Keynote speech: Unlocking Value in Derivatives Markets via FinTech

Mark Whitcroft of Illuminate Financial gave this keynote address to a packed ISDA audience. In the speech Mark demonstrated that the migration to ‘fintech’ is happening as we speak. Mark
November 7, 2019 - Editor
Category: Technology

Mark Whitcroft of Illuminate Financial gave this keynote address to a packed ISDA audience. In the speech Mark demonstrated that the migration to ‘fintech’ is happening as we speak.

Mark Whitcroft of Illuminate Financial gave this keynote address to a packed ISDA audience. In the speech Mark demonstrated that the migration to ‘fintech’ is happening as we speak.

Executive Summary

  • The landscape of Capital Markets, FinTech and the Derivatives market is changing, innovation and new solutions will be a large part of that change.
  • We believe cost; control; capital and compliance will be more important than competitive advantage for these new solutions to be adopted.
  • The change will impact the whole of the trade lifecycle (pre-trade; point of trade and post-trade).
  • FinTech will take its time to have an impact, it is important to be realistic about what the opportunities are.
  • We think partnerships will be a key to success in this space
  • STP (Straight Through Processing) needs to move to more of a Round Trip Processing to increase the efficiency and reduce the human elements of workflows.
  • If you chose to do nothing it is important to do it from a state of at least understanding of what is out there.

Video replay

The original speech with HD slides can be watched here, or read on below.


Speech Transcript

This conference is focused on technology in the derivatives market and what needs to happen for implementation; standards; different innovation models; the processes. What needs to happen to make this a reality and unlock the potential and value in this space.

I would often get asked who that person is on the cliff edge in that first picture, and one could argue it was a derivatives lawyer during the documentation crisis, but it varies on who you are speaking to. I think when we look at this as a topic, we have to look at it in the context of a broader FinTech or Capital Markets agenda. What are the frameworks that need to happen? Where are we today? And where are we potentially going in this space in terms of drivers and catalysts for change?

Do you need more technology in your life?

My name is Mark Whitcroft and at Illuminate we do a couple of things: we invest in early stage Capital Markets FinTech businesses and we are backed by a number of industry players. We advise a number of banks and buyside institutions on their FinTech strategy and I will hopefully give you some views on what we have seen and learnt over the last 5 and a half years of doing this, and what we see really as a moment of generational change within the context of Capital Markets including derivatives.

Searches for the term Technology 

As market participants we all like charts, and we all like charts that go up and to the right. What we have here is Google Analytics, so search words and the analytics, in terms of what people today will care about and if we look at this in the context, this is the search for technology in Google.

Searches for broad technology topics 

As you can see there has been a rapid rise in the past two years, and particularly in the last year. I question if people are actually searching for the right thing. Is technology the most important thing people should be searching for? It is potential that it is, but we see technology as an enabler, but what people should be focusing on is the change drivers that are happening. The reason for that is, nobody woke up this morning wanting more technology in their organisation.

What they woke up with is a long list of challenges from their boss and from the regulator of things that they need to solve for. If you’re a business person or a product specialist, you’re not asking for more technology solutions, you’re asking for business solutions to solve your problems. So, is that technology enabled or not?

Real use-cases 

Specific use cases are things you’re looking to challenge for and what that means for us today is that if we look at FinTech and what has actually happened in the space, its actually worthwhile looking at the automotive industry for a second.

Top left on the slide in terms of the old looking car, I wonder how many of you know what model of car that is? That is the Ford Model T, it is a car from the early 1900s. It is the first affordable automobile, and it is still considered today one of the most influential cars of the 20th Century.

So why was it so revolutionary? Well, in part it was due to the production line. The other two pictures on the top line there, are from the ‘Ford River Rouge’ production plant, set up in the early 1920’s, Detroit. They manufactured nearly all of the components of the Ford vehicles in house, it was fully integrated. One big block, with rubber and steel going in one end and a car coming out the other. Vertical integration was a big part of the industrial revolution, and I wonder how many recognize what model the car on the bottom left is?

The Tesla Model X considered the car of the future and if you look at the Tesla production plant, Freemont, California it would actually look very similar to that of the Ford plant back in the 20s for Detroit. All of the assembly happens under one roof, but from a perception perspective Tesla is viewed in a very different bucket. They’re viewed as a pioneer in the automotive industry and as highly innovative, so much that the market has rewarded them with a very high market cap around $53 billion. That puts them as one of the most valuable automotive companies in the states and at times, they have actually had a market cap bigger than GM and Ford. Also, they have done this being ten times younger and with a Research and Development budget which is a fraction of the cost. Even by selling far less cars than competitors, so how has this been achieved?

Vertical Integration

Well it has been achieved by foregoing vertical integration, they select best in class components for their products. On the bottom right what you can see there is a multitude of different vendors that have their components put into a Tesla car. One of the lesser known facts about Tesla, is in fact they only manufacturer themselves core aspects of the car. It is the engine and the batteries that they manufacture and then a huge number of different vendors that they work with, not just one building and not just a few large incumbents.

Vertical integration was a huge part of the industrial revolution, it has been a huge part of financial services and financial markets to date and what does this mean for today? How does Ford Model T and Bloomberg terminal, what is it that they have in common?

Well its full vertical integration, one big block, one manufacturer for components and what we are seeing now is a change. But previously it was very much the fact that technology within financial services firms was either made in house, or from a small number of selected vendors.

Bloomberg; Misys; IBM; Thomson-Reuters are all known in the financial
industry but the phrase no one got fired for hiring IBM is now no longer
applicable. The old model of production is dead, or its’ dying in certain

We are moving to a componentized world, a very similar to the model of production for Tesla. You have got different modular components that individually solve specific problems, but actually when you add them together you get a best in breed assembly model, not a one size fits all solution. That evolution is already happening in Financial Services, Capital Markets and Derivatives. Selection of specific vendors that offer best products, whether that is a point solution or a workflow solution.

6 Aggregation Versus Integration


This picture is taken from a Morgan Stanley research report that was released in 2016 and it is looking at the breakdown of the Bloomberg terminal into constitute parts. With the idea being that there are different providers out there now that can provide you with a service that is the same as Bloomberg. I think what is different and important here is less about the individual names, but actually if you look at the cost and the cost difference there is substantially difference. Capital Markets is clearly in a wave of change at the moment, but this is already happening in retail banking and corporate banking as well.

One core platform being taken down by a multitude of different vendors. I want to highlight this change does not happen quickly, change is often overestimated in terms of speed and impact in the near term, but also underestimated in the longer term. It is also worth acknowledging that FinTech has been around for a long time, there is a lot of hype around it at the moment, but this has been something that goes back as far as the 70s.

Nasdaq had the first electronic stock market in 1971, Swift’s 200 banks in 15 countries was defined and put together in 1973. We saw a surge of electronic trading in the 80s. In the late 90s and in the early 2000s we had PayPal which fundamentally changed the world of online payments.

If you look through to today, we have thousands of FinTechs that are receiving significant investment in their ventures and also corporate venture arena. And if there was one indication that we are in a moment of generational change it would be the amount of money that is being ploughed into the sector.

Between 2011 to 2015, $40 billion dollars was raised across 4,000
companies. If you fast forward to this year alone Q1 had $4 billion of
funding and then Q2 was double that at $8 billion dollars in funding as
well. That is the FinTech funding environment that we see ourselves in.

If we turn to the regulatory environment, the fact we are now in a multi-jurisdictional regulatory environment, there is zero tolerance for compliance failures post financial crisis. New vendors are providing solutions that address and embrace a lot of these requirements out there as well. So how is the industry dealing with this wave of innovation that is happening?

How to engage with Fintech?

Well, there is different industry engagement models happening and to talk about them high level you can either buy the solution; if you are an incumbent you can use and adopt it; as a client you can partner with it; you can invest in it and we are at an all-time high from a corporate venture perspective at the moment. You can still build things internally and you can ignore it. With the partners that we work with I think one of the things that they find is ignoring it, if you chose to do that from a place of knowledge is a very important factor rather than from a place of complete ignorance.

How is this applicable for your market?

Given we are at a once in a generational moment of market infrastructure change, competitive advantage pre the financial crisis was one of the main drivers for in house technology builds, or selection of external vendors. What we see is five Cs that are now we would argue are more important than competitive advantage for the environment in which we are operating. What is that environment? It is one where the industry has had significant de-leveraging, multi-jurisdictional regulation and that zero tolerance for compliance failures.

Cost is a huge pressure everybody has to deal with, control whether it is of people or processes. Capital is a very scarce resource these days and compliance is clearly something everybody has to deal with as well. Any technology solution or business solution that we see hits a multitude of those vectors are the ones we believe have the best chance of being selected or winning through, in terms of gaining clients and addressing real problems.

Tagging for fun and profit

Illuminate have seen over 1,500 companies in the last three and a half years that we have been operating and we have defined a way of mapping this universe of clients. We have about 160 different tag words that break down across function; business unit; regulation; theme and driver. With the idea being that a firm can come through the door and we give it 8 tags, it might get 15 tags or even 30, but what it allows you to do is look at the different solutions across multiple different vectors.

On the slide above is a word cloud and how much that tag has come up in the universe of 1,500 companies. As you can see regulation; big data; analytics are all massive drivers and it would be on everybody who is involved in the change in this industry to be well versed in some of these topics. As you can see there is plenty of words here that are synonymous with the derivatives market.

The trade lifecycle

These solutions are impacting all aspects of the trade lifecycle, pre-trade through to point of trade and through to post-trade. What you are see above is a rework of the ISDA visualisation of the derivatives workflow and with added logos of companies that are addressing aspects of this workflow. It is not a complete picture, and actually it is not about the individual names here. What is important is that young Fintech companies are addressing every aspect of this workflow, and we are often seeing that some of the parts of these individuals creates a greater whole than a one solution fits all.


One trend to watch for is partnerships, in this space is something we think that is highly important to the success of established vendors and new vendors. Whether its start-ups partnering with start-ups or its established vendors partnering with start-ups, we think vendor relationships is something that is hugely important. As industry participants, things like vendor relationship management you may want to have less vendors to deal with because its less of a pain. In fact, actually you should consider whether you should be having relationships with more vendors. That way it allows you to have a better complete solution, things like procurement and integration will all be areas of differentiation for market participants going forward.

CloudMargin as an example

To give a live example as to how we are seeing this change happen: CloudMargin is a company that is addressing the collateral management market change. EMIR regulation requires more robustness around that process and previously in this space there has been a few legacy providers that provide solutions for the sell side. Everybody else including the buy side has been using Excel, as well as email and phones. Looking at the whole of the 90s even the noughties, the focus was very much about high levels of STP (Straight Through Processing).

The problem with STP being it does exactly what it says on the tin, stuff goes straight out the door really efficiently whether its payments; documentation or something else, but what happens when it doesn’t come back? The documentation crisis of 2005 really demonstrates how bad it can get with the processing environment when you see things going out the door, but not coming back.

We are suggesting a new target, in a very interconnected world in which
we operate now which is around Round-Trip Processing. How do I ensure
that my counterparty has sufficient infrastructure to be able to respond to what I send their way?
Without my organisation having to use significant manpower, to respond to that.

When your response to client interaction is based on Microsoft Excel and Outlook as your main solution to the myriad of counterparty problems, you are going to have a major human element on your side. Your efficiency is only as good as the average efficiency across all counterparties. The roll out of cloud solutions, or as a service like CloudMargin enable the democratisation of being able to address the long tail of counterparties of a business processing previously in the arena of Microsoft and like products. We are finally at a point where we have a toolkit in the industry to raise the efficiency levels benefiting the entire network and technology will be an enabler of this, whether its Machine Learning or AI they will have a role to play here.

Note: Since this speech CloudMargin has announced a strategic partnership with AcadiaSoft.

Concentrate on best in class

In summary the landscape of Capital Markets, FinTech and the Derivatives market is changing, innovation and new solutions will be a large part of that change. Cost; control; capital and compliance we believe will be more important than competitive advantage for these new solutions to be adopted. It will impact the whole of the trade lifecycle so, front to back pre-trade through to point of trade through to post-trade. And FinTech will take its time to have an impact, we need to cut through the hype, there is a gap between the promise of tomorrow and actually the reality of today.

So, it is important to be realistic about what the opportunities are. We think partnerships will be a key to success in this space and we think that STP (Straight Through Processing) needs to move to more of a Round Trip Processing to increase the efficiency and reduce the human elements of workflows. The industry has different models of innovation and engagement, some work better than others and you may choose to do nothing. But it is important to do nothing, from a state of understanding what is out there and importantly there will be winners and losers.

It’s a case where the dialogue around blockchains; smart contracts; AI and machine learning were originally technologies looking for a problem to solve. But we are now at a stage where there are real life examples of using these technologies to solve real problems.

Transcription of a speech by
Mark Whitcroft, 2017
Founding partner of Illuminate Financial

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