Cloud in the Time of Covid: If Not Now, When?

In the capital markets, workflows have been pulled apart by the responses necessary to handle the ongoing Covid-19 crisis, revealing both strengths and weaknesses. Resilience has been tested like never before and modern IT architecture has stood up to the challenge.

When trading volumes in secondary markets spiked as the pandemic emerged, it created pressure across market infrastructure. Equity markets reported trading volumes up by around 30% compared to the previous year, while during the month of March, CME Group reported that global volumes were up 68% year-on-year. Every entity trading in those markets needed to handle huge data volumes in order to support their risk and pricing engines, as well as their trades. Firms also had to process orders post-execution through their middle and back offices, allocate and reconcile these trades, and manage their inventory. While many regulators globally eased up on reporting rules during the toughest weeks of trading, reports still had to be filed, and for more complex trades—multi-leg transactions or over-the-counter (OTC) derivatives that require collateral to be posted as margin—the many moving parts had to be managed and checked.

Additional Work
All of this additional work was performed in an environment in which many traders and trading support functions were being managed remotely with a sudden increase in demand for accessing core systems. Having a back-up in another major financial center was not much help as the global pandemic’s impact spread. The interaction between a broker and a custodian to settle a trade or clear a transaction had to be achieved via a far lengthier and fragmented communication chain. This increased complexity and manual patching created time delays and additional risk to firms during a disruptive event that required timeliness and reliability above all.

Covid-19 also created unprecedented staffing challenges. If some team members were struck down by the virus or were otherwise unable to work as a result of changed circumstances, the rest of the team would need access to the right data at the right time, presented in a format that allows for its effective use. Automation alleviated much of this, as it reduced the need for direct contact between team members. It also minimized the proportion of firms’ workloads dedicated to processing, and maximized the focus on more complex tasks, of which there were many.

Lessons
Three key lessons resulted from the pandemic’s global impact. First, capacity is key. Cloud-based systems, which are able to take on processing and storage as needed, represent the level of elasticity that any capital markets firm must be assumed to have. Several banks publicly complained about middle- and back-office failures caused by technology unable to keep up with increased volumes. Those operational risks represent real threats to investors unable to trade into or out of positions, as systems stopped working, while systemic risk was similarly heightened as back-office processing broke down.

Cloud-based technology also represents a solution to the challenge of remote working. Access to a platform for trading, risk management or trade administration should not be contingent on on-location systems—it should be accessible to all through a software-as-a-service-based model. Location-based technology simply does not work in a pandemic environment.

This crisis has also shown that systems need to be modular so that each component can be accessed as needed by teams dedicated to specific functions, rather than reliant on a single front-to-back design, which is harder to deliver to individual teams. A modular approach also better supports remote access, as it reduces the level of messaging exchange necessary. If a platform is constructed from pre-integrated components, adding new systems takes less time and requires light interfacing that can add new functionality as necessary to support teams where members may be out of action, or have limited time and connectivity.

Finally, automation can improve analytics by processing information faster and drawing users’ attention to patterns of activity that might indicate risks or opportunities that would otherwise be overlooked. In situations where the collateral management headroom reports have to be posted five times a day instead of once overnight, and transaction volumes managed by a desk may have increased from 50 to 1,000, automation can prove to be a game-changer for a bank and the service levels it is able to provide its clients.

Testament
The success of market infrastructure in withstanding the 2020 sell-off is testament to the cloud technology many firms already leverage. As periods of volatility become increasingly common and market uncertainty continues, agile technology will continue to be the differentiating factor, accelerating the financial industry’s wholesale (and long overdue) move away from legacy technology.

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