 |
 Tony Freeman
Director of Industry Relations, EMEA
There’s an old saying that you can achieve more with honey than with vinegar. Certainly in many walks of life this can be said to be the case. However, it seems that no amount of honey will mobilise a securities industry that is in part still stuck in the dark ages when it comes to back-office innovation. Several industry bodies, from ISITC (of which I recently became a board member) to FPL, have made considerable progress when it comes to recommending the adoption of messaging standards in our industry. However, this is not always enough. Faxes, email, phone calls and chaos still abound in the post-trade space. So when should the big guns step in and regulate? Regulators are often given a dim view, categorised along with estate agents and lawyers, but it seems that sometimes only regulatory mandates will force the operations industry to direct the necessary budgets and resources to reducing errors and risk.
Having said that, at the moment at least, regulators both in the UK and in the US seem to be focused more on the trade and pre-trade space, with MiFID and Reg NMS dominating the regulatory landscape. It has been left up to industry associations to address inefficiencies further downstream, to varying effect. In the US, the Securities Industry Association (SIA) and the Bond Market Association (BMA) have been extremely influential. Now the two associations are merging, with the intent to “create one strong voice for the entire securities industry and financial markets on regulatory and legislative advocacy, market practices, communication, education, and leadership while preserving and enhancing the public's trust and confidence in the markets and the industry.” No mean feat indeed. Certainly this new über-association could be a formidable force, but whether it focuses on the less sexy parts of the securities industry (i.e the operational infrastructure) as it did in the early nineties when trade volumes were rocketing, remains to be seen. Two years ago, when the SEC issued its consultation paper to reintroduce T+1 settlement in the US market, the SIA’s lack of support for T+1 was widely credited with being its final nail in the coffin.
In Europe, comparable industry bodies do not command the same might as their US counterparts. This is not surprising, given the breadth of disparate market practices and infrastructures that any pan-European organisation needs to span. EFAMA, the European Fund Managers Association, has been less vocal when it comes to the post-trade space, tending to focus more on areas such as market transparency. While in other financial processing areas such as payments, the European Banking Association admitted that it must work more closely with the IT community to enable the facilitation of a single European payment solution.
There was recently a hint of changing tides, when recently, it appeared a post-trade automation mandate would come from the EU. In the last few months, Charlie McCreevy, the European Commission member responsible for internal markets and services, had threatened legislation to enforce improvements to cross-border clearing and settlement procedures unless market participants voluntarily provided proposals for cutting cross border costs. However, such regulation has recently been replaced in favour of a set of principals, or code of conduct, rather than formal legislation. Whether McCreevy’s efforts to facilitate change in the industry will succeed through suggestive principals rather than enforceable regulation remains to be seen. It is worth noting, additionally, that the EC maintains that regulation could be brought into effect if a code of conduct fails to achieve necessary change.
One group actively contributing to the advancement of European operational issues is ISITC. This is well evidenced by its contribution to the MiFID Joint Working Group. ISITC’s role in centrally hosting all MiFID collateral, managing the Best Execution Group, as well as looking at Reference Data is a key part of assisting financial institutions in their readiness for MiFID. In addition, ISITC continues to provide a forum for debate around key industry issues such as derivatives processing and alternative investments.
Swift’s role, as the gatekeeper for ISO standards, has had a large impact on the global securities industry. At the same time, even it has found that without hard and fast deadlines around how and when standards should be implemented, firms will fail to act. Industry consensus around adoption of the 20022 standard is that some kind of mandate is required in order to see it widely implemented.
It certainly seems that the EU has been encouraged by the investment banking lobby which has sought the break-up of the exchange models on which clearing and settlement is vertically integrated with dealing. There have been some small indications of progress as some exchanges have indicated that they may be open to wider ownership of their clearing and settlement businesses in return for gains made through merger activity.
So will regulators step in to good effect in the post-trade space? Well, unusually we need to look to the Canadian market to find an example of this practice. Traditionally, the U.S. has been credited with initiating much of the wide-reaching reform to the global securities industry over the past few years. However, while the U.S. is still grappling with Sarbanes-Oxley and gears up for Regulation National Markets System in the front office, the Canadian securities industry has turned its attention to the back office in an effort to shore up one of the most risk-laden spaces in the trade lifecycle. The Canadian Securities Association (CSA) has pioneered the latest efforts to reduce costly errors for the greater good of the industry. It has mandated that institutional trade matching be adopted by investment managers in the Canadian financial market by the summer of 2008.
In contrast, similar mandates around STP proposed a long time ago in the U.S., (the above mentioned T+1 initiative) have lost their urgency. Once driven by surging trade volumes and a deep desire to make the industry as efficient as possible, the environment in the U.S. today has changed. Industry-sweeping initiatives have been replaced with more tactical, enterprise level improvements that will bring tangible benefits to each participant rather than change the building blocks of the industry as a whole. Indeed, the progress made in the U.S. post-trade environment is impressive: as it stands today, approximately 80 percent of trades are matched by the end of T+1 in the U.S., as compared to approximately 53 percent in Canada.
With so much ground to be made up, the Canadian securities industry has recognized that in order to drive change, best practices won’t do, and that regulation is necessary to meet (and perhaps exceed) the efficiency gained by U.S. markets. National Instrument 24-101 aims to reduce firm-specific and systemic risk across the industry, bringing Canada to the forefront of global efficiency. Same day affirmation (SDA) will be key for firms to comply with the regulation – locking in details of a trade on the same day that it has been executed.
SDA provides enormous benefits over low levels of automation or those who still rely upon telephone, fax or email to confirm details of a trade. The high SDA rates afforded by automating the trade matching process, which can cause dramatic reduction of risk and cost in the post-trade environment, have been known to jump to 80 percent and higher. Additionally, it has been demonstrated that operating costs and trade failures can both be reduced by up to 70 percent. Those who leverage automation are also better equipped to handle volume peaks than those who do not.
What remains to be seen is whether the efficiency gains anticipated in Canada will provide impetus for the U.S. to revisit similar mandates or other European markets to join in Canada’s lead in efficiency. The ultimate outcome would be that securities firms themselves outside of Canada will see the benefits of same day affirmation and that they will increase their focus on efficiency without the need for a regulatory mandate. Having said that, I suspect that this is still wishful thinking. In the meantime, regulators need to take note of the post-trade space as the gap is certainly widening between front and back office efficiency. A repeat of the US paper crisis of the 60s may not be as far away as we think.
Back |
|
|
|
