To say the industry has been through some seismic changes over the past decade is an understatement, to put it mildly. From ever-increasing defaults and regulatory changes to clearing and collateral, not to mention the continued use of technology and automation.

By Traiana's Laurence Jones 

Global financial markets have been exposed to a series of changes in what is an incredibly vast and complex landscape. However, if there is one thing that has remained constant is processing and lots of it.

Processing, the plumbing that underpins the entire financial system, is vital to ensuring the health and stability of markets. It needs to be done in a timely fashion, and the data needs to be correct and in-line with any regulatory obligations. Some parts of the post-trade lifecycle are well-oiled, mainly due to regulatory pressures on specific focus points as well as the central network effect and interoperability between both asset-classes and process types. Others, though, simply are not.

Impact on Volumes

The evolution of derivatives has in other areas resulted in continued layered manual processing. Not only does it still rely heavily on email and excel spreadsheets, but also offers relatively low levels of control. If this was not enough, ever-rising volumes and the fragmented nature of these processes have led to costly and unscalable workloads. We all know volumes can be erratic.

Too many factors to list constitute an impact on volumes, but decisions are often made that result in ‘quick and dirty’ layered manual processes that become really challenging to manage over time. Factor in the current global pandemic that has now surpassed a year in the making and the challenge only gets harder.

Fragmented Manual Processes

The payments and settlements space is not only huge but also fundamental to all other parts of the trade-lifecycle. Ultimately, trades need to settle, yet a lot of inefficiencies exist. Traiana’s research from 2019 showed that $500 million a year is spent supporting certain inefficient payment and settlement processes for the top 450 financial firms (50 global investment banks/400 Global Investment management firms) and could be higher with continued challenges.

The bulk of this is centered around the messaging and matching of cashflows. There are several key challenges and inefficiencies when it comes to the messaging and matching of these cash flows, including:

  • Different cashflows: these can be handled by different internal systems, which can use various data types. Typically, inefficiencies exist in uncleared products.
  • Margin management: inefficiencies exist in uncleared products. Depending on the asset class and the regulated domicile of the entities there may be some level of margin management occurring, but these are large exposures, often running uncovered and into the tens of millions of dollars that can remain unsettled past the expected settlement date due to the manual nature of the confirmation/affirmation process.
  • Settlement errors: with an increase in regulatory focus for late or incorrect settlement fines, inefficiencies can soon cost more than just the cost to manage.
  • Uncleared headaches: the OTC world, while under tighter controls from the phased-in uncleared margin rules (UMR), remains fairly antiquated in part. Many banks and buy-side firms are still using email and excel based processes to agree to, and then often instruct cashflow movements across all asset classes, including in OTC where products could be cleared but aren’t. These flows are often mismatched, unmatched, or sent to the wrong place entirely to agree and confirm.

Single Connection for Payment Details

Large banks and buy-side firms are still using email and excel based processes to agree to, and then often instruct cashflow movements across all asset classes, including in OTC where products could be cleared but aren’t. These flows are often mismatched, unmatched, or sent to the wrong place entirely to agree and confirm.

CME Group’s Traiana operates the leading market infrastructure for post-trade processing and risk management across asset classes and provides client service and risk management technology across the financial sector. Global banks, broker/dealers, buy-side firms and trading platforms use our cross-asset class services to automate risk management and pre-trade/post-trade processing of listed and over-the-counter transactions. Traiana’s network is comprised of the global financial community’s leading voices – providing insight, thought leadership and connectivity. GO TO TRAIANA