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Building the future through innovation

Capital markets harmonisation

Building the future through innovation

Angus Scott, Head of Product Strategy and Innovation, says wholesale financial markets are set for a period of potentially disruptive change. Is this signalling a fundamental re-think of the traditional finance business models in the post-trade world? At Euroclear, we believe these models will increasingly evolve towards a collaborative, peer-to-peer approach. 

There are three key factors that are driving change in the wholesale markets. 

First, bank returns on capital remain under pressure from both increased costs and reduced revenues. Second, banks are increasingly careful about where they deploy their balance sheets. This is a response to the first point as well as to regulatory changes such as the Basel III capital requirements.

Both of these factors are changing not only banking business models but also the fundamental business architecture of the capital markets. For example, where does liquidity come from if dealers no longer maintain inventories of fixed income securities? The full impact of these trends is yet to be felt.

The third factor is technology. This continues to enable, and drive, deep changes to the financial markets.

Fundamental re-think?


Until recently, the biggest technology impact had been felt in the front / middle office with the introduction and proliferation of electronic trading platforms. This can be traced back to the mid-1990s when exchanges started to introduce electronic public limit order books.

The post-trade world has been a little less racy with a focus on automating existing process rather than transforming business models. This could be changing however, with new thinking about how to extract value from data and improve collaboration when STP breaks down. There is also the possibility that distributed ledger technology – the technical innovation that underpins Bitcoin – could offer completely new ways of managing and sharing data between firms. Could this lead to a fundamental re-think of our traditional finance business models? Only time and experimentation will tell.

Looking for new ways to deliver client value


As a neutral infrastructure with a track record of providing high quality, reliable post-trade services to some of the world’s leading financial institutions, Euroclear sits at the confluence of these changes. Our strategy reflects this. 

Of course, we continue to develop our core business activities, looking for new ways to deliver client value in the areas in which we traditionally operate. This is something we have always done and will go on doing, whether through large-scale strategic initiatives, such as our joint venture with the DTCC – DTCC-Euroclear GlobalCollateral – or more targeted work, such as discussions on calculating a secured risk-free rate for sterling markets.


Data is a key theme in this context. Good data naturally makes for good business. We are using our data to extract business intelligence that helps our clients make better, faster, more focused decisions. For example, can we predict which settlements are most likely to fail, and so help a client focus its settlement team on the most high-risk items?


Extending our network

We are also looking beyond our core business by building on our network of participants to create new solutions to common problems.

An early example is SetClaim. We launched this service in June 2015 and are now on-boarding our first clients. SetClaim is a payables and receivables matching and processing service designed to enable our clients to agree details of payment obligations that arise in their everyday business transactions.

Structuring communications in this way will allow our clients to automate processes that today are manual and slow. We estimate that the annual cost of managing coupon and dividend payment claims alone exceeds USD 150 million a year. Thousands more payment claims are generated across mortgage pricing resets, fees and commissions, and tax processes.

Towards a collaborative, peer-to-peer approach


SetClaim is just the start. We believe the business models of financial services firms will increasingly evolve, for the reasons highlighted above, towards a collaborative, peer-to-peer approach based on shared ownership of data and better communication tools. This combination will fix common data problems and could lead us to reimagine business models that have remained unchanged for generations.

We should not underestimate the challenge of managing such change. However, if we incumbents worry too much about the barriers, we become vulnerable to new competitors who have a fresh perspective and none of the legacy that slows down more established players.

For this reason, Euroclear is adopting a collaborative approach wherever possible, working with third-party innovators in ways that reward their innovation while simultaneously giving us flexibility. If we can help to incubate new ideas and businesses without swamping them with the demands of a big organisation, so much the better.

Our aim is to foster an environment in which creativity can prosper. For example, earlier this year we made a substantial investment in a firm that allows financial services operations staff to locate and collaborate with each other across organisations to fix common problems.


So where do we see the industry in two or three years' time?

We expect to see new models of collaboration and cross-industry partnerships. The old hub-and-spoke model may well have had its day. The financial industry will increasingly look to operate on a peer-to-peer basis, sharing huge amounts of data and adding value where it matters.

Yet, there is still much to be done before this vision becomes reality. Identity and credit-worthiness are key in a distributed environment. The hub-and-spoke model has a multitude of gatekeepers that a peer-to-peer model will find hard to replace. But, whatever happens in the future, Euroclear will continue to support the market with its customary neutrality.

"Three factors are driving change in wholesale financial markets:  bank returns on capital; balance sheet management/liquidity; and technology"

"The business models of finance firms will evolve  towards a collaborative, peer-to-peer approach"

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