Innovation needs infrastructures, say panellists
Despite the hype proclaiming that the blockchain will solve everything including the common cold, the reality is more prosaic, according to panellists at the Securities market infrastructure innovation: the next frontier session yesterday. Instead, the reality may be that capital markets innovation can only really take flight when the market infrastructure gets involved.
“You really should not be killed by the train you see coming,” said Tim Howell, chief executive at Euroclear. “If you sit and do nothing, the threat is existential. Turn a blind eye and it’s disruptive. But what will actually happen is you’re likely to see a lot of innovation and not much disruption. Total disruption is rare. But if you stand on the track, it will get you.”
Howell was responding to a discussion between panellists as to whether the capital markets infrastructure was behind the market or ahead of it in terms of innovation. An interactive vote among the audience returned a result of 53 per cent for those who thought the capital markets infrastructure was behind the market; 34 per cent thought it was on par, while only a minority took an optimistic view. Howell’s point was that the implication that disruptive financial technology firms and other innovators might disintermediate financial institutions was relatively unlikely as long as those institutions did not simply stand still and take no action.
However, other panellists disputed the audience vote more directly. Michael Bodson, chief executive at US post-trade utility the Depository Trust and Clearing Corp (DTCC), was particularly vocal. “Something overlooked in the aftermath of 2008 is that the infrastructure worked really well,” he said. “The DTCC manages over a trillion in volume every day. The CSDs [central securities depositories] weathered the storm. The infrastructure managed everything thrown at it and you don’t do that by having antiquated technology.”
He asked the audience to consider risk management and processing: “Who is that far ahead of us? Is the front office that far ahead? Where? They may do things quicker. Algorithmic innovation may be one place, but overall I think they are grappling with a lack of innovation and I think we are doing rather well.”
Much of the discussion on innovation in financial services centres on ‘disruptive innovation’. For example, new digital products, services and companies in financial services are often pitched as disruptive. But Howell warned that there is a problem of perception, in that too many people in the industry think disruptive innovation is the only definition of the word.
“The whole industry is moving, in a tectonic plates kind of way, and that is innovation, even if it’s not what some people strictly think of as innovation,” he said.
Jaehoon Yoo, chairman and chief executive at Korea Securities Depository, suggested that the drivers behind innovation in front-end financial institutions and in financial market infrastructures are very different. “In Asia, emerging markets CSDs are very much local and rely on conventional service and depend on stock exchange business. The ownership and governance structure is not necessarily conducive to innovation. However, together with the government in our market we introduced crowd funding and we have created a single registry of crowd funding to protect investors, so it can be done.”