. We also see a heavy focus on security.

How will data innovation help drive modernization?

Don Henderson: If you ask that next generation of college graduates - the 21- and 22-year-olds - when was the last time they were in a bank, they're going to say never. Their experience today is about using a digital device to be able to bring together all the information that they want to use, and they are becoming the next generation of investors. That next generation is going to expect that digital experience, and they're going to expect to be able to get the analytics and the services they need into a digital format.

In order for us to be able to deliver that, we need to solve for the underlying data issues that we have in the industry today. For us to help our clients to deliver their strategies, we need to fix how data is built, how data is curated, and how data is operated. It's the operational innovation that is going to help drive our clients, to deliver their strategies for their clients.

Cindy Schreiner is Managing Director and Head of US Wealth Management Operations, Operational Transformation and Key Strategic Relationships at RBC.

Don Henderson is Chief Technology Officer at BetaNXT.

Innovation and Transformation

Frank La Salla: When I think about innovation in the new world we're moving into - whether it's T+1, Treasury clearing - it's really about resiliency, recovery, new technology, new access models, and also being transparent about how to manage risk in a much more concentrated, tight and short settlement cycle environment. We've moved from 19.5 hours to five hours in the new T+1 environment, and firms' ability to meet those deadlines becomes critical. We, at DTCC, are working with all our member firms to make sure that resiliency is top of mind for them, top of mind for us, and we will partner with them with new technology to help them recover.

In terms of Treasury clearing, obviously the rule is still being rolled out and we're getting accustomed to what those changes might be. But what's top of mind for us in terms of innovation is making sure we're providing as many access points for our member firms to join and comply with the Treasury rule. So, we're working very closely, not just with counterparts and participants who are large, but also smaller ones. Things like "done-away" trades is a big topic. We want to make sure that we can help the industry innovate with new solutions, to be able to handle "done-away" trades in the new environment.

How do we remove barriers to innovation?

Chris Perry: I think, with today's new technologies and specifically AI, we have to have a little bit of what I'll call "Charles Dickens and Fudd". Charles Dickens: it's the best of times, it's the worst of times - but we have to be in the times. If we operate in fear, then only the nefarious people will have access to the AI. So, we have to make sure that we are enabling through use cases, turned into iterations, turned into solutions. On the Fudd side: fear, uncertainty and doubt. You do have to have a partnership between regulatory bodies, your own compliance and risk teams and put it out there that you are developing with AI, enabling all the capabilities with AI as you build new solutions.

If you have a mentality that forces people to think innovatively, have conversations innovatively, you can be really successful.

Christopher Pullano: In a regulated industry like financial services and large-scale financial institutions, there needs to be evidenced control, and evidenced safety and soundness and resiliency around those technologies and those core infrastructure components, particularly as you get to get into the concepts around artificial intelligence and what's happening there. The right way to use that, the right way to prepare that data, store it, control it, protect it - that's going to be the key to driving the new infrastructure requirements.

Frank La Salla is President, CEO and Director of DTCC.

Chris Perry is President of Broadridge Financial Solutions.

Christopher Pullano, Principal, Financial Services Advisory, PwC

The Heard at Ops series features one-on-one conversations with operations and technology leaders filmed onsite at SIFMA Ops, the definitive conference for operations professionals in financial services.

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