The Post-Trade Market Revolution in Japan

The securities market revolution is a prelude to an infrastructure revolution that is on the horizon for the entire capital market, portending change that will mandate paradigm shifts for financial institutions, providers of securities settlement services, and IT service vendors. Presumably, the paradigm shift can be expected to be precipitated by financial institutions and technology vendors who simultaneously forge ahead with innovation in the following three areas.

Process Innovation

All processes related to securities settlement services have long been rooted in manual, paper-based, and batch processing operations. Moving forward, institutions will be faced with an imperative to use digital technology to create alternatives to these three “evils,” namely through a shift to automated, paperless, and real-time operations. STP being used for digital trading in the front office should be extended to post-trade services. System reform should be perceived as an opportunity to update and renew legacy processes.

Technological Innovation

Up until recently, recommendations related to computer use meant people inputting solutions devised in advance into computers (programming). Today, the limitations and preconditions associated with computer-based solutions are increasingly disappearing by virtue of technological innovation. In addition, both the types of data that can be handled (unstructured data, audio and image data, natural speech generation and processing) and analytic methods continue to increase, dramatically altering the areas of application in capital markets. AI and robotics solutions that were first applied in the front office now have applications in post-trading. Of course, in parallel with these developments, partial use of modularization and cloud-enabled off-premise operation can also be expected to prove effective.

IT Sourcing Model Innovation

Utility model approaches can be expected to become the norm for IT sourcing models in the post-trade market due to soaring maintenance and operations costs and ongoing resource bottlenecks. In addition, because volatility is a source of revenue for the utility model and pay-as-you-go fee model, capital markets, with their historic dependence on trading volume, seek the most cost-effective solutions. The objective of sourcing model innovation goes beyond reducing costs. The shift to technology and systems as a service also means opportunity for companies to parlay their internal IT units into profit centers. In addition, the white label model holds the key to industrial standards not only for IT service vendors but also for post-trade service companies.

For many years, Japan’s post-trade market has been characterized by the use of in-house systems and resources to orchestrate idiosyncratic solutions to accommodate the costs associated with system changes and process changes. The survey responses of market participants indicate that they sense an increasing diversification of possible solutions. Companies are already moving to overhaul operational structures by coupling internal and external resources and harnessing RPA and AI to automate processes to accelerate STP. Moving ahead, expect the market winners to be the players who undertake innovation related to processes, technology, and sourcing models simultaneously, and who not only reduce costs but also improve their top lines. In the derivatives market, competition hinges on a firm’s ability to respond and its response speed.