By David Pearson, head of post-trade services, Fidessa
The economics of the financial industry are different now. Increasing regulatory demands and scarcity of capital mean that traditional ways of working are no longer sustainable. Simply finding cheaper versions of the same operating models will not deliver the real cost savings that firms require. As the industry faces up to outdated regimes some firms have already reengineered their business models.
Nowhere is this revolution more apparent than in post-trade.
Exposing the inefficiencies
Post-trade has traditionally been dominated by expensive, proprietary, outmoded technology or time-consuming, inefficient manual processes. This is particularly the case for affirmations and confirmations - a vital function in the trade lifecycle. As long as processes were delivering for the most part, there was no imperative for radical change. Instead, firms have layered on more people, money and quick fix solutions. On the buy-side, this has resulted in a mesh of complex internal controls over crucial business processes.
With infrastructures already operating at capacity the impact of greater regulation, intense cost scrutiny and shorter settlement cycles as T+2 is introduced in Europe in October will be profound. Firms with inadequate processes will not be able to take the strain. More robust regulatory structures, coupled with a real punitive approach, means non-compliance through a lack of appropriate controls and oversight has the potential to be dramatic, costly and hugely damaging to a firm’s reputation.
Forging a new, direct approach
A group of forward-thinking buy-side firms have recognised that by repurposing FIX in post-trade they can deploy a more efficient model for exchanging affirmation and confirmation messages with the sell-side.
The definition of a direct affirmation workflow is perhaps the most significant shift in these firms’ thinking. Importantly, it is the adoption of open standards that is facilitating this move.
They have found an alarmingly simple solution that applies FIX in post-trade on the buy-side, mirroring the existing sell-side workflow to deliver operational efficiency and increased transparency. FIX makes sense because, unlike other standards for post-trade, it follows the natural direction of the trade workflow.
Work by the FIX Trading Community paved the way. By building on open standards in the front office, it opened up the possibility for firms to further disseminate and persist information all the way through to the back office.
Affirming and confirming trades with the sell-side on a direct matching basis puts control firmly back in the hands of market participants, removing the need for fragmented and manual processes and unifying post-trade operations. The direct model is proving to be faster, cheaper and more accurate, achieving levels of efficiency that were previously unattainable.
When the concept of an EMS emerged in the front office, it provided the workflow to sit on top of an open standard, delivering an effective and holistic way to manage orders across multiple brokers. This was just the beginning. The adoption of common workflow tools subsequently transformed the front office and led to new ways of working. The humble EMS now transcends its original design of simply managing and processing trade orders. It accommodates other applications, such as embedding broker algorithms and the analysis of counterparty flow.
Similar levels of innovation are possible in post-trade. By adopting a standards-based approach for affirmations and confirmations, firms are achieving all the immediate benefits of improved trading relationships, lower costs and reduced operational risk.
Improved workflow outside of the front office will have a far-reaching impact. This will include better ways of working in other areas, such as the management of commission sharing agreements, regulatory reporting, and broker analysis. For the first time the buy-side will begin to see the emergence of a true 'middle office', bringing together innovative new solutions for the operations department that has depended for too long on tactical fixes.
A new class of post-trade application
Having identified and proven a workable, scalable operating model, the next crucial step is to make this standards-based workflow accessible to the broader buy-side community. For this to happen, other buy-side firms need a better way to access the sell-side community.
Many large firms have the in-house capabilities to support the direct approach to affirmations and confirmations. Those with limited budgets and fewer resources will need a cost-effective tool that builds workflow around FIX.
The enabler for this will be technology and the emergence of a new class of post-trade application for the buy-side that would follow an industry-standard model to deliver comprehensive affirmation workflow. It would automate time-consuming, expensive manual processes and allow many more firms to benefit from the latest innovations in post-trade. It would remove the operational risks associated with using a central single facility for a major part of the settlement process, enabling firms to reduce clearing and settlement times and re-use information captured in the front office. Greater visibility of the trade economics for both parties would increase the likelihood of successful matches and affirmations.
Innovation has redefined the post-trade operation and a true buy-side middle office is being created.
The revolution has started and it’s time to get on board.