Report: Post-trade Infrastructure in Focus as Regulation Grows and Legacy System Age

The post-trade ecosystem is the backbone of capital markets in many ways, responsible for ensuring that ownership is transferred, cash is moved to satisfy payments and collateral is pledged to manage risk. It’s an intricate ecosystem that, while high functioning, is at the moment beset by change on all sides. Imminent changes, settlement cycle acceleration, new regulatory reforms, digital currency adoption and resilience demands are forcing post-trade organizations to assess the entirety of their operations and their capacity to accommodate large-scale change that impacts every post-trade touchpoint, from account openings to FX, treasury, settlement and asset servicing.

Nasdaq and the ValueExchange recently partnered to survey organizations across the post-trade value chain on these challenges and how they’re responding. What we learned from global financial market infrastructures (FMIs) and their participants is that these conflicting pressures of regulation, growth and resilience are only exacerbated by legacy technology that’s aging, costly to improve and not future-proofed.

One thing is for certain: Change is coming for post-trade institutions, and they need a holistic plan for how to address it.

Regulation dominates headlines

Increased regulation was the chief concern for respondents by far, cited by 64% as their top strategic driver. While the bar of compliance naturally rises as time goes on and markets evolve, regulatory change today puts an even larger strain on organizations as it is both mandatory and comprehensive.

Large-scale changes like CSDR, T+1 settlement and SFTR require process reengineering across the scope of operations. The report found that T+1 alone impacts no fewer than seven business units on average. And because these sweeping regulations are also mandated, FMIs have no choice but to allocate significant resources and attention to operational transformation to achieve compliance. This can sap investment from other areas: 44% of FMI budgets go toward incremental improvements to legacy technology. Historically, patchwork fixes may have worked well enough to help FMIs accommodate new regulations; increasingly, however, regulatory change will impact core functions in such a way that may only be resolved by fundamental platform transformation.

Settlement acceleration demands innovation

It’s likely that settlement windows will only continue to get shorter, a future state FMIs will need to prepare for. The legacy issue is particularly problematic here: 50% of respondents in settlements said their legacy technology is 10 years or older.

Settlement acceleration will require FMIs to be agile and flexible with access to advanced tools and capabilities to ensure accuracy. The less time allotted for settlement also means the less time available to spend time fixing problems. Consequently, 44% of respondents in settlements plan to initiate a system transformation in the next five years.

Ideally, FMIs can harness platform modernization to reap both operational benefits and growth opportunities. By positioning themselves for the long term, firms can more efficiently incorporate innovative technologies like DLT and digital assets to help them capture new business as they build a scalable foundation for the future.

Resilience always in focus

FMIs are striking a fine balance between supporting legacy systems that underpin operations and modernizing with new platforms and deployment models that can help them meet the demands of change. The difficulty was summed up by one head of operations at a leading FMI: “Our core system is soon going to celebrate its 50th birthday. It works, it’s impossible to break—and yet it is the biggest obstacle we face in every change project that we’re running.”

This puts FMIs in a delicate position of having to prioritize keeping the lights on over legacy transitions. As with settlement velocity, volumes and volatility may only grow and amplify, straining the precarious balancing act. As it stands, the report found one-third of FMI systems worldwide are set to reach their end of life by 2028. Reliance on legacy technology presents a risk to reliability that’s forcing FMIs to act.

Change is no straightforward journey

The themes of regulation, growth and resilience run deep in the post-trade mindscape. Technology considerations are rightfully top of mind when approaching legacy system transitions, but FMIs must not forget the importance of the softer aspects of change management. People, culture and vision are pivotal levers to enacting change in a successful way that helps FMIs future-proof and address their strategic and operational priorities.

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