The lack of data standardisation, outdated software and fragmented data sources are the biggest barriers to efficiency in derivatives post-trade reconciliation, according to the study – Derivatives Reconciliations: “Good enough” is no longer good enough – by market intelligence firm Acuiti.
The study, which was commissioned by software provider Kynetix, surveyed or interviewed over 60 sellside firms operational in the derivatives market and found that the reconciliation process was an increasing focus for senior executives as they seek to reduce risk and improve client service.
The study noted that the implementation of multiple data symbology standards was one of the main obstacles in derivatives reconciliation efficiency. For example, 81% of surveyed tier 1 banks use spreadsheets within the core reconciliation process, compared with 19% of brokers and non-bank futures commission merchants (FCMs).
Meanwhile, 19% of tier 2 and 3 banks have more than 10 manual touchpoints in their standard reconciliations process.
However, investment in reconciliation software is increasing due to more stringent regulatory oversight, as well as a response to the vulnerabilities highlighted by the significant volatility experienced in 2020.
It showed that 67% of brokers and non-bank FCMs have upgraded their reconciliation software over the past three years. Of those 90% spent less than 10% of their total back-office budget on technology costs. This reduced to five out of 10 for those that did not upgrade.
The report said that the efficiency emanating from investment is also born out in the time it takes to reconcile. Of those that had invested, six out of 10 met the internal target for reconciliations to be completed more than 90% of the time compared with just over a third that hadn’t invested.
“After a sustained period of increasing regulatory burden, sell side firms are recognising the need to address outdated and overly manual legacy derivatives reconciliation processes,” said Matt Dolton, CEO of Kynetix.
.He added, “The heightened need to reduce reliance on key personnel skills, plus the pressing need to resolve exceptions faster, has meant that FCMs are seeking cloud solutions that deliver easy resolution, day in, day out, in the fastest possible time.”
Will Mitting, founder and managing director of Acuiti, added, “Over the past decade, volumes, the complexity of market structure and regulatory requirements that require efficient reconciliations have all increased substantially putting immense pressure on operations across the sell-side.”
He noted. “All firms are targeting greater efficiency and automation but each faces unique challenges in realising these goals. While some smaller firms have been able to pull everything together into a ‘golden source’ with zero manual intervention, for larger firms the expanse and complexity of their operations means that reducing manual touchpoints and a reliance on spreadsheets can result in significant strides towards greater efficiency.”
©Markets Media Europe 2021