Global Custodian Securities@Sibos 2019 - Page 13

[ S I B O S PA N E L S | D ATA ] 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