David Pearson, head of post-trade services,
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to outdated regimes some firms have already reengineered their
is this revolution more apparent than in post-trade.
Exposing the inefficiencies
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.
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.
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
Forging a new, direct
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.
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.
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.
by the FIX Trading Community paved the way.
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.
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
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
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
A new class of
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
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.
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.
has redefined the post-trade operation and a true buy-side
middle office is being created.
revolution has started and it’s time to get on