Finance Under a Microscope

New perspectives on key industry challenges are being explored through academic research projects, funded by the SWIFT Institute.

“Payment system regulators around the world are grappling with the challenge of both promoting and controlling innovation in payment systems,” says Jane Winn, professor of law, University of Washington Law School, whose ongoing research project, under the revised working title ‘Governance of Competition and Innovation in Payment Services’, is funded by The SWIFT Institute. The project will focus on recent developments in the US and EU. Winn continues: “Under conditions of intense global competition to harness innovation for economic prosperity, governments are struggling to find the right blend of regulatory mandates and collaboration with private organisations to achieve their goals.”

Promoting innovation requires governments to encourage competition, while promoting the diffusion of innovation in highly regulated markets requires coordination on standards and risk management. In Winn’s terms, private self-regulatory organisations face similar challenges and possess skills that governments could leverage. Examples of private global regulators in payment services include the payment card networks or standard setting organisations such as W3C, the Internet standards consortium. Successful private global governance organisations create an ‘ecosystem’ populated with diverse stakeholders, which must interface with multiple legal systems, observes Winn, and adapt to a wide range of regulatory initiatives. How might a public-private partnership approach to payments governance work? Winn is due to report in Q2 2016.

The evolution of global payments markets is one of a number of issues debated at Sibos 2015 that are being further investigated by academics with funding support from the SWIFT Institute; research papers are due for completion in advance of Sibos 2016, and will inform the discussion in Geneva. Typically, these are global issues significant to the finance industry and to society in general, for which academic research can play a role in identifying potential solutions. The project ‘Transatlantic Extraterritoriality and the Regulation of Derivatives’, undertaken by Stuart Weinstein, professor and head of Coventry Law School at the UK’s University of Coventry, examines the regulatory conflicts and challenges that might lead to inconsistencies for firms operating across borders.

Regulatory conflicts

“Sometimes, regulators have conflicts interests,” says Weinstein, discussing the crucial issue of communication between regulators. “The same country might have two regulators who disagree over who has jurisdiction.” The research will ask: what are the best strategies for fi seeking to operate in multiple markets to ensure that they minimise their compliance risks in the OTC derivatives market? The topic is a live one, with brokers, investors and market infrastructure providers all caught up in the many differences between how US and European regulators introduced G20-mandated reforms to the derivatives markets over the past half-decade. Differences arise from many sources, including existing securities laws, legislative timetables, market practice and regulatory priorities. Weinstein continues: “In the US, OFAC (the Office of Financial Assets Control) has been focused on financial compliance. The Europeans are more focused on the protection of investors.” There may be a convergence here, Weinstein suggests, with European regulators moving towards a US view, but the research poses another question: will so-called US regulatory “overreach” mean that certain markets such as the US will be excluded from OTC derivatives global trading? “The dialogue continues,” says Weinstein.

In Singapore, as in Boston in 2014, Sibos delegates also spoke about workplace diversity, including gender diversity. The SWIFT Institute is funding the research project ‘Women in Finance: A Global Perspective’, conducted by Renee Adams, professor of finance at the University of New South Wales, and Tom Kirchmaier, researcher, financial markets group, London School of Economics. The project is part of a longer- term study into boardroom gender diversity globally, and is the first to focus specifically on finance industry boardrooms. “Women don’t come through onto these boards,” says Kirchmaier. “It’s a pipeline problem.” Women are under-represented in STEM (science, technology, engineering, mathematics) and finance boardrooms more signifi gantly than in other sectors, representing “an economically signifigant leadership gap”, as the current draft of the research puts it. Under-representation of women is most marked in three industrial sectors: fi services, manufacturing and natural resources. A number of possible explanations for this gap are identified in the research, among them fl ws in educational provision for girls globally – “We don’t teach these girls proper maths,” says Kirchmaier – and “biases or impediments to work-life balance that make it harder for women to achieve leadership positions in STEM & F sectors”. But the research’s provisional conclusion is clear: “With the right people on the board diversity can lead to greater creativity and more innovation.” We can expect to find creativity and innovation on the agenda for Sibos 2016, and diversity is a route to both.

Gradual evolution

“There has been a lot of interest in the blockchain, but the people who know are not putting a short timescale on this.” says Alistair Milne, professor of financial economics, Loughborough University.

The SWIFT Institute has also funded research into the future use of the blockchain by the finance industry. The groundswell of interest in this topic was evident in Singapore: a more- than-capacity audience attended the Innotribe session ‘New Kids on the Block(chain)’. As its working title – ‘The Impact and Potential of Blockchain on the Securities Transaction Lifecycle’ – suggests, the research project takes a specified focus, but also manages to address broad strategic issues as well. Working on the project are Michael Mainelli, both emeritus professor of commerce and trustee at Gresham College and executive chairman of Z/Yen, a London-based think tank, and Alistair Milne, professor of finance economics, Loughborough University.

“A key question we are investigating is whether the blockchain will be a one-time game-changer that transforms the front office and the back office and the relationship between them, or a gradual evolution, first used in a few markets and growing from there,” says Milne. “There has been a lot of interest in the blockchain, but the people who know are not putting a short timescale on this.” Milne distinguishes “permissionless” blockchain, as exemplified by the technology underlying Bitcoin, which anyone can join, and “permissioned” blockchains with controlled participation. Their research already indicates that almost all financial market practitioners envision using a permissioned blockchain to connect participating institutions. This gives a degree of regulatory credibility that a random collection of Bitcoin miners would not have.

While these projects take on some of the major challenges facing the finance industry, they are only a sample of the research initiatives currently being funded by the SWIFT Institute. Another key focus is the use of big data in the finance sector, with one project looking at how financial institutions are using big data analytics within their governance operations, and another exploring the legal and regulatory implications of the use and commercialisation of such analytics. Another recent research project has undertaken a critical and empirical examination of existing financial data collection processes and standards, while another, just getting under way, considers automation and dematerialisation in the securities market through the development of CREST, the UK settlement utility owned by Euroclear. If you can’t wait for Geneva to find out the conclusions of the research, log into www. for regular updates on research and related events.  “The same country might have two regulators who disagree over who has jurisdiction.” Stuart Weinstein, professor and head, Coventry Law School.

This article first appeared in the November 2015 SIBOS Issues – Wrap-up Edition.