 Lee Cutrone
Managing Director, Industry Relations
This year's SIBOS in Copenhagen was as remarkable for those that didn't attend as for those that did. Primarily still a bank driven event, strong buy-side representation was still lacking. This has led some to the conclusion that by and large investment managers are still not taking interest in discussions around operational efficiency. However, in reality this isn't necessarily the case. As buy-side firms continue their focus on core competency and operational efficiency, more and more are recognising straight through processing as a fundamental component of their business' performance and an essential contributor to achieving a strategic advantage over competitors.
The need for automation being felt across the wider asset management industry was expressed only a few weeks ago when the Asset Managers Forum published seventeen recommendations to try and ensure best practice STP in derivatives. Some commentators have expressed surprise these have only just been published. The notional outstanding value of the OTC derivatives market stands at approximately $22 trillion. With hedge funds and pension funds acquiring larger stakes in this market, competition is intensifying and the days of manual post-trade processing are definitely numbered.
Also, let's not forget regulation as a driver for change. Whether it's drive for risk mitigation from Basel II or for improved controls from Sarbanes-Oxley, all parts of the securities industry have been touched by regulation. So forcible has been the push by regulators on both sides of the Atlantic for greater due diligence and transparent procedures that market commentators are speculating on whether paying heed to copious regulation could stifle creativity in the securities industry, to the point that the very heart of the hedge fund industry, for instance, will be ripped out.
One aspect of trading that has escaped the attention of regulators is cross-border trading - until now, that is. Only a few weeks ago, Charlie McCreevy, European Commissioner for Internal Markets, made a very public threat to take action against European financial services companies which fail to slash the costs of cross-border trading in securities within six months. At a recent industry discussion forum held by Omgeo, this resonated with participants, who showed consensus that the growth in cross-border trading within the EU and between the EU and US markets is pushing the need for efficient cross border trading to the fore. However, at the same time, the reliance by investors on intermediaries for their cross border trading is creating inertia that keeps costs high. As an illustration, cross border equity trades currently cost $5 per trade to process, compared with $0.50 per cross border payment transaction.
Having said, that there is progress in other areas. Recent industry reports indicate a strong focus towards transaction cost analysis in the fixed income space. This is encouraging for champions of operational efficiency in fixed income as firms recognise areas where they can gain competitive advantage by offering more efficient processes, reducing costs and offering clients more added value.
The critical factor for the buy-side in reducing these implicit costs is finding the right STP solution, in order to be an attractive proposition to the whole buy-side organisation. An effective STP solution must help firms address a particularly complex trading landscape. First amongst these, as referred to earlier, is the increased requirement for transparency and decreased risk resulting from the litany of buy-side focused regulation, from MiFID to Reg. NMS. Alongside this requirement is the need to respond to competition in the market by supporting the diversification of trading strategies, and the continued growth of the use of derivatives and new exotic instruments.
So what can investment managers hope to realise from such a post-trade solution? Simplicity is key: they are asking for a single view into the post-trade world, across multiple post-trade destinations and across multiple asset classes. The new trend will be for new, web-based hub technology offering investment managers a single point of access. Firms are expressing a strong desire to outsource their non-core operations to a single solutions provider. Whilst the buy-side doesn't want to take on the burden of maintaining complex technological infrastructures themselves, most firms are taking steps to improve their operational efficiency via solutions providers. This surely has to be an encouraging sign in the ongoing push for decreased cost and risk for the securities industry.
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