Even as regulation is dramatically changing the global post-trade environment, leading market participants in Asia are staying ahead by embracing and shaping operational best practice, argues Clare Fraser, managing director of strategy at Omgeo.

Even as regulation is dramatically changing the global post-trade environment, leading market participants in Asia are staying ahead by embracing and shaping operational best practice, argues Clare Fraser, managing director of strategy at Omgeo. The firm – founded in 2001 – provides post-trade processing solutions to automate operations and reduce risk in areas such as equities, fixed income and derivatives. This area is part of the “plumbing” of the financial system: an area which tends not to get much attention until there is a problem. But it is crucial for the smooth functioning of the wealth management industry. The editors at this website welcome this contribution on a complex but vital topic.

Competition, cost pressures and regulatory change continue to drive decisions among capital markets participants worldwide. In today’s challenging market environment, the argument for investing in operational infrastructure to lower risk or implement industry best practice often goes unheard among more immediate calls to cut spending or meet increasing capital requirements. This is often the case even when investment translates into direct cost savings and increased efficiency in the longer term.

Investment in certain industry best practices, such as automation of the trade confirmation process, leads to fewer failed trades, lower costs, and reduced risk. Yet without immediate incentive, regulatory or otherwise, some firms sometimes lack sufficient motivation to invest in these areas in order to reap these long-term benefits. Like going to the gym, we know we should do it and that it’s good for us, yet sometimes it is impossible to self-motivate unless incentivised in the short term.

However, some clients are taking immediate steps now. Leading industry players are moving ahead with implementing industry best practice in Asia, not only to stay ahead of the regulatory curve, but to remain more competitive and shape industry best practice. This drive for process improvement benefits the market overall, with post-trade automation and standardisation creating market efficiencies that in turn result in higher returns for investors.

Same-day affirmation

One way to measure post-trade efficiency is to track same-day affirmation rates. SDA refers to the verification of trades on the same day they are executed (T+0) and is becoming widely recognised as an industry best practice.

According to a study commissioned by Omgeo, securities trades verified on the day of execution have a much higher chance of settling on time and are less likely to fail. In fact, settlement efficiency in countries with SDA rates of over 90 percent – India, Taiwan, Hong Kong, Japan, Singapore and Korea – is 26 per cent higher than in countries with SDA scores of less than 70 per cent – Brazil, Italy, South Africa and the United States. Many Asian markets lead the way in SDA, especially for equity trades.

On the other hand, SDA rates for fixed income trades in Asia, as well as other regions around the world, remain stubbornly low. Many segments of the Asian fixed income market continue to rely on manual processes such as spread sheets, faxes and emails.  However, the market realises the opportunity to streamline operations in this area, and there is continued dialogue and strong agreement that industry participants need to work better together to bring greater levels of automation to Asia fixed income in order to both establish and shape operational best practice for that market.

In practice, some firms are further along that journey than others. In markets like Asia, automating the trade confirmation process through the adoption of existing vendor solutions enables firms not only to reduce risk and costs sooner and on their own terms, but also to focus their resources on other areas of business complexity that this market undoubtedly presents, such as a myriad of stringent know-your-client requirements that exists across different jurisdictions in the region. This gives some market participants a competitive advantage over firms that wait for regulation to shape improvements to how they manage their post trade operations.

While regulation can be an efficient way to drive market-wide change and would generate a welcome improvement to the current global post-trade environment, it is leading firms like these that are not only investing in industry best practice ahead of the curve but indeed driving it and, in the process, ensuring the markets in which they operate are more efficient and that their clients are better served.