Covid 19 and the move to remote working has exposed the operational weaknesses in post trade derivatives processing which is why 95% of tier 1 and 2 banks plan to invest more than $1m in this area over the next three years, with 45% aiming to inject over $5m.
Sponsored by Broadridge Financial Solutions, the report found that volatility surged in March and April as firms looked to close positions and hedge against risk. Trading volumes of global exchange traded derivatives soared by more than 60% compared with 2019. This pushed 58% of respondents to report they had major issues with back-office processing and trade reconciliation.
This is not a new problem as investment in the back office has lagged that of their front counterpart for decades. In fact, as the study points out, in some institutions, front-office systems capable of executing thousands of trades a second are sending those trades to run back-office processing on 20-year old platforms.
The study attributed the lack of investment to two major reasons – the fact that the back-office is seen as a cost rather than a profit centre and that it is easier to patch up and tolerate deficiencies in post-trade infrastructure. Fixes, upgrades and enhancements have been frequently implemented, stitching new processes onto old processing systems and making do, according to the study.
It found that brokerage payment and static data were the most inefficient processes for tier 1 & 2 banks while client and transaction reporting were the weakest links for non-bank future commission merchants (FCMs).
While 22% of overall respondents would consider fully outsourcing their post-trade operations to a managed services vendor if there was greater choice in the market, the number rises to 40% for non-bank FCMs.
Looking ahead, artificial intelligence is predicted to be biggest driver in post-trade efficiency over the next three years. In addition, sellside firms would like to see not only greater standardisation of data between the FCM and central counterparty (CCP), but also between the FCM and client.
“The unprecedented volumes experienced during the spring volatility confirmed what many in the market have known for some time: investment in post-trade has lagged behind other sell-side operations,” said Will Mitting, founder and managing director of Acuiti.
“There is no quick fix to replacing core back-office technology. But firms that have invested report huge increases in efficiencies and reductions in operational overheads,”added.
Justin Llewellyn-Jones, head of capital markets (equities, FX and derivatives) at Broadridge, noted, “Post-trade has been an overlooked segment of the derivatives industry, but advanced new solutions are available to solve issues that the industry is currently facing with incumbent technology”