More than half or 60% of institutions blame problem in the middle office operations for settlement failures, according to a new global survey conducted by Torstone Technology, SaaS provider of post-trade securities and derivatives processing in collaboration with GreySpark Partners, a global capital markets consultancy.
The report canvassed 58 individuals working in middle-office roles from leading buy and sellside institutions across Europe, Middle East Africa, Asia Pacific and North America.
It found that 45% intended to change their middle-office system entirely because of incomplete matching of settlement instructions as well as issues meeting the settlement deadlines. They also voiced their concerns about the inability to borrow or recover, and data flow disruption and the lack of straight through processing (STP).
More specifically they pointed to challenges in facilitating the real-time transfer of static, trade and reference data from the back office to the front office and vice versa.
They also pointed to incorrect or missing data in the middle-office resulting from fragmented and siloed front, middle and back-office functions that lack API-driven integration capabilities.
In addition, they noted difficulties in automating failed trade notifications to the front office due to fragmented systems’ reliance on manual processes.
Respondents were also worried about the potential joint impact of the proposed US T+1 settlement cycle and incoming Central Securities Depositories Regulation (CSDR) regulations on the middle-office.
Although respondents indicated that while a shorter settlement cycle in the US could reduce settlement risk, it will introduce operational challenges such as navigating shorter timelines to reconcile and repair trades.
In addition, the CSDR will introduce punitive charges and buy-ins for trades that fail to settle and will increase the cost of settlement failure – a risk that could increase under T+1.
The CSDR, which was originally introduced in 2014, aims to increase the safety and efficiency of securities settlement and the settlement infrastructures in the EU.
In 2022, CSDR will introduce a new Settlement Discipline Regime (SDR) to provide a set of common requirements for central security depositories (CSDs) operating securities settlement systems across the EU, further harmonize certain aspects of the settlement cycle and mitigate settlement risks.
In May, the Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) announced they were collaborating to accelerate the US securities settlement cycle from T+2 to T+1.
“Fragmented legacy middle-office systems built with varying levels of functionality and automation are not only inefficient, time-consuming and costly but present significant operational challenges for banks and brokers of all sizes,” said Brian Collings, CEO for Torstone.
He added, “Automation in the middle-office via STP platforms is key to solving these problems – remedying data connectivity issues, ensuring the timely delivery of trade data and confirmations to clients, reducing settlement risk as well as preparing for the possibility of a T+1 settlement cycle.”
Rachel Lindstrom, Thought Leadership Manager at GreySpark, said, “A lack of investment, over many years, has stifled efforts to rationalise and automate processes in the middle office in many banks and brokers.
However, as firms look to achieve STP to reduce settlement failures and speed up trade processing, transformation programmes in many firms are shifting from the front office to address challenges in the middle office.”
Daniel Carpenter, Head of Regulation at Meritsoft, echoes these sentiments. He says, “There is no getting away from the fact that reducing settlement fails is a primary goal for all market participants. While huge strides have been made to improve communication and collaboration between counterparties, this is only one part of the process.
What’s really needed is a better understanding of when and with which party trades are failing to settle, and why; and the only way to achieve this is to create a single ‘pane of glass’ view of all the relevant settlement data.”
©Markets Media Europe 2021