The sell-side back office stands out strongly as a leading area of legacy risk and pressure, according to a new report – Transforming Legacy Tech – undertaken by ValueExchange, the global market research and benchmarking company in partnership with S&P Global and Digital Asset.
Analysing over 125 firms across the investment cycle, they found that over 25% of back-office systems were more than 20 years old.
On average, banks and brokers’ systems, were up to 12 years older than their buy-side counterparts.
This translates into reduced system flexibility, higher processing costs, increased manual interactions and potentially increased security risks.
The report identified clearing and settlement as the most acute area of legacy risk across the trade lifecycle.
However, as the report notes, these differences between buy and sell-side firms can be misleading.
It says that given the huge growth in middle office outsourcing amongst investors over the last 10 years, it is unlikely that most fund managers will be able to accurately gauge the age of their providers’ systems.
What is more certain is that the buy-side statistics indicate ‘when the systems were outsourced’ more than the systems’ true ages – highlighting a hidden risk across the buy-side.
“With many custodians and outsourcing providers operating technology platforms today, that are older than the systems they replace, the gap between perceived system ages and the reality underlines a need for deeper due diligence by investors when they come to outsource,” it says.
The report also notes that due to intense risk and regulatory pressures, sell-side houses are mostly unwilling to trigger meaningful change in their clearing and settlement infrastructures unless driven to do so by the market such as with T2S in Europe or with the Central Depository replacement in Singapore.
In addition, the survey shows that currently only 3% of derivatives platforms are capable of handling other asset classes, while 52% of brokers have to run their processing systems on a local or country level, meaning that the case for addressing legacy technology silos is “compelling”.
“This survey highlights the critical role that legacy technology plays as both a challenge and an enabler for firms today,” says Barnaby Nelson, CEO of the ValueExchange. “Managed badly, aging and inflexible systems look set to undermine efforts to improve settlement efficiency, in a T+1 and Central Securities Depository Regulation context, and to bolster operational resilience.”
However, he adds, “Managed well, legacy tech transformation can open up huge revenue opportunities for firms and underpin their growth. In an era of fierce competition for investments, firms face an urgent choice of which side of the line they want to be.”
©Markets Media Europe 2022
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