Resilience and innovation in post-trade

Speech given by
Dave Ramsden, Deputy Governor for Markets & Banking

The Association for Financial Markets in Europe 12th Annual European Post Trade
Conference, London
8 May 2019

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 Introduction

I’d like to start by paying tribute to Simon Lewis and his nine years of tireless service as CEO of AFME,
which he has announced will be ending this autumn. I’d like to wish him every success for the future.

I’m delighted to be here at today at the AFME post-trade conference. This is my first AFME European Post
Trade conference, but I believe it’s your 12th. There has been a lot of change in the European post-trade1
space over those 12 years. Post-trade has traditionally been a little in the background – a part of the
financial system we might refer to as plumbing – sometimes out of view, but absolutely critical for functioning.
Today, various developments have brought post trade to the fore, and made it an increasingly exciting space
to be involved in.

I’m going to focus on technological developments and also resilience, two themes which resonate with my
responsibilities at the Bank and my priorities for 2019. The Bank’s involvement here spans two levels – of
soft and hard infrastructure. On soft infrastructure we can think of the Bank’s regulatory approach, led by our
policy committees – FPC and PRC, and the Financial Market Infrastructure Board, and the rules it makes
and standards it sets. Much of the hard infrastructure falls to the area of the Bank I lead, and includes
running some plumbing of our own. I’ll discuss this more later but, briefly, along with our supervisory and
regulatory activities, we also operate middle and back offices for our own operations, which include extensive
liquidity operations, and we run the UK’s high value payment system – CHAPS - and the Real Time Gross
Settlement service – the infrastructure underpinning payments and settlements in the UK.

Innovation and change

Our current RTGS service was built in 1996. It’s been a long 23 years in technology. 1996 was two years
before Google was founded and eleven years before the first iPhone. In 1996 just over 1% of the world’s
population was an internet user, compared with ~48% now2, and ~2.5 out of every 100 of the world’s
population had a mobile phone subscription; there are now more subscriptions than the over seven billion
population of the planet3. Given the quantity of technological change that has happened, firms renewing
systems now can also use the opportunity to make systems more safe, efficient, and innovative.

Finance has changed too. Looking to the future we can expect to continue to see evolution driven by our
changing world. The global challenge of climate change; the shift in demographics as society ages; the
growth of emerging market economies and opening up of their capital accounts - will all continue to drive

1
Post-trade generally refers to the processes applied to a trade subsequent to its execution.
2
See World Bank and International Telecommunication Union, Individuals using the internet (% of population), World
Telecommunication/ICT Development Report and Database. Available at: https://data.worldbank.org/indicator/IT.NET.USER.ZS
3
See World Bank and International Telecommunication Union, Mobile cellular subscriptions (per 100 people_, World
Telecommunication/ICT Development Report and Database. Available at: https://data.worldbank.org/indicator/IT.CEL.SETS.P2
2

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 changes in the global financial system. Large, interconnected and complex markets adapting to these
changes require robust infrastructure underpinning them.

So, finance is changing, and technology is both driving and enabling that change. The rise of fintech is one
obvious manifestation, with the transformational role it is beginning to play in finance. The Bank recognises
this, having a strategic goal of embracing fintech. The Governor spoke at last week’s Innovate Finance
conference4, previewing the approach the Bank is taking to its work on the future of the UK financial system5
in response to key economic trends, and how we can provide a platform for a more resilient, effective and
efficient financial system. I spoke too, highlighting the role of our Fintech Hub6 in delivering our goal.

The pressure of technological change is pertinent to the post-trade system where, industry-wide our
capabilities are likely lagging our potential. The post-trade system is a collection of systems, infrastructures,
and workflows that differ across firms, with low levels of interoperability. Many firms operate on legacy
post-trade systems and technologies that require a lot of maintenance and upkeep, but are critical for the
firm in its daily operations. The current system contains inefficiencies and complexities, with many firms
running on systems which were developed in-house by firms during the 80s and the 90s. Many firms have
run on the same systems over this time, patching and upgrading, whilst the environment we are operating in
has developed, becoming bigger and more complex. There are obvious cost benefits in simplifying. But if
you look at the kinds of innovation the sector has seen since it built the systems on which it runs, it is clear
that there are also opportunities to take advantage of the benefits of new technologies and functions.

As you would imagine, the Bank is not immune from the needs of change and development, and we have
been investing in our own plumbing. As a central bank, our portfolio varies in profile: from more the things
you probably won’t see or hear about – such as a multi-year investment to simplify a complex web of six
middle office valuation and operational control systems and over 60 interlinking system exports by
introducing a single data management system, affectionately known as MOSR; to the things you definitely
will have heard about (not least because I have already mentioned it today) – such as our ambitious and
innovative renewal of the infrastructure at the heart of UK payments – RTGS7.

Change of course comes with risks and costs, and those need to be managed carefully. But it also offers
potential in the long run to reduce costs, increase efficiency, and improve resilience. A more efficient post
trade system could reduce settlement times and operational risks. In a world where, internationally,
economies are growing and opening – resilient post-trade markets will need to service an ever growing
sector of users.

4
Carney, M. (2019). A Platform for Innovation. Available at: https://www.bankofengland.co.uk/speech/2019/mark-carney-speech-at-
innovate-finance-global-summit-2019
5
Carney, M. (2018). New Economy, New Finance, New Bank. Available at: https://www.bankofengland.co.uk/speech/2018/mark-
carney-speech-at-the-lord-mayors-bankers-and-merchants-dinner-mansion-house
6
Ramsden, D. (2019). Embracing Fintech. Available at: https://www.bankofengland.co.uk/speech/2019/dave-ramsden-speech-at-
innovate-finance-global-summit-2019
7
RTGS Renewal Programme: A blueprint for a new RTGS service for the United Kingdom. Available at:
https://www.bankofengland.co.uk/paper/2017/a-blueprint-for-a-new-rtgs-service-for-the-uk
3

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 Resilience

Resilience in its many forms is vital to meeting the Mission of the Bank of England – to promote the good of
the people of the United Kingdom by maintaining monetary and financial stability. Resilience permeates the
work of the Bank’s policy committees and how they go about meeting the remits they have been given.

It’s the resilience of the financial system, and major banks and insurers who operate in the UK, where
post-trade is most relevant. Most recently, a major focus of the Bank’s Financial Policy Committee has been
resilience to the risks associated with a disorderly no deal Brexit8. This has also been a consistent focus of
the recent work of AFME under Simon’s leadership.

We have a responsibility to ensure the consistent supply of the vital services that the real economy demands
from the financial system – things like paying for goods, services and assets; intermediating between savers
and borrowers, and channelling savings into investment; and insuring against and dispersing risk. We have
evaluated what effect of a worst case disorderly scenario would be on the core of the banking system, and
concluded that it would be resilient to such an event9. Just as importantly, we have published our
assessment of the most significant technical risks to financial stability from disruption to cross-border
services in a disorderly scenario – things like ensuring clearings services can continue between the EU and
UK, or that UK and EU insurance contracts will continue to be able to be serviced. And we have worked with
other authorities in the UK and EU to mitigate those risks as best we can.

This work has been largely successful: in our view most risks to financial stability that could arise have been
mitigated – although, particularly in the absence of further actions by EU authorities, some potential risks to
financial stability, primarily to EU households and businesses, remain. And it’s important to note that financial
stability is not the same as market stability; a disruptive Brexit could still be expected to bring significant
market volatility.

Of course, shocks can also be operational, with operational disruptions having the potential to cause harm to
consumers and market participants, and cause instability in the financial system. The Bank and
Financial Conduct Authority (FCA) have been focussing on this recently, with a programme of work to build
the financial sector’s operational resilience10. We ask firms to plan on the basis that operational disruption
will occur, and so the focus of our work has been on the ability of firms, FMIs , including CHAPS - run by the
Bank, and the sector as a whole not only to prevent, but to ensure that they can respond to, recover and
learn from operational disruptions.

8
Financial Policy Summary and Record (March 2019). Available at: https://www.bankofengland.co.uk/financial-policy-summary-and-
record/2019/march-2019
9
Key elements of the 2019 stress test (March 2019). Available at: https://www.bankofengland.co.uk/news/2019/march/key-elements-of-
the-2019-stress-test
10
Building the UK financial sector’s operational resilience. Available at: https://www.bankofengland.co.uk/prudential-
regulation/publication/2018/building-the-uk-financial-sectors-operational-resilience-discussion-paper
4

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 Innovation and resilience of the Bank’s own operations

The Bank, and other authorities, can provide a platform for innovation through the hard and soft
infrastructure it provides.

The Bank’s biggest piece of hard infrastructure is RTGS; settling around £600bn every day, RTGS is at the
backbone of UK payments, and a piece of critical national infrastructure. RTGS eliminates settlement risks;
claims between banks and other participants are able to be settled in central bank money – the ultimate
liquid asset. And RTGS plays an important role in the post-trade system. CREST11 and CLS12 both settle
through RTGS, enabling us to deliver safe settlement in central bank money to post-trade infrastructure.

The Bank’s operation of CHAPS and RTGS contributes to meeting its financial stability remit, and our
renewal of the RTGS service is another of the Bank’s strategic goals13. We have now finished our
‘Plan Analyse Design’ phase of the programme, meaning we have defined its scope, with input from the
payments industry. We’re on track with the next phase of the Programme, where we are running a
competitive procurement process under the Official Journal of the European Union to appoint a
Technology Deliver Partner to work with the Bank on the design and build of the settlement engine, the
foundational part of this core financial infrastructure.

Increased operational resilience is at the heart of the renewed RTGS service – which aims to offer best in
class resilience. We are building on today’s functionality with increased resilience and strengthened end to
end risk management, to enhance our ability to identify, mitigate, and respond to the most significant risks,
including cyber risk. In this context, I’d like to highlight that CHAPS members have recently commended
GFMA’s work14 on developing a ‘Cybersecurity Profile’ to us, in our role as systemic risk manager for
CHAPS. Additionally we are recognising the changing environment in which RTGS operates – the demand
for faster, simpler, cheaper and more flexible ways to pay. And we are ensuring the new system will be a
flexible, innovative sterling settlement system fit for the future, contributing to a more diverse and resilient
payment landscape. I’m going to highlight some of the ways we are delivering this.

We are exploring whether the new service could facilitate synchronised settlement. Synchronisation, or
atomic settlement, is the idea that two or more payments or movements of assets are linked in such a way
as to ensure that one asset moves if and only they all do. We have been investigating the demand for
synchronisation and how we would make it work, undertaking a call for interest exercise15 recently to explore

11
Crest is the central securities depositary of the UK.
12
CLS provides FX settlement services.
13
More detail in Annual Report and Accounts. Available at: https://www.bankofengland.co.uk/-/media/boe/files/annual-report/2018/boe-
2018.pdf?la=en&hash=37A60AD4BB7912B2A7D065A828C8B0E30B59C1B6
14
See http://www.gfma.org/news/press-releases/2018/industry-unveils-cybersecurity-profile-to-help-financial-institutions-develop-and-
maintain-cyber-risk-management-programs/
15
Call for interest: synchronised settlement in central bank money. Available at: http://www.gfma.org/news/press-
releases/2018/industry-unveils-cybersecurity-profile-to-help-financial-institutions-develop-and-maintain-cyber-risk-management-
programs/
5

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 this further. In that exercise we engaged with a number of post-trade technology service providers, who
highlighted the various costs associated with the established settlement processes which could be reduced
through synchronised settlement. If properly harnessed, synchronised settlement could deliver efficiencies –
such as by operational costs or bringing liquidity efficiencies - in areas such as FX, repo, securities lending,
and cross border payments.

We’re also using RTGS renewal to drive forward developments in data standards to increase harmonisation,
resilience and innovation. Current messaging standards in payment systems limit the amount of information
that can be provided, and a lack of both domestic and international harmonisation impedes interoperability.
Moving to a co-ordinated single standard could bring a host of benefits in risk reduction, fraud and crime
detection, supporting competition, and more. A number of other countries have committed to a new, global
standard ISO20022; in the UK the Bank of England and Pay.UK have committed to introduce it for CHAPS
and Pay.UK’s retail payment systems, via the introduction of the Common Credit Message, helping to
integrate a common language for global payments data in the UK’s payment systems16. I’m sure many of
you recognise the ISO20022 from the ECB’s Target2-Securities and Target Instant Payment Settlement17 .

In doing this the Bank has also committed to making Legal Entity Identifiers a mandatory component of its
financial institution to financial institution CHAPS messages, and can see great value in also extending use
of Legal Entity Identifiers (LEI) to a wider range of transactions in the longer term. I’m sure many of you are
familiar with the LEI, as part of MiFID II transaction reporting. As well as being a valuable financial reporting
tool, we believe the LEI could be a building block for further innovation, delivering wider economic benefits
for end users of financial services – increased usage could raise efficiency, competition and productivity18.

As well as the benefits that come with international harmonisation, greater flexibility, and richer payments
data, there are gains to be had for system-wide resilience. Using the same messaging standard across
many payment systems will help to facilitate the re-routing of payment messages, reducing the impact of
system outages. This is going to be a transformational change for payments in the UK – the first stage of the
cutover for CHAPS is planned to occur in 2022. So I encourage any of you engaged in systems or settlement
to start considering now the impact on your own systems and operations – both so you can be ready for the
change and take advantage of the benefits.

And at the softer end of our infrastructure agenda, we have the FCA, HMT and Bank’s Fair and Effective
Markets work19, which aims to catalyse improvements to fairness and effectiveness in FICC markets. A
focus of this work on the immediate horizon will be the use of technology in post-trade.

16
A new messaging standard for UK payments: ISO 20022. Available at: https://www.bankofengland.co.uk/payment-and-
settlement/rtgs-renewal-programme/consultation-on-a-new-messaging-standard-for-uk-payments-iso20022
17
See https://www.ecb.europa.eu/paym/target/tips/html/index.en.html
18
Ramsden, D. (2018). Setting Standards. Available at: https://www.bankofengland.co.uk/speech/2018/dave-ramsden-remarks-at-iso-
20022-conference
19
See https://www.bankofengland.co.uk/markets/fair-and-effective-markets
6

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 Given the challenges to the use of technology in post-trade that I mentioned earlier, the Bank and FCA will
convene an industry-led “Technology Working Group” to bring together different financial market
stakeholders to catalyse collective action and reform in the use of technology in the post-trade system. This
may help in identifying a way forward on reducing the e cost and inefficiencies in the post-trade processing of
financial market transactions, reducing complexity and increasing system-level resilience. The work will
stocktake current and emerging post-trade technology solutions, identify key pinch points and barriers to
adoption across markets and products, and look at the cost and benefits of different solutions to address
these barriers.

Conclusion

The post-trade system is a key component of a bigger effective, efficient, and resilient financial system; one
much reformed since the financial crisis of eleven years ago. A key feature of the financial system is it is
one of multiple interdependencies, and it is this interdependent nature which is why I chose to focus on
resilience and innovation today On the face of it, these two concepts are quite different – one referring to
the ability to return to a previous state, the other referring to making change. But in practise they are
irrevocably linked. An environment that prioritises resilience and innovation is one that ensures post-trade
continues to thrive and adapt to technology, finance, and wider changes in the economy, whilst avoiding
costly fragmentation. The Bank is playing its part here, with strategic goals on the one hand focussing on the
need to innovate and drive change (Fintech; RTGS), but on the other on maintaining resilience (operational
resilience; RTGS) – demonstrates that well. That’s why we’re focussing on providing a platform, via the right
hard and soft infrastructure, for innovation to flourish. And why we will never slacken our focus on the
criticality of resilience.

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