How have buy-side firms adapted to the Settlement Discipline Regime?

Penalty spot kick

How have buy-side firms adapted to the Settlement Discipline Regime and what are the operational challenges that remain? By David Veal, Senior Executive: Client Solutions, corfinancial®.  

The Settlement Discipline Regime is a new obligation stemming from the European Commission’s review of the Central Securities Depositories Regulation (CSDR), which came into force on 1 February 2022. These additional regulatory processes supplement the existing CSDR protocols and focus on enhanced controls and governance around trade settlement.

In this article we highlight anecdotal thoughts and feedback received from market participants and corfinancial clients who have been working with the proposed changes. Full details of this feedback can be found in this Discussion Paper.

Failed Trade Management and T+1 Lifecycle

Buy-side firms in Europe that trade in US instruments will soon have less time in which to allocate and fund stocks, resolve any settlement issues and comply with the CSDR’s new penalties regime.

Having access to a central source of executed trade data and being able to track transactions throughout the entire securities lifecycle is vital to facilitating settlement efficiencies. Clients want robust governance with which to minimise trade settlement failure. However, there are changes to operational processes and potentially regional coverage that need to be considered in future   environments that support global trading from Asia to Europe and the US, especially when a single middle office team manages this. Firms must work towards avoiding trade failure rather than managing this after the event. Having the right tools to achieve this in a near real-time environment is essential.

Cash Penalty Fees Management

The provision of prime broker or custodian statements to support the reconciliation of cash penalty fees is improving, but there is still a way to go. The sentiment we received was that some parties still lack the full infrastructure to manage the timely provision of cash penalty fee data, so some may be choosing to absorb cash penalty fee debits rather than passing them on (although penalty fee credits are being sent). The argument is that penalty fee amounts are often too small, and net/net are not worth passing on. However, this approach certainly goes against the essence of the SDR cash penalty objective.

Automating The Processes

Some feedback focused on the most effective trade records on which to base best practice controls and governance. It was suggested that some solutions base their primary trade position records on the market side of trades, whereas solutions like SureVu® centre on the buy-side view of executed trades. There are clear differences with how solutions in the space have been designed. It is uncertain how these different models will evolve in the lead up to T+1 and beyond.

The SureVu SDR solution from corfinancial was designed differently.

SureVu clients believe it is essential to manage post execution trade settlement positions from their own record of executed trades, not data assimilated by third parties.  

For a more detailed assessment of our investigations, please download our free Discussion Paper or contact us at info@corfinancialgroup.com and we will be happy to share our thoughts and details of how we help address the SDR challenges.

www.corfinancialgroup.com

The differentiation potential within consumer duty

Reflection of Canary Wharf Skycrapers
By Daryl Roxburgh – President and Global Head, BITA Risk® part of the corfinancial® Group
Wealth Management
Late July saw the Financial Conduct Authority unveil the finalised version of its new Consumer Duty regulations, setting in motion what the regulator has termed a “paradigm shift” in its expectations of the UK’s retail financial institutions. Highly laudable though its aims certainly are, the timeframes for implementation are short and the challenges around proving compliance numerous, with firms having to have plans in place by the end of October.
 
I say ‘proving’ with purpose. Any reputable firm will have surveyed the guiding principles underpinning the new regime and see little that will not already be in their corporate DNA. Clear communications and meaningful customer support, fair charging, and a client-centric approach to providing financial services and products with a focus on good outcomes are nothing new to this country’s already tightly regulated – and highly respected – financial services sector. Developing capabilities to meet the regulator’s expectations for evidencing all of this may well be, however.
 
The FCA estimates that the implementation costs for the sector will be as high as £2.4 billion and wealth managers can be expected to bear much of the brunt of the pain due to the wide-ranging and often very long-term relationships they have with their clients. Dizzying changes to wealth demographics and investor preferences, along with an economic outlook which is uncertain to say the least, further complicate the picture.
 

Segments of one

Never has the old saying that each client is “a segment of one” been truer. How then to prove the consistency of outcomes among increasingly diverse client bases? With ESG considerations arguably rubbing against fiduciary duty in the time-honoured sense, even the seemingly simple matter of proving that an investment was appropriate in the first place is becoming vexed.
 
The wealth management industry has long had to wrestle with a paradox: while deeply personalised service lies at the heart of its value proposition, cost considerations – on both sides – must limit customisation to where it really counts. Mass customisation of portfolios facilitated by technology has long been acknowledged as the only workable path. But now, these customisations need to be factored in when considering the analysis of the consistency of outcomes and foreseeable risks under consumer duty. Whether it is a restriction on what can be bought, a restriction on what can be sold, or a desire to hold a proportion in cash, these are some of the myriads of reasons that a portfolio will perform outside its peer group. In understanding outcomes, these points must be considered.
 
Foreseeable harm in theory precedes outcomes, and this requires testing to evidence that a client’s portfolio is suitable. Not just in a high-level asset class check, but in terms of the assets bought and their contributions to overall risks taken. These risks naturally include market risk whether volatility or CVaR, but should go further into looking at illiquid, un-researched, high risk and concentrated positions. The first challenge is knowing that these exist in a portfolio, only when they are known can they be addressed, mitigated, or agreed with the client as acceptable.
 
The challenge is daunting: according to EY*, 87% of firms see a need to implement key technological change to meet it. The good news, however, is that offering the kinds of monitoring and evidencing capabilities firms need will really be nothing new to leading technology vendors. For our part, we feel there has been a great deal of prescience in how we have developed BITA Risk’s solutions over the years: Consumer Duty represents just a sort of cross-cutting complexity our products were designed to solve.
 

Beyond box-ticking

Canvassing the large and growing range of institutions which already rely on our products reveals a heartening degree of confidence in how they will cope with the new rules. Others who have perhaps held back on their investments are now feeling the April 2023 deadline bearing down. The industry is however showing itself eager to wring the maximum business benefits from this compliance challenge, as it should: rather than merely “ticking the box”, EY* has found that 60% of firms want to take a holistic, business-wide approach to the Consumer Duty rules.
 
What this already looks like at our client firms is very positive, with foreseeable harm monitoring, performance and yield outcome monitoring already deployed in many cases. This monitoring – with the attendant MI (management information) on trends and systemic issue identification – is backed up by a systematic approach to collecting reasons why a portfolio may be out of line, enabling management of the exceptions apart from consistency checks on the core.
 
Firms with our profiling solution are carrying out risk-profiling and suitability assessments at the level of individual financial goals, monitoring against clients’ capital and income requirements, and keeping a close watch on ongoing costs and charges at both the portfolio and asset level. As a result, many can already point to immaculate management information on any Consumer Duty metric the regulator might choose.
 
But, of course, for the best providers, all this is about so much more than fending off potential compliance concerns. They will want to be able to deeply interrogate their information to be absolutely sure that their clients are achieving optimal outcomes – and to be able to further improve their investment and advisory strategies wherever they can. From our experience, the message that duties can be readily transformed into differentiation opportunities is very much one firms want to hear.
 
We all know that upholding Consumer Duty will already be business as usual for any wealth manager worthy of the name; that the whole industry is now being asked to fully operationalise and evidence adherence to these principles should therefore be a welcome change – and particularly so for those organisations able to compete more vigorously on this basis. It certainly is for us.
 
As leaders in portfolio monitoring and governance, BITA Risk analyses circa £180 billion of wealth management assets every night for a range of Wealth management firms. At our core is the quick, efficient analysis and aggregation of data, with seamless and efficient workflows for governance and client managers alike. We have extended our solutions to deliver what firms need now for ESG, TCFD, and Consumer Duty together with the significant added benefit for the firm of identifying problems before they arise, reducing both compliance risk and the chance of poor client outcomes, meaning both parties can benefit from a forward-thinking approach.
 
If you would like to discuss any of the points raised here, please contact us at BITARisk@corfinancialgroup.com or see more information on our solution here.
 
In the next few weeks, we shall be sharing thoughts on the monitoring of CIPs as well as Risks and Suitability. Sign-up here to receive these updates directly.
 
*Footnote:

ESG – Enhancing the client experience

ESG

ESGBITA Risk’s study this summer on the current challenges for wealth managers in portfolio governance and management has revealed five key areas requiring action: TCFD, ESG, Consumer Duty, Central Investment Plans and Risk.

In a series of short reviews, we look at ESG to understand what it really means, and the key challenges firms are facing in delivering appropriate solutions.

So, what is meant by ‘ESG’ and what does it mean to any individual client? In discussions with investment managers, heads of sustainability and clients, it has become clear that both firms and clients view it in many different ways.  For simplicity, I include Environmental, Social and Governance factors, climate and carbon factors, impact and green exposure, and then ethical restrictions (from simple issues like alcohol and tobacco through to complex research and armaments definitions) within the ESG umbrella.

Missing either restrictions or expectations can prove costly, so the definition and agreement process is key.

With this inherent complexity, how can and should client requirements be recorded, or even discussed with them? Given that this sets the foundation, it is an element of the process that must be clearly defined and understood.

There is more to this than seeing if a client gives to charity: that implies ESG investing is a charitable cause, and it’s not, it’s a thematic approach to investing that meets the dual utilities of seeking return and something that will give the investor additional utility or not give them disutility relating to ESG. These additional utilities can be very specific.

Clients mostly will have general requirements:  “greener than it is now or compared to the benchmark” , “but I don’t want any GM foods or animal testing”.  Here communication of the firm’s approach is key. This must explain that the perfect company does not exist, that trade-offs have to be made, and that zero tolerance can be highly constraining. So, the client needs to understand what is possible within a firm’s investment approach and what is not.  This is easier with segregated portfolios but a minefield with funds.

If the client has specific requirements or a passion in a specific area, they may have more knowledge in the area than their manager and this has resulted in the rise of specialist teams that can discuss the requirements with the client. Firms need to consider how they establish or access such specialist knowledge, and also how this information is then incorporated into investment management and delivered to the IM desktop and client reports.

The most common approaches we see to sustainable preferences are, a percentage in ESG focussed investments, adherence to ESG focused buy-lists and ESG embedded in the central investment process and bespoke requirements. However, even with the more generic approaches of suitability driven buy-lists, client specific ethical restrictions and positive screening and negative screening preferences are often offered. Two things to consider: clearly state to the client the ESG parameters of their service and provide the manager with tools to identify assets that may fall short of expectations and then have a defined process of identifying, communicating, and managing these exceptions.

What is clear is that you cannot offer the client the option to select from some three thousand metrics to establish their sustainable goals. A set of thematic approaches with the question as to whether the client has specific requirements is more feasible.  The client’s requirements can then be recorded in the context of the firm’s service and played back to them. This may well mean splitting requirements into different groups with different granularity – e.g., overall portfolio A+, good board diversification, no civilian armament production or distribution for direct investments and ensuring that funds bought have above average scores in these areas.

This requires the client manager to have access to an easy but structured way of recording these preferences and playing them back to the client. That is giving the client freedom within the firm’s ESG framework. The framework should be comprehensive enough to cover complex clients, as well as addressing the more generic needs of the body of the client base.

Once this structured definition of requirements is in place, checking, reporting, monitoring, managing, and governance become possible.

The challenge then becomes continually ensuring that the requirements are met.  Monitoring a portfolio against preferences and restriction is key and avoids costly oversights. While a stock or fund may have been OK at purchase, its characteristics may have changed, the client preferences may have changed, and it needs to be considered in the context of the portfolio. Our approach enables firms to monitor positions automatically at three levels – client preference, firm’s sustainable buy-list(s) and policies, and portfolio metrics, with daily alerts for outlier positions. This gives peace of mind and avoids laborious manual checks and the risks of breaching mandate.

Always think about the thin red line – the small percentage of investments that score badly for one or more factors. Is the manager aware and would it be an issue for the portfolio or the client?

Many firms have invested in sustainability research and the development of focused investment offerings. We have found that most then struggle to demonstrate this process to clients, especially in the context of their individual requirements and portfolio. Where this can be done, it usually involves many manual processes and is limited to a single data vendor’s analysis.

By combining sources of ESG (remembering the broad definition at the beginning) with positions and preferences for all client portfolios, BITA Wealth delivers a clear report, showing what your process means to them. This narrative demonstrates value add and your investment process. Over 60% of firms spoken to have a Stewardship process in place, but none could demonstrate this. We are in the process of incorporating this data in client reports so that proactive effort is demonstrated and appreciated.

Often the comment is heard that the “data is not good enough” or there are gaps. It is research data in many cases and that is only as good as the process and the same due diligence should be undertaken as with any research data. Handling the gaps and making clear limitations is explicit in TCFD, and we have followed the same approach in ESG. Knowing the gaps can enable a firm to press vendors and funds to improve their coverage.

Many firms we speak to provide their own overlay on vendor data and firm specific commentaries. Making this data integral as part of the preference, management, monitoring, and reporting cycle delivers significant benefit to the firm and client alike.

Structured integrated data delivers a powerful insight into portfolios and delivers sustainable investing across a firm in line with its overall investment and governance processes, improving the investment narrative for the client and ensuring compliance with objectives.

As leaders in portfolio monitoring and governance, BITA Risk analyses circa £180bn of wealth management assets every night, for a range of wealth management firms. Fast analysis and aggregation of data, with seamless and efficient workflows for governance and client managers alike is at our core. We have extended our solutions to deliver what is needed now for sustainable and ESG-focused portfolios, together with significant added benefits for the firm, integrating with key data vendors and then adding analysis and client facing interpretations.

If you would like to discuss any of the points raised here, please contact us at BITARisk@corfinancialgroup.com or see more information on our solution here.

In the next two reviews we will look at the monitoring of Consumer Duty and then Central Investment Propositions. Sign-up here to receive these directly.

Daryl Roxburgh – President & Global Head BITA Risk® part of the corfinancial® Group

TCFD – The clock is ticking

Time is running out

Time is running outBITA Risk’s study this summer on the current challenges for wealth managers in portfolio governance and management has revealed 5 key areas needing action: TCFD, ESG, Consumer Duty, Central Investment Plans and Risk.

In the first of a series of short reviews of these topics we look at TCFD reporting, and the key challenges and opportunities that this brings.

TCFD (Taskforce on Climate-related Financial Disclosure) reporting will require investment management firms, including most wealth managers to be able to report at entity, product, and portfolio level on key carbon metrics, both on a current portfolio and its history.

The FCA has made it clear that they expect a firm to consider making this reporting available on demand to all clients in due course, but there is an immediate need to address the collection of data to support future historic reporting. Some firms already have the processes in place to be collecting this from the start of January.

A key challenge is data quality and availability of data, and this is made transparent through reporting the coverage and quality of data for each asset group. In some cases, proxies can be used systematically, and these then replaced as coverage improves. This will certainly focus attention on the data vendors to increase coverage and quality.

The foundation of TCFD reporting by wealth managers has to be a systematic approach that utilises structured data. While Excel aggregations and manual aggregation of data may work as an interim measure, these inefficient and time intensive processes will soon be overwhelmed.

Working to support firms in this area, we suggest building a data history across the 100 plus key metrics for portfolios, with sufficient granularity to enable easy aggregation, interrogation, and reporting. In this way, the year on year and longer-term historic reporting is quick, efficient, and consistent.

In discussions with firms, we found that often their data comes from one or more vendors, and they may then apply their own overlay. This creates the challenge of a single portfolio view that manages and collates these data sources, something we have already solved.

So, this admirable drive to net zero requires considerable data, married to every portfolio. A huge challenge in itself, but once the right approach is taken, there can be significant beneficial spin-offs in both client engagement and investment risk management.

With the right approach, meeting the regulatory needs of reporting can deliver further immediate benefits:

  • Demonstrable trend of carbon exposure across the firm and for a client
  • Identification of climate related risks at portfolio and asset level and joining up data for the investment manager
  • Business intelligence to support a firm’s carbon strategy whether majoring on sustainability or focussing on meeting the regulations.
  • Improving the Client experience, showing your firm as ahead of the curve, treating climate change not as a regulatory requirement, but a risk management exercise and something for the good of all.

With Consumer duty requirements fast approaching, one should consider the carbon metrics reported under TCFD as a key foreseeable harm which needs to be identified and addressed. This includes identifying potentially stranded assets and those with a high Climate VaR.

As leaders in portfolio monitoring and governance, BITA Risk analyses circa £180bn of wealth management assets every night for a range of Wealth management firms. At our core is the quick, efficient analysis and aggregation of data, with seamless and efficient workflows for governance and client managers alike. We have extended our solutions to deliver what firms need now for TCFD, together with significant added benefits for the firm, following the IA (Investment Association) template as a base and then adding analysis and client facing interpretations.

If you would like to discuss the points raised, please message us at BITARisk@corfinancialgroup.com

In the next two reviews we will look at the monitoring of ESG and Ethical Restrictions and then Consumer Duty. Sign-up here to receive these directly. 

Daryl Roxburgh – President & Global Head BITA Risk® part of the corfinancial® Group

TCFD: helping the wealth industry make its mark on climate change

TCFD

TCFD (Task Force on Climate-Related Financial Disclosures) reporting will be a challenge for many firms. While the initial requirements relate to larger institutions and certain client portfolios, firms with GB£5 billion-plus Assets Under Management (AUM) will also have to report with comparisons to data collected in 2023, meaning careful planning is needed now. This historic comparison data will add further to the complexity of the 100-plus data points in the Investment Association TCFD report template. In addition, this data will need to be aggregated across client portfolios for entity reporting. Lastly, there is clear direction from the regulator that on-demand reporting is expected to be made available to all clients in due course. So, there are significant challenges in TCFD reporting.

The UK’s Financial Conduct Authority helped set the pace for the global adoption of Environmental, Social and Governance standards in financial services when at the end of 2021 it became the first securities regulator to introduce mandatory TCFD-aligned disclosure requirements for asset managers and asset owners. This is already having a huge impact which will only grow.

The report content, in line with other sustainability-related regulatory required reports, has been proscriptive, which removes ambiguity, but does not necessarily make it easy. The Investment Association has published helpful templates for segregated and pooled fund portfolios. The first set of reports for institutions with over GB£50 billion in AUM will need to be submitted by the end of June 2023, to cover the 2022 calendar year; those with GB£5 billion-plus in AUM will be subject to the rules from 1 January 2023, with their first reports due end-June 2024. By that point, a full 98% of the UK’s asset management industry will need to comply with the Task Force on Climate-Related Financial Disclosures’ rules. Part of the challenge will be the requirement to provide a year-on-year comparison of the portfolio metrics reported.

A good deal of voluntary reporting has also been taking place, and pressure both top-down from regulators and bottom-up from investors will likely mean that most firms will want to get their TCFD house in order well ahead of the second-tier deadlines kicking in. This yoking together of compliance and client demands is a very welcome development for those who care about environmental action as we all should.

The TCFD report focuses on the investment organisation’s governance-related arrangements through a climate change lens and provides a consistent way of reporting the risks and opportunities faced in a portfolio as a result of it. It is safe to assume that most end-investors do very much want to be apprised of the climate impact of their financial holdings today, and it is certain that providing such insights will be a hygiene factor for tomorrow’s core client base. Research recently conducted by Compeer found that 80% of clients want access to ESG-compliant investments in their portfolio, with this figure rising to 94% for clients under the age of 40. With wildfires and floods making the impacts of climate change clear for all to see, the “E” reigns supreme among the Environmental, Social and Governance concerns investors want to see reflected in their portfolios now.

Thought leadership through technology
Whether a firm provides a sustainable investment offering – and an expanded TCFD report offers an opportunity to demonstrate this to clients – or not, the key to efficient reporting and avoiding issues will be a systematic approach. This brings the benefit of information and analysis across the client base, uncovering risks, providing calls to action, and giving insight to the investment manager and central investment teams alike.

At BITA Risk, we have always prided ourselves on having a finger on the pulse of both domestic and global regulatory change and cultivating a deep understanding of where the rule books might be heading – in light of both the spirit and the letter of the law. This has served us extremely well in developing our products to help keep institutions ahead of compliance changes, rather than just reacting to them. The range of institutions we work with has also enabled us to become something of a thought-leader and conduit for conveying best practices as the industry grapples with ever-changing regulatory regimes. As such, more and more we have a highly consultative role.

No doubt conscious that the UK’s institutions are having to cope with a barrage of new rules, not least its sweeping new Consumer Duty regime, the FCA is currently asking only for fairly limited TCFD reporting to clients. However, the expectation is clearly that all investors will have climate impact information at their fingertips in short order. Clients’ expectations for ever more personalisation being as they are, we can further predict that firms will need to be able to drill into these metrics in any number of ways too.

Having considered the requirements to provide year-on-year metrics at a portfolio level and to be able to aggregate metrics across client segments, we have suggested using this data to identify stranded assets, portfolios with climate risk exposure and to demonstrate a firm’s changing exposure through time.

With a structured data approach, communicating to clients the investment firm’s stewardship activity and mitigating reasons for holding carbon-heavy stocks, not only becomes easy, but drives a demonstration of the firm’s worth to the client.

How to make climate impact information relevant and readily comprehensible is not just a matter of client satisfaction, although it certainly is that; helping people to make investment decisions which reflect their priorities in the widest sense is what the disclosure rules are all about.

The TCFD rules aim to serve the most high-minded of principles, but as we help to steer capital to more sustainable deployment, the industry must stay firmly in the realm of their practical application too. We have been delighted to offer institutions guidance on firm, product and ad-hoc reporting requirements, metrics definitions, reporting templates and more. Personally, my work has never been more interesting, or more valuable in a societal sense.

Another portfolio monitoring lens
While climate impact disclosures are important from humanitarian and environmental perspectives, there is a regulatory drive to report soon. We like to emphasise to firms which may feel daunted, that this is just another lens through which to view portfolios – and therein arguably lies our particular strength. We have spent decades now enabling firms to master their metrics on performance, risk, suitability, and costs, meaning that we have abundant transferable insights on how to make TCFD reporting work optimally in everyday operations too.

Firms’ first concern will undoubtedly be how to avoid manual processes and being dragged back to “Excel hell”; then, relatedly, they will want to know which processes need to be in place to facilitate portfolio analysis and change. With profitability remaining under pressure, adviser productivity has to remain a top concern. Running analysis for individual portfolios and collating historic data will take time, as will aggregating across groups of clients for entity reporting. Creating structured data and an automated framework will alleviate pressure on the adviser and give the client a better experience.

These are undeniably challenging times for business leaders, but we see a gratifying proportion keeping the competitive advantages available from these pioneering reporting requirements front of mind. Here, we have been assisting institutions to develop trend reports to demonstrate progress on positive investment practices at both the client and entity levels to great effect. Helping the individual know the impact they are making will be a very powerful thing for both client satisfaction and retention. Being able to demonstrate the difference the firm as a whole is contributing is, in my view, a ready-made marketing campaign. I know that many Chief Marketing Officers agree.

In all, the TCFD requirements represent a particularly novel kind of compliance challenge, but one which we are seen leading firms rapidly embrace as an important differentiating factor. Sophisticated clients can already see that espousing ESG credentials is one thing, but that evidencing them robustly and acting on them is quite another. We look forward to working with even more firms in the latter camp as the industry moves to make its mark on climate change.

As leaders in portfolio monitoring and governance, BITA Risk analyses circa GB£180 billion of wealth management assets every night for a range of Wealth management firms. At our core is the quick, efficient analysis and aggregation of data, with seamless and efficient workflows for governance and client managers alike. We have extended our solutions to deliver what firms need now for TCFD, together with significant added benefits for the firm, following the IA (Investment Association) template as a base and then adding analysis and client-facing interpretations.

By Daryl Roxburgh, President and Global Head BITA Risk® part of the corfinancial® Group

If you would like to discuss the points raised, please email me at BITARisk@corfinancialgroup.com.

In the next two reviews, we will look at the monitoring of ESG and Ethical Restrictions and then Consumer Duty. Sign-up here to receive these directly.

For more information please visit https://www.corfinancialgroup.com/financial-software-products/bita-risk/ or contact us at BITARisk@corfinancialgroup.com.

Time is money: the hidden challenges of T+1

Man squeezed

Man squeezedThe Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) last year published a report targeting the first half of 2024 to shorten the US securities settlement cycle from trade date plus 2 days (T+2) to trade date plus one day (T+1).

Perhaps this will be a first step toward broader coverage in other currencies, regions and exchanges. Proponents suggest that the immediate benefits of moving to a T+1 settlement cycle include reduced market risk and lower margin requirements, as well as significant cost savings.

A move to T+1 will certainly have its challenges: industry participants will have to align and implement the necessary operational and business changes. T+1 will pressurise the industry to get things right on trade date, which means more straight-through processing and less cumbersome or customised processes. In a T+1 settlement cycle, if a trade is executed today, the confirmation or affirmation process should occur on trade date – mostly at the close of business in the region – for the trade to settle the following day. There’s very little time for the firm to identify a mistake that could lead to failed trade settlement.

When industry executives consider T+1, a natural starting point for the conversation is from the US perspective. Most firms perceive the main challenges impacting asset managers based in the US, who are dealing directly with the DTCC locally. The truth is that the impacts of this truncation of the settlement cycle are actually far greater due to multiple factors stemming from the differences in time-zones for participants trading outside of the US. This article looks at some the operational problems of T+1 from outside of the US footprint.

 

Across the time zones
For a firm located outside the US, T+1 automatically becomes extremely difficult. For example, currently with a typical UK investment management firm its staff have ended their working day well before the markets close in the US. In a T+2 environment, many traders don’t complete the deal records until the morning of T+1. Occasionally they might log in at around 11pm to sweep up any unbooked trades, but if they don’t match perfectly with a broker the trade will remain unmatched until the operational team returns the following morning.

Under T+2 that firm would have an entire day to correct and instruct the settlement of the trade, so there would be little or no issue, although if the counterparty is a US broker, it will be early afternoon in the UK before they can fix it. If we put this scenario into a T+1 context, the firm has effectively lost a day. While a trade is in an unmatched status, the parties can’t confirm the net settlement amount for the cash component of the trade, impacting funding processes.

 

Stock lending, custodians and FX
There are additional complications if a party is participating in stock lending. A custodian, for example, will not know about a requirement to recall stock until an asset manager sends the trade instruction to sell. If an asset manager sends an instruction after markets close, there is little or no chance to recall stock on the same day.

This scenario will have an impact on the number of failed trades because there’s not enough time to facilitate settlement. The net result when the settlement cycle decreases will be that custodians may impose earlier instruction receipt deadlines. Furthermore, if stock is not readily available, then trades are going to fail. Service level agreements may also have to be revisited, as each party wants to protect their position and not be responsible for failed trade fees.

Many custodians allow UK-based asset managers to instruct on settlement day for US equities, but that’s because the US market is still open when the UK market has closed. Deadlines for asset managers in Asia may become even tighter as their day is ending before the US market opens.

In India, T+1 has already been introduced and many UK firms already feel the pinch because the market there closes around 11am GMT and some custodians are looking for instructions by or before 9:30am. As this new trading lifecycle is established, many UK asset managers may struggle to meet these deadlines, resulting in pre-funding issues and foreign exchange challenges.

Similarly, there have been discussions on the impacts in the broader Euro markets of moving to T+1. From experience we often see that if the US markets introduce change, the tendency is that other regions follow suit. With new Central Securities Depository Regulation (CSDR) impacting processes, there are potentially going to be more failing trades, therefore more penalties incurred. All creating additional headaches for asset management firms.

 

Changing working practices
At this stage, many asset managers will be establishing forums or working groups to understand their custodians’ requirements under T+1, to then formulate internal procedures to support T+1 when it does go live in the US markets. This might involve testing their operational team presence in the local market time for executed trades, so perhaps trialling support in US market hours to see how that might work in practice. Team shift-work, accommodating a much longer working day may well be the necessary endgame.

Indeed, the imperative to adapt operating models is an interesting yet challenging area for discussion. Changing local working hours is an easy statement to make, but every firm has a finite number of resources in their operational teams. Getting an even split between staff members would be key so that the workload naturally flows, requiring careful analysis and staff commitment to change. For example, if US hours are typically 2pm to 11pm GMT, then there is likely to be a trade processing bottleneck around 4pm when all euro and UK trades are often still being booked. However, UK based asset managers are anticipating very low volume activities between 6pm and 10pm, adding to the challenges of balanced resourcing in a lengthy window of inactivity.

 

Conclusion
When firms look at a move to T+1, it is essential that they fully comprehend required changes to the post-trade environment. This is even more crucial for firms that have not re-engineered legacy systems.

As operational efficiency and regulations bring technology to the fore, now is the time to overhaul dated technology and systems and move away from practices like batch processing, which is still common in a great number of companies around the world.

The many operational problems associated with T+1 can be alleviated by corfinancial’s Salerio® software. Salerio deals with confirmation, matching and settlement instructions management, helping the middle office deal with high volumes of trades that must be processed on trade date. Salerio achieves this through complex matching automation leaving users to only deal with exceptions, thus enabling firms to process high volumes of transactions in the most time-efficient manner. Our software takes control, because as soon as the firm can send an instruction to a custodian, the custodian can issue notifications on the matching and settlement status of trades that Salerio centrally manages.

Facing the new monitoring challenges in wealth management: going beyond drift and minding the gap

Wealth Mosaic

Daryl Roxburgh – President & Global Head BITA Risk® part of the corfinancial® Group

Wealth Management

Living through 2022 is underscoring an eternal truism: that life’s challenges are seldom episodic and often come piling on top of each other in a way that is most challenging. This is very true for those managing portfolios in the wealth management space.

Long gone are the days where asset allocation drift, and possibly asset class risk, were enough to satisfy suitability and ongoing portfolio monitoring requirements. These are just one slice of a large – and growing – portfolio monitoring “pie”, and there are several portions I fear firms will find hard to digest without modern technology designed for the purpose. These coalesce around two core themes: sustainability and the highly tricky business of not just doing right by clients but proving one has done so. Spreadsheets and manual data manipulation are just too time consuming, labour intensive and risky to be fit for purpose.

So, the challenge of properly monitoring portfolios has become multifaceted, requiring the checking of numerous metrics, both individually and across your entire client base – and all of the time. These metrics can often be client or proposition specific and at both asset and portfolio levels adding further complexity. This requires automation and exception management if it’s not to become a drain on the front office’s time.

The acknowledgement of change is supported by recent research carried out by Compeer which found that 46% of firms are now reviewing suitability on a continuous rather than an annual basis. From a compliance perspective, but more importantly from that of clients themselves, this is no small thing, although the industry as a whole clearly has some way to go still.

Consumer Duty

Putting the customer first is a movement which has been gathering pace globally for some years building on TCF and which will reach something of an apotheosis in the UK when, at the end of July, the FCA publishes its final “Consumer Duty” rules. The regulatory focus is now on firms tracking and measuring the investment journey to ensure both consistency of outcomes and how these are best achieved. We will need to map and document such that even if clients choose slightly different paths and different vehicles (pun intended), those with similar objectives still arrive at the same place or it is clearly documented as to why not.

You may think that this is solved by Centralised Investment Propositions (CIPs), but research has shown that this is not always the case. Firms must be able to ensure and demonstrate that Centralised Investment Propositions are working as intended for each client’s objectives, and alert and document where not. Being able to identify early on and rectify reasons why performance, and yields, aren’t quite meeting an individual’s expectations and needs will help head off all manner of risks apart from those related to compliance – not least that of losing the client.

ESG and Ethics

It is in the sustainability sphere, however, that things are getting really thorny in portfolio monitoring. Our research with Compeer found that 80% of clients now request some access to ESG-compliant investments in their portfolio, with this figure rising to 94% for clients under the age of 40. Demand, in the purest sense of the word, is most certainly there and will only grow to ubiquity. It is just as strong (if not stronger) from regulators, with SFDR and TCFD headlining an alphabet soup of frameworks, rules and regulations requiring carbon, ethical and other non-financial metrics also be part of what institutions monitor, measure and report on. This starts to become complex, as not only does the ESG (in the broadest sense) data need to be managed and applied to portfolio positions in et context of client preferences and restrictions, but a number of metrics need to be looked at through time.

Compeer found that a lack of personalised reporting and portfolio updates are a deal-breaker for two-thirds of clients and firms clearly see that ESG reporting is shaping up to be a real differentiator in these conscientious times: 43% already report on ESG metrics to clients and the remainder are working hard to catch up. Ethical restrictions have been simplistically applied for years, but now that there is detailed data on companies and funds, there is the opportunity to apply these automatically both pre-and post-trade. No longer does the front office have to spend time manually checking each month, this along with sustainability metrics can be constantly monitored.
 

Multifaceted Solutions to Multifaceted Challenges

These slices of the monitoring pie may seem to be largely compliance, but the reality is that more and more of it takes up front-office resource. Indeed, Compeer tells us that for a quarter of firms as much as 80% of a compliance project is performed outside of the compliance department – and this at a time when margin pressures mean front-office efficiency is more important than ever. The more automation in portfolio construction, monitoring and reporting which can be achieved, the better both direct and indirect compliance costs can be kept down – and high standards of provision kept up. These tools provide managers with decision support as well as calls to action in investment management Managers must be freed up to manage and build their client bases.

All of this is to say that when faced with multiple challenges, wealth and asset managers need to be seeking truly multifaceted solutions. That way, multiple problems which threaten to become an entangled mess can actually be solved pretty much at a stroke. Future-proofing can then also come into scope. Once you have a cutting-edge portfolio monitoring solution in place, then it doesn’t much matter what regulators, clients, senior management, or anyone else requires you to measure and report upon. You could even choose to break with the pack and look at portfolios through an entirely new lens. I know some of our clients are already thinking about this.

Our BITA Wealth® solution has consistently stayed ahead of the market and encompasses a wide range of risk, portfolio analytics and decision support tools to monitor suitability and outcome meeting today’s challenges. Now servicing over £180bn in client AuM, we can confidently say that we’ve helped get a large part of the sector to a position where proper guardrails are always on.

That, I would argue, has to be the spirit in times like these: you can seek resilience in the face of a regulatory onslaught and wring business benefits from compliance challenges. Our client stories give ample evidence for how that’s already been done. If you would like to receive our updates on Consumer Duty, please subscribe here.

For more information please visit https://www.corfinancialgroup.com/financial-software-products/bita-risk/ or contact us at Info@corfinancialgroroup.com.

Archer turns to Salerio to add retail trade processing

Archer logo

Boston, May 3, 2022 – corfinancial®, a leading provider of specialist software and services to the financial services sector, announces that Archer, a leading technology enabled service provider for investment managers, has extended their use of corfinancial’s  Salerio® Post-Trade Execution solution to commence trade processing for their retail services.

Headquartered in the Philadelphia region, Archer provides a robust ecosystem of technology and services to the asset management industry. An early adopter of Robotic Processing Automation, Archer continues to deploy advanced technology like Salerio to streamline processes for investment manager clients and their brokers.

“As more investment managers launch new products specifically for retail investors, we’re continuing to invest in technology that creates powerful operational efficiencies for our clients,” said Bob Lage, EVP, Global Head of Product and Technology at Archer. “At Archer, we’re always looking to upgrade our tools in ways that allow our clients to grow their businesses. By integrating Salerio into our trade settlement process, we are adding automation that creates significant efficiencies in matching trades across our clients’ counterparties.”

Archer used Salerio to migrate its institutional clients away from DTCC’s OASYSTM utility in December 2021 and began moving its retail clients in March 2022. This latest move with the retail application of the technology enables asset managers to match trades more rapidly through a centralized service. Specifically, Salerio facilitates enhanced connectivity to banks and brokers via DTCC’s CTMTM utility, including SWIFT messaging – all highly automated and fully integrated into the Archer IBOR, dashboards and reporting.

David Veal, Senior Executive for Client Solutions at corfinancial added: “Archer’s confidence in our Salerio solution is well-received and this recent change reflects the flexibility of our product to adapt to different operational processes, creating a comprehensive, centralized solution that can scale as our clients’ businesses grow.”

BITA Risk wins innovation award for its ‘ESG Manager’ private client solution

Wealth Briefing - Award-2022-Winner

London, 31st March 2022 – BITA Risk® (part of the corfinancial® group) announces that it won the coveted ‘Best Innovative WealthTech Solution B2B’ award at the Tenth Annual WealthBriefing European Awards 2022 for its BITA Wealth® ESG Manager private client solution.

Showcasing ‘best of breed’ services and solutions in the European region, the awards were designed to recognise outstanding organisations grouped by specialism and geography which the prestigious panel of independent judges deemed to have ‘demonstrated innovation and excellence during the last year’.

ClearView Financial Media’s CEO, and Publisher of WealthBriefing, Stephen Harris said: “The organisations and individuals who triumphed in these awards are all worthy winners, and I would like to extend my heartiest congratulations to the winners.”

BITA Wealth ESG Manager supports evolving ESG strategies by helping firms to understand, manage and monitor portfolio ESG exposures, enabling the integration of ESG analysis and reporting within a firm’s investment proposition.  Climate, impact, and ethical restrictions dovetail with investment policies to deliver analysis and governance to compliance teams and the wealth managers. This key differentiator enables client managers to deliver a better service to clients in the world of sustainable investing.

Commenting on the firm’s triumph, Daryl Roxburgh, President and Global Head of BITA Risk, said: “We are delighted to have won this award in recognition of our innovative approach to managing the complexities of ESG investments for private clients. While many firms have built sustainability into their central process, only a few can embody it in day-to-day portfolio management and demonstrate this clearly to a client while monitoring that they are in line with the client’s preferences and restrictions. This is what our innovation delivers.”

Wealth Briefing - Award-2022-Winner