Paul Wilson, Senior Sales Director SFCM at Broadridge, explores the factors that are persuading firms in the securities finance industry to move away from on-premise installations in favor of hosted solutions.

Change is imminent in the securities finance industry. Like with many banking applications, the industry runs mainly through on-premise applications. Now, cloud-based infrastructure and modern technologies can deliver complex functional features with real-time data to a browser or desktop.

There is an expectation that applications should be simple to use, cheap to run, receive regular upgrades, and work without the support of a team of in-house experts. Why should securities finance platforms be any different?

The Path for Change

Securities finance firms have several factors to consider when contemplating a move to hosted solutions, so let’s explore some of the primary considerations.

Data security is a good place to start. Securities finance firms are increasingly comfortable with the data residency capabilities of hosted solutions. Many realize that the cost benefits can be considerable when they work with hosting providers that have enormous buying power for acquiring equipment and maintaining data centers.

Hosting providers can centralize support functions because most of our clients will have the same daily end-of-day and start-of-day interfacing needs, allowing them to automate exception queues.

Hosted services also provide access to expertise. Smaller banks — particularly in emerging markets — often have limited knowledge of system and database administration, resulting in software updates taking much longer than necessary to be completed.

In some cases providers are also able to work with clients to understand local regulators’ rules around data residency. As an example, we previously worked with a client and the local regulator to determine how we could provide the controls and data security guarantees to host Luxembourg data belonging to the client, in our European hosting centers. After multiple reviews, the regulator decided this was possible because it acknowledged the robustness of our information security and data residency protocols.

Benefits of a Hosted Environment

Why should banks choose to be a hosting provider when the time and resources required to do so would be better spent on growing their core activities?

Hosting providers have proven their ability to host business-critical applications, most notably during the pandemic when lockdowns forced client trading desks to work from home. The minimal disruption caused by this massive shift in working practices highlighted the value of robust disaster recovery protocols. The recent hacking event that caused serious disruption to derivatives trading further accentuated the importance of data security.

One of the recurring themes that we hear from firms opposed to a hosted environment is the value they place on familiarity with - and control of - their software and the ability to run queries and mine data directly from their platforms. However, in a hosted environment this is replaced with access to feeds of data that are pushed out to the client in the format of their choosing.

Additionally, with a Software-as-a-Service (SaaS) deployment, we can access the test environment and deploy a hotfix into our client’s system in real time.

Of course, there are costs associated with moving to a managed service. However, this additional expenditure is usually offset by the savings made from eliminating additional services which are no longer required and a managed service will also produce a much better client experience, improving customer satisfaction and retention.

Breaking Away From the Resistance

Even the most conservative firms are embracing SaaS in a way they would not have done even 12 months ago. This is fueled mainly by the accelerated adoption of digital transformation technologies due the pandemic with firms digitizing their operations with the aim of reducing cost.

We recognize that change is hard, especially for institutions that feel they are losing control of their software systems. The ultimate decision has to be made by the client and we help inform this decision by outlining the factors mentioned above and as the priority is usually information security, this will involve completing detailed questionnaires with details of regulations and data residency.

But securities finance firms also need to factor in the value of a hosted environment that supports scalability, operations, and alignment with their business strategy. The most progressive buy side and sell side firms are replacing legacy systems with cloud-based IT platforms, accelerating their digital transformation, and becoming market leaders.