Why post-trade still needs more attention

After years of neglect, back-office processes are beginning to garner the attention they deserve. However, the post-trade technology landscape remains fragmented and opportunities are being left uncaptured. By Vijay Mayadas, president, capital markets at Broadridge.

Most senior leaders will tell you that technology innovation is synonymous with competitive advantage. The 2022 Broadridge digital transformation and next-generation technology survey of capital market executives recently confirmed this, with industry leaders reporting expectations of increased revenues, improved profitability and better strategic decision-making from digital transformation initiatives. In practice, we are witnessing firms doubling down on their technology investments in a tight race to secure these benefits and capture defensible market share.

At the same time, however, executives recognize that the daunting pace of technological change is exacerbating practical operational and regulatory challenges, putting hurdles in the way of rapid progress on the digitalization front. Furthermore, much of the value-add from innovation over the years has primarily accrued to the front and middle office, leaving back-end capabilities wanting.

There are many reasons for this, including an early strategic focus on reimagining customer experiences, value propositions and retention that most obviously held the promise of expanding revenues and growth through greater differentiation. This is a critical objective for executives faced with rising competition. These highly visible parts of the business have also typically been perceived as offering companies “quicker wins” and “more digestible” project scopes than more ambitious plans to upgrade core technology systems on the back end.
 

Where this leaves firms today

Although it may seem that neglecting the back office has been a benign trade-off for sell-side firms over the years, this couldn’t be further from the truth. Many of the post-trade technology platforms that firms have in place are not built to handle the realities and needs of today’s investing community. As global buy-side trading volumes continue to rise, and asset allocations become increasingly diversified across the investment risk spectrum to include less traditional asset exposures, the inadequacy of current systems has become more obvious to market participants. Cracks are starting to form under the pressures of rising complexity.

Even if we ignore increasing asset flows into alternative investments, the magnitude of demands placed on the sell side is clear. For example, $160.95 trillion was traded electronically in 2021 across nearly 46 billion trades, which represents a 16.9% rise in equity value traded and a 20.4% increase in volumes, according to the World Federation of Exchanges. Statistics from the Futures Industry Association (FIA) indicate the total volume of exchange-traded derivatives worldwide in 2021 recorded a fourth consecutive year of record-setting activity, jumping 33.7% from the previous year to 62.58 billion contracts.

Although these figures seem to indicate significant opportunities for sell-side players, they also mask brewing trouble. This has manifested in the rise of settlement failures during times of heightened volume, volatility and market stress. In February, the European Securities and Markets Authority (Esma) published its first Report on trends, risks and vulnerabilities for 2022 (the second 2022 report can be accessed here), which showed that failed settlement instructions as a share of total value across the 30 European Economic Area countries climbed to around 14% for equities and close to 6% for government and corporate bonds at the height of Covid-19-pandemic-induced volatility in March 2020.

This compares to an average range of 5–10% and 2–4% for equities and all bonds traded between 2018 to 2020, respectively. Equity settlement failures were more frequent in 2021 than before the pandemic, and slightly above the second half of 2020 levels across other asset classes.
 

Post-trade advantage: Simplicity amid complexity

These single-digit percentage point increases may not seem much, but the volume of transactions being settled globally each day is in the trillions. These increases are only a snapshot of the much larger challenges intensifying on the horizon, with the implementation of new regulations such as the European Union’s Central Securities Depositories Regulation Settlement Discipline Regime and the decision by some markets to move towards T+1.

Firms unwilling to enhance their back-end capabilities for the needs of this tomorrow will face an erosion in competitive positioning. Most sell-side firms continue having to manage highly fragmented, complex technology stacks. Silos divided by asset class and geographic region are common. Even as staff shift toward multi-asset coverage, the systems that support their activities remain separate. Many traders use different systems to manage orders and execute trades as a result, while operational staff wrestle with multiple middle- and back-office infrastructures. This is no longer good enough.

It’s time for the industry to embrace the simplicity of global multi-asset post-trade solutions that can empower a consolidated, automated workflow across asset classes to reduce the cost, complexity and risks of running multiple operations and technology silos. Advances in artificial intelligence, distributed ledger and other next-generation technologies are already raising expectations and separating forward-thinking innovators from the rest. 

 

This feature forms part of the Transforming post-trade operations special report
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