Standardisation and automation are the logical response to problems of scale and complexity. If a simple task needs doing a couple of times a year, you have little incentive to improve the process. If a complex task has to be executed every few hours, minutes or even seconds, you soon look for ways to systematise the management of the task, to get it done quickly and efficiency.
This principle has driven progress from the industrial revolution to the era of the production line to today’s trading rooms, where order and execution management systems have evolved to cope with vastly increased transaction volumes across multiple asset classes and counterparties. But it only applies if labour costs make it more efficient to automate a process than to hire more people to handle increased volumes or complexity. Securities settlement was relatively slow to be automated in India, for example, because little marginal cost was added by banks employing extra staff to courier share certificates between counterparties.
Similarly, broker-dealers globally have regularly increased back-office headcount to handle periodic rushes to meet new regulatory obligations or unexpected upsurges in demand. As surveillance requirements increase under the EU Market Abuse Directive and MiFID II, banks and brokers are recruiting legions of para-legal staff, often seconded from law firms or consulting groups, to plough through voice recordings of trading desk conversations, when required to provide further data on trades under investigation by regulators. At the same time, firms are looking to automate and standardise their surveillance processes, but investment cycles and reduced budgets mean they must also deploy short-term, labour-intensive and ultimately unsustainable solutions.
Today, the pressure on broker-dealers to standardise and automate back-office tasks is reaching breaking point. Largely, the pressure stems from regulatory drivers, not an increase in transaction flow, meaning that extra budget to quickly facilitate process improvement is hard to come by. Overwhelmingly, the aims of regulatory reform – greater transparency, stability and efficiency – are laudable, but collectively they represent an unprecedented squeeze on resources.
For example, the Central Securities Depository Regulation has already cut securities settlement cycles in Europe to two days from three, giving back-office staff less time to fix the same number or errors or exceptions (indeed more, as many clients have turned to broker-dealers to help them handle the transition). Soon the same regulation will impose mandatory buy-ins, reducing the timescales permitted to counterparties to find a security in the event of a trade fail. Separately, the volume of collateral transfers is expected to increase substantially, as counterparties to both cleared and non-cleared OTC derivatives are obliged to formalise margin arrangements. Even if collateral transfer fail rates remain at 3%, a recent study by PwC and DTCC-Euroclear GlobalCollateral Ltd has estimated that brokers will need to increase dedicated staff from three to 16 between 2015 and 2020, just to manage the extra workload from non-cleared OTC derivatives trades.
Faced with so many pressures to standardise and automate back-office processes, the COO is painfully aware that traditional options do not fit the bill. COOs cannot afford, in any sense of the word, to brief a team to conduct root and branch, multi-year, multi-asset class, multi-jurisdiction process automation projects.
But the cupboard of ideas is far from bare. Just as order management systems extracted the core data from a portfolio manager’s instructions to the trading desk, reducing lengthy conversations to a few standardised data fields, it is possible to strip down the current cumbersome methods used to outline the actions needed to fix a failed transaction or settlement snafu. Similarly, the execution management system now sends precise instructions to multiple broking counterparts on how and where to execute a trade, replacing time-consuming and somewhat vague phone calls to various sales traders. Like executing an order, resolving a collateral fail or buy-in is a complex, multilateral activity. But the difference today is that the automation and standardisation of back-office tasks need not take as long as the evolution of OMSs and EMSs, via development of message protocols and extensive industry-level collaboration. As such, a task management system – or utility – for the back office is not a far off dream, but a tool that could rapidly reduce manual intervention.
In many respects, the hard miles of back-office standardisation and automation have been traveled, thanks to the networked connectivity that already exists between counterparties, and the new generation of IT communications capabilities that can support the shared terminology, directories and templates needed to process complex back-office interactions on a more cost-effective and scalable manner than broker-dealers have achieved to date.
While some of the technology infrastructure to facilitate back-office task automation and standardisation is relatively new, the enabling, driving force is the will to change. Higher levels of standardisation and automation will not only support complex processes and relationships more efficiently, it will help broker-dealers achieve broader regulatory objectives of transparency and stability. As such, COOs need to look beyond traditional approaches to consider how fintech-based solutions can tackle today’s problems today, not tomorrow.
We’ve thrown people at the back office for too long; now is the time to give them the tools to do the job better.
