Capital markets operations and operations technology proved their resiliency during the recent COVID-19 pandemic when the market experienced market volatility and a sudden shift in the workforce to work from home, according to a recently published whitepaper entitled “Managing through a Pandemic: The Impact of COVID-19 on Capital Markets Operations” published by The Depository Trust & Clearing Corp (DTCC), with research assistance from McKinsey & Co. In a Q&A, Marie Chinnici-Everitt, Managing Director at DTCC, sheds light on the paper’s major findings, its key takeaways and the key areas where innovation can continue to transform the post-trade space in the future.
Q. According to the recently published paper, those surveyed cited that the recent COVID-19 pandemic was not a catalyst for change but rather validated changes already made for many firm’s business continuity plans (BCP) and recent investment in their post-trade operations. What do you think are the critical changes a firm could have made in the past that would have made their operations and processes so resilient to the recent market volatility and crisis in general?
A. According to the white paper findings, the combination of both ongoing post-trade automation efforts following the 2008 financial crisis and robust BCP planning ensured that market participants were resilient to the impact of the Covid-19 pandemic.
While the survey highlighted that there were variations in challenges and disruptions to operating models, technology platforms and products, there tended to be a high correlation with levels of investment in those areas. The survey also showed that scale and resourcing tended to have a significant impact on a particular firm’s ability to deliver post-trade services with minimal disruption during the pandemic.
Due to their simpler operational models, the buy-side experienced less disruption to post-trade processes than sell-side firms. Broker dealers experienced more challenges due to the need to co-ordinate the resolution of issues such as unmatched trades and fails with hundreds of thousands of clients. Sell-side firms also cited challenges in reaching their clients because contact information had to be updated or increased email or phone interaction was required to address post-trade issues.
From a BCP perspective, one of the main reasons cited for market participants’ high level of resilience was their past experiences of dealing with BCP events and market volatility. Survey respondents cited disruptive events over recent years, ranging from severe weather events such as storms and hurricanes in the US, to market events such as Europe’s sovereign debt crisis, to Treasury and FX flash crashes. As a result of these BCP events, some firms had already implemented certain WFH procedures, such as the introduction of a one-day-a-month working from home model, while others implemented a system whereby a number of employees could work from home one day of the week. Some firms already had a flexible seating policy on their operations floors, while others implemented a campus location strategy. These types of innovative working practices proved to be of great value to firms during the pandemic.
Q. The paper identifies key areas where further changes (firm or industry-wide) could further transform the post-trade space for better. Can you share the common challenges and what changes could address these challenges?
A. In terms of common challenges, survey respondents cited that from a processing perspective, settlements/payments and collateral/valuations were hardest hit at the peak of the pandemic. With regards to the former, market participants reported difficulties in obtaining settlement status, which in turn led to delays in matching and netting. The survey also highlighted that in OTC derivatives and repo, collateral processes were encumbered by sharp margin hikes; while collateral was also an issue in exchange-traded markets, with fragmented schedules and uneven end-of-day remittances increasing friction.
More than half of firms surveyed are planning to either increase capacity, build new capabilities or re-engineer post-trade processes in order to address these challenges. For example, a number of firms shared they are actively looking into further streamlining connectivity and communication processes across counterparties, dealers and clients to improve trade information sharing. Others report plans to automate their futures platforms and upgrade workflow tools.
Q. The paper addresses the huge change in workforce from office to working from home (WFH). It appears that firms surveyed largely thought this shift went well. Do you believe firms will work strategically towards a hybrid working model as a result of the change in workforce in the last year? What might a post-pandemic working environment look like for operational professionals?
The survey predicted that many firms will now be looking to retain a hybrid model whereby remote and flexible working will remain for Ops and Ops Tech employees. This is because during the pandemic, firms have been able to see that productivity was not impacted by operational teams working from home. According to the survey, digital tools helped to facilitate effective WFH, such as the availability and adoption of video conferencing and other digital tools. The survey also highlighted that several semi-manual processes such as physical signatures and printing out of reports, which were previously viewed as obstacles to WFH for Ops professionals, have now been re-engineered as a result of the pandemic, hence making WFH much less of a challenge in the future.
Q. Were any of the findings from the survey and research in the paper surprising to you?
A. Given that we are in constant dialogue with our buy-side and sell-side clients, and have been throughout the pandemic, the survey findings confirmed what we had been hearing anecdotally. And, of course, throughout the pandemic including times of peak volatility, we had direct insight into the post-trade processing experiences of a broad cross section of market participants. As a result, we can confirm that those with high levels of automation fared much better than those dealing with legacy technology and systems or manual processes.
Overall, the industry proved its resilience, and the results of this survey highlighted the valuable work that it has been conducted since the 2008 financial crisis to improve post-trade automation in order to mitigate risk and increase operational efficiency. But it also highlighted areas for improvement. There was general consensus amongst both the buy-side and the sell-side regarding the need for further simplification and standardization of a specific sub-set of post trade services which were hardest hit. Sell-side firms stated priorities as reconciliations and confirmations, and the buy-side cited trade fails and collateral management. DTCC looks forward to continued collaboration with all relevant market participants to strengthen their post-trade processes further and provide even safer and more resilient financial markets going forward.