Feeling the Pressure: Fixed income processing

In March, new issuance and continued interest rate volatility contributed to further increases in fixed income volumes according to leading brokers like ICAP, who last week announced a 22% volume increase over its BrokerTec platform on the previous year.

If regulators succeed in their aim to move a significant proportion of OTC trading onto exchanges to increase market transparency, the hikes in trading volumes of standardised fixed income products will only continue. Front offices are responding to this opportunity by investing heavily in their technology.

Unfortunately this is also putting major pressure on the firms’ middle and back offices to cope with the processing requirements of both expansion into new markets and the increase in volumes.  To succeed, firms should be investing in scalable back office technology that will allow them to retain operational efficiency, keep settlement risk and costs low and be able to support market driven initiatives such as the move to T+2 settlement in Europe and new product development.

Extending their current equities specific processing architectures just isn’t a sensible option unless they were architected from day one for these more complex trade structures. Debt instruments are far more complex with multifaceted business processing required for numerous accrual bases, complex repayment methods and the variety of financing options.  These processing complexities can also mean that relatively small volume increases in the trading of a particular fixed income instrument can result in unsustainable costs if the right systems are not in place. Incidentally, trying to throw more people at the problem will also not solve it.

To relieve the pressure and meet current and future requirements of the fixed income world, firms should be looking for a solution that:

1.       Allows them to move into new geographies and products quickly with a low risk implementation path

2.       Offers a broad spectrum of asset coverage and CCP connectivity

3.       Is delivered by a service-oriented fixed income specialist with proven creds

But they’ll need to act fast if they want to take advantage of the opportunities presented by the changing market dynamics.