By Marcus Consolini, Managing Director, ULLINK
The post-trade landscape is undergoing radical transformation: shrinking trade settlement windows, new compliance requirements around auditing and reporting, the need for risk aggregation across asset classes and systems, and the increase in low-touch/DMA trading are just some of the forces reshaping today’s ecosystem. As a result, sell-side and buy-side firms are re-considering their middle office workflows. In addition they are re-considering what the middle office does; as the workflows are re-defined, so are the technologies needed to support them.
So what are the requirements and the challenges that sell side firms have to overcome? There are three areas that most will be focused on when implementing a middle office solution:
Automation and Exception Management
The implementation of a fully automated solution on top of a robust exception management framework.
With the global trend of migration to a shorter “T+2” settlement window, firms will have one day less to perform their middle and back office operations. This has a big impact on operational processes – the concurrent increase in volumes means that automation and STP has never been so critical. It effectively equates to trying to cover a longer distance in a shorter time, despite already operating at maximum speed and capacity. So, a change in technology is inevitable. STP is now required from front to middle and customers will soon all be expecting same day affirmations, regardless of the time of the trade. This means the processes of booking, allocation, confirmation, fees calculation and affirmation must be automated from end to end. As it stands, with the enormous variance in technology support across firms, issues can still occur anywhere in this process. Therefore, a solution must come from a flexible exception management framework, where the sell side operator can still manually intervene over part or all of the process – for some or all of the flow – and still be given the tools to perform operations by lots rather than one by one.
In the end, the solution should enable – at the very least – the automatic booking, allocation, confirmation and affirmation of a trade in real time. If the STP can be extended one step further and push settlement instructions to the back office in real time, then the loop is closed.
Risk Management
The implementation of a cross-asset, cross-platform solution that can consolidate post trading operations and better manage and monitor risk exposure.
A growing trend amongst market participants is that of increased diversification of trading across asset class, market, time zone and currency. And whilst there are many front office platforms available to trade multiple asset classes, the main challenge that exists is from a risk perspective and how to consolidate across those multiple platforms. How does a firm accurately assess risk exposure resulting from trading activity, when there is no aggregation between trading systems at the front office level? To deal with this, solutions to manage risk and real exposure efficiently in the post trade world need to involve consolidation, and because it’s in the middle and back office where trades are converging that it makes sense to have this consolidation implemented at this level and away from the front office level (where it doesn’t belong).
Auditing and Reporting
A growing requirement from governments and regulators is for increased transaction reporting as well as audit trail / reference data collection. Data generated by front office systems is generally dispersed and rather difficult to aggregate and compile. Reasons for this include liquidity fragmentation, deployment of smart order routers and multiplication of sponsored client trading through firms’ own systems. However, since all this data converges around the middle office, it can be compiled at that level.
As a general rule, and although some convergence has taken place, front office systems remain specialised and generally incompatible with each other. They are either designed for a specific asset class, market, or type of product (e.g. listed or unlisted etc.). This means that given the lack of rationalisation in the front office world, it is effectively impossible to adequately address current (and future) reporting requirements.
This is where the middle office becomes the ideal (and preferred) area for a solution. It is a natural convergence layer and is able to address the ever increasing demands from regulators to produce reports against all participants and their market activity.
In conclusion, while the level of technology support for middle and back office workflows has traditionally been relatively unsophisticated, the ever changing requirements from both regulators and trading participants are now forcing significant changes to workflows and the technology the middle and back office uses to manage post-trade activities.
Given these changes, many firms are having to re-think their model for managing technology infrastructure. Cost and complexity of trading mean only very few will have the resources to build and maintain home-grown systems. It is not all doom and gloom though as market participants can now benefit from vendor solutions that can reduce costs and guarantee a solution that is managed by experts in accordance with industry needs and standards. In addition, vendors can also help deploy efficient cost management methods down to the actual deployment themselves – so instead of deploying a large vendor system internally, firms can take a standardised, outsourced, and potentially modular solution which will make the integration easier. It is these many nuances that are now pushing the vendor community to support the development of Middle Office solutions that are needed in the market place.
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Transforming Post-Trade
