Legacy Modernization in the Japanese Securities Industry, Part 2: Prescriptions and Proposals

by Eiichiro Yanagawa, February 22, 2017
Industry Trends
Asia-Pacific

Abstract

Legacy modernization in the securities industry is much more than the application of novel technology. Rather, it portends nothing less than a structural overhaul. It is an opportunity to envisage anew and redefine the industry’s future. There can be no doubt that this transcends the establishment of a digital channel; rather it will certainly impact products, services, IT units, and sourcing models, and, in so doing, provide the securities service providers of the future a chance to seriously consider exactly what kind of companies they would like to be and the corporate cultures they would like to foster.

Celent has released a new report titled Legacy Modernization in the Japanese Securities Industry Part 2. The report was written by Eiichiro Yanagawa, a Senior Analyst with Celent's Asian Financial Services practice.
 
This report is based on a legacy modernization survey Celent conducted in 2015. The survey targeted securities firms, financial institutions, and brokers. It was supplemented with information gathered in follow-up interviews. The previous report spanned the financial industry, reporting on Celent survey results, putting forth an analysis of the results and salient comments from interviews, and examined the overall implications of legacy modernization trends across the industry.

This new two-part report is an extension of this work that narrows the focus to the securities sector. Part 1 offers an overview of the state of modernization in the industry. Part 2 builds on this to offer policy prescriptions and suggestions for industry players. The reports also provide an overview of the industry systems in Japan and the future vision.

More securities firms are seriously considering legacy modernization and moving to the implementation stage: The norm for replacement strategies is increasingly the deployment of a new system rather than a version upgrade or wrapping, with the decision driven by cost, fit with existing IT skill and aptitude levels, and risk tolerance. Securities firm legacy system modernization means migrating a securities firm’s core system, including business operation functions, integration, support, new product development, scalability, and sourcing models, to a more modern configuration to streamline operations and create business opportunities.

Business drivers of system modernization are typically a desire to implement a growth strategy, restructure and rebuild business units, and realize new processes (high-efficiency STP) to respond to changes (more digitization) in demand.

  1. Understand the legacy modernization framework.
  2. Understand your organization’s priority challenges and risk tolerance. 
  3. Define the scope. 
  4. Ensure that the modernization does not simply reproduce legacy issues.

“In the securities services value chain there exist both areas where firms can and should go it alone to generate unique in-house high value-added services and products, and others where they stand to benefit by collaborating with other firms to drive down costs. Also, if firms thoroughly consider economies of scale and economies of scope, they can collaborate with other firms, parlay their cost centers into new profit centers and play a role in the industry infrastructure,” says Yanagawa.

“In actual operation, after deliberating and implementing such initiatives, big data analytics and automation of all processes will prove key. Here as well, a shift to a modular supply structure will be required, and a critical factor in determining the success of financial institution management will be alliances — namely how adroitly firms partner with other entities,” he adds.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

1

 

Key Research Questions

1

 

Definitions

2

Legacy Modernization in the Securities Industry

3

Securities Industry Core Systems: An Overview

4

 

Customer-Facing Systems

5

 

Market-Facing Systems

7

Why Modernize?

10

What Does It Mean to Modernize a Core System?

12

 

Trading Lifecycle Optimization (TLO)

12

 

Enhanced Risk Management: Realizing a Dynamic Risk-Adjusted Investment Cycle

14

Five Approaches to Modernization

18

 

New Technology and the Need for an External Perspective

18

Celent’s Recommendations

20

 

Digital Financial Services and Legacy Modernization

20

 

Diversification of Technology Sourcing Models

21

 

Legacy Modernization Framework

22

Proposals for Japanese Securities Firms

25

 

Landscape and Targeting

25

 

The IBOR Option

25

 

Modernization that Avoids Recreating Legacy Issues

26

Digital Transformation of the Securities Industry

31

 

Modularization of Industry

31

 

The Securities Industry of the Future

32

 

The Role of New Technology

33

 

In Conclusion

34

Leveraging Celent’s Expertise

35

 

Support for Financial Institutions

35

 

Support for Vendors

35

Related Celent Research

36

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