Why post-trade innovation could be ‘Big Bang 2.0’ for the trading desk
By Daniel Carpenter, Head of Regulation at Meritsoft, a Cognizant company
This year marks the 35-year anniversary of the Big Bang – a set of UK government rules that proved to be the precursor to the computer-dominated world of electronic trading. Over three decades on, Britain’s financial sector is on the cusp of undertaking a second coming of the Big Bang. Only this time, it is the traditionally more understated world of back-office post-trade processing that will have its moment in the spotlight.
Since the original legislation was passed, it has been a constant uphill battle for back-office post-trade workflows to be in sync with the front-office trading desk’s relentless, technologically driven pursuit of alpha-fuelled returns. In order to transform these workflows, it is important to acknowledge what heads of desks are searching for. Ultimately, they need real-time data transparency and analytics, fewer trade fails, a deeper understanding of capital allocation on a daily basis and, crucially, they need to maintain enhanced compliance at the same time. This is no small task, and in order to achieve these goals, the back-office needs the equivalent 80’s reforms – call it Big Bang 2.0 – to revolutionise how their post-trade operations function with the front-office.
From client onboarding to sorting out the long-standing issue of reducing trade settlement fails and transaction tax processing, there is plenty for financial institutions to ponder right now.
Client onboarding conundrums
As highlighted in last year’s Bank of England post-trade report, client onboarding is one of the most time-consuming functions that burdens banks. It’s also a large part of the brokerage, clearing and exchange costs they incur. The onboarding stage tends to be critical to the long-term profitability of a customer and a central part of the brokerage reconciliation process, and yet it is during this period that manual process challenges often appear increasing the time to revenue.
On average, banks need weeks and sometimes months to fully onboard a new corporate customer with their existing manual applications. Onboarding systems at financial institutions are also largely disconnected from other important functions, such as know your customer (KYC), which can result in a disjointed view of the client and a lack of transparency in the process.
If banks harbour any hopes of addressing this issue, they need an onboarding application, or service, that helps them deliver a full end-to-end client lifecycle management process from onboarding through KYC and beyond. The best applications are those that encourage maximum compliance, can manage regulatory changes globally, integrate with leading KYC utilities and legacy systems, globally manage complex entity onboarding and due diligence, and are scalable. Partnering with a provider, such as Cognizant, that has established relationships with various industry leaders and expertise in developing and seamlessly integrating such solutions can ease these brokerage challenges.
However, brokerage is just one area where we find challenges stemming from manual processes. The pandemic-induced volatility of 2020 has highlighted another key post-trade challenge for financial institutions to ponder: trade settlement fails.
Prepare for trade settlement fails
The most recent ESMA Trends Risks and Vulnerabilities (TVR) report has shown that there is still a relatively high volume of settlement fails in equities, following the dramatic surge in the level of fails during the second half of March 2020. These episodes, combined with regulations such as CSDR, serve to underline the industry’s need to reduce the number of fails to improve operational efficiencies, and to arm against the impact of future market volatility. What is needed is a better understanding of when and with which party trades are failing to settle. To achieve this, all the relevant trade data needs to be centralised and accessible.
With a single pane of glass, through which all the necessary transaction data can be viewed, data analytics and artificial intelligence (AI) from a professional technology and services provider, including Cognizant, can be applied to examine the likelihood of settlements failing, and the sources of the most costly and frequent fails. These insights will provide heads of desks with important information on which counterparties are failing and when; this, in turn, can better inform contractual negotiations and trading decisions.
To make truly informed trading decisions that will ultimately help generate revenue for the bank, heads of desks require even more insight than this. Both the front and back office must also turn their attention to the area of tax as another example of how creating a centre of excellence with automation and analytics can reduce costs.
Why is tax so taxing?
The recent introduction of a new financial transaction tax (FTT) in Spain and discussions around other global transaction taxes has brought transaction taxes to the fore once again. As a result, there is a need for greater centralisation and automation of transaction tax processing.
Similar to the other parts of operations workflow, banks should be taking a more holistic approach and managing their tax operations through a centralised, automated system that can be easily configured to process any new tax data that is required, in order to comply with additional tax regimes as they come into force.
This will not only minimise the operational lift required to process their transaction taxes but also provide control and transparency around which taxes are owed and how clients need to be charged. And, as a result the system will go a long way towards enabling clear oversight of the trading desk’s obligations and costs.
Can post-trade generate big bucks?
As Britain is on the cusp of undertaking a second coming of the electronic trading Big Bang, or a Big Bang 2.0, it is evident that greater automation can be applied across some of the many facets that constitute the post-trade lifecycle.
Key steps need to be taken to transform existing technology systems so that the front and back-office can work together more harmoniously. Instead of minimum compliance with month-end reconciliation and validation, the two units can drive the adoption of daily calculations and reconciliations with greater transparency. If you have capital for allocation but don’t have a granular understanding of how much and from what point in time, then it is effectively ring-fenced doing nothing when it should be contributing to returns. As a result, heads of desk will be better able to identify where capital is daily, which is crucial to the overall performance and profitability of the desk.
Any tension between the front and back office should transform into straight through and fluid cooperation, helping each side make smarter decisions and reduce overall costs. Although this may sound simple, firms need to allocate appropriate budget and time to industrialise their tech solutions in order to make this workflow efficiency a reality. For those who think the required costs seem steep, the savings and benefits in the long run should be substantial.
©Markets Media Europe 2021