Automation: how we, 10 people, manage an asset worth billions of dollars - IT protection from people and operational risks

In 2009, Russia decided to make a voluntary effort to become an international financial center. Here, as with any hackathon: for it to become international, you need to invite, for example, a Belarusian. Actually, just in 2009, laws were changed precisely for securities from the Republic of Belarus.

Our law hackers discovered a bug and came up with burning eyes saying that we can actually directly trade Western indices. Then no one did this. Why this is important and cool is a little lower. In short - after discussion with the state regulator, it turned out that this is not a bug, but a feature.

Next were trips to London, Singapore, New York and Tokyo. Polite people in ties listened to us, searched for Russia on the map of financial flows (and didn’t find them), and then said: “Well, you understand what infrastructure is needed for this, IT support and legal support.”

The hardest thing was with IT. Two data centers in London, a bunch with Russian offices, emergency deployment points, duplication of all nodes and, most importantly, integration software. Plus a lot of automation (for example, so as not to sign each document with your hands and not accept calls like brokers in the 30s of the last century).

It took 4 years to start.

IT protection against operational risks

When you buy new ETFs (shares in the fund’s shares, here are the details on GT about what it is ) for 50 thousand rubles, somewhere far away in London a special robot buys real live shares of companies from the ETF’s fund index. An index is an instruction whose stocks and in what proportions you can buy. For example, if we are talking about ETFs by Western companies like Google, Apple, MS and further down the list, then Gazprom shares cannot be bought into this fund.

When you buy ETFs on the secondary market (stock exchange), you simply gain ownership of these shares. One person handed them over to another, and the intervention of a robot from America (buying shares in the fund) is not required.

We are the first ETF provider in Russia. Our work is similar to the work of the system administrator: we make sure that there are no malfunctions in the process of buying and selling, but in no way interfere with the work of the fund.

In order to make it clear how this works, I’ll first tell you about what we did to get started, and then about the process of buying a single ETF.

Start

It was impossible to just buy and buy ETFs in Russia. Even if there was a fund in America, Great Britain or Germany that sold them, you had to work through a foreign broker. To us.

The first task is for ETFs to be listed on the Moscow Exchange. That is, they were included in the list of securities sold there to a wide range of individuals. Our reference Federal Law “On the Securities Market” of 04.22.1996 No. 39-FZ allowed this in 2009, as I wrote above. Thanks to the new feature.

Further: a foreign security (stock of an ETF fund) must have an international identification number (ISIN) and a financial instrument classification number (CFI), which determines the type of security in accordance with Russian law. More information about ISIN / CFI should be published on the website of NSD (National Settlement Depository). In fact, all shares traded in Russia, one way or another, pass through it. It acts as a kind of gateway or drive.

Further: for listing in the Russian Federation (only after that the instrument becomes available for private investors) it is necessary that the instrument was previously placed on one of the foreign world exchanges approved by the Federal Financial Markets Service. The security must then be deposited with NSD. The requirements established by the Federal Financial Markets Service in the Regulation on the organization of trade in the securities market must also be fulfilled.

This is all from our side - hello to the lawyers.

On the part of funds from other countries, the legal procedure itself has been worked out and polished to a brilliance, but there are difficulties in IT. From the point of view of data storage and processing, European regulators (in our case, Central Bank of Ireland, ESMA and FCA) impose extremely severe infrastructure requirements in terms of continuity of business processes, both at the level of the fund manager, and the administrator and custodian. In particular, the requirements of the regulator provide for the duplication of all important infrastructure elements: office, data center, channels, trading platform and so on. Despite the low price of errors due to the long-term investment orientation of the instrument (shares are traded at T + 2, that is, for two days - this is far from milliseconds on the exchange market), nothing should fall. Failure of any infrastructure node at any point is allowed - and the system should continue to work. KamAZ drove into the office - deployed in another, backup. Refused the data center - deployed in another backup. Road workers cut the provider cable from the office - there is a second on a different route, and so on.

As a result, the data centers required not two, but five: two “combat” in London and three recovery sites. One emergency data center in Brighton (50 kilometers from London), the second in Belham (the southern suburbs of London, in fact part of the city), the third in Nyudigat (25 kilometers south of London). Naturally, in data centers optics have different routes. The offices also have two Internet lines and an additional telephone copper. Our main office is in London, the duplicate is in the suburbs. All our platforms run on data center servers and can easily migrate to emergency points without losing transactions (I recall that counting on hours rather than milliseconds can be done relatively easily, and our data centers are within synchronous replication - the speed of light is not introduces delays requiring asynchronous replication up to about 50-60 kilometers of difference between points).

Accordingly, all platforms can also be accessed remotely and run remotely from laptops. This applies in particular to tools for subscription and repayment applications.

Plus, due to the fact that backoffice is built on platforms with its own data warehouses, information loss will not occur even in case of simultaneous destruction of our two data centers and information loss on local servers.

Plus, our system is designed in such a way that our IT solutions provider and Internet for individual workplaces (Options-IT), approved by the English financial regulator (processes are fully consistent with the requirements, the provider specializes in servicing financial companies), has the necessary infrastructure for setting up trading platforms and systems remotely - in other words, in the unlikely situation of a complete infrastructure and the need to reconfigure the system, Options will be able to do its job 24/7.

Similarly, the rest of the infrastructure.

So far (knock-knock) all this has not come in handy.

For professional participants in the securities market in the UK, Ireland and the EU as a whole, the regulator makes much more stringent requirements regarding the continuity of processes, which completely avoids the manifestation of technical problems (even the events of 9/11 did not significantly affect the work of financial companies whose offices were located in twin towers - only those companies where most of the staff physically died were concerned with continuity problems).

All companies like us operate on a constantly updated Business Continuity Plan (BCP): at least once a year, provided that there are no significant changes within the year.

Protection against operational risks and human factors

See, here is a list of companies that are involved if you click on the confirmation of the purchase of ETF in the web interface or any Russian brokerage program:

1. Your application does NOT actually mean a request for the purchase of shares in the fund for the provider. When you buy ETF shares through a broker in the secondary market, you are working with a seller who previously purchased these securities. If you invested 50 thousand rubles, in fact you cannot buy anything intelligible on them in a large market. However, you buy a share in the fund, that is, your amount is evenly distributed among the companies in the index. A rough analogy: it’s like consuming the computing power of a cluster, but instead of a cluster, it’s a depository with shares.
2. If we are talking about the primary market, that is, about subscribing to new shares directly in the fund, then only authorized participants (authorized participants) can do this. Their activities are somewhat similar to the actions of vendors - they seem to act as intermediaries between the fund and end users. Subscribing, as a rule, is possible only in large volumes (say, $ 2 million).
3. The application flies to Ireland, where the Central Bank of Ireland is located, which monitors the activities of the fund. An authorization procedure and several security checks await you along the way. The final step - the bank says: "I see money, you can buy." Securities are delivered according to the DVP principle - delivery against payment, this protects the client as much as possible.
4. The amount of funds allocated to the fund should be invested exclusively in the index - the money should not go to anything other than the purchase of shares from the list of companies of the ETF fund.
5. Applications are clustered within a few hours and sent to share purchase processing.
6. Checking company (custodian) BoNY Mellon Trust from the United States verifies that no one was mistaken anywhere. It simply does not allow stocks to be credited to the fund if their name or weight does not match the index. In the event of any error, the transaction simply cannot be carried out at the precontrol stage, and the fund is warned. Or a strict warning (plus BoNY Mellon Trust is obliged to “knock” the regulator).
7. Through Euroclear (simplifying the interstate system of shares circulation, checking all participants and the legality of the transaction), an instruction on the purchase of shares is issued. In parallel, all this is checked by Computershare (the registrar of the fund, roughly speaking, is a certification center in IT terms).
8. Each of the independent parties gives its “OK”, and the transaction is executed.
9. Assets (stocks) come to the custodian in the USA, from there ETFs are issued, which are then sent through the Euroclear transaction to the Russian depository.

As you can see, this is quite difficult, but it eliminates errors. I repeat: the practice has been worked out for many years in the USA and the European Union. It is this automation and simplicity (well, in comparison with other tools) that makes ETFs so desirable for investors. If in a nutshell - the income is higher than on a bank deposit, but there are no problems with operational risks. The only significant risk is market, if suddenly the sector of the economy where you invested goes down.

Key Infrastructure Elements

When starting all this business in Russia, we needed a few more IT solutions.

Our first partner - Charles River Solutions - organizes a trading platform (trading), frontend and middleland. This is a common platform for many countries, but in our case it is specially adapted to the needs of FinEx. A couple of years after us, VTB Capital partially deployed its infrastructure on the same platform. The general purpose of this system is more automation of trading, less human participation. The basic algorithm is laid down, according to which the client on the buyer's side contacts the broker (for example, Morgan Stanley) and through them makes a purchase or sale, in order to minimize losses. The platform is “heavy” and this is not cheap. Only a few ETF providers around the world use CRS because of the high cost of finalizing the file (plus just the complexity of switching to the platform). Because we are relatively young at FinEx ETF, had the opportunity to immediately do "as it should." Investing in IT in the financial sector pays off like nowhere else.

Most often, the platform is used by managers and banks who do not have a task to complete transactions simultaneously with all assets included in the index portfolio. In our case, the manager is obliged to complete transactions simultaneously with 500 or more assets, and we spent a lot of time and effort to adapt the platform for these purposes in order to correctly collect requests in packages and not work with individual transactions.

Plus, each of the funds operates with assets in different markets where excellent methods of accounting, delivery and settlement of transactions with assets are adopted. Accordingly, the launch of each fund required improvements related to accounting and maintenance of asset deliveries. Perhaps you know the task of organizing an information link between departments - this is about the same thing, only all parties were interested in cooperation, so it turned out in just 2 years.

Together with Charles River, a special automatic ETF Expand module was developed, which allows you to automatically process information from the administrator (BNY Mellon) regarding the structure of the subscription basket and generate trade orders, transfer them for execution and verify the correctness of execution. An extremely important block, since it allows you to avoid mistakes when buying / selling securities when subscribing / redeeming ETF shares and, as a result, significantly reduce risks. This excludes the human factor.

The second important element of the infrastructure is our own risk management platform, which we have already developed (more precisely, a group of our developers and a London outsourcer). MDX Technology was also involved in the work. As a result, the platform allows us to adequately take into account the risks associated with trading derivatives that we use in ruble hedge funds (in particular, we are the only ETF provider issuing funds with hedging foreign currency assets against the ruble). As a result, Russian investors wishing to invest in foreign currency Eurobonds and US Treasury bonds have the opportunity to do this without the risk of a change in the ruble exchange rate plus an increased ruble yield. Simply put, if the ruble suddenly jumped down, your assets will rise in price, but you will pay a huge income tax. Moreover, the assets themselves stood rooted to the spot. The use of protection against ruble fluctuations and a number of other features make it possible to avoid such situations.

Total

We were able to assemble and raise the entire infrastructure of the ETF provider. We achieved listing of a really interesting tool (ETF) on the Moscow Exchange. We built integration in the automatic mode throughout the purchase process (it’s just space after “voice trading”).

Now you can simply call your broker or enter any application that allows you to buy shares on the Moscow Exchange - and purchase ETFs. A very long road was needed in order for it to work. Naturally, large banks are now trying to repeat our path, but they won’t succeed quickly - you need to have a lot of experience in interactions in international markets, hacker lawyers and, most importantly, experience in quick error-free integration with the help of your IT teams.

About what ETF is in practice and how this tool works (and what you can count on by buying it for 50 thousand, for example), you can read it here on Gicktime .