Emerging Trends in the Post Trade Industry
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23 April 2014Arin Ray
We identified a number of drivers that will have significant impact on the post-trade industry going forward. While some of them act in opposite direction, some reinforce others’ impact. Based on our analysis for each of the several drivers, and interaction with several market participants, we see the following trends emerging in the post-trade business:
- Regulatory and market pressures will force investment managers to reassess their business models. Limited revenue growth opportunities have meant they are now focusing on optimizing cost and improving efficiencies to remain competitive.
- There is a move toward automation of processes, upgradation or replacement of legacy systems in the mid-back office, and integration of disparate systems to obtain a more holistic approach.
- Firms are working under severe budget constraints. A large portion of the technology budget is being spent on addressing regulatory and compliance issues, often in a reactive way. Thus significant investments to achieve true process efficiency and improvement are difficult to come by in the short run. However, automation of large number of manual processes frees up resources, and some firms are looking at the problem from this perspective.
- Budget constraints are pushing them toward considering outsourcing mid-back office operations. Given that all firms have to adhere to a same set of regulatory requirements, some vendors are considering coming up with a utility model of offering that will allow multiple firms to use a basic core platform to address many of these issues. However, customizing such an offering to suit firm specific needs, especially for large financial institutions, will be a challenge.
- Growth of alternative trading venues is presenting new opportunities to broker-dealers. They can now internalize trades carried out between two counterparties both of whom are their clients. Institutions with large client base are best suited to take advantage of this. The number of institutions in this market is not large and going further down; therefore share of internalized trades will increase in future.
- Regulators are trying to achieve harmonization across markets by planning to come up with common legal and tax norms. This trend is particularly visible in Europe. The success of such initiatives depends on political actors and is difficult to predict. They can potentially encourage more cross border trading which should contribute to the growth of settlement volumes.
- There is also a move toward achieving shorter settlement cycle. While participants in most markets are either operating in, or getting ready for, a T+2 environment, plans to move to T+1 model will have major impact across the board. That is unlikely to happen in the near term.
- Growth in volumes can be potentially offset by other developments, such as interoperability of CCPs, which can increase netting of trades and therefore suppress settlement volumes. This would be further aggravated by consolidation among market infrastructure providers.
- Regulators are also promoting competition among market infrastructure providers, particularly among CSDs. Many of them will have to change their business models to stay alive in the market. They will be forced to compete more directly with sub custodians in the asset servicing business. Achieving scale will be important to stay alive in the business and smaller players will be driven out or get acquired.