Economic Growth

Why we must innovate to create the financial market infrastructure of the future

Financial stock market background on a blue digital display. FMI, charts, diagrams and grids with numbers, tickers, line and bars related to stock exchange rates, financial figures, trading data and market trends. Focus on a candlestick chart. Perspective effect with selective focus. Blue background.

FMIs can be instrumental in driving positive change Image: Getty Images/iStockphoto

Frank La Salla
President, CEO & Director, DTCC
This article is part of: World Economic Forum Annual Meeting
  • Financial market infrastructures (FMI) have long played a critical role in protecting the safety and stability of the global financial system.
  • FMIs can even make a broader impact, guiding transformational changes that strengthen market structure and benefit the investing public.
  • The FMIs of the future must be innovation leaders, creators of client value and strategic partners at the forefront of positive market change.

Financial market infrastructures (FMI) have long played a critical role in protecting the safety and stability of the global financial system. They serve as trusted stewards to the industry, operating behind the scenes to ensure that trillions of dollars in financial transactions are risk-managed and efficiently processed daily. More recently, however, FMIs have demonstrated their capacity to make a broader impact, leading the industry through transformational changes that strengthen market structure and benefit the investing public.

Earlier this year, DTCC reinforced this point by galvanizing the industry on the historic conversion to a T+1 settlement cycle in North America. In doing so, it sent a strong message that FMIs can drive large-scale, industry-wide initiatives that deliver significant value and benefits. As FMIs continue on this path of evolution, market participants are increasingly turning to them to serve as strategic partners to provide advice, guidance and creative solutions to address their top challenges.

As change in the operating environment continues to accelerate and client needs grow, competition among FMIs, incumbents, fintechs and new entrants will intensify. For FMIs, the key to long-term relevance starts with innovation.

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How is the World Economic Forum improving the global financial system?

The fundamentals of innovation

While technology will be the linchpin of innovation to a greater degree than in the past, not all innovation will be tech-enabled. True innovation involves reimagination and applying ingenuity to transform all aspects of a business, from operating models to processes, workflows and more.

In the US, for instance, the impending regulatory mandate requiring the central clearing of US Treasuries serves as a prime example of this. DTCC and CME recognized an opportunity to innovate an existing agreement on cross-margining – no new tech required. Working together, we identified an expanded suite of products eligible for cross-margining, which has optimized collateral usage, reduced capital requirements and improved market efficiency for participating institutions.

That said, technology will fuel the lion’s share of innovation and value creation in financial services in the years to come. As firms refresh legacy businesses and systems with the integration of blockchain, cloud, quantum computing and artificial intelligence, they will be in a strong position to deliver positive benefits to the end investor – from price discovery or reduced frictional cost to enhanced market safety and greater resilience.

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Digitizing financial markets to maximize efficiency

FMIs have a unique opportunity to prove this point by leading the evolution of the digital financial markets. At DTCC, we take a “disrupt ourselves first” mentality when it comes to blockchain technology. We’ve embraced this mindset by rallying the industry around the need to establish the critical building blocks of a sustainable digital asset ecosystem.

For the past year, we’ve collaborated with two of our largest peers, Clearstream and Euroclear, to develop a framework for establishing standards, procedures and governance in a digital environment. This unprecedented partnership has produced innovative and creative ideas, which have sparked global interest and signalled the industry’s eagerness for guidance around digital securities.

While these principles provide an important framework for digital asset adoption, FMIs can also play a bigger role in driving the acceptance and adoption of tokenized assets. For example, we recently launched a sandbox for market participants to collaborate and co-create solutions using digital technology, providing a runway to usher in the new era of digital financial markets.

Harnessing the power of AI

While blockchain will transform the markets over time, AI is a new frontier for FMIs because it holds the power to revolutionize every facet of our operations. It has the potential to reinvent all stages of the trade lifecycle to enhance market efficiency, risk management and liquidity.

For instance, when it comes to managing large trades, AI’s ability to almost instantaneously process vast amounts of data can help improve how markets function. We also see tremendous opportunity for predictive analytics by using AI to analyze historical data, learn from patterns and accelerate data accessibility and discoverability efforts.

While fully-fledged adoption of AI is part of a larger and longer-term industry transformation, FMIs need to serve as early adopters to define and drive market transformation.

The path forward

Innovation is more than an ideation process. It is a mindset that challenges us to think beyond the traditional perimeters of our organizations, experiment with new ideas and have the confidence to fail fast before achieving success. Whether it involves optimizing or scaling an existing service or solution or introducing new capabilities and techniques, the FMI of the future must be an innovation leader and a creator of client value. In doing so, FMIs will be recognized as strategic partners that stand at the forefront of positive market change.

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World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

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