By Sofiya Kantorovich and Dave Allen, NRI
There are plenty of challenges in cross-border securities regulation, starting with the fact that while the securities industry is global, it is regulated for the most part at the national level. An International Organization of Securities Commissions (IOSCO) task force examined the issue and concluded in a 2019 report that despite some progress, cross-border regulation continues to pose challenges for market participants. We can certainly vouch for that.
Nomura Research Institute, Ltd. (NRI) is Japan’s first private sector think tank, founded in 1965 to identify financial market trends. Its technology business dates from the 1966 creation of Nomura Computer Systems Co., Ltd., a spinoff of Nomura Securities. The two companies merged in 1988, guided by the philosophy that there can be no think tank function without a systems function, and no systems function without a think tank function.
Today, NRI Financial Services division provides financial IT solutions globally. Our clients include broker-dealers, asset managers, custodians, banks, insurance companies. While our biggest presence is in Japan, we also operate elsewhere in Asia, and in Australia, Europe, and the U.S. If we were just conducting business in the U.S. and had one set of regulations to deal with, it would certainly be easier. That day is long gone, though.
Retail-oriented broker-dealers who previously traded only in domestic securities have been expanding into foreign markets, where we’re accessing securities for them and transacting in local currencies. We do the same for U.S.-based mutual funds, typically sector or country-focused, looking to trade foreign securities on a foreign exchange in non-dollar currencies. Currently, we’re set up to transact and settle in local currency or U.S. dollars in more than two dozen international markets.
We know how costly it can be to transact business on a global scale. Cross-border payments take longer than domestic ones and are not as easy or transparent. According to the Bank of England, in some instances, a cross-border payment can take several days and can cost up to ten times more than a domestic payment.
The Group of 20 identified this area as a priority, leading to the European Union’s Cross Border Payments Regulation 2, intended to increase pricing transparency and ensure non-E.U. members don’t pay more in euro-based transactions. Like our non-E.U. clients, we’re pleased with the E.U.’s initiative, which took full effect this spring, but the fact that regulations are constantly changing is another challenge.
Avoiding costly mistakes
Other issues arise from the fact that different jurisdictions have different rules on processing corporate actions. As a result, issuing dividends, conducting reorganizations, tender offers, mergers and acquisitions, requires a deep understanding of the various requirements around the globe. For example, countries like South Africa and Spain have their own rules on how they register securities and settle transactions. Mistakes aren’t tolerated and if you get it wrong, it can be extremely costly. We’re proud of our performance in this area, and we view it as an opportunity for NRI to shine.
Average investors are increasingly aware that cross-border regulation is not an intangible feature but a factor that can affect them directly. The Chinese example is a telling one. Chinese equities have come under pressure as investors balked at the lack of information about China-based companies. Chinese stocks once were flying high and now have come crashing down, reflecting investors’ frustration with the level of regulation and transparency in China, and their lack of control over it. Through this experience and others, investors are realizing that regulatory structures outside their home country can and do have an enormous effect on share prices.
We’re sometimes asked to what extent technology is the answer to the challenges of cross-border regulation and to what extent it is the problem. The answer is both. In the U.S., especially for international transactions, we see a lot of older, manual systems that are harder to integrate into a modern, low-touch environment. While we’re running on a very modern platform, many of the vendors we work with rely on older applications running on large mainframe supercomputer.
It's quite difficult to modify legacy systems yet investors, including our customers, are demanding changes. As just one example, our customers in Europe are seeking seamless, straight-through processing, streamlining the entire process from the front end to the back end. It’s another challenge, but we also view it as another opportunity to excel.
Given such demands, we expect the next five years will see a shift in technology that combines mainframe power, machine learning, and artificial intelligence. Why? While the older mainframes are inflexible and not user-friendly, when it comes to processing, they reliably handle huge volumes of transactions daily, which is paramount.
Balancing speed and stability
Although financial market activity is cyclical, the general trend is for more activity, not less. Underscoring that, a 2021 World Federation of Exchanges report showed that the number of trades increased 8.2 percent in the first half of the year compared with the same prior-year period.
Rising interest rates have cooled some markets, but with Russia’s invasion of Ukraine, oil and certain derivative products are being traded much more heavily than usual. We’re seeing trading volumes surge as the price of oil moves higher, and we’ll see the same when it’s on the way down. At times when markets are in turmoil and prices are moving rapidly, clients want assurances that their trades will be executed quickly.
We don’t want to throw away something that is working well, but we do want to modernize as much as we can so that we can manage large volumes of transactions and make users’ lives easier. To illustrate, consider the task of onboarding new clients seeking to invest at home and abroad and thus subject to cross-border regulations. Even with globalization, this is a duplicative, time-consuming, largely manual process.
We believe there are significant opportunities for improvement in client onboarding, so we’re testing whether artificial intelligence can make it smoother and swifter. We believe we can deliver significant time savings if we’re successful. As long as we live in a world with national regulation of global markets, we see opportunities in this area and others to use technology to break through barriers and facilitate trading.