COVID-19 and Custody: The catalyst for digitization?

3 Direct Custody and Clearing | COVID-19 and custody: The catalyst for digitization? Global Investor (GI): What immediate impact did COVID-19 have on the trend to digitized processing? Aashish Mishra : Before the COVID-19 outbreak, the availability of new technology and the cost savings it could achieve drove digital adoption across the trade life cycle. Many of these savings were concentrated in the pre-trade environment rather than the post-trade environment, where we work. Post-trade, the main hurdle to wider digital adoption, and the benefits that follow, was encountered in the ‘last mile’. Here laws, rules or market practices imposed explicit constraints on digital adoption. In many cases and in many countries, these required, for example, the presence of a physical document or that a representative of an organization that was party to a transaction be physically present. These were hard, fast — often legal — barriers that could not be overcome. COVID-19 provided a compelling need for market participants and their regulators to overcome these last mile hurdles. Overnight the benefits of digitization moved from theoretical and nice to have, to practical and essential. Where regulators had justifiably taken the view that shifting to digital processes in many cases was principally a matter of improving convenience for market participants, it was now clear that these shifts were essential to keep markets accessible to investors and therefore continuing to function. Suddenly there was a degree of willingness — much greater than at any stage in the past — to drive wide scale change, quickly. GI: What specific risks arising from COVID were digitization initiatives designed to combat? AM: Where physical market practices did not immediately allow for a digital alternative, COVID-19 revealed three groups of unique risks: tactical, financial and systemic. Tactically, during COVID there was genuine fear that participants may not be able to perform certain critical activities which are physical in nature — like obtaining IDs or licenses to operate in a market, account opening for investments, tax procedures etc. These tactical implications could have a material impact on individual investors, and potentially across the wider market when combined across multiple participants. In some cases, temporary relaxations and workarounds were implemented but the challenge will be to make these permanent. The second group of risks entailed by physical processes was financial risk. For example, in companies’ shareholder meetings, holders of shares or their proxies must participate in votes on agenda items, such as capital raising whose outcomes have an immediate impact on those companies’ share prices. Where that process required physical paper work or individuals’ physical attendance, participants realized immediately the scale of this economic risk of being unable to carry it out. The third group of risks was systemic and required participants to review their entire operating model. Suitable infrastructure and contingency planning was essential to support critical activities across the post-trade cycle. One reason this was so challenging was that previous plans had not anticipated widespread social distancing requirements. Typically these plans had been built around a single geographic relocation, when the failure of one site — arising from a terrorist attack, for example — triggered a plan to relocate the business processes, and those required to support them to a second, alternative site. Few participants had made provisions that allow for the truly distributed operational solution that would be required by having their entire workforce work from home. GI: How did these risks present to providers like Citi? Bryan Murphy: Where participants supported large chunks of the market, their ability to respond to the systemic risks created by COVID-19 was critical for the smooth functioning of the market.