Following the recent announcement of its investment into the launch of Zodia Custody, Northern Trust’s Justin Chapman and Gil Platteau in Switzerland, answer some pressing questions around how the securities industry may look in 2030, the changing roles of traditional participants and the potential benefits for investors.
Gentlemen, what will be the biggest changes to the financial services industry in the next 10 years?
The key dynamics of change will center around data and the digitalization of assets; assets will be built entirely differently and data will be used more effectively to generate greater insight and value.
Over the last 10 years, firms stored data in private repositories and data lakes; but moving into the next decade, we’ll see increased emphasis on the public cloud, and on generating powerful insight for clients.
Digitalization completely rethinks the processes between counterparties, with assets flowing from issuer to investor through flexible systems and smart contracts, using consistent, standardised real-time data. These benefits, alongside increased use of AI technologies, will help improve decision-making.
«Institutional investors may be reluctant to rely on start-ups when looking to invest in new digital opportunities»
The challenge with this new approach is the difference in the systems involved compared to the industry’s current architecture, which creates data multiple times across the investment chain, and, in some cases, within each asset servicing firm.
What role will new asset classes and market places play?
Investors are always looking for improved returns, better transparency, a more efficient investment process and, often, more direct influence over their investments. Meanwhile, there’s an industry-wide focus on providing simpler, faster access to those investments with less execution or operating risk.
We’re already seeing the development of new market places and are mindful this will allow for the development of new asset classes.
Will there still be a role for custodians?
Institutional investors may be reluctant to rely on start-ups when looking to invest in new digital opportunities, as the usual asset servicing processes are substantially different from traditional assets. We expect more firms to respond to this need.
One way Northern Trust has responded is with its partnership with Standard Chartered to invest in the launch of Zodia Custody, an institutional-grade cryptocurrency custodian that combines the agility of a fintech company with the traditional custody principles of a bank.
«Regulation is moving swiftly in the digital asset space»
However, amongst all of this evolution, the central role of the custodian in protecting clients’ assets won’t change. What will change is the execution and the mix of traditional assets versus native digital assets in portfolios. For institutional investors, custodians will remain critical in ensuring the benefits of the traditional world aren’t lost in terms of asset safety, regulation and control, and that the benefits of new digital environments are maximized – reducing cost, improving liquidity and, potentially, enhancing asset safety.
With all this innovation and change, what view are regulators taking?
Regulation is moving swiftly in the digital asset space, although this is accelerating in different areas and regions, and at a different pace. Industry digitalization is not only concerned with technology, but also with change to market operating processes. We believe regulation should remain agnostic to specific technologies and remain focussed on the outcomes of the use of those technologies in terms of the operation of the market, the stability of the financial sector and the protection of investors.
«This could eventually create environments that are effectively self-regulating»
A key advantage of digital assets and markets is the ability for the regulator to be involved directly in the ecosystem – when combined with developments in AI and automation, this could eventually create environments that are effectively self-regulating.
With this incredible pace of change, what are the key considerations for firms as they adapt?
Firstly, custodians’ duty of care and responsibility to ensure asset safety will remain their primary responsibility. How that’s achieved will need to evolve – particularly, what the operating model looks like, and the skills and talent needed to support it.
Secondly, firms have always adapted to the rapid pace of development in the ecosystem, as well as regulatory evolution; with these developments, there’ll be a need in the medium-term to manage parallel infrastructures as traditional systems give way to new technologies.
«The multiplication of opportunities over the next ten years will be significant»
Lastly, there will always be a need to remain client-centered and flexible. The journey should be guided by what investors need to succeed, not what service providers want to do – meaning changes won’t look the same for everyone in the value chain.
Ultimately, it’s essential that organizations prepare.
It’s very easy to focus on what’s right in front of you, but without looking further ahead, it’s very hard to move large organizations to ensure they’re ready for change. Firms need to be structured to deliver new products, services and capabilities.
The pace of change will accelerate as the industry moves forward, and the multiplication of opportunities over the next ten years will be significant – as will the risk for those who don’t move quickly enough.
Justin Chapman is the Global Executive in charge of Securities Services where he is responsible for strategy and profitability. He is also the Global Head of the Market Advocacy & Innovation Research organization that coordinates Northern Trust's key industry associations and regulatory engagements whilst researching and framing new market and technology innovations to drive profitable business growth and operational efficiencies. He has worked for organizations in the Investment Banking, Asset Management, Custodial, Consultancy and Vendor space. He has previously held the following industry positions: chairman of International Securities Association for Institutional Trade Communication (ISITC) Europe, also as founder and chairman of the SWIFT International Securities Advisory Group.
Gil Platteau is Senior Vice President and a member of the leadership team at Northern Trust Switzerland. He maintains key relationships with institutional investors in Switzerland and across the EMEA region. He joined Northern Trust in September 2019 and brings 20 years of industry experience. He has held senior positions at Rothschild Asset Management, Barclays and Mercer Delegated Solutions in Zurich as a country head, among others.
