Mr. Lee Byungrhae, chairman and CEO of the Korea Securities Depository (KSD), and chairman of the Asia-Pacific Central Securities Depository Group (ACG), will, as chairman of the World Forum of CSDs (WFC), make opening remarks at the WFC 2019 conference in Marrakech on Tuesday 9 April 2019. As he told Dominic Hobson, Mr. Lee sees increased co-operation between CSDs, including the use of common services as well as the exchange of know-how, experience and ideas, as the best way to tackle the growing challenge of cyber-security and the threats and opportunities created by new technologies such as blockchain, AI, machine learning and robotics.
Mr. Hobson: What have you learned in your first ten months as chairman of the WFC?
Mr. Lee: I have learned that the roles and functions of the CSDs are highly diverse across different countries and regions. Such diversity has made me realize that it is even more important for CSDs to co-operate with each other as we work to enhance the quality of the services we provide.
Mr. Hobson: Encouraging CSDs to work together more closely was an ambition you set when you became chairman of the WFC. Are you pleased with the progress so far?
Mr. Lee: Well, I cannot say that I am fully satisfied with the status quo, but I believe that we are on the right track toward more communication and co-operation. It seems co-operation between CSDs in advanced countries is carried out seamlessly, but not necessarily so between CSDs in advanced countries and those in developing countries. To bridge the gap in levels of co-operation, WFC has been making efforts to make a reality of the mission and objectives of the WFC as set out on its Terms of Reference. In other words, we have sought to increase communication between regional associations of CSDs, encourage exchanges of information and discussion of issues of common interest, and increase our collective engagement with and influence over regional and global developments in our industry.
Mr. Hobson: What practical steps has the WFC taken to ensure co-operation becomes part of the furniture of the industry?
Mr. Lee: To put the spirit of co-operation into practice, WFC has taken two steps. The first is to establish an on-line WFC Knowledge Centre, where all CSD members can introduce their recent projects or systems. It is a knowledge-sharing portal in which every member is free to participate, and all members can benefit from the know-how of other CSDs, as well as contribute from their own experience. The second step is the WFC Single Disclosure service. This is an on-line questionnaire platform that enables CSDs to complete submissions to the Association of Global Custodians (AGC) survey, and file disclosures on progress towards compliance with the CPMI-IOSCO Principles for Financial Markets Infrastructures , using standardized templates. The platform reduces the reporting burden on CSDs, but also means regulators, industry associations and market participants receive data in a common format. It makes compliance easier, improves transparency and makes better use of CSD data, without adding complexity or rigidity to the reporting process. The simplicity and flexibility of the platform has encouraged us to adapt the same tool to collect data for the upcoming CSD Fact Book.
Mr. Hobson: To what extent are the regional associations heeding your call to communicate and co-operate more and exchange more information directly?
Mr. Lee: The five regional CSD associations are making efforts as well. The European Central Securities Depositories Association (ECSDA) has shown the way by playing a leading role in sharing knowledge through the International Securities Services Association (ISSA) and other bodies in Europe, but other regional associations are also increasing co-operation between CSDs. At the 14th International Conference of the Association of Eurasian Central Securities Depositories (AECSD) in Minsk in September last year, agreement was reached with the Asia-Pacific CSD Group (ACG) to discuss ways of improving co-operation between the two associations. At the 26th annual meeting of the Africa and Middle East Depositories Association (AMEDA) in Botswana in April this year, AMEDA and the ACG agreed to explore ways of enhancing communications and co-operation. In November 2018, the Americas’ Central Securities Depositories Association (ACSDA) is hosting a cyber-security workshop in Miami, to which all CSDs are invited, with the objective of sharing up-to-date information on current cyber-threats and strategies for defeating them. All in all, we CSDs are getting closer to achieving the ideal level of communication and co-operation, where we help each other without it becoming a burdensome obligation. I am pleased the regional associations are making progress, because it was part of the vision I set out when I assumed the chairmanship of the WFC in November 2017.
Hobson: The AGC cyber-security event addresses a topical issue. What can CSDs do to improve their cyber-security?
Mr. Lee: We need to continue to monitor trends in cyber-attacks and make a concerted effort to address a series of threats that are becoming increasingly difficult to combat. We must also work on raising the skills, knowledge and competence of the people we put in charge of cyber-security. At the end of the day, our cyber-security is only as good as the quality of the people we assign to it. Although advanced cyber-security technologies are being developed and implemented, threats evolve continuously, and pose grave challenges to our ability to maintain our businesses safely. That is why raising awareness of cyber-threats and the need to manage cyber-risk is as important to the resilience of CSDs as adopting the latest technologies to combat cyber-attacks. Seminars and workshops that help us raise the quality of our human capital, inform us of the latest technologies and raise awareness of the nature and scale of the threats, throughout our organizations, would be highly beneficial to the CSD community.
Mr. Hobson: Talking of the latest technologies, do you see blockchain as a threat or as an opportunity for CSDs?
Mr. Lee: In my view, the emergence of the blockchain technology has provided CSDs with an opportunity to think outside the box. Now we are aware of the possibility that new technologies could make us irrelevant to the capital markets. In these circumstances, the price of burying our heads in the sand about the technology could be unbearably high. Responding pro-actively, and trying to take advantage of the new technology, is the right strategy. Some first movers in our industry are already doing that, heralding a potentially huge change in the nature of post-trade services. The Australian Securities Exchange (ASX), for example, is looking to deploy a distributed ledger technology (DLT) platform for clearing and settling equity trades by 2021. In Canada, a consortium that included the central bank, the stock exchange and the payments market infrastructure conducted a successful experiment to prove instantaneous clearing and settlement of securities could be accomplished using DLT. So it is almost certainly true that blockchain will influence our business architecture. But I do not see it as an immediate threat that will overwhelm all current CSD operations. In the short term, I believe blockchain can be employed successfully in over-the-counter (OTC) transactions and in some of the value-added services we supply, such as electronic voting of proxies.
Mr. Hobson: Blockchain is one application of digital technology. Are you aware of CSDs making use of other applications, such as artificial intelligence (AI), machine learning and robotics?
Mr. Lee: When I attended the ISSA Symposium in Zurich in May one of the main topics was robotics and AI. The presentations, which were led by industry participants and consultants, were certainly interesting. After the presentations, we had a break-out session dedicated to robotics and AI, where attendees shared ideas and experience of actual implementations. I learned that many financial institutions have introduced AI, machine learning and robotics technologies not just to cut costs and increase the efficiency of data processing but to enhance client service, improve investment decisions, and offer advice to investors. But when it comes to CSDs, I do not recall a case where a CSD has introduced any of these technologies in their core services. Maybe that is because CSDs, as systemically important organizations, have to be prudent in their approach to adopting new technologies.
Mr. Hobson: If CSDs must be prudent, how should they approach new technologies? Should they adopt them directly, buy from technology vendors, form partnerships with FinTechs or collaborate with each other?
Mr. Lee: CSDs should entertain all available options. Technology is not perfect; it is susceptible to failure and needs continuous improvement. We should not become over-reliant on a single technology, no matter how advanced it is. We should focus on nurturing our internal capabilities and develop technologies that cater to our particular needs. At the same time, we should collaborate with external vendors for systems development.
Mr. Hobson: If CSDs focus on their own needs, how can they remain open to insights from outside the industry?
Mr. Lee: Of course, we should be open to diverse ways of thinking and embrace different methods in search of optimal solutions. After all, there is more than one way of climbing a mountain. But this approach is not without problems. We simply do not have enough time and money to subject all the technological possibilities to the tests which are necessary to deploy them safely. That is why we have established the WFC as the global community for CSDs – by sharing our knowledge and experience, we can limit the investment of time and money necessary to deploy new technologies.
Mr. Hobson: Are the stakeholders in CSDs – by which I mean users, central banks, issuers and regulators – becoming more demanding in what they expect of CSDs? Are stakeholders asking CSDs to do more or to do less?
Mr. Lee: CSD stakeholders certainly have higher expectations of CSDs. They are definitely paying more attention to what we do, because better connectivity makes it easier for them to change providers. If CSDs fail to continue to provide satisfactory services, they could be out-competed by other organizations, including some of their stakeholders, offering similar types of services. In our ever-more inter-connected world, CSDs must endeavour to continue to offer safe, high quality services at the right price.
Mr. Hobson: How can CSDs best take advantage of that growing connectivity to make it cheaper and easier for capital to flow across national borders? Are CSD-to-CSD links the answer, or more standardization, or something else?
Mr. Lee: One option is to adopt international standards such as ISO 20022 for cross-border transactions. However, CSDs must also take into account the interests of their domestic stakeholders when looking to capitalize on growing connectivity between markets. In the long run, introducing a global standard may be the most efficient solution for cross-border flows. But adopting a single global standard could well be a burden for domestic market participants, especially at the beginning. We cannot ignore domestic considerations. Implementing the optimal solution demands thorough discussion with all our stakeholders and support from the regulators. Adopting a phased approach to the implementation of a new standard would help to make the transition smoother.
Mr. Hobson: Where are the new business opportunities for CSDs?
Mr. Lee: In my view, we can seize a number of business opportunities simply by leveraging our existing platforms. For example, Korea Securities Depository (KSD) is currently providing fund servicing, crowd-funding, e-voting, and collateral management services, to name just four adjacent opportunities. Subject to domestic regulatory considerations, CSDs should be exploring pension and individual savings account services, including fund subscriptions, trading and settlement services, and the provision of investment information. CSDs which have invested in advanced technologies should consider offering advice and consulting services.
Mr. Hobson: Looking ten years ahead, do you think CSDs will be doing much the same things for much the same clients, or will their activities and their clients have changed?
Mr. Lee: Much will depend on how digital technologies evolve and how we apply them in our businesses over the next ten years. Participants in the capital markets will certainly demand new services, while expecting CSDs to continue to provide the existing services. As platform providers, CSDs will find more roles to play. In fact, as markets becoming more digitized and sophisticated, the provision of efficient post-trade services by CSDs will make a major contribution to the development of markets and the satisfaction of the customers that are active in them. Without any doubt, there will be more business opportunities out there for CSDs. The question is whether we will be sufficiently prepared to seize the opportunities quickly as they arise.