Andrew Hauser: Building the market infrastructure of tomorrow -
CREST, RTGS and the Bank of England, 20 years on
Speech by Mr Andrew Hauser, Executive Director for Banking, Payments and Financial
Resilience of the Bank of England, at the CREST Twentieth Anniversary Conference,
London, 20 September 2016.
* * *
I am grateful to Sana Siddique for her help in preparing this speech, and to David Bailey, Jo Clennell, Toby
Davies, Rachel Greener, Chris Redmond, Iain Saville, Hugh Simpson and Paul Symons for their input and
guidance.
Introduction
July 1996 was an eventful month. Dolly the world's first cloned sheep was born. Boris Yeltsin
was re-elected as President of Russia. The Spice Girls' first single, "Wannabe", was riding
high in the charts. And the summer Olympics opened in Atlanta. By the time the Games
closed in early August, Great Britain had won only 15 medals in total, finishing 36th in the
rankings - three places behind North Korea, twelve behind Kazakhstan and 32 behind
China. As that song of 1997 had it, "things could only get better".
But there was one rather more upbeat event that month back in the summer of 1996. On
15 July, in a crowded room high up in Trinity Tower, Wapping, Chancellor Ken Clarke picked
up a computer mouse - then still a relative novelty - and, waving it towards a large computer
screen like a wand, declared the CREST settlement system open for business. Frantic
Treasury officials tried to correct the Chancellor's mouse-handling technique - but they
needn't have bothered because the equipment had wisely been disconnected from anything
that mattered. Indeed, CREST had already been running for some hours...
Figure 1: The official launch of crest (15 July 1996)
CREST itself was far from a publicity stunt, however. Its introduction finally enabled the
much-needed dematerialisation of equity settlement into electronic form, sweeping away the
antiquated paper-based Talisman system, bringing some of the UK's most important financial
market plumbing into line with its front office systems, and catapulting it towards best-in-class
internationally. Today, CREST accounts for half of the payments processed through the
Bank's RTGS system - around a quarter of a trillion pounds every day.
The launch of CREST was a particularly important moment for the Bank of England, because
the team that designed and built CREST was drawn predominantly from the Bank's own
staff, hurriedly called into service after the disastrous collapse of the Stock Exchange's own
project to dematerialise equity settlement, "TAURUS". Indeed that time also has an important
place in my memories. My first job at the Bank was in its Financial Markets and Institutions
Division, one of the areas from which the CREST team was taken. I vividly remember the
gaping hole left in the office, complete with empty coffee cups and discarded paper files,
when the team left for their new premises.
Building such systems, with all their attendant costs and risks, is not something any central
bank undertakes lightly. For much of the twenty years since the launch of CREST, the Bank
of England has focused on building up its capacity to analyse and set monetary and
macroprudential policy, and carry out prudential supervision. But the financial crisis and its
aftermath have once again reminded us all of the role central banks globally must also play
in ensuring that the "soft" and "hard" infrastructure of the financial system1 is fit for purpose,
delivering both systemic stability and efficiency.
The Bank of England of today takes that role seriously. And that is why, last week, we
launched a consultation paper on our vision for a new generation of Real Time Gross
Settlement here in the United Kingdom2. "RTGS", as it is known, is the system that manages
the Bank's electronic liabilities - or "central bank reserves" - and hence lies at the heart of
everything we do, from setting monetary policy through official interest rates and quantitative
easing, to the settlement of the most important interbank payments in central bank money for
seven payment systems, including that embedded in CREST. This is an exciting, but also
challenging, time of change, in payments and settlements more broadly, reflecting dramatic
developments in technology, demand and regulation, coupled with a relentless push to
reduce costs.
Against that backdrop, I want to do three things in this speech today. First, I want to look
back to some of the lessons the Bank drew from the building of CREST twenty years ago.
Second, I want to explain how we have applied those lessons to our current strategic review
of RTGS. And, third, I want to ask what lies ahead for securities market post-trade
infrastructure over the next twenty years.
Why was the building of CREST such a success?
Ironically for a project designed to do away with paper, the Bank's work on CREST left
behind great slabs of dusty paper files! Reading those files is a fascinating reminder of a
remarkably bygone age - but it also throws clear light on the steps the Bank took to ensure
CREST succeeded where TAURUS had not. Those steps remain hugely valuable lessons
today, and can be summarised under three key headings: first, establish early strategic
direction and momentum for change; second, secure close industry engagement; and third,
keep it simple, focused and open - both in your project team and in your system design.
In the interests of time, and because they relate most closely to our current work on RTGS, I
am going to concentrate on the first of these themes in my remarks today - but Table 1 sets
out the full set of lessons from our own analysis, and I look forward to hearing more from the
independent CREST research project later in the day, which has reached very similar
conclusions3.
Table 1
Key lessons for success from the crest project
All successful projects need a clear platform for change - and CREST had a burning one!
The collapse of TAURUS on 11 March 1993, followed by the resignation of Peter Rawlings,
the Chief Executive of the Stock Exchange, was front page news. The huge rancour,
reputational damage and cost (estimated by the FT at £400mn all-in, in mid-1990s money)
cast a pall over the UK financial system, already reeling from the failed attempts to defend
sterling on "Black Wednesday" and the publication of the BCCI Report in 1992, and facing
renewed competition from financial centres in continental Europe and elsewhere.
Without TAURUS, the UK was left with what one leading fund manager gloomily described
as a "Third World settlement system in a first-rank financial centre". Equity settlement relied
entirely on paper certificates, passing through an average of 25 pairs of hands for each
trade, each time running the risk of getting lost, misfiled or stolen. Settlement occurred only
once a fortnight, and on a fixed rather than a rolling timetable. Unsurprisingly, a fifth of all
trades failed to settle on time.
If the case for change was clear, so too was the common purpose shown by the public
authorities. As Pen Kent, the Bank's Executive Director in charge of CREST said at the
time, "TAURUS gave the Bank the legitimacy to step in and get on with the job: it needed a
market failure to get everyone pointed in the right direction." The Bank of England, called
upon privately to act by the Chairman of the Stock Exchange, had two main goals: first, to
reduce the material risks to financial stability posed by such an extended and uncertain
settlement process; and, second, to ensure the UK had an efficient and internationally
competitive market infrastructure.
There is no doubt that the second of these goals weighed particularly heavily with the Bank's
Governors of the day. Not everyone agreed that the Bank should become closely involved,
worrying that it could be a costly and reputationally risky distraction from the post-ERM
project of repositioning the Bank as an organisation capable of taking on independent
responsibility for setting monetary policy for the country as a whole. But the majority view
won out, bolstered by the active support of the UK Government, notably HM Treasury, which
took responsibility for ensuring that the complex and extensive legislative changes required
were delivered in a timely and effective way.
A Securities Settlement Task Force, led by the Bank, met for the first time on the morning
after the collapse of TAURUS to begin the task of translating these broad objectives into a
clear set of policy-based principles for change. Three months later, after extensive
consultation with market participants and users, it set out its recommendations4 - in many
ways a classical statement of the full range of ways in which a central bank can become
involved in infrastructure design:
1. Settlement processes should be streamlined and automated, moving from paper to
electronic media (hard infrastructure);
2. Settlement times should be reduced dramatically over time, moving from fixed to
rolling T+10 in mid-1994, to rolling T+5 in 1995, and to T+3 over a longer time
horizon (soft infrastructure)5;
3. Sterling settlement should be against central bank money at the Bank of England,
through so-called "Delivery Versus Payment (DVP)" (use of central bank balance
sheet); and
4. The Bank should prepare a detailed design for a new system, to be called "CREST",
within 9 months, and the system should become operational 2-3 years after
completion of that design (central bank as co-ordinator of market interests).
It is remarkable how prescient this simple, but challenging, set of policy goals turned out to
be. But there was still much to do to make this a reality.
First, the project needed to secure and maintain close buy-in from the industry that
would use the new system. The Bank did this by: setting up a senior level Steering
Committee to oversee the development of the design; forming many working-level working
groups and consulting on all major design decisions; and ensuring that the industry bore the
cost of the overall project. The Steering Committee was for making decisions and knocking
heads together. According to a "senior banker" quoted by the Independent newspaper, Pen
Kent (as Chair) and Iain Saville (as Chief Executive) were a "Mr Nice and Mr Nasty' duo ...
bludgeoning the vested interests which sank TAURUS into submission"6. The consultations
were voluminous, had short turn-rounds (some as little as two weeks), and respondents
received personalised replies (much to their initial surprise): a strategy christened "choking
the cat with cream". And the financial commitment sought by the Bank was broad-based:
when CRESTCo was first established, 69 institutions were asked to subscribe £12m in share
capital, giving them skin in the game from the start.
Second, the project team committed to an approach to building CREST that was simple,
focused and open: in the design of the system itself, and in the composition and work
practices of the project team. From the start, the November 1993 "Green Book" set out a
deliberately minimal blueprint, excluding non-critical functions required only by a few, or
which could be performed by users in their own systems. This approach was consciously at
odds with that adopted for TAURUS, which had tried to be all things to all people7. But it also
focused minds in the industry, forcing them to make difficult tradeoffs, and creating a clear
incentive to market providers to produce "add ons" for extra user functions. The project team
itself projected a similarly minimalist, open approach in its work - building on their own past
experience of having developed the Bank's system for dematerialised settlement of gilts (the
"Central Gilts Office"), involving a full range of disciplines (including policy, IT and legal) in all
outreach and design meetings, and embracing a robust attitude to analysis and self-criticism,
perhaps best summed up in their T-shirt logo "Purist and Bloody-Minded".
Not everything went to plan. Some early project management structures were found wanting.
PWC's audit of the project in Spring 1994 identified what might be euphemistically termed "a
range of unfinished business", but allowed the project to go forward. And the early months of
operation after that launch day in July 1996 faced technological challenges and setbacks.
But it is remarkable to think that this basic approach delivered a system that, at its core,
remains with us twenty years later.
How has the Bank applied the lessons from the building of CREST to the strategic
renewal of RTGS?
It is striking, too, to find how many of the lessons of the CREST project remain relevant
today, as the Bank begins its consultation on a new RTGS service:
• We set out the strategic drivers for change in a speech by the Deputy Governor for
Markets and Banking in January this year: a combination of aging core technology
and an unprecedented pace of change in the external payments environment. We
secured the broad support of others in the public sector, including HM Treasury and
the Payments Services Regulator. And we set out a clear set of policy goals: to
maintain or enhance stability and resilience, whilst also delivering a system better
able to enable change, innovation and competition.
• We have remained close to the stakeholders in RTGS throughout the first phase of
the project, holding meetings with over 100 users (old and new), infrastructure
providers, policymakers, academics and technologists, consulting on a vision for the
next generation of the service, and confirming that the new system will be paid for
by the users of the system through the future RTGS tariff (through which we also
gather current running costs).
• And we have stayed true to the principles of "simple, focused and open", conducting
the review using a small, dedicated, multi-disciplinary team of policy and technology
experts.
The consultation paper sets out our proposals in detail, which affect everyone with a stake in
sterling payments and settlement. With that in mind, I hope that as many of your firms as
possible will respond to the questions in that document by the deadline of 7 November.
What next for securities infrastructure?
Impressive though the achievement of building CREST was, it is a sad fact that the
persistent delays that pre-dated the project meant the UK came late to the party. Today, as
the industry again faces enormous pressures for change, it is important that it responds more
proactively than it did in those pre-CREST days, avoiding the twin perils of complacency or
over-ambition, embracing innovation to deliver a service to users that is both more efficient
and more resilient than ever before.
The case for reform is easy to state. Although most countries now have well-functioning
modern Central Securities Depositories, the structures below this top layer for providing
posttrade services in securities markets remain in many cases extraordinarily complex and
balkanised. Multiple tiers of custodians and sub-custodians, issuing agents, correspondent
banks, clearing members, registrars and brokers - many operating on a solely national basis
- provide an overlapping web of services to separate pools of market participants, using
different operating procedures, systems and databases. That siloised model delivers
settlement and collateral movements which, though much smoother than they were twenty
years ago, are still typically measured in days rather than minutes or hours, and require
multiple reconciliations - posing fixed costs, raising settlement and operational risks, tying up
collateral, reducing transparency and posing barriers to entry.
These segmented structures have not arisen by chance - in many cases they reflect the
differing needs of market participants, variations in national practice and regulatory rules, and
legacy systems. But they stand in the way of establishing a genuinely efficient international
capital market. And they are now under unprecedented pressure from three sources:
demand, technology and regulation.
The strongest demand pressures come from the largest users of capital markets, who need
to find further sharp cost savings if they are to deliver improved return on equity to investors.
Amongst other things that means: they want settlement that occurs closer to real time
(ie T+0) to minimise settlement and operational risk exposures and economise on collateral
usage; they want to deal with fewer separate intermediaries, systems and data protocols -
getting closer to a single seamless experience across sectors, border, currencies and
timezones; and they want to be able to control a single global pool of collateral and assets,
with access to a single comprehensive view of their data in real time. An important question
is how far this demand for convergence is met through further industry consolidation, and
how far it is met through improving the ability of still-separate systems to operate seamlessly
with one another (so-called "interoperability").
A key enabler of this change will be new technology. This may take many forms, including
real-time computing, the cloud and messaging standards. But of course discussion at the
moment is dominated by the potential of Distributed Ledger Technology, or "DLT". At its most
extreme, DLT is quite revolutionary. The "utopia" described in Euroclear and Oliver Wyman's
recent paper8 would replace the current cat's cradle of systems with a single, distributed
network in which single pools of stock moved seamlessly in real time against central bank
money, between and across borders, with only one set of reconciliations to perform, a single
global data set available to each user, with integrated reporting and regulatory oversight and
spectacular resilience characteristics. The paper envisages that whole classes of
intermediary, such as custodians and CCPs, could become redundant, replaced by smart
contracts.
There is no likelihood of such an extreme revolution occurring any time soon: much more
work is needed across a whole range of issues, including: speed and scaleability;
confidentiality protections; developing common protocols; integrating cash and securities
movements; and establishing regulatory and legal norms. In many cases, reform to
outmoded business processes will need to precede any application of the technology itself.
But there is clearly scope for less ambitious but still potentially transformational applications
in specific markets, not least those where current infrastructure is less well developed. A key
challenge for incumbent firms is whether to take on competition with challenger firms
headon, or partner with them to develop and implement the most promising forms of technology
internally. But doing neither is a risky approach.
The final driver for change is regulation, which since the financial crisis has greatly
increased the focus on centralised post-trade infrastructure as a means of promoting
transparency and reducing system-wide risk. Amongst other things, banks and other financial
intermediaries have been required to hold more high-quality collateral and be ready to
mobilise rapidly across a wide range of businesses in response to margin calls. They have
faced much stronger incentives to use centralised clearing and avoid settlement fails. And
they have faced the need to support an increasing range of account types and reporting
requirements. In turn, supervisors have increasingly expected infrastructure operators to act
as systemic risk managers. Taken together, these requirements are designed to bring about
a material increase in the stability of the system as a whole - but in terms of their influence
on the structure of the market, they also amplify the impact of the demand and technology
drivers, further intensifying the pressures towards rationalisation and convergence.
What is the Bank of England's role in all of this? Our primary objective is, as it has always
been, to maintain monetary and financial stability. But that does not mean holding back
innovation or competition. Far from it: our role should be to help enable these things, where
that can be done in ways that do not compromise stability. That could include: modernising
risky, out-of-date systems; reducing single points of failure by increasing interoperability and
reducing concentration; strengthening protections against cyber attack; improving risk
management; and reducing operational and settlement risk by reducing settlement periods.
We pursue our objectives in three ways:
- First, through the use of our balance sheet. Ensuring that settlement occurs in
central bank money has been a major achievement of the past twenty years, and it
is important that this should continue, however the structure of the market develops
in future years. That is a central design principle of the proposals we recently
announced for the new generation of RTGS, and will be delivered though broader
access for infrastructures, adoption of ISO 20022 as the new messaging standard,
maintenance of the existing DVP link for CREST and regular FX settlement for CLS,
and consultation on new functionality to deliver synchronisation with innovative
technologies.
- Second, as regulator and supervisor, we will ensure that financial market
infrastructures are subject to high standards of resilience and soundness, whatever
technological form those infrastructures take in the future. That in turn means
developing a supervisory net that is sufficiently flexible to cover the risks posed by
new technologies, in a proportionate manner, as they develop.
- Third, we will continue to act as a catalyst for change - through our research work
on the policy and technical questions raised by the distributed ledger and central
bank digital currencies9; and working with innovative firms on applications of new
and existing technology to central banking topics through our new Fintech
Accelerator10. It is not our job to second guess the market where innovation is rife.
But where direction is required on standards, consistency with regulatory needs or
policy requirements, we will play our full part, alongside other national central banks
through the FSB, G20 and Basel processes.
Conclusions
We have come a long way from those mouse-jabbing days in Wapping. But the themes of
that time are remarkably topical - embracing new technology to improve risk mitigation and
innovation in financial market infrastructures and working together between public and
private sectors to achieve common goals.
Fairly or otherwise, the post-trade sector does not always have a reputation as being the
most forward-thinking when it comes to reform. In a speech in November 1996, the Bank's
then-Governor said the following:
"For many years, payments and settlements risk was largely disregarded as an
administrative matter for the "back office". Perhaps not surprisingly, as the
numbers have grown there has ... been a growing awareness - among both
commercial and central bankers - of its crucial importance, so that it has moved
up the agenda, from the back office to the board room."
I am not sure those issues have been neglected quite as badly in recent years as they were
then - but, given the changes afoot, we are I believe entering another period where central
banks and market participants will again need to show real ambition, and work closely
together to harness the potential benefits of another wave of innovation in ways that maintain
stability for all.
Thank you.