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07:30 AM
Allan Grody
Allan Grody
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Financial Industry Infrastructure in Need of Rebuild

The C suites are responsible for tearing down silo thinking and reengineering the financial system. So far, they've left much to be desired.

One of the myths of the financial industry is that its members are innovators of sophisticated technology. True, some are, occasionally, but most aren't. They are great at spending huge sums of money on sophisticated technology developed by software and computer companies, data vendors, and platform developers. That's why vendors and technology companies love to do business in this industry. That is where the money is. And that is where and why all new things are first vetted.

That's all the more reason why the financial industry should be at the tipping point of major leaps in technological deployment for cost efficiencies and infrastructure re-engineering, but it isn't -- nowhere close. The financial crisis should have been the root of that change. Aggressive regulators have been the change agents, but the legacy mind set and competitive nature of the industry's business models are holding back progress. Money is being spent on front-end, revenue-driven applications, not infrastructure rebuilds. That's what you get when budgets are driven by revenue-driven silo owners.

The technology innovators of today, the Silicon Valley and Silicon Alley entrepreneurs, have given us new infrastructure platforms: all-on-all-the-time plug-in cloud computing; globally pervasive big data networks; massively parallel computer power; multiple data stream computational processing power; and speed-of-light communications. Unfortunately, this technology is being used incrementally at the front ends in silos, not strategically for wholesale re-engineering, as is needed. Why not? Infrastructure rebuilds are the sole province of the CEO and the C-suite executives. That's where the silos come together. The rebuild is long overdue. Regulators have taken the first step, but they need direction. The CEOs need to step up.

Regulators themselves are taking direction from the pan-ultimate power brokers, the G20 global leaders. They have empowered a new standards entity, the Financial Stability Board (FSB) to organize regulators toward adapting standard practices for "stabilizing the global economy." It is heartening to see that the board's first focus is on standardizing data for regulatory reporting, so that regulators can see what they are mandated to oversee, and they can see it globally, so that they can mitigate the contagion of system risk, which almost did us in in the 2007-2008 credit crisis. Unfortunately, these leaders too are failing to grasp the revolutionary power that is theirs to exercise if they can only cooperate before they return to nationalistic instincts and self-interests. They too suffer in silos, though theirs are sovereign states, not strategic business units.

The FSB's most important initial paradigm-shifting initiative is establishing common global codes for financial market participants (the LEI), financial products (the UPI), and financial transactions (the UTI). The board also plans to standardize how transaction data is to be aggregated across the globe once these codes are implemented.

It is quite prescient of the FSB to start out resetting the pillars of the financial systems through creating a bar code-equivalent identification system for the financial supply chain. A global identification system for managing transactions across the global financial supply chain is long overdue. With such a universal coding setup, re-engineered enterprise-wide systems and cooperatively re-engineered infrastructure systems can be built using software tools in common use.

This is the first time regulators are embracing such a fundamental global infrastructure practice in an attempt at a global solution to a global problem -- the first attempt to define a universal coding system and design a new global market infrastructure for swaps. However, the industry is mired in legacy thinking, best practices of another era, and a Rube Goldberg infrastructure that evolved from supporting revenue-producing front ends when the plumbing needed to be fixed first.

We need the CEOs of the global financial institutions, now called global systemically important financial institutions (SIFIs), to clear the path and organize their own equivalent of the Financial Stability Board, as the G20 heads of state have done for regulators. (SIFIs have already come together as a group as the Financial Services Forum.) Then the ultimate decisions makers in both camps can be held responsible for re-engineering the financial system. They will at least pay attention to what is too easily dismissed as just "plumbing." To industry professionals, proper plumbing is well understood as essential for smoothly functioning automated business applications globally connected through a vast array of networks and computers collectively referred to as the "global financial system."

To quote Albert Einstein, "We cannot solve our problems with the same thinking we used when we created them."

Allan is President and founder of financial industry joint venture development company Financial InterGroup Holdings Ltd; and strategy & acquisition consultancy Financial InterGroup Advisors. The companies are engaged in the capital, contract, currency, cash and investment ... View Full Bio
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