SECURITIES SETTLEMENT REVOLUTION: THE SECOND CHAPTER

 (Source: Wikipedia, Tokyo Stock Exchange)

The second chapter in the securities settlement revolution is the shortening of the equities settlement cycle planned for 2019. Japan has worked to raise the bar for its securities settlement system, with examples including implementing delivery versus payment (DVP) for securities settlement in 2007, and taking equities paperless in 2009, however, the settlement cycle remains at T+3 (four business days from trade). As such, the next step and chapter in this ongoing story in the settlement revolution is to fully migrate this to T+2.

Shortening the settlement cycle has the direct benefit of reducing settlement risk. In addition, the resulting increase in liquidity can also be expected to indirectly contribute to maintaining and strengthening the market’s competitiveness internationally. Japan Securities Dealers Association (JSDA) and the Working Group on Shortening of the Stock Settlement Cycle have sought to forge a consensus among market participants on how to address the following three points.

  • Reducing settlement risk.
  • Enhancing efficiency, stability, and liquidity of the equities market and the financial market.
  • Maintaining and strengthening international competitiveness (bring operations in line with international standards and orchestrating globalization of the equities market).

The European market migrated to T+2 securities settlement in October 2014, ahead of Japan. In coming to grips with the market reform witnessed in Europe, Asia-Pacific market participants have struggled with process changes and compliance measures accompanying settlement cycle shortening. Addressing challenges from the investment that would be required to risk points proved to be issues that could not be tackled lightly. Meanwhile, in the post-reform European market with the shortened settlement cycle the “settlement revolution” continues to play out.

The simultaneous implementation of integrating the securities settlement infrastructure (central securities depository (CSD) integration in Europe due to T2S (TARGET2-Securities) clearing settlement system) in tandem with market system reform (implementation of common European CSD regulations) ushered in a major turning point in infrastructure and great advances in the post-trade processing ecosystem for the first time in 20 years in the European market.

European market participants significantly expanded investment in the sectors of technology, operations, and systems, however, this has been taking place at the same time, that the entire securities industry is facing intense pressure to cut costs. This growth in IT spending coupled with cost-cutting pressures has spurred an evolution in post-trade operation models that has seen them move from being in-house, closed, and integrated to more innovative, open, and linked.

Changes in Europe Following the T+2 Revolution

What actual changes transpired in the European market following the shift to T+2 conducted in parallel with market infrastructure system integration? Here we will draw on the changes seen in the wake of the European securities to explore responses in Japan’s market as it moves to follow suit.

Post-trade Market Changes  

The simultaneous pursuit of securities settlement infrastructure integration (integration of CSDs across Europe via the T2S platform) and securities settlement system reform (implementation of CSD regulations common across Europe) marked a major turning point as they brought about the first major rethinking of the post-trade ecosystem and infrastructure in the European market in 20 years.

Although market participants have greatly expanded spending on technology, operations, and systems, they still face intense pressure to reduce costs. This growth on IT spending coupled with cost-cutting pressures has spurred an evolution in post-trading operation models that has seen them move from being in-house, closed, and integrated to more innovative, open, and collaborative.

Participants in the post-trade market not only face the need to improve the efficiency of routine operations, but also to reduce costs through shared and mutual use of operations and systems, devise new business models through business alliances and partnerships, and convert post-trade operations from a cost center to a profit center. Pursuit of heightened efficiency in operations as a means of cutting costs is spurring new initiatives—such as through streamlining operations, pooling collateral, and reducing intermediaries—that are in the processes of redefining the structure of the industry.

Structural Change in the Securities Settlement Industry

For individual financial institutions seeking to trim costs by simplifying and standardizing operations, business process outsourcing (BPO) was a good first step. However, the introduction and proliferation of utility services has generated secondary added value and cost reductions on a scale greatly transcending that possible through individual, company-based BPO initiatives.

For instance, new asset management services created via partnerships between small and medium-sized local custodians and large CSDs and efforts to parlay post-trading operation centers into new profit centers are typical examples. The viewpoint of improving the efficiency of securities settlement infrastructure can serve as a chance to reevaluate efficiency, optimization, and added value through comparing cost savings possible through mutual or shared use of operations and systems versus the merits of simple BPO with outsourcing use.

In particular, firms do not need to worry unnecessarily about excessive dependence on other firms, but rather medium- and small-sized market participants will find business alliances and introducing utility services as indispensable to bolstering their bottom lines. This move toward alliances and use of utility services is driving a shift toward the vertical integration of operation flows and partnerships and integration among smaller CSDs.

 

Register today!

(JP) Broadridge & Celent Webinar | The Securities Settlement Revolution in Japan

Related release:

(JP) Shortening the Equities Settlement Cycle: Second Chapter of the Securities Settlement Revolution in Japan

English version will be forthcoming shortly.

 

革命前夜

日本の証券市場は、決済革命の前夜にある。市場参加者は、革命を契機としたレガシー&エコシステムマイグレーションの実践、イノベーションとエマージングテクノロジーの可能性を追求すべきだ。

「証券決済革命」の第1幕は、2018年5月に予定される国債決済期間の短縮である。日本市場は2012 年4月アウトライト取引 及びSCレポ取引 のT+2、GCレポ取引のT+1(以下総称して「T+2」)を実現した。革命の第1幕はその「T+1」 への完全移行を目指す。

「証券決済革命」の第2幕は、2019年に予定される株式等の決済期間の短縮である。日本市場は2007年の証券決済DVP化、2009年の株券電子化などを通じて、証券決済システムの高度化に取り組んできたが、株式の受渡日は「T+3(約定日から起算して4営業日目の受渡)」である。革命の第2幕は、その「T+2」 への完全移行を目指す。

決済期間短縮は直接的には決済リスクの削減をもたらす効果がある。また、流動性の向上、国際的な市場間競争力の維持・強化など間接的な効果も期待される。

日本市場の対応状況―セレントサーベイの結果から

期間短縮の流れに対し、日本市場はどう対応してきたか?セレントの「決済期間短縮(国債T+1 / 株式等T+2)対応サーベイ2016」の結果に基づくと、以下のとおりである。[1]

  • 市場参加者の大半は株式等決済の影響度を見極めつつ、国債決済のT+1及び新現先市場への対応に注力している。
  • 現状は不可避な制度改正対応に終始しており、着実ではあるが漸進的な歩みであり、決してダイナミックで前倒しの取り組みとは言えない。
  • 日本国債や株式のグローバル化への期待が9割を超え、非居住者取引の進展、ユーティリティサービス(ITOやBPOなど)の新たなITソーシングモデルの進展への期待も大きい。

証券決済革命の行方と提言

これまでの日本の「証券制度改正」は15年以上の時間を要す穏やかな進展であった。今後の「金融インフラ革命」のスピードが同様であるはずがない。この変化に迅速に追随出来る金融機関が勝者となる。

また、ブロックチェーンやDLT(分散型帳簿テクノロジー)といったテクノロジーの普及は、「金融インフラ革命」の誘因となろう。金融機関は金融インフラの管理を再考すべきタイミングにある。

制度改正とデジタル技術の普及は金融サービスの需要サイド(投資家)に地殻変動を起こし、金融サービスの供給サイド(金融機関)に津波をもたらした。また、そうした地殻変動に俊敏に対応するため、取引所や清算機関といった金融市場インフラとの関係の簡素化を制度改正は要請する。そのインパクトを正しく認識し、新たなビジネスモデルと、それを司るITソーシングの模索が必要である。

「証券決済革命」に際して、セレントは「モジュラー・フィナンシャルサービス」への移行を提唱する。そのアーキテクチャは、I) 顧客経験の管理、II) 商品サービスの管理、プロセスの管理、リスクの管理、III) インフラの管理、の3つの階層的なモジュール群から構成される。今回の制度改正対応は、III) 「インフラの管理」が焦点である。

金融インフラの管理、つまり金融インフラ(取引所、清算機関、決済インフラ)との接続関係を固定化し縛り付けてしまうことは、戦略自由度を下げるばかりでなく、ビジネスとITソーシングモデルの選択肢を狭める。

標準化、モジュール化と外部化、そして規模と範囲の経済の獲得が、こうしたディスラプティブ・モデルの勝因となる。[2]

***

[1] 調査結果の詳細は、下記のブロードリッジ・ホワイトペーパーをご参照ください。

「証券決済革命: 市場参加者の動向とパラダイムシフトの提言」

[2] ブロードリッジ・セレントオンラインセミナーへご参加下さい。

参加登録はこちらから

 

SECURITIES SETTLEMENT REVOLUTION: JGB T+1 & the Dawn of a New Repo Market

  (Source: Wikipedia, Bank of Japan Head Office)

This series of reports on the so-called “securities settlement revolution” will focus on key trends and changes in Japan‘s securities settlement market while exploring legacy systems and ecosystem migration, as well as the related possibilities of innovation and emerging technologies in this context.

The first effort in the securities settlement revolution involves shortening the settlement cycle for JGBs, planned for the spring of 2018. In April 2012, the market successfully introduced a settlement cycle that was shortened to two business days (T+2) for outright JGB transactions and special collateral (SC) repurchase transactions (repos) and one business day (T+1) for general collateral (GC) repos (together collectively regarded as T+2). The upcoming “revolution” hopes to shorten this settlement cycle to T+1, one business day after a trade.

Market participants should take this event as an opportunity to modernize their business processes and systems:

  1. Initiatives to shorten the settlement cycle for JGBs and securities.
  2. Efforts to enhance the functions, and expand the use, linkages, and integration of the CCP.
  3. Enhanced functions of the central securities depository (CSD).
  4. Accelerated adoption and use of straight-through processing by market participants.
  5. Facilitating smoother cross-border securities settlement. The revolution in the works will go beyond mere cosmetic reforms to the market system.

This new market, envisioned to reach a scale of 20 trillion to 30 trillion yen, could cause structural change.

  1. The coming watershed in repo trading is an opportunity to create a new repo market.
    This is because of the shift from Japan’s unique “gentan” repo (securities-lending
    approach) to the “gensaki” approach, which is the international norm.
  2. With the advent of this new system, a same-day settlement market will emerge in
    Japan’s money market. 

Technology continues to evolve. It advances without waiting for the financial industry or its players to come to grips with it or to develop pertinent applications. The securities settlement revolution in Japan has unfolded slowly, requiring more than 15 years all told. The coming financial infrastructure revolution should not take place at such a glacial pace.

Financial institutions find themselves at a point where they should reconsider their approaches to financial infrastructure management. System reform will need to be tackled. Loosely coupling (or unbundling) connections with the financial infrastructure (exchanges, clearing houses, and settlement infrastructure) can increase the available options in business and IT sourcing models, contributing to strategic flexibility.

To be continued – Click here

 

Related release:

Securities Settlement Revolution: JGB T+1 & the Dawn of a New Repo Market

 

DIGITAL TRANSFORMATION OF THE BANKING INDUSTRY, Part 3

  (Source: East Japan Railway Company)

Leverage Digital Technology

In the banking sector, players should strive to become trailblazing purveyors of financial services that leverage digital technology.

There are areas in the banking services value chain where firms should work independently to generate unique, in-house, high-value-added services and products; there are also areas where banks stand to benefit by collaborating with other firms to drive down costs. Also, firms should consider collaborating with other firms to leverage economies of scale and economies of scope, parlaying cost centers into new profit centers, and securing a role in the industry infrastructure.

In actual operation, after deliberating and implementing such initiatives, big-data analytics and the automation of all processes will prove the most important. Here as well, a shift to a modular supply structure will be required, and a critical factor in determining the success of financial institution management will be alliances — namely, how adroitly firms partner with other entities.

In Conclusion

Celent offers the three points below as food for thought and policy prescriptions for modernization in the banking industry.

1. Technology as a driver of growth:

  • Look for ways to pioneer new segments through the use of technology without fixating on the segments that have been your bread and butter up to this point.
  • For example, robo-advisors can be used not only for mutual fund but also for insurance products sales to retail customers. Bancassurance and alternative distribution channels should also be driven by robo-advisors.

2. Vertical disintegration:

  • Prioritize finding the sweet spot for cost and risk and revisit and rethink your processes (such as vertical integration and/or internalization, and the use of horizontal division of labor and/or outsourcing) across the board.
  • For example, enhancing the agility of new payment product research and development might be achieved by vertical disintegration of banking business into payment services discovery, development, and marketing organizations.

3. Industry-wide priorities:

  • Place top priority on initiatives to raise financial and IT literacy among customers.
  • Actively seek to leverage monetary policy and system reform as business opportunities; avoid a passive approach to system reform.
  • Rebuild the industry value chain through methods of modularization, specialization, and integration.

Legacy modernization in the banking industry is much more than simply the application of novel technology. Rather, it portends nothing less than a structural overhaul of the banking industry, an opportunity to envisage anew and redefine the industry’s future. There can be no doubt that this transcends the mere establishment of a digital channel; rather it will certainly impact products, services, IT units, and sourcing models, and, in so doing, provide the banking service providers of the future a chance to seriously consider exactly what kind of companies they would like to be and the corporate cultures they would like to foster.

Celent perceives legacy modernization in the banking industry as instigating change at a fundamental level, in both business execution and organizational structure. Moreover, this transformation promises to have legs and vast implications that will play out over the long haul. Legacy modernization is much more than just new technology and it will have sweeping implications.

 

Back to the top of this topic Click here

 

Related releases:

Legacy Modernization in the Japanese Banking Industry, Part 1

Legacy Modernization in the Japanese Banking Industry, Part 2

 

DIGITAL TRANSFORMATION OF THE BANKING INDUSTRY, Part 2

  (Source: Charles Schwab)

The Banking Industry of the Future

The securities industry can be regarded as the first sector in the financial industry to have embarked down the path of modularization. Mutual funds was the first major area involved in this first step toward modularization. Mutual funds are now mainstream products of banking and wealth management. The banking industry should not overlook the following episodes.

The mutual fund business model can be broken down into two process areas: 1) selecting investments or investment destination (portfolio building), and 2) sales of the created mutual funds. In the former, the products (portfolio) are designed and created (produced), while the latter involves the sales of investment firm securities (mutual fund beneficiary certificates), with sellers undertaking the office processing such as customer transaction reports.

In the closed model era of brokers and mutual fund firms, the norm until the 1960s, mutual fund firms would outsource sales to securities companies (full service brokers). This resulted in mutually beneficial consignment-based relationships between the investment trust companies and securities firms that endured for a long time with a fixed fee structure (investment sales commissions paid from the customer to the securities company) and securities trading fees (paid by the mutual fund company to securities company). These sales formats have since diversified.

No-load funds entered the market starting in the 1970s, spurred on by the liberalization of commissions for the brokering of securities, sluggish demand in the stock market, and the emergence of discount brokers that did not offer investment advice. This era was characterized solely by diversification of sales methods, and was entirely absent changes to the closed model that covered planning, manufacturing, and sales.

However, change descended on the market in the form of the mutual fund supermarket revolution. With the launch of Mutual Fund OneSource in 1992, Charles Schwab offered multiple funds that customers could purchase without paying a commission, but for which Schwab’s mutual fund management arm collected an annual management fee based on asset balance. Metaphorically speaking, this approach was akin to companies putting mutual funds on the shelves of a supermarket and charging commissions only for the products sold. The interface between mutual fund companies and securities companies opened up, and the creation and sales components were decoupled and functionally modularized.

More change is on the horizon. An era is coming in which the banking industry should orchestrate a shift to a structure that hinges on modular demand to respond to new needs fostered by digital technology and the new demand of the emerging digital generation.

Industry players should be ditching vertically integrated direct sales, or so-called keiretsu, which are tantamount to direct sales routes; instead, they should establish delivery models that are more dynamic and open. Omnichannel initiatives are not only opportunities for firms to launch or shut down these channels, but also to revisit and reconsider their optimal delivery model. Moreover, collaborating with non-financial sector players, including start-ups, opens the door to the possibility of accessing vast and new untapped market frontiers.

Robo-advisor initiatives can be expected to accelerate the speed of advances in modular demand structure. Presumably, coming delivery channels will seek to optimize information and investment expertise, driven by approaches that respond to the needs of investors by providing automated advice and harnessing bankers as human support mechanisms.

To be continued – Click here

 

Related releases:

Legacy Modernization in the Japanese Banking Industry, Part 1

Legacy Modernization in the Japanese Banking Industry, Part 2

 

DIGITAL TRANSFORMATION OF THE BANKING INDUSTRY

  (Source: Apple)

Modularization of Industry

Industries across the board are undergoing structural change. This change extends beyond individual firms and spills across industrial sectors. Some industries that have been exposed to the tide of technology-driven structural changes have harnessed technology to reinvent themselves as new industries befitting this evolution in industrial structure. The financial industry traditionally has been far from the vanguard of this change.

The proliferation of the Internet and digital technologies is only accelerating the evolutionary shift across all industries. This stands in stark contrast to the traditional non-modular, vertically integrated structure (where all the products and services are provided through and within one exclusive value chain) that the industry has historically embraced. However, disruptive new market players have visibly forced conservative, existing entities to begin to seek new approaches; at the same time, regulatory authorities have started to embark on establishing a new, more robust system for regulating the financial industry.

The hotel industry offers a prime example of modularization on the demand side. Today, hotels, as well as the entire travel industry, offer consumers the experience of comparison shopping across service, price, and quality. Celent refers to this phenomenon as modular demand.

Modularization on the supply side is perhaps best exemplified by the aviation industry. The aircraft industry intrinsically does not lend itself to being a self-contained business, relying on a variety of actors to make, operate, and commercialize aircraft. Technological innovation, deregulation, and cost pressures transformed the airline industry, spurring it to evolve into a quintessential modular structure on the supply side.

This modularization goes beyond the industry infrastructure that includes airports and ground facilities. All components of the value chain — from in-flight services such as meals and movies to ground services such as boarding and baggage handling, as well as aircraft maintenance, flight plans, management, pilots, and cabin attendants — are now all subject to external procurement. The airline business now hinges on corporate management’s adeptness at forging and managing alliances. At Celent, we refer to this phenomenon as modular supply.

Today’s music industry showcases some of the greatest modular advancements. On the demand side, the industry saw a shift in the listening experience, as consumers moved from CDs to online downloads and streaming. Dramatic technological advancements have enabled music distribution sites and social networking services to tailor recommendations to users, offering songs and videos to suit music preferences and enabling consumers to search for, purchase, and enjoy music in real time.

On the supply side, record labels and their vertically integrated model were initially largely blindsided by innovation because musicians no longer needed to rely exclusively on CD sales or being scouted, signed, recorded, and promoted by record companies. The ensuing change saw a shift to a new model where a diverse range of artists recorded themselves and harnessed social media and trendsetters to promote their colorful charm and generate fans. Both the supply and demand sides of the music industry value chain underwent a dramatic upheaval that shook the industry and spawned a more dynamic and open industry. This resulted in a new life for the music industry that relegated the CD and conventional business practices of music labels to history.

To be continued – Click here

 

Related releases:

Legacy Modernization in the Japanese Banking Industry, Part 1

Legacy Modernization in the Japanese Banking Industry, Part 2

 

New Hybrid Digital Bank, PurePoint™ Financial

This development marks a true milestone in terms of the global development of Japanese banks.

We have already seen Japanese insurers using M&As as they seek to internationalize their operations, including telematics-based auto insurance, as they enter the fray in cutting-edge financial services in mature markets.

Until now, overseas expansion in Japan’s banking sector has typically started with transaction banking and hinged on wholesale operations (trade finance, foreign exchange, and investment banking services to support the overseas development activities of Japanese companies).

This initiative signifies an expansion into retail operations of locally incorporated subsidiaries in North America with which the bank has a long history and abundant goodwill. This initiative will also provide valuable feedback that can be applied to the Japanese market. To succeed in this market will require meeting the needs of the millennial generation with state-of-the-art technologies such as IoT and AI and conducting operations in a way to develop next-generation digital financial services.

 

S&P Global Market Intelligence:  Mitsubishi UFJ Financial seeks stable dollar funding with new US online biz

NIKKEI: Mitsubishi UFJ expands in US with online banking

 

Celent Report Recommendation: Defining a Digital Financial Institution: What “Digital” Means in Banking

 

ハイブリッドデジタル銀行:ピュアポイント

またひとつ、本邦金融機関によるグローバル展開のマイルストンが刻まれた

既に保険セクターではM&Aによるグローバル事業展開が進んでおり、テレマティクス自動車保険をはじめ、成熟市場における最先端の金融サービスへの参入が始まっている。

これまで銀行セクターの海外展開は、トランザクションバンキングを筆頭に、ホールセール業務(なかでも、日系企業の海外展開を支援する貿易金融や外国為替、投資銀行業務)が中心であった。

本取り組みは、長い歴史と強い暖簾を持つ北米現地法人における個人向けリテール業務の展開であり、その挑戦と成果は、日本市場へこれまでにないフィードバックをもたらすであろう。

ミレニアム世代のニーズにマッチしたIoTAIなど最先端のテクノロジー活用と、相応しい事業体の運営による次世代デジタル金融サービスの展開が大いに期待される。

 

関連したセレントレポートの推奨:

バンキングにおける「デジタル」とは何か

日本の銀行業界におけるレガシー・モダナイゼーション パート2:銀行業界への提言

 

– Click to read more

 

 

 

JAPAN’S REGIONAL BANK CONSOLIDATION

This is just the beginning of a battle for survival in the red ocean.

The intense competition is not the result of financial authorities' encouragement but rather grows out of the zero interest policy and resultant alteration in the operating environment.

Japan's banks have already been striving to raise efficiency by consolidating their core systems.

Now what they need to focus on is leading the digital initiative, which can be adaptable to diversifying needs, rather than focusing exclusively on gaining broader market to increase ROE.

New markets and customers should be calling for innovative financial services.

Setting and implementing a new strategic framework that has not existed up until now is key to success in this era.

 

S&P Global Market Intelligence: Japan's regional banks under pressure to seek scale for survival

Nikkei: Japan's regional bank consolidation gains momentum

 

Related releases:

(JP) Legacy Modernization in the Japanese Banking Industry Part 2

(JP) Legacy Modernization in the Japanese Banking Industry Part 1

English version will be forthcoming shortly!

 

MoneyGram Agrees to Merge with Ant Financial

Through this $880 million deal, Ant will connect MoneyGram’s network of 2.4 billion bank and mobile accounts with Ant’s customers.
Ant, which is working closely with Alibaba, is seeking to expand its global presence amid increasing competition with the Tencent group at home.

Last year, Rakuten, Japan’s top e-commerce firm, downsized its international presence once again, closing its marketplaces in the UK, Spain and Austria, following a streamlining strategy to pull out from Southeast Asia and Brazil last year.
As the Rakuten case shows, the global expansion of e-commerce is more difficult than that of financial services.

The "last-mile" logistics problem still exists in e-commerce, requiring huge assets in local distribution centers.
Meanwhile, in modern financial services, technologies for mobility and security are the key.
In this sense, this M&A deal can be seen as an effective investment. Similar trends will likely accelerate in Asia as well.