Fintech Insights

COVID-19 has changed the face of sell side nearly overnight

Pontus Eriksson I Senior Strategy Director, Capital Markets, FIS

July 27, 2020

When news of COVID-19 started to dominate headlines earlier this year, banks and brokerages with operations in Asia, the epicenter of the virus, took swift action to protect staff. Based on their experience with the 2003 SARS outbreak, protective measures were put into place including reduced office hours and splitting the workforce into teams working between the office, disaster recovery sites and home.

By late February, despite extreme volatility, stock markets stabilized but the epidemic continued to cause concern. Most sell-side institutions believed their disaster recovery plans were enough to mitigate any potential crisis and its impact on operations, according to a new white paper from FIS and Acuiti, “Managing Front-office Brokerage Operations During the Coronavirus Crisis.”

The pandemic changed everyone’s plans

By mid-March, the World Health Organization (WHO) declared the coronavirus a pandemic, and in a matter of 48 hours, Acuiti says, the situation changed beyond recognition. Within a few weeks, tens of thousands of front office professionals were doing their jobs from home. Markets continued to function, and the risk of a financial collapse was averted. The success of sell-side front-office operations teams in relocating staff during a period of unprecedented volatility shows the operational resilience of the industry and the power of technology.

The pandemic will continue to impact the wider economy; governments will continue to issue financial rescue programs to help stabilize their economies, but stimulus programs mean increased budget deficits. To offset the deficits, governments will consider strategies like lowering interest rates, increasing inflation or taxes.

Volumes remain high and liquidity has improved

While the markets experienced record-high trading and extreme volumes, equity markets declined but have now rebounded. Going forward, there will continue to be volatility with daily index movements at very high numbers. The pandemic response will put pressure on credit markets, creating liquidity and collateral challenges for lenders and borrowers. To add to the uncertainty, regulators are delaying some of the new regulations.

Regulators are using the flexibility in the current framework to lower the amount of capital required by banks. This is a relief for banks in these hard times but has also caused some negative impact as regulators have increased the buffer for countercyclical risk. As banks struggle, regulators must balance the need to make sure they are well-capitalized – providing a remedy for survival – while continuing as the lifeblood of the credit markets.

A time to refocus on business continuity

Continuity is the key word for businesses focused on forward momentum. Today, ~98 percent of staff from most firms can work successfully from home, but not every organization can make it work. Banks must split trading teams into sub-teams that cannot be blended. They are using different locations with a parallel stream of services to continue to operate. Banks and other institutions will need to refocus on a holistic continuity plan that embeds all the parts of the firm.

Many firms will discover that a robust and resilient disaster plan that meets today’s requirements is going to add cost and complexity at a time when a lot of firms are trying to cut costs and simplify operations.

Structural changes are coming

Firms have been preoccupied with financial risks but there are other risks becoming increasingly important. For example, because people are more digitized than ever, risk is on the rise. The industry is seeing growth in fraud, money laundering and risk associated with outsourcing. Firms want to outsource more and use Software as a Service (SaaS) solutions, but these also come with risk. Quarantine-associated work-from-home mandates come with risk as well, and the new normal will have a blend of people working more from remote locations than from home.

What the industry must solve for today will emerge as the basis for disaster planning in the future. Work from home, once considered an auxiliary function, is now of primary importance. Consider the new challenges that now need to be solved. How will firms deal with prolonged staff absences in a critical function without compromising performance and control? How will your company supervise remote offices or manage a process for required equipment?

Market risk has evolved; so has the regulatory environment

As market turbulence continues, the real-time aspect of risk has become more important. As firms see higher margin requirements and more margin calls, they will need more robust risk services and ideally want to hire “as a service” when employees are unable to work in the office.

Regarding the rollout of new regulations, plans have changed there as well. The LIBOR transition is unlike any other regulatory reform as it underpins contracts affecting banks, asset managers, insurers and corporates estimated at $350 trillion globally. The move to alternative rates leads to the questions like: “Do you keep going with what you started?” or “Since this is one of the most massive transformations ever, why would you do this at the same time as you have the pandemic crisis?”

Bend but don’t break

As the market continues to see stress, there is also ongoing uncertainty that adds a layer of complexity to people’s jobs and lives. To take the pressure off, FIS™ helps firms establish remote-work capabilities without the threat of disruptions or diminishment of speed and responsiveness. We have provided support for firms with parallel operations, single-site or remote operations. Fortunately, most clients have managed their businesses incredibly well under the circumstances as the market infrastructure has been through a highly stressed environment but has come through with flying colors. This shows how robust and resourceful the industry really is.