Davos Agenda

5 ways to transform industries and kickstart growth

A man wearing a facial mask, following the coronavirus disease (COVID-19) outbreak, stands in front of an electric board showing Nikkei (top in C) and other countries stock index outside a brokerage at a business district in Tokyo, Japan, January 4, 2021. REUTERS/Kim Kyung-Hoon - RC2P0L9GIDED

The pandemic has highlighted the importance of Financial Market Infrastructures. Image: REUTERS/Kim Kyung-Hoon

Michael C. Bodson
President and Chief Executive Officer, The Depository Trust and Clearing Corporation (DTCC)
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Davos Agenda

This article is part of: The Davos Agenda
  • Long-term growth will be built on a foundation of operational, technical and business resilience.
  • Remaining aligned with client needs will require the highest degree of flexibility and agility.
  • Market infrastructures must sharpen their skills in data intelligence and technology.

Financial Market Infrastructures, or FMIs, emerged from behind the scenes during the 2008 crisis, and the coronavirus pandemic has in turn brought renewed focus on their ability to protect the stability and integrity of the global system. FMIs are the key components of the financial system – comprising Systemically important payment systems, Securities settlement facilities and Central counterparties – which ensure the smooth functioning of markets.

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Less well-known, however, is their long-standing role in driving innovation for the industry and changes to market structure. At a time when businesses are actively preparing for the new normal, especially as the mass distribution of vaccines signals what we hope is a brighter future for us all, market infrastructures are once again positioned to use the lessons they have learned over the past year to lead industry transformation.

With an eye on tomorrow, we have identified five key areas of focus that firms should prioritize as the world emerges from the pandemic and begins writing the next chapter in its history.

1. Strengthening resilience

Long-term growth for the industry will be built on a foundation of resilience: operational, technical and business. In the past, firms typically viewed resilience as protective measures, but the pandemic made clear that the ability of a firm – or a financial system on a larger scale – to withstand a shock, recover and quickly resume operations is critical in an environment where market disruptions occur with greater frequency.

This point was reinforced by the Basel Committee on Banking Supervision, which recently called for an increased focus on operational resilience, noting that “pandemic-related disruptions have affected information systems, personnel, facilities and relationships with third-party service providers and customers”.

In a post COVID-19 environment, financial institutions will need to embed resilience into all business, technical and cybersecurity processes to ensure they are prepared for the widest range of potential scenarios.

2. Exercising agility

Firms have used lessons learned from the pandemic to begin identifying critical stress points, priorities and needs for the future. However, the industry also is facing significant parallel pressures beyond the impacts of the crisis, such as ongoing cost challenges, disruption of incumbents, the growth of private markets and the need to eliminate manual workflows.

In turn, market infrastructures are rethinking their own approaches and processes to address these pain points, but in an environment of rapid change, remaining aligned with client needs will require the highest degree of flexibility and agility.

Market infrastructures proved they could pivot quickly when the pandemic took hold last March, seamlessly transitioning to remote work while many institutions experienced a bumpier path.

In the past, the core strategy of FMIs was to solve industry pain-points through sharing costs and risks by creating communities and systems that provided economies of scale. Unfortunately, that legacy approach of building over a long period of time is out of sync with clients’ current demands for quick solutions to their problems.

FMIs now must build on their most recent experiences by leveraging Agile principles to drive product innovation, improve speed to market and develop minimally viable products to provide value throughout the development lifecycle.

The VIX volatility index shows the fear in markets caused by the pandemic.
The VIX volatility index shows the fear in markets caused by the pandemic.


3. Reimagining the client experience

The transformation of the client experience was underway well before the pandemic began, but those efforts have accelerated over the last year as the digital revolution has gained speed. In the on-demand, personalized service age of Netflix, Hulu and Amazon, client expectations have evolved. Today, firms want to access services in ways that are unique to their business and satisfy their individual needs.

In response, providers must build digital platforms and develop application programming interfaces (APIs) to give clients direct, on-demand access to their systems and services. In addition, market infrastructures must sharpen their skills in data intelligence and technology, including leveraging applied machine learning and artificial intelligence, to give clients a deeper and more meaningful understanding of their data to help support effective decision-making and problem resolution.

4. Promoting automation and digitization

While market infrastructures managed the extreme volatility and volume created by the pandemic without issue, it also shined a light on the fact that certain post-trade processes remain highly manual, posing unnecessary risk for market participants.

For instance, at the height of the crisis, firms experienced challenges with margin processing because much of this activity is still managed with faxes and emails. Similarly, the existence of physical securities certificates in the US required some employees to go into the office to help keep the markets operating.

These issues have existed for many years, but the pandemic may finally serve as the inflection point for change. Market infrastructures have launched new initiatives to increase automation, including exploring the potential of digital processing for clearing and settlement; accelerating the use of cloud-based systems; evaluating securities tokenization; elimination of paper-based and other manual processes; and testing the use of digitalization in certain markets to promote growth and promote safety and stability.

5. Modernizing talent acquisition

The post-pandemic workplace will bear little resemblance to the offices many of us left behind last March. As firms use what they have learned to create more flexible work arrangements for employees, this shift will have a significant impact on recruiting and retaining talent. In fact, it will likely emerge as a key differentiator as workers will expect to have greater freedom to perform their jobs remotely and not be locked into rigid schedules.

This represents a massive mind shift in which output rather than physical presence becomes more highly valued. Certainly, offices will continue to play an important role in the life of a company, but their purpose will evolve to focus on collaboration, culture building and informal and formal networking. Workplace flexibility will also support diversity and inclusion programmes because it will enable firms to attract candidates who they might not typically meet when they are limited by geography.

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What is the World Economic Forum doing to manage emerging risks from COVID-19?

While the impact of the COVID-19 pandemic on financial services will be felt long after the virus is neutralized and life returns to normal, firms need to begin planning now. As market infrastructures play an increasingly important role in leading transformation, we believe the above five areas of focus represent the core elements that will help drive industry growth in the years ahead.

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Davos AgendaCorporate GovernanceFinancial and Monetary SystemsBanking and Capital Markets
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