The Changing Dynamic Of Post-Trading Operations
With Dean Chisholm, Regional Head of Operations, Asia Pacific, Invesco
Across the post-trade platform, the same trends of the last two to three years are continuing. At a macro level for asset management there has been continued growth in passive products. As a result of this, more products are being sold which increases the volume of trading, which inevitably leads to smaller ticket sizes and an increased level of trading across portfolios. At Invesco, we are having to balance on a more regular basis which has a knock-on effect on the back office because there are more trades to process.
At a recent global asset managers’ operations conference in Bangalore, discussion focused on the trend towards the gradual globalisation of processing. Much of the processing is moving offshore, away from the trading teams, into global processing centres, mainly in India with some in Malaysia and the Philippines. Traders tend to stay close to the markets with proximity to the trading hubs.
Currently a very large firm will probably have four or five hubs through Asia; they need one in Japan as it is hard to trade Japan unless you are there, Australia is in a different time zone, and then there will be teams in Hong Kong or Singapore. Depending upon the size of the firm, they may also need local market traders in countries such as Indonesia.
However, there are moves within the industry to pull together the processing. The aim is to have a common processing centre behind the front office, ideally in a low cost location. Some support for the trading desk would be left behind and the fund managers would stay in-country, but the bulk processing would move out. The largest firms are likely to have two hubs – one somewhere cheap in North America and one in India.
There’s a wider philosophical push when considering where to set up a processing hub. One strategy is to find a city with a good university population; to try and keep the costs down and to leave only a few people close to the traders in New York or San Francisco etc.
If a firm has ten hubs with five people in each hub processing trades, those five people will be pretty stressed each day. One person may be on leave for some reason, so there may actually only be four people who will end up firefighting to get things done.
When that firm moves to a central hub, condensing ten locations into one, there will be, say, 50 people sitting and working together. The firm can then think more objectively about how they recruit, more specifically about graduate recruitment so they can access a different generation of people. If a firm isn’t on a global platform for operations and settlement, then it will be trying to get onto a global platform.
Traditional centres such as Singapore, Hong Kong and Tokyo all have ageing populations and not that many people at the bottom level coming into the industry. Experience has shown that in India there are many more people who are IT literate and confident in using modern tools; so finding ways to automate transactions is making progress there. There is also conversation there around robotic automation processing that can be developed when there is some slack in the system.
There are therefore two trends to watch – one is the cost trend, which is forcing staff out of high cost locations. And there’s the second, which is a positive feedback loop of building that global hub and tapping into new recruitment and processing models.
Once a firm is on a common platform, it can move to the next level of realisation, which is that it requires different people. The focus is no longer on processing the transactions, it is now about automation of those transactions which requires staff with a different skillset entirely.
In today’s modern front office, there should be no excuse for errors because a trader keys in the wrong execution price – if there is a decent front end platform, it should all be automated. Traders can then spend time on the execution quality and the difficult tail of orders which they are trying to achieve. An effective global hub and processing environment can have a similar effect on the back office.
Asia has been on T+2 settlement for some time now and the rest of the world is starting to catch up and move to T+2.
When changing settlement cycles, the first pressure is on the market structure. In a T+1 environment that will have an impact on the firm, if the team is processing large volumes and variable levels of volume, they will have no choice but to automate or find themselves in difficulties very quickly. To this end, the brokers probably automated before the fund managers because of these huge volumes. The large fund managers are now virtually all automated or are investing heavily in order to achieve full automation.
Regulatory pressure has been driving the derivatives world. The reality at the moment is that Asian markets are probably a bit behind Europe and North America and each of those markets is taking a slightly different approach to reporting. There is considerably more stress in the derivatives environment and so that is where the focus tends to be from a settlement angle.
Unity of markets
The reality is that the world is made up of many different countries with widely differing political aspirations. In terms of wider settlement and the macro environment, it will not be possible to standardise things like Bank Holidays or times zones. Focusing on Asia, it is unlikely that the Japanese will use the RMB in our lifetime. Realistically, the industry is probably nearing the limit of how far markets can come together.
However, it should be possible to reach a place where T+2 will be the longest of the equity settlement cycles. In addition, there will be some linearisation in a number of the more restrictive markets so they become more ‘normalised’; examples include the gradual opening up of China and Taiwan.
However, traders will be more concerned with liquidity and volatility than the actual market structures, because since the global financial crisis, volatility and liquidity have always been the primary concern.
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