Post-Trade Processing: Updating The Long Tail
With David Pearson, Strategic Business Architect, Fidessa
One key area of concern is that there are a large number of smaller asset managers whose traditional technology footprint is quite light and whose appetite to invest in technology has traditionally been limited. By continuing to operate a manual process after the point of order distribution, they are a real challenge for the brokers because they represent a disproportionate operational cost. By supplying their allocation instructions on spreadsheets or emails they don’t see the need at the buy-side end to sort out a problem that they don’t have.
There is a concern around this because in a T+2 environment there is less time to sort out a manual process; this process represents one particular area where the procedure could go wrong simply because you’re spending too much time on what ought to be a fairly straightforward operational area.
Can the buy-side get up to speed?
This time last year some of the exchanges said they would do T+2 in October 2014 rather than the deadline in 2015 and initially people said “we already do it for some markets, like Germany, so it could be rolled out” but as organisations have put their process under the microscope they realise that there are areas where they could see difficulties. The regular day to day stuff that is happening now will continue to be done, but it is the unusual trades around the edges that will suffer – unusual currencies, markets, and investors in distant time-zones are all areas where T+2 could be a real problem.
There are multiple focal points here – the sell-sides are starting to recognise some of those problems, but for some investment managers where you have third party admin going on, where firms are the buy-side for their own funds and for third parties, they have a problem with this administration. I think that the sell-side recognises that they might have to step in to improve the process – some smaller buy-side firms still think the problems lie with the sell-side; but they will start to understand this change should they see their costs rise because of higher levels of settlement failures as the sell-side has to push back on manual processing – if they hurt someone in their pockets the buy-side has to react, and it might take that to get them to upgrade and improve their processes.
How do the deadlines and timelines impact development?
These firms almost need to feel the pain to see what they could possibly gain – when people get to T+2 and they see the reality of where additional operational manual processes are rapidly having to be put together to cope with difficult scenarios. I think we’ll see the right kind of solutions being developed to help firms overcome that. What we’ve tried to do is build the cornerstone framework for processing, and as other areas come to light we’ll be in a good place to help solve the problems of those businesses. But we need to get to October 8th to see where those conversations become more real.
Operational staff have shown themselves very adept at getting things sorted but potentially in a relatively inefficient way. The business will be done and trades will be settled, but the cost will be inefficiency in manpower and time, and this is where solutions can make a difference.
Regulatory pressure has focused the industry on ensuring that it can efficiently handle the post trade workflow in a T+2 environment. We’re seeing now in Europe and the US, innovation coming through from operators and vendors alike. Building on the agreed standards laid out by bodies such as the FIX Trading Community, Fidessa has its new AMS service specifically to provide that kind of affirmation processing that actually ought to enable asset managers , big and small, to take control of technology where they were unwilling to make that investment and where they seek to improve their business process. That innovation will roll through, building on those industry-agreed standards.
Are firms still separating front from back in their thought process?
Many of the smaller businesses outsource the back office function, and one thing revealed to us is that no one really identifies a middle office on the buy-side . Many of those firms will outsource part or all of the client servicing and settlement process, and there is a very strong division put in between front office and the rest. There is a growing realisation of the need to integrate these things together, so front and middle become more seamless enabling better trade processing that will benefit the back office as well. Innovative vendor software will help bridge that gap and help the smaller fund managers, and through the outsourcers they will see the benefit of more integrated post-trade processing. The outsource providers have a significant throughput and reducing costs improves their value within that business – a collective shared cost of ownership across their clients.
It is interesting when you start to discuss certain issues with the larger fund managers. Issues like the creation of a middle office function for post-trade pre-settlement, making better use of that data that is now available and that information that you are storing in that middle office function. This may help these firms deal with other issues, particularly on the regulatory side. Firms looking at what they have to do in terms of upcoming regulation recognise the opportunity that a middle office solution addresses to solve problems that are still being analysed.