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Post Trade Processing in ‘The New World’ Published by Salerio June 2012

Post Trade Processing in ‘The New World’ Perhaps the first question to be asked is: “Is this truly a New World for the Financial Services Markets?” Many would say that the kind of issues coming to the fore now have always been around. It’s just that for Post Trade Processing (PTP), their priority has been low in the past. As any market develops new factors will affect it, and financial services is a market that has seen more innovation and shifts in emphasis than most over the last 10 years – HFT (High-Frequency Trading), a plethora of new investment products, correspondent clearers, agency custodians, Multilateral Trading Facilities (MTFs), general clearing members, and increasing regulation amongst many others. Looking forward, there is no sign of respite. Indeed, the pace of change is only likely to quicken, particularly in response to the growing desire for harmonisation of regulations across Europe, courtesy of The European Securities and Markets Authority. The pressure to comply with increased regulation combined with managing normal business issues will inevitably put strain on many middle and back office operations: Transition to T+2 will inevitably be more complex than many think. The benefits of a one day reduction in latency, with corresponding credit risk benefits, will be partially offset by failure rates reaching a wholly different order of magnitude (500%-800% higher according to some industry observers) – as systems and processes are strained to breaking point. The increasing focus on credit risk with the introduction of Legal Entity Identifiers [LEI], a Financial Stability Board initiative, which will improve collateral management and risk management. The constant cost challenge to improve operational efficiency and reduce costs per trade. Doing all of the above within severe budgetary constraints.

So what’s the answer? For some, a strong temptation will be to wait and see, presumably in the belief that final regulations may be modified and deadlines moved out as they prove unrealistic. As a technology vendor, we also have to recognise that there is understandable reluctance to invest in systems when budgets are under severe pressure – even when the business case for process automation to lower costs and better manage risk is virtually unarguable. As you will see later, this paper is primarily intended to introduce some thoughts around new ways of approaching technology development in the PTP space, in response to the needs of, and for the benefit of, all parties operating within it. As we see it, post trade processing is inexorably climbing up the senior executive agenda. COOs, CIOs, CTOs and heads of trading are all recognising the imperative to reduce costs and manage risks driven by, or in anticipation of, the regulatory challenges coming down the track. Here we set out some explicit challenges for clients which exist today:

June 2012

Salerio white paper: Post Trade Processing in ‘The New World’

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Capital Requirements. In order to meet more stringent capital adequacy requirements, post trade processing (PTP) cost control is likely to be higher on CFO agendas than perhaps it has been in the past, as any savings achieved will contribute to more efficient use of financial resources available. As many industry commentators highlight, there is a divergence between significantly higher costs of buy side processing than cost of trading execution, as the latter has seen dramatically higher investment in technology advancement. Given that there are more processes and parties involved, PTP is understandably – and significantly – slower than the trade execution...where the front office can execute trades in microseconds, the back office can take up to 3 days to confirm and settle – if there are no hiccups in the process. Quite apart from the inherent operational, market and credit risks, when combined with money wasted on instructions needing repair, mismatched confirmations and tardy settlement, the potential for impact on liquidity is all too apparent. As noted earlier, transition to T+2 could see substantial increases in trade failure numbers – in all likelihood at each stage of the settlement process – potentially exacerbating pressures on liquidity. With the entirely feasible prospect of back office capacity potentially limiting a firm’s trading volume, this must be an area where meeting the regulators’ current objectives should provide substantial commercial benefit to firms. Central versus local matching. A surprisingly large number of brokers still settle their trades using local matching and time-honoured methods of spreadsheets, fax and now email. These tend to be smaller firms, where the cost of central matching is regarded as too great a pressure on margins, despite the obvious processing and risk benefits. The pros and cons of central versus local matching are of no concern to us. We respect that individual customers will use whichever solution best meets the needs of their business, and are told by many that they would welcome the opportunity to do both, dependent upon the nature of the trade being made. In any market though, competition usually results in cost benefits for customers. This begs the question: is there a place (and an opportunity based on market needs and wants) for a local matching service that replicates the efficiencies and risk management of central matching, but at a more acceptable price for the smaller firm? As for technology in local matching catching up, our view as a post trade processing technology provider would be that the end user should be oblivious to the background utility being used, and their processing system should automatically accommodate both options without the need for differing work procedures. Risk Control. Mark Profeti, Post Trade specialist at industry analysts and consultants The Realization Group (TRG), believes he is seeing some fundamental shifts in operational thinking as a result of greater emphasis on risk control. “The Holy Grail used to be 100% end-to-end STP. That’s being replaced by the need to manage risk. With the increasing functional synergy on the sell side, many post trade operations are becoming asset class agnostic, and more functionally aligned, removing the previous product aligned processing silos.” Profeti believes there will be an increasing trend to realign settlement operations based on the transaction lifecycle – middle office, pre-settlement, post-settlement, cash, collateral, treasury management, reconciliations and so on. He sees it as a step towards creating a horizontal processing model that all parties can subscribe to. “The advantages of a standardised approach across all asset classes are obvious in terms of risk management and control and achieving cost reduction through economies of scale.” TRG also report seeing migration towards more exception-based processing environments, endorsed by Paul Bowen, Head of Product for post trade processing here at Salerio. “For all the time a trade is not settled there is inherent risk. For the vast majority of trades processed through a robust system, the risk may be considered low. It is when there are exceptions that systems come into their own. The best will not only highlight exceptions early in the settlement cycle, but will also give as clear an indication as possible to the underlying problem – enabling the quickest intervention and minimal chance of the trade subsequently failing completely.”

June 2012

Salerio white paper: Post Trade Processing in ‘The New World’

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A ThomsonReuters Risk Management report published in October 2011 claimed that on average across US capital markets, 60% of instructions needed repairing, 10% of confirmations were mismatched and 15% of trades failed to reach settlement. For an institution making 10000 trades a day that equates to – largely avoidable – annual costs of $4.8million (c £3million). And a whole lot of risk. What do buy side senior managers want? In the latest survey of UK buy side operations conducted by London researcher City IQ, entitled “Visions of 2015” and published in October 2011, it is little wonder that the senior managers participating reported significantly high and consistent concerns reflected in the top six of their priority objectives:

1. Reduced Operational Risk

4. Improved Operational Resilience

2. Reduced Costs

5. Improvements in Management Information

3. Reduced Manual Involvement

6. Extending Automation

Projects, projects, projects. Even most technology providers will acknowledge that customers are likely at some point to suffer from ‘vendor fatigue’. Projects for which the business enthuse initially can soon be regarded as millstones. As one hedge fund COO recently put it: ”All we want is technology that works and solutions that perform as described. All too often we have to make do with what developers have taken an age to create.” We have sympathy for that view. When Salerio was developed more than 10 years ago, we invested in many man years of considered thought, expertise and innovation in the specialist field of PTP. We created a system designed to: automate work processes from confirmation through to trade matching, delivery and settlement in a way that users would be comfortable and confident to use. be implemented much faster than bespoke projects – almost an ‘out-of-the-box’ product which by default included extensive capability across each function, the relevant parts of which could be enabled according to the users’ needs. be highly regarded for its deep specialism – doing what users want it to do. be agnostic to existing architecture and work practices – it can fit snugly into any PTP environment.

What is the Business Impact? Because of this pre-investment focus on what users would most value, when potential customers looked at Salerio, they could recognise why we were able to offer fixed cost pricing rather than an open-ended project. The return on investment for clients was clearer (and delivered each time), and Salerio built its desired reputation – for delivering rich functionality, as described, quickly and cost effectively. In today’s fast changing business and compliance environment, a key consideration to technology investment decisions is the ease to do so and the cost of change. Salerio is founded on a Standard Model Architecture, which we’ve found suits all our existing customers very well, and the advantages of which are available to all new customers considering upgrading their PTP technology. The main benefits of Standard Model Architecture have proved to be threefold: 1. We can confidently fix project costs at outset – no surprises 2. Implementation time both for upgrades and new installations is shorter – performance improvements are delivered sooner 3. As a consequence of both the above, payback starts proportionally sooner too

June 2012

Salerio white paper: Post Trade Processing in ‘The New World’

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As we said earlier though, all things move on. Now that in today’s world there is a drive to automate PTP of the more esoteric instruments in order to better manage the risk involved and reduce costs, we believe there is an opportunity to extend the thinking we undertook and scoped out within Salerio’s initial and continuing development. We believe that many of the problems and frustrations business operation managers express about IT projects can be avoided, if all the parties involved can begin to work in a different manner on their technology needs. As we have proved with Salerio, a different approach at the right time can result in significant advantages for systems purchasers. Right now, we believe the same sort of approach – but on a wider scale – will achieve more robust, more secure and better value solutions to the operational concerns and priorities the City IQ survey identified.

A GOLD standard for Post Trade Processing Throughout the first half of 2012, not only have we have worked alongside customers to ensure that Salerio’s post trade processing services remain at the forefront, but we have also been actively identifying ways to improve post trade processing performance across the industry. We call the ideal post trade processing state, the ‘GOLD standard’. It’s a vision for a future way of working on industry wide technology issues, with the following objectives: To improve industry performance – and that of individual clients – by standardising on best practices. This will provide benchmarks against which individual firms’ can assess their specific work practices, secure in the knowledge that achieving those benchmarks will deliver improved performance, with corresponding financial benefits. To reduce risks: credit, market, legal and operational risk can be more confidently managed, and with greater transparency. To drive down development and on-going costs of technology, contributing positively to liquidity and capital adequacy. To demonstrate to external bodies the commitment to respect the wishes of the investors we serve and the regulatory bodies charged with overseeing the conduct of all industry participants. We are actively engaging with a number of different trading firms and supporting bodies to collaborate on achievement of these objectives. All discussions are undertaken on a non-exclusive basis and we would welcome conversations with any firms with an interest in sharing this common goal.

Consistency with Flexibility is Key The ‘GOLD standard’ does not infer imposing a ‘one size fits all’ solution, however there are elements that must be consistent across the PTP space. For the most part, Firm A should not be doing anything dramatically different within its PTP environment from Firm B. So why should each firm effectively reinvent the wheel by individually investing in bespoke projects, when there are clearly economies of scale and greater confidence in solutions to be enjoyed from a more unified approach. Salerio’s ability to deal with a broad range of mainstream products in any architecture and the ease with which it is deployed, is convincing firms of the early benefits to be realised. Our pre-included standardised capabilities means that firms can realistically achieve a return on their investment within the first year of operation. Benefits for all. Users will get technology that does what they want it to do. Investors will benefit from reduced costs in a more competitive market. Risk managers will have more control over the processes and practices they adopt. Financial managers will see reduced costs contributing to their need to make firms’ capital work for them as they would wish. Regulators will see an industry actively embracing the regulatory framework they create, the transparency of which should in turn filter through to public confidence.

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Salerio white paper: Post Trade Processing in ‘The New World’

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The GOLD Standard PTP Best Practice Initiative Summary and Strategic Benefits

Post Trade has suffered from chronic under-investment with an urgent need to comply and meet business drivers. There is a need to improve performance whilst providing greater choice and flexibility. The GOLD Standard is a call for industry collaboration to promote Strategic Sponsorship by answering key questions: What is the business impact of improved automation within our business context and priorities? How can we positively impact the current year operating plan? How can we increase our readiness for T+2 and secure a strategic competitive advantage through increased agility? The Gold Standard includes support for Central or Local Matching with the same automated workflows

What are your thoughts? Whatever your role or organisation, if you agree there is scope to better manage the development of technology to meet the current needs of your business concerning post trade processing, we would like to hear from you. If we find there is consensus on the validity of exploring a unified industry-wide approach, we undertake to invest our time and energy into collating and sharing those views, and organising a suitable forum for initial exploration of ideas from all concerned. We would welcome your thoughts about the content of this paper and whether you would be interested to participate in the GOLD Standard initiative. Please contact the CEO of Salerio, Bruce Hobson, by email at

June 2012

Salerio white paper: Post Trade Processing in ‘The New World’

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For further information about how Salerio could help automate your post-trade management processes, please email: or visit our website: “Salerio” and “COR-FS” are trademarks of COR Financial Solutions Limited or its subsidiaries. © Copyright COR Financial Solutions Limited 2002-2011. All rights reserved.

Post Trade Processing in ‘The New World’  

Many would say that the kind of issues coming to the fore now have always been around. It’s just that for Post Trade Processing (PTP), their...

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