The Future of Post-Trade
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6 February 2014Arin Ray
In spite of its small size, the post-trade industry plays an important role in the financial market system. The post-trade activities and processes at financial institutions have traditionally not been given their due importance. Leading up to 2007, financial firms invested heavily in technology and processes. However, most of the spending went to the front office managing pre-trade and trade execution processes. At that time the economic climate was favorable, and profits were rising. Since the front office trading departments are primary revenue generators in trading firms, the technology decisions were largely determined by front office staff and based on their immediate needs. Investments in mid and back office facilitating the post-trade processes were largely ignored. Many institutions continued to use outdated systems, with many of them based on simple Excel spreadsheets, offline communication, and manual processes. There is little integration between the mid-back office of the disparate platforms used in the front office. This creates huge operational inefficiencies. The crisis of 2008 changed firms’ priorities dramatically. In the tumultuous economic climate revenues took a hit, and managing costs became an utmost priority. While downsizing enabled cost-cutting in the short run, firms had to consider long-term cost savings opportunity by improving operational efficiency and making strategic technology decisions. The regulatory environment too has undergone rapid changes, which have created additional obligations on the mid-back office processes, particularly in the areas of risk management, reporting, and regulatory compliance. It has become essential that firms address the complete trade cycle in a much more holistic way, and many of them are acting in that direction. It must be mentioned, though, that at the moment most of firms’ technology budgets are being spent on addressing regulatory and compliance issues. They are struggling to make significant investments in strategic initiatives to improve and increase efficiency. While these factors have provided the impetus for the rising importance of the post-trade process among investment managers and broker-dealer firms, regulatory and competitive dynamics are driving the development among market infrastructure providers. Competition among exchanges is forcing them to improve systems to handle trading and settlement processes in a more efficient manner. At the same time regulators, particularly in Europe, have been making efforts to attain best practices by trying to achieve standardization and harmonization of processes. There is also a move toward settlement of trades on T+2 basis, and possibly T+1 basis, among many of the global regulators. Celent has identified the following drivers that will have major impact on the post-trade industry in the cash market - equities and fixed income (click on the image to enlarge). In a recent report titled 'Future of Post-Trade Industry, Part I: Identifying the Drivers of Change' we discuss in detail each of these drivers and their impact on the post trade ecosystem.
Asia-Pacific, EMEA, LATAM, North America