The undeniable truth of automation and T+1 trade settlement

Making the whole post-trade process more efficient and effectively scalable has been a challenge for financial institutions around the world for many years. A lack of real exception workflow is the fly in the ointment for many firms, slowing down operations and costing them heavily in both financial and reputational terms. Given the move to T+2 settlement cycles (and ultimately T+1), a recent survey on trade exception management from US software vendor DTCC makes interesting reading.

The survey of 364 buy-side firms found that 84% of respondents reported that fixing trade exceptions is very impactful or somewhat impactful on their organisations. The issue here is matching data between the asset manager’s view of the world and the broker’s view. When those two views diverge, then an exception is created. The answer, of course, is to automate the handling of that exception, building in rules to negate the risk of a similar situation arising in the future. Indeed, automation is the only way to effectively scale a business and keep key middle and back office resources focused on value added tasks; in a manual environment, the firm would repeat that process time and time again, creating bottlenecks and generating risk.

The survey also found that 80% of respondents feel that improving exception handling is a key enabler for achieving T+2 settlement cycles. In moving from T+3 to T+2 (the days between trade date and settlement date), a day is clearly being taken out of the settlement cycle, but what is not clear is who loses that day. Is it the asset manager, the custodian or the broker? The likelihood is it will be the instigator of the trade, the buy-side firm, who loses the day. For them to be comfortable losing a day in the middle of a trade lifecycle, the automation of exceptions is going to be critical. The alternative would be increased pressures on manually intensive processes within an operating model dependent of multiple workstations and functions.

Other pain points cited by the survey as affecting their organisation’s middle and back office processes:

  •          78% agreed (34% strongly) Missing or incomplete SSIs (Standard Settlement Instructions that guide the custodian and their agents as to the movement of the underlying stock and cash). This is a data issue; without clarified and correct SSIs the asset manager cannot accurately instruct the custodian and trades can falter completely.
  •          70% agreed (22% strongly) Post-trade allocation, confirmation and matching processes being managed on different platforms. Obviously, having post-trade matching performed by multiple utilities causes major headaches for asset managers, yet it is not uncommon for this situation to exist at even the biggest financial institutions as a result of different international asset classes. The solution is to bring all of the exceptions across various asset classes into one central dashboard, wherever possible.
  •          65% agreed (20% strongly) Manual processes in post-trade matching. Certainly, in the T+3 world asset managers could manage with having a stack of papers on their left, which was all their internal reports of the trades they had done, and on their right all the faxes from the brokers, and they manually stapled them all together. In losing a day in the settlement cycle, that luxury is eliminated as the risk rises exponentially.

The research summary concludes: “Solutions aiming to improve the exception handling process should help to ease two main pain points for middle and back office staff; ‘Missing or Incomplete SSI’s’ and ‘Post-trade allocation, confirmation, and matching processes being managed on different platforms’.” In overall terms, attacking these two issues seems to be the most effective way for buy-side firms to mitigate the risk of trade failure – and the resultant loss of interest on the cash that has not been delivered on time.

Market participants need to work in conjunction with Omgeo’s trade confirmation utilities and services to enhance the end-user experience. There is room for additional controls, automation and exception management to further hone that process.

The buy-side must embrace technology to eradicate the need for manually repetitive activities that may have been feasible with longer settlement cycles. Every minute in every hour counts, putting pressure on the post-trade cycle and adding risk of settlement failure as timelines are compressed. Effective automation removes the risk of human error, providing scalability to the processing environment and giving support teams capacity to deal with important exceptions only.

Of course, T+2 is not the end of the story; there is clearly market interest in moving to a T+1 environment. As the settlement lifecycle continues to shorten, not only do institutions require the centralising of exception data on one dashboard but they must also question whether they can actually afford to not be running an exception-based protocol if they wish their business to be scalable.

T+2 has triggered a significant interest in the automation of exceptions; the move to T+1 will make it an undeniable truth.

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