THE TIME TO STREAMLINE.

With multi-asset trading continuing to take hold, Matthew Pountain, Head of Product Management, Securities Processing Solutions International, Broadridge Financial Solutions, considers how firms can meet the challenge of integrating asset-based post-trade processing.

The trend towards multi-asset trading has been on the rise for some time: in the last ten years in particular, there has been a huge increase as buy- and sellside firms seek out alpha through diversification of portfolios, increased use of alternative assets and new geographies in response to growing competition in the market and the need to engage with new opportunities.

During this decade of low interest rates, continually shifting regulation and the ever-pressing need to manage costs, the growth in trading of alternative assets, particularly FX and listed futures and options [see Figure 1], has been a response by many firms to improve returns. However, the flip-side of this growth in the trading of non-traditional assets is that unprecedented demands are being seen on post-trade processing, putting pressure on both operational groups and technology budgets.

For many firms, post-trade processing has been divided along asset lines, such as equities, fixed income, FX/money markets and OTC and exchange-traded derivatives, with most firms opting for silo-based operational models that effectively replicated front-to-back office services across each group of asset classes traded.

With the challenges inherent in sustained multi-asset growth, the need to re-evaluate the post-trade approach is clear. Within this new environment, the continuation of the silo model has the potential to cause difficulties for firms. Rising cost pressures, along with inefficiency and increased levels of operational risk, are now driving the need for a more centralized approach.

That is not to say that the integration across asset-based silos does not present challenges of its own; however, there are many benefits to be gained from this approach. Centralising post-trade operations offers enhanced business opportunities, streamlined operations, improved position management, lower operating costs after a year in which financial firms allocated $12.2 billion on technology to support post-trade automation activities [see Figure 2], and a reduction in operational risk.

Providing clients with access to new investment opportunities ahead of the competition is becoming a necessity, with rewards to early entrants into any marketplace. Being able to differentiate service offerings by providing access to emerging product segments or asset segments can offer brokers considerable business opportunities.  Clearly firms with the capabilities to support these new market requirements cost-effectively will have a significant advantage over the competition.

Streamlining operations can permit resources that were once allocated to discrete (yet replicated) operational activities to be redirected in order to meet growing customer demands and expand revenues. In so doing, financial firms are able to create a flexible and scalable framework that simplifies their operational processes.

An integrated approach post-trade also encourages a global, business-wide capability for cross-asset position management, enabling a single view across global holdings for all asset groups. A top-end integrated structure may offer the capability to forecast and manage future-dated balances of all asset classes with full breakdown of ownership, better enabling firms to manage real-time positions and maximize the use of all firm- or client-owned assets. It also addresses the need for control with the ever decreasing settlement lifecycle timeframes, reduces funding costs associated with borrowing for positions not forecast, and aids risk mitigation by avoiding unnecessary exposure to external parties for prolonged periods.

A multi-asset class, post-trade solution additionally enhances risk management capabilities through streamlined automation, state-of-the-art workflows and the optimization of STP rates. This approach enables firms to consistently flag and resolve exceptions, reducing risk and capital exposure. Firms can review operational risk parameters encompassing the entire processing infrastructure instead of one segment of the business.

The structural shifts occurring across global markets present both challenges and opportunities to firms in supporting their evolving needs. Creating an enterprise-level, multi-asset class operations infrastructure capable of managing the constantly shifting market structure is a significant undertaking and only a few of the largest global firms have the capabilities to create an in-house solution. Firms are increasingly turning to external IT providers to help [see Figure 3], and securing the right partner is critical for streamlining post-trade operations across asset classes and unlocking the additional benefits from a mutualized cost model.

© BestExecution 2014

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