Moving towards real-time confirmations

The world like Premiership footballers, we are told, is getting faster. Speed today appears to be the essential element in providing services and executions. For years the race in front office dealing systems has been to extract every possible miniscule time element out of the transaction executing process. Latency is a bad word and financial investment in new technologies to go faster and faster has been vast and shows no sign of slowing down.

As speed in the front office accelerates it hits a brick wall when it comes to post-trade processing. The requirement to attach clearing and settlement information to the executed transaction and inform all parties involved in the settlement chain really does need attention, if the finance industry is to eventually attain all the good objectives that everyone has been calling for. We all know the list! Cost reduction, risk reduction, improved efficiencies in client services and a secure market environment. So speed is just as important in the back office as it is in the front office, but hardly any attention or budget is ever applied to getting settlements into the fast lane. Why is this?

I think it might be that there is little knowledge at board level to appreciate the need to invest in faster processes and systems. Not just for any individual firm but on a broad industry basis. For most boards the old adage of ‘if it’s not broke why fix it’ clearly applies. However, this will soon not be the case as T+2 settlement and T2S are going to create the need for a new level of investment in back office technology and processes on a wide industry scale not seen for twenty years.

In the UK the development of the CREST system born from the ashes of the failed TAURUS system caused the virtual rebuild of settlement processes, despite the kicking and screaming of firms at the time. The eventual success of CREST meant that most people kept quiet about the massive changes in operation and the expense of new system development. Success followed success and the UK securities market had a brand new system that could settle unheard of volumes of transactions within a risk management system where Banks could monitor and manage potential damaging financial exposures of market firms. The inventiveness that was brought to fruition then is needed again.

T+2 brings a requirement for the whole of the investing community to invest in real-time confirmations and match with their markets counterparty agents and Custodians. ETC (Electronic Trade Confirmations) was something I had a small hand in developing in the early nineties but it has not achieved the high percentage levels hoped when the project was initiated. T+2 should be the tipping point that makes all firms invest in an ETC system. CREST of course offers matching but this is just a part of the industry need.

T2S in the European cross-border markets will create the environment for increased pan European trading and investing. This investing opportunity should attract all types of financial services firm of all sizes that hitherto did not enter these markets because of the cost.

SWIFT and other ETC and matching providers should provide the capability to comply with T+2 but only if firms invest in new in-house system technology, upgrade their processes and educate their staff to greater levels of efficiency. All this and more will feature in the next Post Trade Forum debate on the 26th June hosted by the London Stock Exchange.