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The liquidity
challenge
Passive shift ‘jeopardises entire intermediary infrastructure’.
O
ne of DTCC’s top data experts
issued a stark warning at Sibos
about the potential threat of
passive investing on the entire
intermediary ecosystem,
unless custodians and market infrastruc-
tures overcome data challenges and show
sentiment and liquidity to the markets.
Tim Lind, managing director, DTCC
Data Services, said that while service
providers have the historical data to help
illiquid instruments trade more effective-
ly and therefore reduce the rapidly grow-
ing shift to passive investing, there are
rules, privacy concerns and regulations
which are posing challenges to post-trade
providers.
“These faint signals and the historic
data that asset servicers – be it a cus-
todian or market infrastructure – can
provide, may show signs of sentiment or
liquidity and help tip the balance more
towards active management, which I
think benefits the vibrancy of this entire
industry,” explained Lind.
“If the industry goes from active to
passive with no expectation of return
based on stock selection, and the entire
mutual fund and retail industry is based
on low-cost ‘throw it in an index’, the
ability of investment managers, hedge
funds and others to create fees and val-
ue-added products is degraded to such
an extent that their business models are
challenged.”
“Everyone at this conference, in some
way or another, services that [active] busi-
ness model. When the core investment
community can’t prove that they can
create return, if companies that actually
have innovation and growth cannot be
rewarded by having investments allocat-
ed to them, then the entire intermediary
infrastructure that you see today will be
jeopardised.”
Custodians and other post-trade service
providers have the potential to draw on
the historical data they have amassed to
create added-value products and services
for their clients. However, participants
agreed that regulations and individual cli-
ent use policies may place limits on that
data use, even if aggregated.
Tim Grant, founder and CEO of DrumG
to fall into the trap of a passive world?”
said Grant.
Regulations and different rules across
jurisdictions mean that service providers
are still trying to get to grips with how
best to deal with these issues, even while
liquidity continues to drop in the fixed
income markets, which, in principle,
could make good use of the insights the
data could offer.
HSBC’s global head of custody, John van
Verre, explained that “More and more, so-
phisticated investors have their own data
policies. That’s a very good development
as it informs us. With post-trade analysis,
you want to include as much information
as you possibly can.” He noted, however,
that, “countries are becoming restrictive
about their cross-border data sharing. So
“Countries are becoming restrictive about their cross-border
data sharing. So there is value in it, but there are limiting
factors.”
JOHN VAN VERRE, HSBC
Technologies echoed Lind’s concerns
about the shift towards passive invest-
ment, but believes rule changes can
liberate the data.
“We have got some massive walled gar-
dens, so how can we liberate this data in
a secure and private way, provide better
information on liquidity and allow us not
there is value in it, but there are limiting
factors.”
The value versus privacy debate will
rumble on, and Lind argued that post-
trade service providers need to understand
the nature of the data and how it is used by
their clients in order to fashion new data
services that are perceived as valuable.
January 2019
Securities@Sibos
13