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A market survey by Acuiti has found that almost all tier one and tier two banks queried plan to invest more in derivatives post-trade operations over the next three years than in the last three, as a result of the COVID-19 fuelled market volatility seen in the first months of 2020.
Almost half of tier one and two banks that responded to the survey are expecting to invest more than $5 million over the next three years in “long-awaited upgrades to post-trade processing capacity”.
A whitepaper based on the survey results, titled ‘The Growing Need to Invest in Derivatives Post-Trade’ and sponsored by Broadridge, examines the pain points that the pandemic exposed in March and April which “pushed post-trade infrastructures to breaking point at several institutions”.
The whitepaper concludes that the volatility induced by the crisis represents the “final warning for many firms that have long known they would need to update their post-trade technology platform but had been putting off investment on account of giving higher priority to investment elsewhere”.
Areas of concern highlighted in the survey include:
· The ability of existing post-trade infrastructures to handle high volumes, and a desire to lower running costs, are the key drivers of investment
· Brokerage payment and static data are the most inefficient processes for tier one and two banks; client and transaction reporting are the weakest areas for non-bank FCMs
· Twenty-two percent of overall respondents would consider fully outsourcing their post-trade operations to a managed services vendor if there was greater choice in the market; for non-bank FCMs that number rises to 40 percent
Turning to possible solutions to these problems, respondents suggest that artificial intelligence is predicted to be the technology that drives the biggest increase in post-trade efficiency over the next three years.
Additionally, executives across the sell-side are calling out for greater standardisation of data between the FCM and its central counterparty, and between the FCM and client.
“Post-trade has been an overlooked segment of the derivatives industry, but advanced new solutions are available to solve issues that the industry is currently facing with incumbent technology,” says Justin Llewellyn-Jones, head of capital markets (equities, foreign exchange and derivatives) at Broadridge.
“Broadridge’s continual investment in its technology stack means that we are in a strong position to help firms across the industry drive transformational levels of efficiency and adapt to the rapidly modernising post-trade landscape.”
Elsewhere, Will Mitting, founder and managing director of Acuiti, suggests that the unprecedented volumes experienced during the spring volatility “confirmed what many in the market have known for some time: investment in post-trade has lagged behind other sell-side operations.”
“There is no quick fix to replacing core back-office technology,” he notes, adding that “firms that have invested report huge increases in efficiencies and reductions in operational overheads”.
Survey data is based on responses and interviews with 109 senior executives across the sell-side institutions, of which 38 percent are tier one or tier two banks, 25 percent are regional and national banks. A further 20 percent are brokers and 17 percent are non-bank futures commission merchants (FCMs).
Respondents were from Europe (42 percent), North America (31 percent) Asia Pacific (21 percent), and the rest of the world (6 percent).
