European T+2 migration obliges post-trade reform says Fidessa

Post-trade processing is set to accelerate when the UK adopts T+2 settlement in October

Shortening settlement cycles and increased regulatory oversight are pushing financial institutions to reform their post-trade processes. That can only be a good thing, according to a new whitepaper from trading technology specialist Fidessa.

In its latest report, A revolution in post-trade; defining a new approach for buy-side post-trade workflow, Fidessa argues that affirmations and confirmations are a particular centre of inefficiency, which the arrival of T+2 settlement across the 28 member countries of the European Union in January 2015 will exacerbate because it reduces the amount of time the industry has to process trades by a third. An advance guard of countries, including the UK, Ireland, France and the Netherlands will move to T+2 in October.

Traditionally, post-trade services have been dominated by third-party centralised systems that used a lot of manual processes. But as with many areas of the trade lifecycle, a gradual shift towards automation offers both the prospect of increased efficiency, and the possibility that some sectors of the market may be left behind.

“Firms with inadequate processes will likely fail to settle trades quickly enough and as a result, fall behind more agile competitors,” said David Pearson, strategic business architect at Fidessa. “With [existing processes] teetering on the edge of operational capacity there is little or no room to accommodate further pressures.”

The other aspect highlighted by the Fidessa document was the regulatory environment, which has become more rigorous and now involves a more ‘punitive’ approach. An overarching focus on increasing transparency runs through much of the legislation, from EMIR to Dodd-Frank in Europe and the US respectively to other similar efforts in Asia.

One of the key tools Fidessa identifies as a means to make post-trade more efficient is FIX, which has the potential to improve the exchanging of affirmation and confirmation messages between the buy-side and the sell-side. Direct affirmation workflow and open standards are areas that are foregrounded as “ripe for reform”, and the FIX Trading Community has been working on the issue since 2013. The organisation re-issued its updated and extended post-trade processing guidelines for equities to extend the use of FIX last year. By building on open standards in the front office, it opened up the possibility for firms to further disseminate information all the way through to the back office, according to Fidessa.

Affirming and confirming trades with the sell-side on a direct matching basis is a positive step, the document adds, because it puts control firmly back in the hands of market participants. It also removes the need for fragmented and manual processes. In a best case scenario, the direct model is faster, cheaper and more accurate than the existing way of doing things.

Fidssa notes that the transformations that are taking place in the back office today may be the equivalent of the changes to the front office that took place when the execution management system was introduced in the 90s and 2000s. While the benefits may include improved trading relationships, lower costs and reduced operational risk, the most important aspects for Fidessa were the management of commission sharing agreements, regulatory reporting and broker analysis, because these will assist the buy-side the most.

“The next crucial step is to make this standards-based workflow accessible to the broader buy-side community,” said Pearson. “For this to happen, other buy-side firms need a better way to access the sell-side community.”

The solution, he added, was likely to be a combination of FIX and new forms of workflow that support the direct approach to affirmations and confirmations. In particular, new post-trade applications for the buy-side will need to be worked out. Fidessa recommends that an industry standard model be worked out to deliver affirmation workflow and automate the manual processes. The result would help to cut the operation risks of using a central single facility for a major part of the settlement process. Firms would also be able to reduce clearing and settlement times, said Pearson, re-using information already captured in the front office. Meanwhile, the greater visibility of the trade economics should help to increase the likelihood of successful matches and affirmations.

In the US, the DTCC is consulting on whether to move to T+2 settlement, which would put the country in line with Russia and Germany, which already settle on a T+2 basis. Proposals are still at an early stage, and there is not yet any confirmed timeline for the proposed change to T+2. The DTCC is currently seeking to set up an Industry Steering Committee for T+2, which would consult with the industry and begin to work out a date for the new shorter settlement cycle to be implemented. Assuming the plan proceeds without any significant obstacles, the DTCC expects the US to adopt T+2 later than Europe, which will move to T+2 in January 2015.