By Laurence Jones, Post-Trade Strategy at CME Group’s Traiana
To say the industry has been through some seismic changes over the past decade is an understatement to put it mildly. From ever increasing defaults and regulatory changes to clearing and collateral, not to mention the continued use of technology and automation, global financial markets have been exposed to a series of changes in what is an incredibly vast and complex landscape. However, if there is one thing that has remained constant is processing, and lots of it.
Post-trade processing
Processing, the plumbing that underpins the entire financial system, is vital to ensuring the health and stability of markets. It needs to be done in a timely fashion, and the data needs to be correct and in-line with any regulatory obligations. Some parts of the post-trade lifecycle are well-oiled, mainly due to regulatory pressures on specific focus points as well as the central network effect and interoperability between both asset-classes and process types. Others, though, simply are not.
The evolution of derivatives has, in-other areas resulted in continued layered manual processing. Not only does it still rely heavily on email and excel spreadsheets, but also offers relatively low levels of control. If this was not enough, ever-rising volumes and the fragmented nature of these processes have led to costly and unscalable workloads. We all know volumes can be erratic. Too many factors to list constitute an impact on volumes, but decisions are often made that result in ‘quick and dirty’ layered manual processes that become really challenging to manage over time. Factor in the current global pandemic that has now surpassed a year in the making, and the challenge only gets harder.
Fragmented manual processes
The payments and settlements space is not only huge, but also fundamental to all other parts of the trade-lifecycle. Ultimately, trades need to settle, yet a lot of inefficiencies exist. Traiana’s research from 2019 showed that $500m a year is spent supporting certain inefficient payment and settlement processes for the top 450 financial firms (50 global investment banks/400 Global Investment management firms) and could be higher with continued challenges. The bulk of this is centered around the messaging and matching of cashflows. There are several key challenges and inefficiencies when it comes to the messaging and matching of these cashflows, including:
- Different cashflows: these can be handled by different internal systems, which can use various data types. Typically, inefficiencies exist in uncleared products.
- Margin management: inefficiencies exist in uncleared products. Depending on the asset class and the regulated domicile of the entities there may be some level of margin management occurring, but these are large exposures, often running uncovered and into the tens of millions of dollars that can remain unsettled past the expected settlement date due to the manual nature of the confirmation/affirmation process.
- Settlement errors: with an increase in regulatory focus for late or incorrect settlement fines, inefficiencies can soon cost more than just the cost to manage.
- Uncleared headaches: the OTC world, while under tighter controls from the phased in uncleared margin rules (UMR), remains fairly antiquated in part. Many banks and buy-side firms are still using email and excel based processes to agree to, and then often instruct cashflow movements across all asset classes, including in OTC where products could be cleared but aren’t. These flows are often mismatched, unmatched, or sent to the wrong place entirely to agree and confirm.
Single connection for payment details
Large banks and buyside firms are still using email and excel based processes to agree to, and then often instruct cashflow movements across all asset classes, including in OTC where products could be cleared but aren’t. These flows are often mismatched, unmatched, or sent to the wrong place entirely to agree and confirm. This means late settlements, backlogs of claims for use of funds for failed onward payments and just generally a complex set of processes to support a multi-billion-dollar problem every day. Factor in that its mostly managing different formats in different connections to difference participants, it becomes really hard to get consistency without centralization at that level.
FIX trading standards
Last year, with the central aim of overcoming these challenges, Traiana helped create a set of new standards through the FIX Trading Community that allows firms to send and receive data relating to periodic payments. It covers 71 cashflow types and has presented a set of standard fields to use to agree on the key economics of the cashflow. Traiana’s new cashflow messaging and matching services fully support the end-to-end workflow created in the FIX Trading Community.
Payment and settlement optimization
8 broker entities have joined our new service, which allows them to remove the need for certain manual email-based processes, as well as the need to manually agree the cashflow amounts. The upshot of this is that firms can improve the workflow, allowing flexibility in data formats through transformation and offers a centralized, real-time truly cross-asset messaging and matching service with full STP, as well as a user interface that sits in Traiana’s new cloud-based platform. By extending the footprint through post-trade, allowing for higher STP and benefiting from a market central network means you can remain agile and become less reactive to certain market changes or pressures.
All these capabilities help to not only bring down historically expensive and inefficient barriers, but also help to speed up the matching process to ensure accuracy and significantly reduce the chance of delay past settlement.
As we move forward, the new year provides continued opportunity for firms to look again at their processes. A more remote working culture, an inevitable by-product of the post-COVID era, means that the age-old processes will continue to present challenges.
Expect an even greater focus on operational efficiency, STP and, of course, improving the messaging and matching around cashflows. There is more work being done in the industry across grouped and netted cashflows, which if done cross-asset can offer an even bigger opportunity to reduce your cost through improved funding processes, quicker and cleaner settlement management and also has a positive impact on liquidity management.
Regardless of what 2021 has in store for the industry, with regulatory challenges now knocking on the door in the settlements arena, there is a more compelling case than ever to focus on a process which is not going away.
For more information and to book a demo visit our website or email us info@traiana.com.
Laurence Jones is Director, Post-Trade Strategy at Traiana
With 15 + years’ experience in the financial services post-trade, Laurence has ownership of payment and settlement optimization, average pricing and FX prime brokerage trade processing strategy. Prior to Joining Traiana in 2018, Laurence held numerous senior level roles within post-trade, including 6 years at LCH where he helped design and develop the first OTC FX Clearing Service. He also oversaw the expansion of FX operations in North America and then managed the collateral operations team globally, leading a 2-year program to improve the settlement process. Prior to this, Laurence worked at JPMorgan, Merrill Lynch and Lloyds Bank within Derivative Operations and Cash Management.
A regular speaker at FIA, SIFMA and FIX conferences, Laurence is an active participant in the FIX trading community, acting as a board member for the Americas Governance Committee & Co-Chair for the Global Post Trade Working Group. Laurence holds a BA(Hons) in Business Management from Bournemouth University and is based in New York.
As the world's leading and most diverse derivatives marketplace, CME Group (www.cmegroup.com) enables clients to trade futures, options, cash and OTC markets, optimize portfolios, and analyze data – empowering market participants worldwide to efficiently manage risk and capture opportunities. CME Group exchanges offer the widest range of global benchmark products across all major asset classes based on interest rates, equity indexes, foreign exchange, energy, agricultural products and metals. The company offers futures and options on futures trading through the CME Globex® platform, fixed income trading via BrokerTec and foreign exchange trading on the EBS platform. In addition, it operates one of the world's leading central counterparty clearing providers, CME Clearing. With a range of pre- and post-trade products and services underpinning the entire lifecycle of a trade, CME Group also offers optimization and reconciliation services through TriOptima, and trade processing services through Traiana.
The content in this communication has been compiled by Traiana for general purposes only and is not intended to provide, and should not be construed as, advice. Although every attempt has been made to ensure the accuracy of the information within this communication as of the date of publication, Traiana assumes no responsibility for any errors or omissions and will not update it. Additionally, all examples and information in this communication are used for explanation purposes only and should not be considered investment advice or the results of actual market experience. Traiana is not a regulated entity.
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