ISLA (International Securities Lending Association) has submitted a joint letter to the Bank for International Settlements, the Financial Stability Board, and the International Organization of Securities Commissions asserting its commitment to defining and promoting the development of a digital future for financial markets.
The joint letter was also signed by ISDA (International Swaps and Derivatives Association), ICMA (International Capital Market Association), LBMA (London Bullion Market Association), UK Finance, Association of German Funds, AFMA (Australian Financial Markets Association) and the International Islamic Financial Market, and sets out a series of principles and objectives aimed at promoting the development, distribution and adoption of digital standards within the financial markets.
“The rapid emergence of economic globalization in the early ‘90s catalyzed the development and adoption of the internet, revolutionizing almost overnight the way that we interact and communicate with each other. A similar confluence between the development of innovative new technology (e.g. DLT and AI) and increasing consumer demand for more open and inclusive digital services suggests that we are on the cusp of a new paradigm shift,” according to the letter.
“The G20 financial regulatory reforms introduced in the wake of the financial crisis have fundamentally altered the traditional operating structure of bilateral financial markets. Firms have implemented these regulations and associated requirements on top of existing infrastructure, placing significant new demands upon it. These new regulatory requirements have also led to the creation of significant amounts of unstructured data and the proliferation of bespoke, paper-based contracts.
“Complex and inconsistent reporting requirements between and within asset classes have further complicated the situation. With the completion of these global regulatory reforms and the emergence of multilateral markets and operating infrastructures, market participants are now turning their attention to how they can use new technology solutions to optimize these systems, processes and data. Now is the time to embrace a digital future for our members and our markets.
“The benefits of doing so are self-evident. The adoption of common data and process standards across the industry will allow for the consistent aggregation of global financial data and more comprehensive risk assessment of supervised firms, promoting greater confidence in the integrity of financial markets. Increased digitization will improve risk management through greater alignment between contracts, processes and data, and allow for the introduction of real-time regulatory oversight. Increased automation will promote more efficient and cost-effective operational processes, reduce complexity, and allow firms to deliver better services and lower costs for businesses and consumers in the real economy.”
None of this is possible without the industry-led development of enhanced standards and distribution of these standards in digital formats that allow direct deployment within these technologies, defined across three core areas: Standardization, Digitization and Distribution.
“Critical to the success of these principles and objectives is the involvement and commitment of regulatory authorities. Underpinning each of these principles and objectives is our commitment to encouraging greater coordination among our members, national authorities and regulators to create an enabling framework for a digital future. The COVID-19 pandemic has highlighted the urgency of these efforts.”
“While markets continued to function well, the significant increase in market volatility experienced at the outset of the pandemic placed existing infrastructure under considerable strain. More fundamentally, the pandemic is now challenging established consensus around how trading and operations should function, with many firms now seeking to accelerate plans for greater digitization and automation within their operating models.
“The financial services industry finds itself at a crossroads. One path leads toward incremental change, continuing to make tactical investments in existing technology infrastructure, and reacting to specific issues and challenges as and when they arise with a patchwork of bespoke, potentially duplicative and manually intensive technologies and processes.”
The letter lays out an alternative path: through the adoption of the principles and objectives, the industry could “embrace transformational change and adopt an ambitious strategy for defining a digital future for financial markets, fostering an environment for technological innovation and building a safer, more robust global financial system.”