DEEP LOOK | A combination of regulatory requirements, recognition of the business case for putting money into back-office systems and the ability to upgrade infrastructure incrementally is helping to close the gap between back and front office technology investment. Paul Golden speaks with the industry to sum up how the “back-to-front” approach transforms the landscape.

Administration and support have long been the poor cousins of their customer-facing counterparts when it comes to investment in technology. One of the main reasons for this disparity has been the perceived difficulty of drawing a straight line between back office technology expenditure and increased revenue.

So while the front office was prioritised for its direct impact on revenue generation and competitiveness, the back office was seen as a cost centre.

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“However, this dynamic is changing due to regulatory demands such as those from CSDR and T+1, which require better integration of back office systems to support front office activities,” says Jacqueline Walsh, vice president, global product development – data and post-trade at SimCorp.

The importance of operational resilience and the increasing need for forecasting and optimisation have further underlined the interconnectedness of front and back office functions.

Measuring the impact

The business case for back office technology investment has been further strengthened by the ability of firms to measure the direct and indirect impact on the top line. Modernised systems help avoid costly regulatory penalties and operational errors and also enable revenue optimisation through analytics for collateral and cash forecasting.

“It’s about creating high straight-through processing in all core back office processes to ensure that marginal costs do not grow with increased transaction volumes, while maintaining control over the operations risk embedded in these business processes,” explains Walsh.

The business case for back office technology investment has been further strengthened by the ability of firms to measure the direct and indirect impact on the top line.

The most visible and direct benefits of back office investments are in costs and revenue preservation, helping to improve margins. According to Arturo Merino, head of securities services IT at SIX, investments in back office technology can lead to cost reductions by reducing the likelihood of costly errors, compliance breaches and fraud.

“This can prevent financial losses and regulatory fines, indirectly supporting revenue preservation,” he says. “Back office technology investment can also increase operational leverage through scalability. Modern systems can handle higher volumes of transactions, supporting business growth without a proportional increase in operational costs.”

Although the back office is typically viewed as a cost centre, it plays a pivotal role in safeguarding revenue streams, agrees John Kirkpatrick, VP product management and head of custody at Broadridge Financial Solutions.

“Subpar service levels from the back office can lead to client dissatisfaction and potential revenue loss,” he says. “Furthermore, acquiring new clients often necessitates investments in technology to meet bespoke requirements and minimise reliance on risky and costly manual processes. Continuous enhancement of straight-through processing and client experience is vital to maintaining a competitive edge.”

When EquiLend was analysing the potential benefits of its distributed ledger-based ‘single source of truth’ for securities lending transactions that would eliminate the reliance on post-trade reconciliations, a third party consultancy estimated the annual cost savings to the industry at $100 million says Gabi Mantle, head of solution engineering.

Shifting the balance

“We estimate the current ratio of operations teams staff to traders sits around 5 to 1,” she adds. “The elimination of reconciliation has the potential to reduce this ratio to 2 to 1. Vendor solutions, headcount and penalties due to errors in post-trade processes all add costs that can be avoided with more efficient post-trade operations.”

“There has been significant investment in enhancing products in every conceivable way, indicating that this process is not just driven by regulation.”

Connor Coughlin, Apex Fintech Solutions

As for the motivation behind securities services technology investments, Connor Coughlin, Apex Fintech Solutions chief commercial officer is in no doubt that business needs are the main driver. 

“There has been significant investment in enhancing products in every conceivable way, indicating that this process is not just driven by regulation,” he says. “Businesses invest to solve challenges compliantly, not simply to meet regulatory demands.”

While regulatory requirements undeniably play a role in shaping securities services technology investments, business needs – particularly those linked to fulfilling client commitments – remain a significant driving force, agrees Broadridge’s John Kirkpatrick. “Balancing regulatory compliance with client-focused enhancements ensures a well-rounded approach to technology investment in the industry,” he adds.

Regulatory requirements have historically been a motivation for technology investments in securities services with frameworks such as Dodd-Frank/EMIR, Basel III/IV, MIFID II, SFTR, GDPR, UMR and FACTA/CRS demanding robust systems for compliance.

SIX’s Arturo Merino observes that regulatory and compliance investments as a percentage of total investments have grown significantly since 2008, which means that in percentage terms business needs investments have decreased.

Increased business focus

However, SimCorp’s Jacqueline Walsh reckons the focus is shifting toward business requirements. “This includes achieving efficiency and scalability to manage growth and volatility, as well as addressing challenges posed by siloed data structures, which hinder comprehensive portfolio analysis and decision making,” she says.

Additionally, asset managers facing diminishing margins due to the transition from active to passive asset management have increased the focus on investing in cost efficient technology solutions.

Replacement of financial markets infrastructures legacy technology platforms was identified as a less significant change in the post-trade space by respondents to Citi’s Securities Services Evolution 2024 report compared to the 2023 edition. But this could reflect the progress already made towards replacing legacy systems.

Indeed, the International Securities Services Association’s Future of Securities Services 2024-2030 report notes that front-to-back integration projects continue to receive funding from custodians where the business case is sound.

“The industry’s technology backbone, built 40 years ago in outdated languages, demands urgent upgrades before becoming a business continuity risk,” warns Apex’s Connor Coughlin.

Data dissipates disruption

When it comes to bridging the gap between legacy technology and new technology in backbone systems and minimising disruption from system upgrades, Sern Tham, product director at Temenos Multifonds refers to the importance of data.

“Most securities services providers have used a best-of-breed approach as they have grown, resulting in multiple core back office platforms depending on the business or region,” he says. “The most common approach to bridging this gap has been to establish enterprise-wide data structures such as data lakes and data warehouses to normalise the content across their platforms.”

The transition from legacy systems to modern platforms is ongoing and many securities service providers are turning to fintechs that are adopting hybrid models that combine legacy systems with cloud-native solutions or cloud-based micro services.

That is the view of Jacqueline Walsh, who observes that data standardisation will also play a key role in ensuring interoperability with phased modernisation – along with continuous testing and deployment – minimising risk and disruption during system upgrades.

“We are seeing firms upgrading segments of their business and increasingly, their entire systems, to new platforms rather than continuing to make do with technology systems that no longer meet their needs.”

Gabi Mantle, EquiLend

“Securities services providers face the intricate challenge of transitioning from entrenched legacy systems to cutting edge technology in response to evolving market demands, such as the rise of digital assets, reduced settlement times and the need for real time data,” says John Kirkpatrick. “To minimise disruption, providers typically employ a strategy of incremental migration, carefully transitioning each specific function to ensure continuity and stability in client operations.”

For a long time, antiquated legacy systems were the only option for securities finance market participants. Firms now have a choice to continue patching and making do with expensive, outdated technology that in many cases is decades old or invest in new platforms where they can run their businesses smoothly utilising the latest and most efficient technology.

“We are seeing firms upgrading segments of their business and increasingly, their entire systems, to new platforms rather than continuing to make do with technology systems that no longer meet their needs,” says Gabi Mantle of EquiLend. “In order to reduce disruption due to upgrades, firms seek flexibility and at times a modular approach to mitigate the disruption.”

Managing the transition

According to Arturo Merino, securities services providers have employed a number of strategies to manage the transition between legacy and new technology while minimising disruption to their business, including layered system architectures and API integration.

“A layered system architecture (front end, middleware and back end) can act as a bridge between legacy systems and new technologies, enabling data integration and communication without requiring a complete overhaul of existing systems,” he explains.

“Application programming interfaces facilitate seamless integration between old and new systems, allowing for the gradual adoption of new technologies while maintaining the functionality of legacy systems. The typical example is to build a state-of-the-art front end that consumes services through APIs from a legacy system.”

Gradual, phased implementation of new technologies allows securities services providers to test and integrate new systems without disrupting existing operations. This approach helps in identifying and addressing issues in a controlled manner.

Moving to cloud-based solutions can provide scalability and flexibility, allowing a firm to modernise the infrastructure without significant upfront investment in hardware. Cloud providers often offer tools and services to facilitate the migration of legacy systems.

As for whether closer co-operation between securities services providers and fintechs would accelerate the adoption of emerging technologies in the back office, Sern Tham of Temenos notes that this type of cooperation tends to happen in more contained or limited models where the more risk-taking providers have some business driver or simply higher risk appetite to push the emerging technology. 

“In front office areas you would certainly see more of this,” he says. “The back office tends to expect a technology to be production ready, at scale and proven, so the risk appetite is relatively much lower.”