CLS Group are the trusted party at the centre of the global FX ecosystem. Working with central banks from across the world, the firm offers a global settlement infrastructure. From operational efficiency to managing risk, CLS Group are an organisation that you may not have heard a lot about. They work with many of the central banks around the world though. Kenneth Harvey joined CLS Group as Chairman from his role as Group Managing Director for HSBC Holdings, in October 2014. His ‘View from the Top’ kicked off proceedings at the second day of #Sibos 2021.
Some of the initiatives that the team at CLS Group are involved with include supporting the Financial Stability Board (FSB) with challenges such as increasing adoption of payment-versus-payment (PVP). CLS also won the prestigious ‘Best FX Settlement and Risk Mitigation Solution’ award at FX Markets Asia 2021 Awards. Apart from the PVP settlement service, CLS was recognized for its role as a ‘systematically important financial market infrastructure critical to the orderly functioning of the global FX market’.
Most importantly, the specialists at CLS Group work to reduce ‘Systemic Risk’. A term many of our readers will be familiar with.
With Kenneth’s experience in global markets, his opening of Day 2 at #Sibos 2021 was met with keen anticipation, even if it was 8am in London.
Banks and Data
Kenneth started by sharing his thoughts about data and how banks are using it.
“Historically, financial institutions in general, and banks in specific, have been the largest repositories of customer data. This formatted customer data is also the most underutilised and under-leveraged in terms of customer service or customer intimacy,” Kenneth explains. “They’re [banks] very good in terms of security and privacy, and historically weak in exploiting data for customer intimacy. Their ‘edge’ is having the largest historic repository, they have the trust and they have the security. Now you just need engineers to help you do something with it.”
On the topic of regulation, Kenneth explained how international banks often take the most extreme regulation and manage to that. Pointing out how the customer has placed their trust in the hands of the bank, he explains how very few data breaches have been the fault of banks. Most data breaches take place amongst retailers, he explains.
However, Kenneth does see “exponential growth of the bad guys”. This exponential rise has resulted in “an exponential rise in investment for financial firms”, which is exactly where Kenneth sees big data and artificial intelligence overlap. Kenneth explains how in combating this rising attack pattern, “you really have to start doing pattern recognition on behalf of your customers.”
Continuing the discussion, Kenneth highlighted how when activity outside of the norm is ‘detected’, one needs to “swoop in and shut it down”. Kenneth thinks that the intersection of big data and AI for the financial community in the beginning will largely be focussed on battling the ‘bad guys’.
Whilst at HSBC, Kenneth’s team cut down a lot of fraud worldwide. The technology has been around for 15 years. Kenneth doesn’t consider this technology to be ‘artificial intelligence’ though, as it may have been called in the 90s. He considers it to be ‘pattern recognition’.
Hardware vs People
Cloud is one of the main talking points in banking in recent times. On-prem servers have become less popular as the cost and security benefits of using cloud solutions provided by Microsoft, Google or Amazon increase in capability and efficiency. Kenneth explained how he saw this trend:
“If you compare technology to what was being used 20 years ago, hardware was expensive and people were cheap. You could go at things with hundreds and hundreds of bodies. That has inverted, and hardware is now cheap, and people are now expensive.
“The use case for artificial intelligence is simply that you have this inversion that hardware is now cheap and people are expensive,” Kenneth explains. “Therefore you can actually do a better job at a lower cost point if you’ve married big data and artificial intelligence.”
McKinsey recently wrote about the ‘cloud revolution’ in a report. According to their experts Fortune 500 companies have benefited to the tune of more than $1 trillion so far. And most of that value comes from business innovation and optimization rather than IT cost reduction.
Kenneth has watched the growth of cloud. And, we have all seen stories like how VISA have become completely ‘cloud-based’. Whilst many banks still have a ‘hybrid could’ infrastructure, Kenneth believes the ‘public cloud’ will continue to mature as well. With the three dominant players in cloud, he doesn’t think that data centres are holding financial institutions back. Historically he points at how financial institutions haven’t had the right engineering staff to build the models. To use the unformatted data.
“There are a lot of quants in risk management who actually have the knowledge of how to build models and go after raw data and create value from it,” Kenneth explains. However, he continues by adding how in his opinion “those skills have not transferred themselves into the customer service and customer intimacy areas of banks. For now.”
Kenneth believes banks are under-recognized for their efforts in fighting financial crime, he believes they are very good at intimacy in terms of keeping you safe. They are not very good at suggesting what might be helpful for you though.
Back in the UK, Chris Skinner recently published a story about how banks are ‘freezing and closing’ customer accounts:
Kenneth doesn’t think this type of behaviour is prevalent in the market though. He points to the penalties that banks have to contend with for missing this type of malfeasance.
“The downside of letting bad guys get through the system is really large. I think it’s very rare that you get these false positives,” Kenneth shares. He believes most banks react very quickly and engage customers before they freeze accounts.
CLS and global payments
As we mentioned in the first paragraphs of this story, CLS is a huge stakeholder helping to bring down the cost of international payments. Kenneth explained a little about what they do at CLS:
“We watch their [our customers] flows every day, all around the world at any time of day. What types of currencies they trade in at given times, their liquidity positions in currencies in different countries and periods of time,” Kenneth introduces. “Our system allows our operators to engage and, if they see something even marginally out of pattern, to directly contact the bank and ask if they know this is happening.
“This has been well received by our clients who appreciate the fact that we are monitoring the ecosystem and reaching out proactively before something happens. As a result, during the first year of COVID we had 100% uptime. Not 99.9%, but 100%,” Kenneth clarifies. “That’s because we were engaging with our clients proactively when we saw possible disruptions or possible changes in patterns that we wanted to verify. And, there were a lot of changes in patterns that took place during this pandemic.”
As the discussion starting to reach its’ conclusion, Kenneth went back to the topic of data again.
“Data is growing exponentially. It’s not all valuable data, but it is correlated data.” Kenneth believes that “there’s going to be a Moore’s Law of data, with exponentially more of it in the cloud and exponentially more data, because more people are monitoring and watching you.
“I think there’s a huge case for analytics, for quants, for artificial intelligence, to both better protect and serve customers,” Kenneth reiterates. “I think safety and security will continue to jump to the forefront, and therefore I don’t actually fear that there’ll be massive disruption in the payment structures of the world.”
People may not understand how much the current payment structures have been provided by the banks. People may underestimate how much work firms like CLS and SWIFT do in the background to make sure everything is safe. Kenneth isn’t worried about the future though:
“Someone’s got to be watching over this ecosystem and keeping the bad guys out. And that someone will be the central banks, the large international banks and firms like us.”
Find out more about CLS Group by registering for Sibos. It’s still not too late.
Author: Andy Samu
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