Sep 29, 2017

The Emergence of the Capital Markets Cloud

Bill Dwyer, VP of  Corporate and Business Development, Numerix

I have been working in the financial services software industry since the early 1990s and have been keenly following the evolution of cloud computing, particularly its increased usage over the past few years. Still, attending the week-long Microsoft Inspire 2017 conference held in Washington, D.C. this past July really drove home how truly pervasive the cloud has become. At this event, more than 17,000 Microsoft business partners joined with Microsoft leaders and industry experts to learn about and share ideas regarding technological innovation, digital transformation, and ways to drive cloud-based solutions across multiple industries all over the globe.

Numerix itself is a Microsoft Azure partner, a partnership reinforced by the recent launch of the Numerix FRTB App, which is a scalable Azure native solution that helps banks comply with the Basel Committee’s upcoming FRTB regulation.

I was invited to the conference to deliver a presentation on the “Capital Markets Cloud” and how cloud-based solutions can address some of the industry’s most daunting challenges. I would like to share with you the key points of that presentation as I believe the cloud will be a real game changer for capital markets institutions in ways that are not yet fully understood.

Some Background: the “Legacy” Issue
For a long time, most sell side firms have been relying on a set of front-to-back trading systems that tightly couple proprietary data models, workflows, user interfaces, and analytics. Some banks favor in-house builds, others buy off the shelf, but the end result is largely the same: a set of “hard” data siloes in each business line segregated by asset class, which makes system integration and process management a hugely expensive exercise. Additionally, this siloed approach makes enterprise wide data aggregation (e.g., for risk reporting or compliance purposes) a continuously significant challenge.

The 2008 financial crisis exposed the limits of siloed systems as firms struggled to understand their risk exposures to counterparties across business lines—and obtaining a joined-up view of their risks could take days and a lot of manual effort. Furthermore, the harsh post-crisis regulatory response significantly changed the economics of banks’ capital markets businesses. New requirements not only imposed costly risk control and reporting processes, but also imposed increased capital requirements, which made trading businesses structurally less profitable.  An entire industry came under duress, and, as a result, this put intense pressure on banks to address not only their risk reporting systems but also their overall IT legacy architectures and associated cost structures.

As banks sought to address these issues and reduce costs in the post-crisis environment, a wave of consolidation projects were launched in an effort to reduce the number of front-to-back silos. In the vast majority of cases, the decision was made to consolidate around a smaller number of similar front-to-back systems.

The limits of this approach soon became evident as the proprietary nature of these systems made them very expensive to implement, manage and upgrade. Although the data silo issue was alleviated, it soon became evident that simplistic consolidation was not a panacea and did little to help the bottom line. New and more innovative ways were needed to better align a banks’ IT cost structures with the new reality of decreased profitability.

Herein Comes the Cloud
Cloud computing has been around for over a decade and is now regarded as mainstream across many industries. However, within financial services, sell-side institutions generally resisted the transition. Technical criteria such as security and compliance challenges, a general culture of risk aversion, and the sheer complexity of their legacy architectures represented significant barriers to adoption of cloud computing. Still, the ever-increasing scale of large cloud providers and the resulting IT cost reductions they could offer have finally worn through this resistance. Over the last two years, we have seen the beginning of a dramatic shift in cloud sentiment, with even big institutions such as JPMorgan moving aggressively to adopt the cloud.

There are a number of reasons for this, but the immediate driver seems to be cost reduction, and indeed there are compelling reasons for banks to take advantage of the unprecedented economies of scale that can be delivered by Microsoft Azure, Amazon Web Services, or Google Cloud. So far, from what I can see, many sell-side institutions are in the early stages of a massive “lift and shift” of existing applications to the cloud, while also seeking to tweak these apps in ways that take advantage of inherent cloud features, such as on-demand computing or big data infrastructures. Currently, at Numerix we are getting numerous inquiries about ways to leverage our pricing and risk capabilities on cloud, whether it is on a bank’s private or public cloud computing infrastructure. We expect this trend to accelerate rapidly over the next two to three years as banks seek faster and better capabilities for servicing their derivatives portfolios.  It is our firm intent to accompany our customers on this journey and we continue to work on ways to better adapt our solutions to the new cloud reality, whether it be our core analytics, our dependency graph framework, or one of our enterprise risk solutions.

Incubation of Innovation
I think the capital markets cloud has the potential to usher in new waves of innovation. As market participants, solutions providers and data vendors make more use of the cloud, they will inevitably look to create new platforms and processes that enable more productive interaction and collaboration, greater flexibility in usage, improved productivity and even more cost efficiency. I believe that in the future we are likely to see the emergence of several “capital markets cloud” ecosystems that include sell-side institutions, buy-side institutions, market infrastructures, vendors, and even regulators. The “proximity” of these actors within the framework of the cloud ecosystem will facilitate cycles of innovation, such as the development of shared service “utilities” that allow market participants to share usage and costs in areas where they don’t compete. I also think we could see new types of providers emerge that are spin-offs of financial institutions, hybrid tech-to-BPO providers, or aggregators whose business models are enabled by the presence of market participant data and processes within the cloud ecosystems. Large data providers will increasingly focus on sourcing and curating higher value data sets, or pairing analytics and data as their old monopolies on distribution are eroded by the capital markets cloud ecosystem. Technology vendors will need to break their monolithic architectures into components and expose them as services within the capital markets cloud ecosystem.

Again, I do not presume to know exactly what the future will bring, but I believe that we are only at the very beginning of the capital markets cloud phenomenon. One thing that is certain is that market participants, solutions providers, data vendors, as well as market infrastructures will all need to adapt their businesses to thrive in this new world. Ultimately, the result could be a radically more flexible, powerful, and productive environment for all participants. In my view, it is a business imperative for capital markets firms to harness the benefits of cloud services and position themselves for the approaching transformation.

Bill Dwyer is Vice President of Corporate and Business Development at Numerix. He has over 20 years of experience in the financial services technology sector and has helped some of the world’s largest sell-side and buy-side institutions overcome their most complex business and regulatory challenges. Currently based in New York, Bill’s past experience has included stints with SunGard and Reuters in Paris, and Teknekron Software Systems (now Tibco) in Luxembourg and Washington, D.C.

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