For over 15 years, I have worked with some of the world’s largest financial institutions to help them make the journey from mainframe systems to cloud and other emerging technologies. Nothing has excited me more than the digital revolution taking place in financial services today—a movement that has redefined the ways in which businesses and individuals transact. The digital transformation that is taking place will not only impact financiers, but also the entire chain of participants, down to the individual investors who fuel the global economy.

However, while we see firms embracing fundamentally new paradigms for asset types, cross-domain transactions, and data sharing, we must address an uncomfortable truth—legacy tech still permeates the majority of financial services. This is a reality that will slow time-to-market for new products and ultimately add significant risk to the world’s largest organizations as more nimble competitors get to market quicker. With this in mind, Digital Asset partnered with the ValueExchange and other industry-leading research participants, including the Network Forum, to conduct a comprehensive, global study of 126 capital market firms covering equities, fixed income, and derivatives segments. The study assesses industry pain points for current technologies, where transformation is taking place in capital markets, and how firms are replacing these systems.

Fragmented, aging systems result in costly reconciliation

A major takeaway from the report was the areas of business with the greatest need for modernization. For example, the average system age for banks and brokers ranged from nine to 16 years.

• Average core system age for banks/brokers: 13 years

• Average clearing and settlement system age for bankers/brokers: 16 years

• Average corporate actions system age for bankers/brokers: Nine years

• Average position keeping system age for bankers/brokers: 12 years

To put this into context, the operating systems many of us were using 16 years ago were Windows Vista, and some of us were still using Windows XP. In 2006, Nintendo released the first Wii console, Italy won the world cup, and the second Pirates of the Caribbean hit theaters and probably released to Blockbuster shortly thereafter. These are the systems that support day trading in 2022. Capital markets operate across dated infrastructure that seriously hinders efficiency.

Fortunately, many of today’s exchanges and banks are aware of this problem and are working to improve processes, particularly straight through processing (STP) metrics, and much of this effort begins with the systems defining clearing and settlement processes. For example, the ASX is using Digital Asset’s core technology, Daml, to replace and upgrade its main trading and post-trade platforms, focusing initially on the clearing and settlement system (CHESS) that supports the Australian equity market. These types of transformation initiatives radically simplify processes and speed up post-trade processing, encouraging greater liquidity and market participation.

The ValueExchange goes into significant detail around the pain points experienced by various market segments, but a major callout from every survey participant was how the initiatives to update legacy technology would not be incremental, but rather transformational. Organizations are taking action to uproot older systems to reflect the rapidly changing landscape for financial products and services.

Regulation, risk, and data drive legacy-tech transformation

While much of the ValueExchange report references pain points and state-of-the-industry metrics for legacy systems, it also explores market drivers for modernization projects across both the sell-side and buy-side. Regulatory compliance projects ranked highly across custodians and brokers, while operational simplification won for investors. We are seeing government regulation impact financial innovation across several markets, and one such example is related to Deutsche Börse’s D7 post-trade platform.

Luxemburg, Germany, and Switzerland recently provided the legal framework that allows for the dematerialization of securities without need for physical paper. These regulatory developments enable a fully digital alternative to physical issuance and securities processing, which led Deutsche Börse to launch D7, a fully compliant, cloud-backed, and DLT-ready post-trade platform that enables same-day issuance and paperless, automated STP for the entire value chain of issuance, custody, settlement, and asset servicing for digital securities. The platform not only paves the way for same-day issuance (T+1h), but also provides a high STP rate while significantly reducing legal and back-office costs. These are the types of use cases the market will continue to consider as regulators implement digital frameworks, requiring the financial services market to plan for new business models, products, and services based on new technology stacks.

Central banks will also be at the forefront of regulatory discussions, and the underlying systems powering these institutions will impact how quickly we see central bank digital currencies (CBDCs) become a reality, as well as the mass adoption of stablecoins and other forms of currency.

Replacing legacy fraught with difficulties

Transforming (particularly migrating) 20-year-old systems responsible for safeguarding assets and consumer PII, is not an easy task—and is the reason for stunted adoption of new technologies like blockchain and DLT. Many of the organizations surveyed in the ValueExchange report stated that a lack of resources posed the largest obstacle to updating old systems.

Many of the new tech stacks, especially blockchain platforms, require significant training and expertise to get right. Development and product teams risk spending valuable time and resources on systems code, fixing bugs and system breaks, and more, simply because the technology is built in a way that does not enable rapid adoption. Digital Asset developed Daml to ensure rapid time-to-market, enabled through its ledger-agnostic, business-logic-only smart contract framework. Daml is easy to use and seamlessly runs across technology platforms — mainframe to cloud, and database to blockchain—and it does not require knowledge of the underlying system.

Capital markets should have the option to modernize and innovate without hiring more resources. Rather, they should employ their teams of experts to develop new solutions with a technology that is easy-to-use and implement.

Another major callout was privacy. Honoring underlying system privacy across all segments was highlighted as a major concern. While legacy systems are subject to privacy risks, it is critical for new infrastructure to take into account GDPR and higher security risks of sensitive data.

Upon completion of the research with the ValueExchange, we discussed the report findings with the Network Forum, and agreed that the underlying theme for all research participants remained consistent—change is welcomed and change is happening. For many people in the financial services industry, this is a positive sign. With the right approach, a digital transformation of financial services is possible without starting from scratch, depleting resources from internal teams, and incurring high amounts of technical risk from implementing a new platform. Finding a platform that supports how the enterprise functions day-to-day, while improving cross-boundary transactions that honor the underlying system privacy and integrity is the key to updating legacy systems. With multi-party platforms such as Daml, capital markets will have the power to modernize quickly, and build interconnected workflows and networks that contribute to a more open and connected global economy.

Join the discussion at SifmaOps

Join us at SifmaOps on May 17th at 3:30 pm.  I'll be speaking with Horacio Barakat, Broadridge, Lou Rosato, BlackRock, and Matthew Pawlowski, EY about legacy technology and the realities of the U.S. securities markets moving to T+1. Click here for event details.

To learn more about the research conducted by the ValueExchange, click here and read the report.

To learn more about Digital Asset and our core technology, Daml, click here.