Trading strategies have become more complex, as directional strategies are being combined with hedging activities that often encompass multiple asset segments and structured products. Not only are portfolio managers seeking to enhance returns by entering foreign markets, they are also expanding strategies to include alternative asset classes including derivatives, foreign exchange and fixed income instruments denominated in multiple currencies. This shift in trading strategies has implications for the business and its operations.
Brokerage firms moving into new regions and assets are challenged to support the greater diversity of trades. Managing the trading needs for the broad range of new assets across multiple geographies is taxing existing infrastructures, especially since clients are using strategies that can encompass multiple asset types, regions and currencies.
For many sell-side firms, each asset group is supported by often outdated, silo-based architecture and discrete operational groups. Silo-based structures make it difficult for the firm to represent and adequately support multi-asset class trading strategies and consolidated reporting that combine a number of instrument types, as these are each dealt with by separate systems and operating models. This is a major source of risk and avoidable cost, and leads to a disproportionately high effort just to meet baseline operational and client needs.
Firms need to invest in resources and processes that can support the transformational shift in trading and post-trade activities. As global regulatory and market change initiatives continue to transform market practices, firms need to be well positioned to capitalise on emerging opportunities. Over-the-counter (OTC) activities, for example, are bringing further change to an already complex market structure in terms of trading, clearing, data repositories and market utilities. Providing access to new industry services requires significant resources that many firms are unable to provide.
Ultimately, firms with the capabilities to support new market requirements cost-effectively will have a significant advantage over the competition.
Key Factors Driving the Need for Creating a Post-Trade Processing Centre of Excellence
1. An increased focus on risk reduction and client service
Risk reduction and control is crucial and continues to gain importance in an operational context. Many firms have inadequate operational systems and processes for delivering risk control and reduction, especially where a client relationship extends across multiple assets and geographies. Finding a lingua franca across systems, operations and asset classes is difficult due to the varying ways in which different systems represent the components of a trade and its lifecycle events. Without a common, consolidated view, it can be onerous to identify operational risks properly.
Firms are also seeking to leverage technology for more efficient work flows, and better operational oversight, to support client and regulatory requirements in compressed timeframes. Periodic batch processing can no longer support trade velocities arising from latency-sensitive strategies used by sophisticated trading firms, especially as these strategies move into new assets and regions where greater price volatility can be encountered.
2. Globalisation accentuates the need for efficiency
As investment managers explore new ways to enhance returns, institutional brokers are driven to access new markets, thereby driving up their costs. Capturing business revenues from new markets requires investment. These investments can no longer be viewed solely on the basis of their top-line impact. The possible negative impact on margins means that firms must ensure both running costs and overheads are minimised as part of their business case. This increases the need to focus on operational efficiency across the full client relationship and internal business lines.
Firms offering trading services across markets and regions need local expertise, with staff fluent in the nuances of the local market structure, including both listed and OTC markets. Connectivity to multiple exchanges, clearing houses and trading counterparties in the cash securities markets may be relatively painless, but the level of complexity in trading and processing OTC instruments is several magnitudes greater, especially as the regulatory environment evolves.
3. Rising Cost Pressures Drive the Need for Centralised Operations
Cost reduction through centralised operations and the automation of manual processes is the key to future success. The costs of operating in, or expanding into, new asset segments and markets can be prohibitive for some firms, and go far beyond providing staffing or compliance expertise. Expanding service offerings to include a new asset group in a core market involves considerable requirements, including not only specialised staff across the front- and back-office, but also systems that can support the trade processing workflow from execution to settlement.
Brokerage firms and banks are challenged to support rapid diversification and comprehensive services to retain and attract new clients while managing to limited resources. As client diversification continues to grow, firms need to be able to scale their operations. Simply adding headcount is not enough.
The need to improve and expand their capabilities is also critical for firms looking to grow their client rosters. Providing access is just one part of the puzzle, however, and as firms roll out support for new industry segments, they need to ensure that they are meeting customer expectations through an efficient, well-managed service and driving the firm’s own profitable growth. All it takes is a bad trade price or fail in the back-office and clients quickly lose patience. At best, a firm may endure responsibility for a fail. At worst, the client shifts business to a competitor, with that revenue likely never to return.
The Advantages of a Multi-Asset, Post-Trade Processing Centre of Excellence
A consolidated, multi-asset global processing solution affords firms enhanced business opportunities, streamlined operations and lower operating costs. Resources once allocated to discrete, yet replicated, operational activities can be redirected towards meeting expanded customer demands and expanding brokerage revenues. In so doing, brokers are creating a flexible and scalable framework that is critical in their efforts to simplify operations—in effect, creating simplicity out of complexity.
Improved Risk Management
As volumes increase and diversity of trading expands to include a wider and range of instruments, a holistic, multi-asset class, post-trade solution enhances risk management through streamlined automation, state-of-the-art workflows and by optimising STP rates. This non-siloed approach enables a consolidated view of positions and client risk exposure, enabling firms to immediately flag and resolve exceptions through customisable business rules to reduce risk and capital exposure.
In real time, firms can review operational risk parameters encompassing the entire processing infrastructure instead of one segment of the business.
Managing disparate regulatory regimes while supporting an ever-expanding range of asset types provides an essential client capability and additional revenue streams. Utilising a consolidated multi-asset class operating model for these additional asset types significantly improves margins over silo-based environments by eliminating redundancies.
Enhanced Client Capabilities
Providing clients seamless access to new investment opportunities ahead of the competition will be a competitive necessity for both brokers and their clients. The first-mover advantage will reward early entrants into any marketplace. Being able to differentiate service offerings by providing access to emerging product segments or into new asset segments provides brokers with a considerable advantage, especially if the client already has a relationship with the firm. It is hard enough trying to win new client business; turning away existing client business simply opens the door to the competition.
Flexibility for Scalable Growth
The ability to consolidate applications and create consistent operations across the firm streamlines information flows and provides processing consistency and efficiencies. Disparate legacy technical structures inhibit innovation and increase the costs of modernisation while reducing efficiencies, with little ability to scale. At the same time, the costs of supporting legacy operations will continue to rise, a consequence which is simply not sustainable in the long run.
A scalable and flexible processing infrastructure capable of supporting a growing array of alternative assets is essential for firms to attract new clients, both in domestic as well as foreign financial markets. These systems will be a firm foundation that facilitates growth opportunities and provides processing efficiencies for clients, allowing firms to lower their operating costs and provide improved service levels.
By Akhter Khan, General Manager, Asia Pacific, Broadridge
Multi-asset trading and the key factors driving a post-trade centre of excellence