Why does the Bank of England think that post trade is in need of reform?

By Neil Vernon, chief technology officer, Gresham Technologies

October 12, 2020 | Gresham Technologies

In June this year, the Bank of England published the findings from its Post-Trade Technology Market Practitioner Panel, which brings together post-trade specialists to identify and discuss the key challenges facing firms. The banking industry was still very much in fire-fighting mode with respect to the coronavirus crisis and whilst the paper raised some interesting questions, many of the points were drowned out as firms dealt with more urgent operational issues.

Whilst we are still in a time of great uncertainty however, the dust has begun to settle. As the industry starts to contemplate how the future will look, it’s interesting to consider how some of the regulatory and operational challenges on the agenda will be handled going forward.

The Bank of England’s focus on post trade tech is driven by a variety of factors impacting the sector over the past few years, as well as external events and market needs which make it important that these challenges are now addressed.

Firstly, the Bank of England highlighted the high cost of manual processes in the back office. As an aside, it is a sobering reminder  that the big-buyers in this industry are the pension funds, and the people that ultimately pay these costs are you and me – in the form of lower returns on our pension investments. A consequence of this back-office inefficiency – and a key driver for addressing it- is that innovation in front end services is also held back. Beyond this however, the Bank also pointed out the importance of operational resilience, which has become a natural priority during these uncertain times. This raises the question – how can the industry drive forward this front office innovation whilst still managing operational risk in post trade tech?

The road to implementation of these reforms is a long one, with working groups still mulling over exactly what needs to be done.

The complexity of the modern trading institution certainly brings challenges. The wide array of services and products offered by firms adds an extra layer of intricacy to an already daunting task, particularly when combined with the fact that many firms are still struggling with complex, interconnected legacy networks which have built up over time. Whilst those responsible for post trade processes are all too aware of the dangers and problems these can bring, there is still an innate fear of attempting to unravel them – particularly as things may have been in place for so long and laid down in such a way that their function and purpose is no longer well understood. However, it isn’t breaking these legacy systems through an attempted fix that firms should be afraid of – it’s the unexpected failure that no one sees coming, or worse, realizes has happened, that presents the real threat. Tackling your legacy systems head on isn’t the scary option – waiting for the worst to happen is.

The report also highlights the inefficiencies of manual processes and the benefits of automation. Internal and external data reconciliation is an area singled out for particular attention, with the Bank pointing out that multiple copies of inconsistent data combined with a lack of automation results not only in duplication and inefficiencies, but also in operational risks. Financial institutions themselves are beginning to understand that automation isn’t just a question of headcount savings and immediate efficiency improvements, it is also about minimizing the risk of the catastrophic errors which can occur all too easily when makeshift manual workarounds are being used in complex processes. This is why addressing the aforementioned legacy issues is so important, particularly at a time of unprecedented operational pressure when no one is quite sure what is coming next.

Traditionally, teams may have found it harder to drive stakeholder engagement and support for transformation projects in the back office rather than the revenue generating front, but this has started to change. Not only is the industry aware of the significant efficiencies that these projects generate, but there is also a growing awareness of the risk management and mitigation benefits, as outlined above. Beyond this is the fact that regulators are paying more attention than ever to these processes and sticking-plaster solutions are increasingly frowned upon due not only to the high likelihood of failure, but also the potential systemic consequences if this does occur. Firms reliant on these may face some difficult questions from their regulators and auditors in the future.

What does the future for post trade technology look like? Well firstly, as the Bank points out, the interconnected nature of the ecosystem these services operate in means that change needs to occur at industry level if we are to truly enhance efficiency in this area. Secondly, back office teams have a responsibility to ensure that their key stakeholders are aware of the impact these processes have not only on back office efficiency but on front office innovation and development. It will also be interesting to see how developments in this area intersect with the questions currently under consideration around transforming data collection for regulatory reporting, which is also the subject of a Bank of England working group, clearly demonstrating recognition that the current situation is unsustainable. Financial institutions need to ensure that their post trade processes are safe, efficient and effective, by eliminating the manual workarounds that put them at risk and using automation to drive 100 percent certainty in their data.



TS Imagine - One Year in Business

Video | Trading & brokering TS Imagine - One Year in Business

TS Imagine
WWS OnetoOne Omnia: Omnichannel Marketing for Your Bank

Video | Infrastructure/architecture WWS OnetoOne Omnia: Omnichannel Marketing for Your Bank

TS Imagine Team at SimCorp IUCM 2022

Other | Trading & brokering TS Imagine Team at SimCorp IUCM 2022

TS Imagine
Bitcoin Financialization (Part 3) – Calling All Crypto Asset Managers

Other | Trading & brokering Bitcoin Financialization (Part 3) – Calling All Crypto Asset Managers

TS Imagine