Cost, regulation, competition in the marketplace, and customer expectations are driving massive transformation in the post-trade processing space. In a recent DerivSource webinar, panellists from Societe Generale, Manulife Asset Management, BCS Consulting and Misys discussed post-trade developments and the impact of business process transformation for technology and operations.
Financial institutions on both the buy and the sell side are facing growing pressure to transform their business processes, increase efficiency and automate manual back-office processes, as the complexity in their day-to-day activities continues to escalate. Many firms are looking to new developments like cloud computing, post-trade utilities and even blockchain to meet the growing demands for post-trade business process transformation in a relatively cost-effective way.
On the sell-side, regulation has been the key driver for business process transformation over the last couple of years, and will remain in sharp focus with the looming implementation of MiFID II. “There are a lot of new data attributes that need to be delivered to support MiFID II. If a bank has a vast array of client reference data platforms, it’s much better to consolidate those platforms and make the changes once, rather than doing it repeatedly across different systems” says Gavin Berry, director at BCS Consulting.
Cost is becoming equally important. For many sell-side firms, the maintenance of complex legacy infrastructure consumes around three quarters of their technology budgets, leaving only a quarter of the budget for projects that are needed to meet regulatory demands, or to fend off competition. With profit margins shrinking, simply cutting costs will only get them so far, and so firms need to be more strategic about the way they spend their technology budgets.
“Their end user customers will be happy if everything happens slickly, quickly, and settlements are accurate and timely, says Peter Farley, senior marketing strategist, capital markets at Misys. “Those common standards are going to become the norm and expected as post trade becomes much more heavily automated and hopefully more efficient as a result”, he says.
Deutsche Bank will reportedly cut jobs over the next couple of years, in favour of increased automation and process simplification. “Their end user customers will be happy if everything happens slickly, quickly, and settlements are accurate and timely, says Peter Farley, senior marketing strategist, capital markets at Misys. “Those common standards are going to become the norm and expected as post trade becomes much more heavily automated and hopefully more efficient as a result”, he says.
“Firms need to be able to be nimble, agile, scalable, and to be able to roll out products in days and weeks, versus months and potentially years if the technology doesn’t work,” says Nadine Chakar, Manulife Asset Management.
From a buy-side perspective, regulatory demands are pushing post-trade and back-office activities in general to centre stage. As MiFID II puts the burden of reporting on fund managers, they need to update their systems and infrastructure accordingly. And with fee compression and the rise of passive investing hurting returns across the board, funds need to find a way to take on more assets for less cost. But transformation also provides a clear competitive advantage. According to Nadine Chakar Senior Vice President and Global Head of Operations & Data Management, Investment Division at Manulife Asset Management, when performing their due diligence, potential clients are starting to look as much at the fund’s back-office automation and talent as they do the fund’s performance and investment strategy.
Post-Trade Services: Commodity or Differentiator?
Many firms—depending on their size and the complexity of their investment model—are looking to outsource their post-trade operations. On the buy side, niche asset managers handling esoteric products will likely have to build their own systems, but other funds will have more options. “Whether they do it in-house or they outsource it, the themes are still the same. Firms need to be able to be nimble, agile, scalable, and to be able to roll out products in days and weeks, versus months and potentially years if the technology doesn’t work,” says Manulife’s Chakar.
Manulife is a large asset manager, which deals with a wide variety of asset classes, and covers a lot of different client segments, in many different geographies. To transform its business processes, the firm has taken a radical approach, totally revamping its infrastructure. “We installed new servers, put in new pipes, new clouds, rolled out new OMS and new middle and back office capabilities, wrapped with various sophisticated data interlinks and data strategies,” says Chakar. The firm opted to overhaul its entire infrastructure because they felt doing it more incrementally or in a piecemeal, tactical fashion would add to the complexity problems they were trying to solve, she says. Where Manulife has bought third party applications, they have endeavoured not to do any customization, to push the reporting data for self-service modules directly to user’s laptops and tablets, Chakar says.
When deciding whether or not to outsource, firms must decide whether post-trade processing is a commoditized service or something that provides them with a competitive edge, and this will vary from firm to firm. “Post-trade processing, unless you’re a supplier of post-trade services, is not often itself a differentiator,” says Berry. “However, there are lots of costly complex processes due to the spread of products and geographies and the complex range of activities for major financial organizations. Many of these are subject to a lot of bespoke systems development, manual processes and multiple data sources, and all of this incurs cost and operational risk. Much of this is in need of simplification,” he says.
“Post-trade processing, unless you’re a supplier of post-trade services, is not often itself a differentiator. However, there are lots of costly complex processes due to the spread of products and geographies and the complex range of activities for major financial organizations. Many of these are subject to a lot of bespoke systems development, manual processes, multiple data sources, and all of this incurs cost and operational risk. Much of this is in need of simplification,” says Gavin Berry, BCS Consulting
Transformation—and being able to demonstrate a firm has improved back office efficiency—is itself fast becoming a competitive differentiator. “Clients want to maximize the returns on their investments, while minimizing their costs and operational risk. Post-trade services are becoming a key part of the assessment we are getting from our clients,” says Christophe Adam, global head of client operations (client services, revenue services) at Societe Generale. The increasing electronification of the OTC derivatives markets is also driving the need for front-to-back office straight-through processing (STP), and those dealers that offer it first see it as a means of competitive differentiation, he says.
“Clients want to maximize the returns on their investments, while minimizing their costs and operational risk. Post-trade services are becoming a key part of the assessment we are getting from our clients,” says Christophe Adam, Societe Generale.
The Changing Role of Post-Trade Services
There is a growing acknowledgement within firms that post-trade services is becoming as important as the front office and that they must work hand in hand to deliver seamless service and the best possible reporting to clients. “The middle and the back office are really moving up the food chain and taking centre stage”, says Chakar. This has an impact on talent as much as technology. Whereas in the past Manulife sought back-office personnel with experience in settlements, pricing, or fund accounting, the firm is increasingly looking for people with regulatory, computer science and other backgrounds to fill these roles, Chakar says.
As the emphasis in the back office changes towards digital technologies, institutions increasingly need to leverage the skillsets of the younger, more technology-savvy generation if they are to take advantage of new technological developments.
In addition to the right talent and technology, once a concrete vision for transformation has been formed, firms need strong leadership with an increased focus on horizontal, cross-functional leadership roles such as heads of operations, technology, and data, says Berry. “The effectiveness of IT systems is dependent on great leadership, and the right decisions being made by those leaders in the design process,” says Berry. Once systems and talent are put in place, strong governance at every level of the institution is key to ensure they are successful. Near-shoring or off-shoring to new, lower cost locations can offer additional benefits, he says.
