Before we get into this week, if you are a reference data fanatic—a wild and crazy bunch, indeed—Max Bowie wrote about how Fidelity has shuttered Fidelity Corporate Actions Solutions, which used to be known as ActionsXchange. Fidelity made this decision back in August 2019, according to sources, but has kept it quiet—even now, as bank reps did not respond to multiple requests for comment.

I think that there are several interesting threads to pull on here, but being that we just wrote about this on Friday, I’ll save those thoughts for another day. If you have some initial thoughts, though, hit me up: [email protected]

And finally, you might’ve noticed that we’ve “branded” this column the “Waters Wrap.” If I’m being honest, I kinda hate it—not the title itself but branding, in general—but I’m told that this is a good thing that will help readers find these stories more easily. I’m just here to offer my fintech nonsense every Sunday, so I’ll listen to the experts on this one. As always, if there are ways that I can improve this space, I’m open to your ideas.

Now for some of my bad ideas.

Let it Roll, Let it Crash Down Low

Obviously, the biggest news story in 2020 has been the Covid-19 pandemic, but another issue has made headlines across the globe throughout this year: anti-money laundering (AML).

For example, in the US, the Commodities Futures Trading Commission (CFTC) is teaming with various other federal and state regulators to enforce AML laws against futures commission merchants and introducing brokers. There’s also the standard fare, like Paraguayan authorities hitting Brazil’s Banco Itaú with a $9.64 million fine for breaking AML regulations, or the FCA slapping Commerzbank with a £37.8 million ($50 million) fine in March.

Australia’s regulator levied a AUS$1.3 billion (~$950 million) fine against Westpac after the bank “admitted to contravening the AML/CTF Act on over 23 million occasions, exposing Australia’s financial system to criminal exploitation.” Let that sink in—23 million occasions. There are only 25 million people living in Australia. I get that this is an apples-to-Chilean-seabass comparison, but still, 23 million seems kind of egregious. (HSBC also got itself into some trouble with Aussie regulators because of AML-related infractions.)

In October, it was announced that Goldman Sachs would fork over $2.9 billion in penalties and fees to settle federal charges over its involvement in Malaysia’s 1MDB scandal. To be fair, though, that’s not your typical AML-fine story, and involved bank employees helping a corrupt government bilk its citizens of billions of dollars in the name of fee profits. So, you know, apples-to-Chilean-seabass once more, I guess.

In February, Wells Fargo, which has a relatively-wholesome reputation here in the States, was hit with a $3 billion fine for the not-so-wholesome act of opening up fake accounts, though I guess on it’s face that’s more of a know-your-customer (KYC) issue than an AML thing. And we’ve seen fines dropped in Sweden, Latvia, Sri Lanka, Hong Kong, and numerous other places.

I think you get the idea. Name a bank, and there’s a good chance that an AML fine has been handed on down over the last five years.

And perhaps because of this growing pool of AML-related fines, as Reb Natale wrote this week, AML platforms “are just not working,” according to some industry observers.

Perhaps AML compliance is a Sisyphean task, but one can’t help but wonder just how effective these platforms are at preventing money laundering. I do know that when vendors walk into a bank to sell these systems, they come equipped with similar headlines as the ones above and say, “We can help you avoid these fines.” The small print that looms large, though, is that when the regulators come knocking, it’s going to be the bank and not the vendor on the hook for paying up.

Here’s my concern when it comes to AML tech (and this could be completely wrongheaded): Is the due diligence conducted on compliance platforms receiving the same amount of rigor that an order, execution, or portfolio management system receives? Or is it viewed as unloved-but-must-have back-office tech? Front-office systems have to work, or it’s going to cost the company money on a daily basis. AML platforms should work, but if it fails, it hopefully will be on the next chief compliance officer’s watch.

Additionally, vendors in the regtech space—and specifically AML platform providers—talk a big game when it comes to using machine learning to weed out nefarious activities, but I think it’s fair to ask if there’s more flash than substance in this space.

I could be off base here, but I think that one potential answer is for regulators to be more active in their audits of the actual AML platform providers. If banks depend, even a little, on these systems to help them combat money laundering—and we are consistently told how important it is that we prevent money laundering—then maybe they can help the banks by providing more thorough examinations of the vendors in the space and guidance to the banks as to best practices. Or, maybe AML fines serve as something similar to parking and low-level traffic tickets in a city—a useful tool for generating income and keeping the city’s lights on.

Think I got it wrong? Think I’m picking on the wrong group? Let me know: [email protected]

To Buy or To Build, That is the Question

Wells Fargo has not historically been a leader in the quant space—that’s not my opinion, it’s the opinion of John Leone, and he has spent almost 30 years working on the buy side, with most of that time spent at Matthew Tewksbury’s Stevens Capital Management (and Tewksbury Capital Management and Trout Trading Capital Management).  

So when Leone joined the bank in the summer of 2019 as its head of quantitative strategy, he had a decision to make: Should Wells Fargo build and enhance its current direct market access (DMA) platform using field-programmable gate array (FPGA) technology, or should it go shopping?

Having sat ringside on the buy side for a long time, he saw how the likes of JP Morgan, Bank of America, Nomura, Morgan Stanley, Citi, and Goldman Sachs have gone about building their DMA and FPGA strategies. With that experience in hand, Leone decided to go down the buy route, tapping HPR (formerly Hyannis Port Research, and I wonder how many times I’ll continue to include that addendum going forward—I’d really appreciate it if y’all stopped renaming your companies).

You can read all about the implementation and Leone’s plans here, but for this column I’d like to once again take a look at HPR.

For the very first Waters Weekly Wrap I looked at the vendor’s move toward the cloud and software development. While HPR had made its name in the hardware space thanks to its FPGA offering, its plans for the future involve growing it suite of software/cloud services, most notably with the creation of a new market data distribution platform called Databot. That pivot to cloud services, which began a couple of years ago, has helped set HPR up to win over the likes of Leone and Wells Fargo.

Yet while every capital markets firm is embracing cloud in some form or another, HPR is looking to control this ecosystem, rather than hand it over to the likes of Amazon, Microsoft, Google, or IBM. In May 2019, HPR founder and CEO Tony Amicangioli, had this to say while on the Waters Wavelength Podcast:

“Just like it was with mainframes and mini-computers, when they used to build those large computers that took up half the floor of a building … nobody ever thought we’d see this little desktop [computer at people’s desks] that would just obliterate that market. … I think there’s a very similar effect coming in cloud computing where people often confuse technology with how they deliver it. … The pendulum will swing back and there will be private clouds—that’s a prediction I make. The technology package has nothing to do with the ability to deliver that technology locally. So for the banks, they need to be really cognizant of this because if I’m right … there will be a downsized version [of what happened] with the desktop computer. … That private cloud, as it relates to the latency-centric aspects of technology providers in the financial space, this is my second bite at that apple [as it relates to the cloud explosion of] 2000, and I am 100% committed to building out what would be tantamount to a private—we’ll call it, or a financial services-centric—cloud-based infrastructure.”

Leone kept on talking about how they chose HPR not only because it offered DMA/FPGA, but also because it could help the bank address other needs in the future, whether it’s market data distribution or trade-flow surveillance.

It’s not my job to serve as HPR’s hype machine, but I do think that vendors and banks can learn about where the market is heading with this new cloud, API, open-source paradigm shift that’s unfolding on Wall Street by looking at how HPR is addressing their future growth prospects. Maybe they succeed, maybe they fail, maybe they get acquired in the future, but the 2020s will be all about data delivery systems. Are your systems and breadth of services up to par?

Closing Thoughts on Blockchain

I received a fair number of emails after last week’s column where I kinda shat on blockchain, and each one agreed with the points I made (not bragging), and some went even further in their complaints of blockchain. Where my blockchain supporters at? As I’ve said previously, a good, convincing argument can win me over.

And, as I wrote in that column, this week we were going to highlight one company that is still very much in favor of blockchain development (and, yes, just as “Q-tips” is a stand-in for all cotton swabs that you shove in your ear, I’m going to use blockchain as a stand-in for all distributed ledgers…deal with it). The company in question is Northern Trust. Wei-Shen Wong spoke with Danielle Henderson-Gerace, head of market advocacy and innovation research for Asia-Pacific, about the custodian bank’s blockchain plans.

NT has used this tech for an administration tool for private equity firms and to deliver integrated asset servicing and digital solutions for fractional ownership of fixed-income bonds. As best as I can tell, Northern Trust is putting its money where its mouth is when it comes to blockchain.

But, the one thing that was clear in Henderson-Gerace’s conversation with Wei-Shen is that for future development, the focus is going to be around digitizing and exchanging legal documents, and building out the bank’s services for digital assets. And here’s the crux of my compliant: Yes, absolutely, these are perfect use cases for blockchain—focus on those and let’s not pretend this tech can run and settle entire equities markets.

I’ve always felt that Northern Trust execs have made sense when talking about blockchain. It’s a useful technology…just stop trying to oversell it.

The image at the top of the page is a horizontal cut of Titian’s “Sisyphus” courtesy of the Museo Del Prado



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