Towards An Efficient Back Office

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By Brian Godins, Global Head Equities Operations, HSBC
For at least ten years there has been debate around the manual nature of processing client side business. The ‘operating model triangle’ – where executing brokers (EBs), buy-side participants and custodians all work towards same day affirmation (SDA) – might more appropriately be called the ‘Bermuda Triangle’, given its inefficiencies. Lethargy in communication between the participants; a lack of protocols and standards in the matching model; and a general lack of consistent and quality data result in many trades going far past T0 for matching, affirmation, confirmation and/or allocation. The trade date process is then further complicated by third-party buy-side middle office outsourcing, and the prime broker dynamic.
On specific asset classes, derivatives have actually seen more progress towards efficiency in SDA than more vanilla securities such as equities and bonds. This is thanks to increased scrutiny from regulators on derivatives, and an industry-led push towards new market solutions which facilitate SDA and lifecycle management. While complex derivatives products still need attention, with more protocols and solutions (like FIX) to follow, most agree that vanilla securities lag behind on SDA. This is perhaps testament to the power of formal regulation in creating focus, maturity and a rapid pace of product development.
T+2 is a step towards an SDA model which is more efficient and lower risk, although the regulatory focus is currently on implementing T+2 on the sell-side, exchange and MTF/OTF trades. While buy-side and OTC client transactions are expected to follow suit and move to T+2, it is not a given. Dialogue within the market, and between broker dealers and buy-side participants, must be constructive and continue to focus on the negative implications of not settling the client side T+2, to make sure it does happen.
There are also an ever-increasing number of vendor solutions emerging to help insulate broker dealers from ‘manual client processing’. Most large players are now using industry solutions such as CTM, SWIFT GETC and FIX to facilitate SDA and ensure all allocations are booked and agreed on trade date. There is however a ‘tail’ of manual clients which continues to provide trade information by more antiquated means – spreadsheets, CSVs, PDFs and even free format e-mail. Helpfully, some vendor solutions provide a technology outsourcing capability that translates these into a standard sell-side format (usually FIX). This gives broker dealers straight through processing (STP) and helps them to interact more smoothly with that ‘tail’ of clients.
There are still a few questions around these solutions, such as, who should ultimately pick up the cost? Will broker dealers get their correctly formatted message in a timely manner? Do these solutions really get to the heart of the challenge at buy-side firms? Do they help improve STP from point of execution or will there still be many hands touching these trades through the process? We’re solving a problem, but are we solving the root of the problem? It will be interesting to see whether these questions develop into broader concerns.
Either way, we are certainly seeing steps forward, and we should encourage these types of solutions on buy-side transactions, to enhance the SDA rate where uptake of industry standards and protocol is not forthcoming. As regulators’ expectations around SDA become clearer, and perhaps more prescriptive, we may see a more forced change in approach. Until then, it is clearly in the industry’s interest to move beyond the old model of manual trade processing, for the sake of a more efficient marketplace.