Financial market infrastructures (FMIs) are often overlooked by RegTech vendors. However, they are heavily regulated and compliance is their top priority, so they seem to be an obvious customer. Throughout this blog series we are looking at what FMIs are, the challenges and opportunities they pose to tech vendors, and we talk to an expert in the field.
For this post, we sat down with Roland Bellegarde, CEO Advisor and Chief of Derivatives Division at the Saudi Stock Exchange Company (Tadawul), to talk about financial market infrastructures. He was a member of the NYSE-Euronext management Committee from 2007 to 2014 as Group Executive Vice-President in charge of European Equities and Listings.
You have worked in FMIs for many years. How do you see the current environment in terms of technology and regulations?
Financial markets have become very global and at a pace far beyond what regulators could control. The crisis in 2008 has shown that financial markets and FMIs need regulations. Implementing these regulations requires much more coordination and technology. It is the execution and embedding the regulation in practice which requires technology to handle a huge amount of data spanning cross-border.
We hear a lot about regulation not being consistent across jurisdictions, not always very clear and sometimes contradictory between geographies but these are teething problems.
You can see a trend when regulators, like in Saudi Arabia, have been domestic for a long time and now open up. They face a real challenge, they don’t know how to regulate something which is not under their jurisdiction, so they need to collaborate with other regulators. At the same time, they have to rely on other market participants – market infrastructures, brokers, financial institutions – to somehow delegate supervision. Their role is moving from enforcing regulations directly on a local, closed market to issuing regulations, approving rules, and making sure the stakeholders are implementing these rules and regulations. I can’t see how this can be done without the help of technology.
Do regulators have enough technology expertise to achieve this goal?
Regulators don’t have the technology expertise, that doesn’t mean they can’t acquire it but I think technology is a means to an end. Technology should help them supervise and regulate, they can’t become technology entities.
Regulators are gradually waking up to the fact that they need to adapt the skills of their staff. I would not say they need a revolution, it’s a normal process of hiring new people that have more knowledge about the new technologies. But let’s not lose sight of the fact they are a regulator.
I have seen regulators build systems and use them but then being unable to cope with the evolution of the market. They can’t invest regularly, follow the market trends or innovate technology-wise and they end up having systems which after a couple of years, are obsolete.
The same applies to an exchange – you should not forget about your core activity to totally shift your skills to new technologies. 20 years ago, exchanges used to develop their own market surveillance tools and now the trend is to use a standard product. The reason is not that this kind of tool can’t be built by an exchange, but as a market infrastructure, your core activity is not to build it, it’s to use it, and that will always have a lower priority when you have to invest and it has no direct return. Today, exchanges tend to use standardised products which are built by other people who have full dedication to it.
How do you see the developments of new technologies?
New technologies, in particular, Artificial Intelligence (AI), help you create links, look at data and figure out connections more systematically than what a human being can do. For example, AI will help a clearing house detect risk patterns. Obviously, the resistance comes from the risk manager who sees his skills and experience as a key component of their own added value and will feel challenged. Detecting trading behaviours across multiple jurisdictions is another area but it requires that these stakeholders (exchanges, CCPs etc.) share information.
As for blockchain, the technology is nascent, there are challenges with speed. It is the cycles we are accelerating all the time. The ability to exchange things intraday is happening but people can’t wait for the accounting system to be updated in real-time. If you can buy or sell something now and get the delivery five, three or two days later, you have a risk. You don’t want to have a blurred view of your accounts. You want to know exactly where you stand at any time. This is an immediacy requirement raised more and more by customers and investors.
Do you see regional variations in development opportunities?
There are big differences in development opportunities across regions. A study published in 2018 by Burnmark highlighted that one of the main hurdles for RegTechs is that the cycle to sell new technologies to banks and regulators is very long, longer than the lifecycle of a FinTech. At the same time, regulators and banks were complaining that RegTech people don’t understand the regulation or the business, they only have the innovative technology idea but do not bridge the gap.
I think a successful firm is one that will make the step on either side. When you look at the Middle East or emerging markets, it’s a slightly different challenge. Regulators draft the regulations but do not know how to implement it or enforce it technology-wise, in practice. The banks are the same – the size of their business is not the same as what you have in developed markets, so it is difficult for them to say. For example, banks clear trades but they never had any clearing house in the region. They use a broker in London to clear their trades, they don’t know what the meaning of clearing is, they don’t have margin calls. For them, it is a challenge to understand what regulation and risk management means in practice, this is even before finding an effective technology solution to implement it.
Does the Middle East look at trends and new developments coming from the West or the East?
The Middle East looks at the regulators first and try to copy what the regulators are doing in the West. They try to find the technology that serves to have the delegation enforced. Part of their dilemma is that their market model structure is like the Chinese one (everything is known at the level of every single investor), but their regulatory ideal model and business model is the UK one. They look at London more than the US, because the US is too far away from them. Most of their investments are made by US firms, but execution goes through their London offices, because of the time zone.
How do you see competition amongst market infrastructures?
In regions like the Middle East and Asia, there is not a lot of competition. They look at their domestic equities exchanges and these are closed markets, monopolies most of the time. You start having derivatives when you see volatility and participants not behaving the same way, entering and exiting the market quickly and then there is a need for derivatives and competition comes naturally because there are no monopolies on derivatives. This being said, these exchanges do compete on a political level. In Europe and the US, FMIs are much more competitive because the ecosystem around them forces them to be competitive. Their margins have reduced dramatically on their core businesses so they are looking for something else. That’s where I see exchanges moving away from their current technology and trying to use FinTech.
There is a hype about Fintech and RegTech – do you think it is justified?
It is true that there are some opportunities and you have ways of disrupting the legacy infrastructure, but it is not everywhere nor in all parts of the value chain. There are some prerequisites to respect. You have individual tasks where Fintech can easily provide added value for example in the post-trade when checking that dividends on multi-listed securities are delivered at the same time and in the same way by different exchanges. Other parts of the value chain are more complex and require strong coordination of multiple participants. So there are domains where technology can easily improve processes like asset protection, and others that require much more coordination.
The most common way of testing a Fintech solution is to do it on a smaller scale, a Proof of Concept, for example, the issuance of one bond, or limited scope for some financing activities between two participants. Most of the time the issue is scalability. To conclude, there is a hype, but the way forward is for the stakeholders to look at what is scalable, what will benefit them and bring value.
RegTech Associates sit in the middle of the RegTech market, with one of our core goals being to bring all sides of the market together. If you’re a RegTech vendor looking to reach out to this segment, or an FMI looking for the best technological solution, get in touch. Our network of regulated firms and tech vendors is unmatched and we would love to help you. You can contact us here.
Roland Bellegarde was previously a member of the NYSE-Euronext management Committee from 2007 to 2014 as Group Executive Vice-President in charge of European Equities and Listings. During this period his mandate extended to cover domestic and International Listings, Equity and Index derivatives, Index business development, structured products as well as market operations. Between 2000 and 2007 he was Executive Vice-President in charge of Euronext markets; he unified from a regulatory point of view the four Euronext markets and integrated them on a single platform on the model of the Single Order Book. Before 2000 he was in charge, as a member of the Executive Committee for Paris Bourse, of the Equity and Derivatives markets – Equity and Rates and Commodities – His long-standing expertise led him to participate to the first ESMA stakeholder group from 2011-2013. He was chairman of Smartpool at the set-up of the company, Board member of LIFFE AM, Qatar Exchange, Clearnet SA as well as Interbolsa (Portuguese CSD). He is holding a PhD in Finance (1984) from Sorbonne – PANTHEON PARIS II.
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