Action needed says Ovum as post-trade ops face regulatory & rogue trader reform pressures

27 July 2012

In the wake of post-crash regulations such as centralised clearing for over-the-counter (OTC) trades and increased transparency via repositories, the post-trade arena is modernising fast according to the latest Ovum report entitled ‘Optimization of Post-Trade Operations: A Business Requirement’.

The impact of OTC transparency regulations after the 2008 crash, allied to impending regulations such as Dodd-Frank in the US, MiFID II in Europe or the Basel III capital adequacy regulations globally, mean that the post-trade area in capital markets is facing very real change in the coming years. The nefarious activities of rogue traders such as Jerome Kerviel at Société Générale and Kweku Adoboli at UBS is also a key driver for reform in the post-trade arena as both started out in the back office and knew where the ‘skeletons’ were buried and how the IT worked in terms of hiding erroneous trades.

As Rik Turner, senior financial services analyst at Ovum and one of the authors of the report, explains: “Aside from regulatory compliance, another compelling argument for the optimisation of post-trade operations is the security angle. Both Kerviel at SocGen and Adoboli at UBS had worked in the back office before moving to the trading floor, so they knew how the system worked and, as a result, how to game it.”

“More standardised, automated processes, with appropriate provisions for managerial oversight, could potentially have flagged any irregularities a lot sooner and avoided both the financial and reputational hit the two institutions had to take as a result of the scandals,” he added.

According to Turner, the “favoured child” status of front-end modern trading environments has created major challenges for under-funded post-trade operations infrastructures and this now needs to change. Capital markets should now be looking to modernise and invest in post-trade operations infrastructure in order to remain compliant and efficient in the future, which means upgrading systems and stopping the traditional under-funding of this segment.

In many cases, back office functions are still reliant on batch processing running overnight and, in some scenarios, such as reconciliations in smaller institutions, firms may even continue to rely on manually poring over an Excel spreadsheet. This is not suitable for the challenges facing the post-trade arena, says Ovum.

The consultancy asserts in its report that the increased scrutiny facing the segment should not be perceived as just another burden, since investment in back-end infrastructure is proving to be good practice during an economic downturn, with straight through processing (STP) benefits accruing. Whether the post-trade investment is designed to drive down costs, ensure compliance or simply to attract customers by handling business in a timely and efficient manner, Turner says that “the time is right for the benefits of upgrading post-trade operations to be seriously considered by the market”.

By Neil Ainger

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