3 Improvements That Post-Trade Firms Should Consider Now, Part 1
Winters aren’t what they used to be. My main winter hobby, cross-country skiing is suffering from a lack of snow and temperatures have been way too high in the Nordic region the entire season! CSDs are also changing rapidly and competition in the CSD industry is heating up!
- In Europe, the first wave of CSD’s are migrating to T2S is in June. Monte Titoli (Italy) and SIX SIS (Switzerland) are amongst the first to test the system. Globally, I see the most interesting things happening in Asia, where HKEx has linked its market with Shanghai and soon with Shenzhen, both supported by CSD-CSD link. I think this development will be followed by other links in the region.
- Many of the discussions in capital markets today are concentrated on finding new business opportunities, diversifying business portfolios (this was discussed in my blog from spring last year) and entering into new attractive markets, all aimed at increasing profitability.
- Profitability is also naturally linked to the cost of operations, which is why I also want to turn your attention to operational efficiency and effectiveness. While aimed at addressing the CSD market, this post certainly applies to the operational efficiency of any post-trade business.
Inefficient operations squeeze margins, decrease profitably and increase the risk of making costly mistakes. The good news is that there are 5 categories where firms can make improvements in operations now:
- All business processes, including the level of straight through processing (STP) in each of them
- Staff effectiveness
- Technology supporting the core business
- Cost of supplementary vendors (i.e. market data and telecom)
- Other operational costs such as office space, tools and systems
While today I want to highlight business processes, staff effectiveness and technology, I also think it is important to acknowledge the possibilities of taking significant savings in the other areas as well.
Since the scope is quite broad I’ll first concentrate on operational efficiency and leave staff effectiveness and technology to upcoming entries.
Operational efficiency in post-trade business processes
In global capital markets, investors, intermediaries (such as brokers, local/global custodians and account operators) and Financial Market Infrastructures (FMIs such as exchanges, CCPs and CSDs) can each be managing one single trade from anywhere in the world, with that trade likely crossing many legal entities, jurisdictions and geographic boundaries.
In a perfect world, when an order transforms into trade, it would contain all of the necessary information for it to be:
- Cleared and settled (even through to investors’ accounts) including all related transactions (i.e. managing the collateral linked to the trade)
- Reported to all parties in the value chain including the investor himself, intermediaries and relevant compliance personnel
Unfortunately this is rarely the case, and there are manual processes within each provider in the transaction chain that can produce immense operational risk. Recent global initiatives to reduce the settlement cycle from T+3 by one day have increased the failure risks. A European-wide move to T+2 however, has proved the concern wrong, mainly due to the very high-level of STP in European post-trade transaction management. On the contrary, Europe saw a reduced number of failed trades right after the big bang in October 2014.
How can operational efficiency be increased?
We, the post trade industry, cannot cure all of the existing problems in the value chain. We can offer solutions for our counterparties that can significantly decrease the various operational risks, with the help from global and regional policies, standards and global market practices outlined by such organizations and industry working groups as CPMI/IOSCO, ESMA/ECB, ISO, SWIFT and regional industry associations such as ECSDA.
Post-trade FMIs should embrace and implement all global best practices aimed at furthering Straight Through Processing (STP) as STP increases operational efficiencies and effectiveness and decreases costly failures in the transaction processing. Omgeo and other industry players estimate that failed settlements (or activities aimed at avoiding them) cost market participants billions of USD annually. Ultimately these costs are passed on to the investors.
To reduce cost pressures post-trade service providers and FMIs should re-define key business processes such as settlement and corporate action processing:
- Identify operational gaps (such as in a workflow issuing a new security or in rights issue) and solve them with process re-design or technology
- Concentrate on optimizing exception management (such as in settlement process and/or impacts to corporate action)
- Look at the transfer of ownership of a business process and how that can be clarified and automated
- Adapt and comply with international standards such as ISO messaging, Corporate Action Joint Working Group (CAJWG) and other industry working groups and best practices associations
- Where standards or clear market practices exist processes should be fully automated supported by compliant technology solutions
- Consult stakeholders and establish in-depth on-boarding programs to achieve maximum impact in your organization, and within your stakeholders’ organizations.
As stakeholders (participants and issuers (agents)) maintain the most power, it is key that proposed structural changes receive their support and thus early communication and participation of post-trade FMIs is crucial. Communicate early, and communicate often!
In myupcoming blog posts, I’ll cover the remaining two angles for the CSD business: Profitability and Effectiveness.
is Head of Product Management for CSD Technology at Nasdaq. He is based in Helsinki, Finland.