Global events, regulatory interventions and the proliferation of new and complex investment products have underlined the importance of having a robust operational resilience toolkit. Michael Davies, our Global Head of Operations, takes a deeper look at Calastone’s operational resilience strategy.
Recent events cement the importance of resilience
Operational resilience was transformed between 2020 and 2022 by COVID-19 and the war in Ukraine.
As we move further into the mid-2020s, regulators continue to take a very close interest in the operational resilience practices at financial institutions. Last year, the Bank of England (BOE) published a paper – “Operational Resilience in a Macroprudential Framework” – zeroing in on operational resilience at financial market infrastructures (FMIs) in particular. As our digital dependencies and interconnectedness increase, so too do our structural vulnerabilities, a point made by the BOE in its paper, which highlighted how outages in one part of the value chain can have serious ripple effects elsewhere.
Increasingly, regulators not only want financial firms to demonstrate the robustness of their own operational resilience measures, but also those of their critically important vendors. The BOE paper cited events at EquiLend, a securities trading platform, which last year suffered an IT outage caused by a cyber-attack. While this whole episode was hugely disruptive for EquiLend, it also had major knock-on effects for the platform’s clients, a number of whom were unable to manage their risk properly or meet certain regulatory reporting criteria during the downtime.
As products and businesses evolve, the underlying operational resilience challenges increase.
Resilience has been embedded into Calastone’s operating model since the get-go. Our expertise and proven success in servicing traditional funds – and ensuring the smooth functioning of the market, even during major events – puts us in an excellent position to support new asset classes, such as Exchange Traded Funds (ETFs) or tokenised funds.
No compromising on operational resilience
As markets change at a rapid pace, operational resilience processes are having to keep up. Providers, such as ourselves, are leading the way.
That’s why meeting and exceeding regulatory and client expectations is at the heart of our approach.
Meeting expectations
Clients and regulators want to know we are adopting best practices on operational resilience.
This can be demonstrated through adherence with internationally accepted standards. At Calastone, for instance, we comply with ISO 22301 for business continuity management and align with the principles of Service Organisation Controls Type 2 (SOC2), a cyber-security framework. In addition, we also subject our staff to regular operational resilience and cyber hygiene training exercises, whilst also conducting frequent cyber-security scenario testing.
In light of the BOE’s comments about supplier risk, we undertake extensive reviews of our vendors – something we have done since our inception. Given their critical role in our operations and those of our clients, we routinely sit down with our cloud service providers and forensically examine their operational resilience frameworks to ensure they are up to scratch.
On impact tolerances – a concept that is also referenced in the BOE paper, we identify core business services, such as payments, and then establish impact tolerances for the maximum tolerable disruption. This is a practice we have adopted and refined over many years.
Getting the basics right is key to keeping clients and regulators on-side.
Ensuring resilience in a fast evolving business
As we increasingly service new markets and products, the fundamentals of operational resilience will not change. However, we do apply many of our operational resilience learnings in the traditional mutual fund world to whatever nuances different markets or asset classes bring. This means we take the concept of impact tolerances to an increasingly granular level as we enter new geographies or financial industries.
Take settlement cycles for subscriptions and redemptions into mutual funds.
In most major markets, mutual fund settlements happen on a T+3 cycle, meaning we have an entire day – and some – to ensure timely payments. In Australia, however, subscription trading is pre-funded, so if there is an issue with a payment, this can put the entire transaction in jeopardy. We need to ensure we are aware of these nuances and have resiliency measures in place to mitigate any financial impact should an issue be encountered.
The story is similar with ETFs. We recently partnered with HSBC on the development of an ETF asset servicing platform which includes real-time processing, monitoring, and cash calculation capabilities to Authorised Participants and ETF issuers throughout the creation and redemption cycle. As ETF servicing became more complex, we made sure we had workarounds to ensure business continuity should a particular component go down, just as we do with all our products. This tried and tested approach will ensure an efficient and robust ETF primary market.
Our operational resilience strategy helps guide the creation of any new product so we can be sure, for example, that we have the same rigorous approach for our recently launched Tokenised Distribution service.
Achieving resilience with technology
Technology plays a crucial role in insulating providers and clients against Black Swan events, which is why we have invested so heavily in our infrastructure over the years.
Our platform, for example, is based on an active/active environment and runs from a combination of physical data centres and cloud-based infrastructure. Each data centre is capable of running the system independently and managing a full day’s traffic. These systems are regularly tested by taking at least one data centre offline, so they are well-positioned to respond to crisis scenarios.
We also operate a comprehensive capacity management program, ensuring our systems are capable of handling unexpected surges in usage that may be seen during periods of socio-economic uncertainty.
System baselining, along with proactive and predictive monitoring, ensures that we never exceed pre-defined thresholds for system utilisation and performance. Additional capacity can be added dynamically whilst the root cause of any increased system utilisation can be established and remediated through our problem management processes well ahead of any possible client impact.
It is all about collaboration
To ensure operational resilience, collaboration is key at both a client and industry-wide level.
Given our unique role in the funds ecosystem, our clients view us as a critical service provider. We take this responsibility seriously and make a concerted effort to be as open as possible with clients about our operational resilience initiatives. Often, we will host roundtables with clients so we can discuss these issues in greater detail.
We are also active members of a number of industry groups and associations, where we are keen to promote best practices and share our experiences on operational resilience matters.
Looking to the future
Resilience is an ongoing discipline that requires constant vigilance. By combining rigorous preparation, continuous innovation, and open dialogue across the industry, we can adapt to new challenges and safeguard the smooth operation of financial markets in any environment. Our goal is to ensure that in all market conditions, we remain ready to protect our clients’ interests and support the stability of the wider ecosystem.
