The Case for More Functional,Utility-Like Trade Management Systems
Contributed by Akhil Tandulwadikar, Aashish Chandorkar & Kunjar Bhaduri
To deliver higher returns, lower costs, and greater transparency, market participants are turning to new trade management systems, some of them in the cloud.
Pressures are rising to cut costs, remove redundancies and create common trade management platforms across geographies and asset classes. Growing trade volumes have been accompanied by increasingly complex service requirements, while middle and back offices of market often cannot provide sufficiently accurate trade processing and settlement. As margins shrink, even minor delays can substantially undermine revenues.
Middle-offices of buy-side firms have moved from being a bridge between the front and back offices to playing a more strategic role. Increasingly, an OTC derivative trading requires a holistic, real-time view of counterparty risks and exposure.
Asset Manager Challenges
In pursuit of alpha, asset managers are exploring new products that will grow revenue and assets under management. However, complex new trading strategies, expansion into new asset classes and markets and increasing regulation put pressure on middle and back offices, while inefficient manual processes limit growth. Asset managers must improve their trading systems to meet demands for cost savings, improved quality, rationalizing technology and supporting new products
Asset managers who outsourced post-trade activities to custodians must transmit messages to various systems in multiple formats with varying degrees of detail. Minor enhancements to trades that require manual intervention by custodians often lead to additional charges. Expansion into exotics, such as OTC derivatives, are delayed due to shortcomings in software and in-house capabilities. Adoption of new algorithmic trading has resulted in lower implicit costs but generated greater trade and ticket charges as trading volumes grow.
Asset managers are demanding custodians provide greater transparency, real-time reporting of asset investments and technology that can handle complex new products. However, custodians are saddled with redundant systems for various geographies and asset classes that were acquired through mergers and acquisitions. As custodians serve new clients in new geographies, they must onboard the same client on many platforms.
Despite these inefficiencies and redundancies, custodians can exploit thses back-office outsourcing platforms by scaling them to provide commoditized post-trade support. This, combined with their experience in providing outsourcing services to asset managers, puts them in a good position to reposition mid- and back-office activities into higher margin vs. high-volume, low-return processes. The low-return processes are ideal candidates for moving to an external cloud provider.
New OTC derivatives regulations will move OTC derivatives to an exchange-based trading model that involves clearinghouses and counterparties, requiring brokerages to establish systems that connect with these parties. These regulations will also require brokerages to provide greater transparency and efficiency of trading and processing through changes in technology and operations. This will also strengthen risk management, which, along with counterparty exposure and compliance, is the top priority of market participants.
Rising OTC derivatives volumes will require buy-side firms to maintain more streamlined and reportable trade management systems for risk management and settlement.
Cloud-based utilities for post-trade functions offer cost savings, the ability to convert Cap-Ex into Op-Ex and flexibility in choosing which functions to outsource. It also provides improved scalability, compliance and risk management. These may be SaaS(software as a service) or business process as a service (BPaaS). SaaS gives firms access to specific components, while BPaaS covers full end-to-end business processing.
Moving highly automated, commodity functions to the cloud allows asset manager to focus on core activities such as trade capture, formatting and enrichment. It also makes it easier to change vendors than earlier outsourcing models in which providers created expensive, customized solutions for each customer.
On the sell-side, there is already a movement toward hosted solutions driven by the greater use of displayed data as reference points. Costs of supporting market data have also increased due to higher message rates. Brokerages are finding the cloud to be ideal for storing records and meeting regulatory requirements.
Assessing the Cloud
To increase efficiency and reduce risk, market participants should assess a cloud provider's capabilities in areas such as:
- Multi-entity, multi-currency and multi-instrument processing.
- Support for various messaging protocols.
- Integration of multiple channels and formats.
- Tailoring of automation, processing and information delivery to user requirements.
- Message validation, business validation, template validation and outbound message validation.
- Workflow engines that allow exception management through calendar-based user/
- Risk dashboard to present data/transactions based on user-configurable risk profiling.
- KPI dashboards to monitor performance.
- Extensive report generation and delivery capability, and
- The ability to integrate with third-party reporting Tools
Market players should also due diligence of the vendor's business and cost model, geographic reach and ability to simultaneously address the needs of multiple teams. They should also focus on optimizing trade management to reduce processing costs in the later part of the trade lifecycle, demand transparency from the vendor around risk management, and determine a clear operations risk profile to ensure overall control.
Read The Case for More Functional, Utility-Like Trade Management Systems (PDF) and about Cognizant's solutions for the Asset and Wealth Management.