The need for a next generation Broker-Dealer back office platform

By Fabian Samaniego, a senior consultant to TCS Financial Solutions and ex-COO of HSBC Brokerage and managing director of global operations at ICM Capital Markets (additional contributors: Danny Garcia and Gary Schwartzberg) The current post-crash landscape in the financial services industry is driving broker-dealers to evolve at a much faster pace than in the past. …

April 2, 2012 | TCS Financial Solutions

By Fabian Samaniego, a senior consultant to TCS Financial Solutions and ex-COO of HSBC Brokerage and managing director of global operations at ICM Capital Markets (additional contributors: Danny Garcia and Gary Schwartzberg)

The current post-crash landscape in the financial services industry is driving broker-dealers to evolve at a much faster pace than in the past. The new business reality requires operations to prepare for volatility, cover a far greater geographic area, a more diverse range of asset classes, process trade volumes much faster and manage risk more efficiently, while adapting to ever-shifting regulatory requirements.

The next generation of securities processing systems will be impacted by all these drivers and should aid true efficiency in securities brokerage operations. Optimal business processes, or true efficiency, can be achieved through the adoption of new technology, integration of systems and consolidation of platforms.

Many firms struggle with these challenges while operating on legacy systems. The ultimate goal is an enterprise-level back-office system on a single technology platform providing a single view of clients, reference data and exposures with global processing, multi-asset class and multi-business entity capabilities. The key components of an enterprise-wide system are:

• The books and records (trade processing, clearing and settlement, risk, compliance and regulatory reporting, account maintenance and transfer, and position maintenance)

• Asset servicing (securities master, corporate actions, cash management, margins, taxes, and securities lending)

• Real-time web services integration to systems, internal and external.

The question is why move now to a new brokerage system? The need has been building for quite some time, but the industry has reached a tipping point in 2012 primarily due to the impact of regulation that mandates change across markets and asset classes, to customer and securities reference data, to transparency protocols and to tax processing. Regulation, coupled with a post-financial crisis willingness to increase the back-office IT wallet share, has led firms to look at new strategic solutions to replace legacy systems. The new regulatory framework is complex with many grey areas being debated by legislators, regulators, and participants. However, what is not being debated is the need to prepare for regulations and have a proper governance structure in place no matter what final regulations look like. A budgetary umbrella for compliance provides leeway for other projects to fall under that umbrella.

Current products in the market provide solutions based on legacy systems. There is a struggle to keep up with client needs while complying with regulatory mandates. This is largely because they lack the flexibility to provide a holistic view of the client, and of the enterprise for transparency, regulatory and risk management purposes.

Business challenge1: Increase revenue and meet client demands
The driving force for broker-dealers has always been the front office – the revenue producing part of the business. The financial crisis has been a seismic event for the retail end clients, and the wave of change is being felt throughout financial firms. Clients have lost some trust in the financial system and in their advisors.

After the financial crisis, wealth management, retail brokerage and investment banking are focusing on building business by keeping and growing clients ‘wallet share’ – by attempting to regain and build trust with clients and gain more of a client’s business (cross-selling). An integral part of this involves possessing the required agility and flexibility to provide enhanced product offerings and services to keep clients engaged. This requires mastering customer data management for marketing purposes, and satisfying client demands for global investment options and real-time data.

The ultimate goal for wealth management is to break down data silos and gain a 360-degreee view of customers. Customers must now be central to evolving IT strategies, with seamless access to data and integration across channels. Additionally, clients require real-time interaction and views of their portfolios. There is a growing necessity to provide ‘on the go’ support to customers – in short, the mobile imperative.

The evolution of brokerage systems has created siloed batch processing, based on a specific geography, asset class, or customer type. This makes it a challenge to achieve the integration needed to deliver on client demands. These core back-office brokerage systems are based on batch processing and have difficulty with real-time multiple time zone processing – a prerequisite for global 24*7 operations. This leads to problems in meeting and improving service levels required in this new business reality.

The business challenge is to integrate different systems on varied technologies to provide the consolidated desktop for the front-office, tie the front-end to custodial platforms, and additionally tie external sources with multiple back-end platforms. A bigger challenge may be the global imperative: broker-dealers need to provide extensive support for global asset classes including equities, fixed income, funds, options, derivatives, foreign exchange and money market instruments. What is needed is connections to market infrastructure such as execution centres, global clearing/settlement engines, depositories and dealing with specific regulatory requirements in each market.

Business challenge 2: Compliance
Two major themes of the new regulatory environment are transparency and risk management. Broker-dealers struggle with the technical challenges of large amounts of real-time data needed to provide transparency. Firms are likely to face a data overload for their middle- and back-office operations, requiring better methods of gathering and reporting information. They are investing in tools to facilitate both data integration and process re-engineering. Integrated data systems also enhance risk management.

Another major theme is the lack of knowledge of the true impact of these regulations on operations. The industry is under significant pressure to interpret the new rules. The faster adopters and strategic organisations are creating a proper governance structure that can build the knowledge-base of rules in the system rather than relying on vendors or relying solely on knowledge in the compliance department. The inflexibility of mainframe systems makes it difficult to use rule management and Business Process Management (BPM) to build this knowledge-base into your systems.

Business challenge 3: Operational efficiency and creating economies of scale
How can broker-dealers support business challenges 1 and 2 while still reducing costs in their current operations? A priority for broker-dealers is to search for efficiencies and consolidate operations while keeping the agility to add more business volume and scale up without further technical investment.

For business and regulatory reasons, a siloed approach has evolved over time, which makes overcoming the challenge to provide a real-time enterprise view and a shared services model across disparate systems all the more difficult. To create a scalable, robust, and efficient platform and shared services, firms need reusable components for ease of maintenance and to give them the much needed flexibility. Multiple platforms and complex, disparate systems make reusable components, such as common rules and workflows to institute governance, very difficult to implement and control.

At present, vendor platforms typically charge on a per-transaction basis. For firms eyeing major expansion in their business, and those interested in consolidating multiple business lines onto one platform, this is not a suitable option in my opinion. It would be better to translate vendor variable transaction costs to a more manageable fixed cost and achieve greater economies of scale by consolidation.

The technology challenge
The need to keep systems synchronized and to keep up with the business challenges has become an extreme burden based on the current use of antiquated systems. Data management, which includes moving and replicating data, has become a significant cost to brokers. The ongoing requirement to move and store data among multiple systems will increase processing costs and require additional investment in replication, adding as much as 10-15% to the IT budget.

Investment has traditionally been in the front-office which drives revenue. With the front-office now having low-latency systems and the latest technology, middle- and back-office systems need upgrades to keep up with the front-office – be it speed or new asset classes or new markets – to be in sync. Order management and execution management systems are getting new connections to the middle- and back-office. All of that new data needs to be highly available and de-siloed.

Upgrading middle- and back-offices is a heavy burden. Newer technologies offer opportunities via shared utility models using cloud technologies and component architecture that allow transition over time. However, legacy systems prevent taking advantage of these benefits due to their limitations.

With increased demand for more real-time access to data, the issue of data security and governance arises. Data governance involves permissions, such as which line of business or user is entitled to see or modify which data. Enterprise data management and governance has come to the forefront of many brokerage firms, but disparate legacy systems make it harder.

The middle- and back-office needs to keep up with the pace of change, and adopt the drivers in the technology world – cloud, mobile, channel integration, low-latency, and automation of manual processes.

So, how do broker-dealers evolve quicker to keep up with the rapid pace of the front-office, regulations, and volatile markets, and resolve these operational issues and constraints to support future growth?

Efficiencies and agility cannot be achieved solely through human capital and process improvements – it is people, process, and technology. Utilising a state-of-the-art global IT platform is paramount. The key benefits are:

• Increase productivity and decrease operating costs via consolidated global operations and a more efficient IT infrastructure that prepares for future integration, automation, and a shared services and smart-sourcing model.

• Increase revenue with a scalable operational architecture that enhances business agility through the ability to launch new products to capture market share and services quicker, improve service levels, and meet client demands for access to real-time data.

• Control your destiny through more technology independence which provides greater autonomy over functionality you can provide to your clients.

• Costs can be significantly reduced through retirement of old systems, less maintenance on existing systems, less resources to maintain those systems and reduced movement/replication/reconciliation of data.

In order to achieve these benefits you need to de-silo; you need the bigger view a single platform across operations provides. It is an intricate and involved process to bring all the pieces together – gathering, analysing and storing data enterprise-wide. This will entail major data management requirements such as the cleaning, normalisation, processing and storage of data, as well as new ways to access key information via risk analytics, business intelligence and mobile end points).

A consolidated operating platform offers opportunities to re-engineer processes, create shared services and ‘smart-source’, thereby focusing on business opportunities.

Financial services firms are starting to embrace cloud computing and the efficiencies it can provide too. The public cloud has had some success in areas such as customer relationship management (CRM), and more affordable low-latency executions and market data. For core processing, a union between private cloud computing and middle- and back-office operations offers significant flexibility and efficiency. Once systems are enabled for the cloud, then web and mobile computing technologies can be used more fluidly to provide access to and from middle- and back-office systems, thereby meeting client demands in a consistent environment.

Over the next decade, broker-dealers will need to take advantage of integration and the data management associated with it to patch their disparate legacy systems or overhaul them. How do they future-proof their middle- and back-office applications? These are the criteria for broker-dealers looking to the future and for best-in-class systems:

• The platform should be the core underlying architecture that will help clients manage their books and records globally.

• Provide true multi-asset capabilities and deliver transaction status in real-time.

• Comprehensive and extensible data model providing integrated market data based on industry standards within one integrated database for all business processes.

• Leverage a service-oriented architecture (SOA) for accessing client-sensitive data ensuring data governance policies.

• Straight-Through Processing oriented workflows closely integrated with enterprise-wide BPM and exception management capabilities delivers results.

• A platform that enables a shared services model.

• A readily available framework that can technically scale using utility grid when higher performance processing is necessary and supports 24/7 multi-time zone global operations and processing capabilities.

• Services-enabled integration for cloud-enablement, XML and market-standard messaging for integration with market infrastructure and internal systems.

Danny Garcia Gary Schwartzberg

Danny Garcia (left) – Senior Director Business Development/Sales for TCS Financial Solutions – North America.

Gary Schwartzberg (right) – Senior Pre-Sales Consultant, Capital Markets for TCS.



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