Sponsored research has identified a lack of automated post-trade management among Europe's private banking community. The survey by Scorpio Partnership has revealed 30% of private banks continue to manually operate trade execution, confirmation and affirmation.
The research, commissioned by post-trade management services company Omgeo, looked at the transaction processing practices of private banks in Switzerland, the US and the UK. It found that even among the 70% of organisations with some back office automation, many still have a considerable amount of manual processes for some types of transactions.
In addition, only 39% of private banks participating in the survey have a post-trade/pre-settlement trade matching process in place. The remaining 61% rely, in the main, on settlement matching procedures.
The research shows that this lack of automation is at its worst in Europe, with only 38% of Swiss participants and 22% of UK participants having a post-trade/pre-settlement matching process in place.
The other main findings of the research are the identification of the key transaction processing concerns of private banks, namely fund transactions, cross border trades and exotic instruments.
The top back-office priority of private banks is to find a standardised solution for fund transaction processing. This is an area that is currently considered as archaic, manually intensive and lengthy.
Drivers for improvement in this area are that funds are a key part of clients’ investment portfolios, along with the wider variety of transaction processes employed by fund providers. Research respondents claimed that while there are proficient providers in certain markets, there is no industry-wide solution.
Fund transaction processing was an area of particular importance for UK and Swiss private banks, where, of those banks interviewed, funds accounted for 31% of the total trading volume, whereas this figure was 18% for US private banks.
It was universally accepted that trading cross-border complicates the trade process due to the individual regulatory environments, processes and settlement procedures in each jurisdiction. Other reasons cited were that when dealing cross border, banks rely far more on third party brokers (rather than in-house brokers), while electronic connectivity to internal brokers and direct access to exchanges is much less likely.
Cross-border trade processing was of particular concern for the Swiss banks whose investment strategies are biased towards cross border trading. Of those Swiss banks interviewed in the study, 80-90% of their transaction volume is cross border, compared to that of 10-20% for US and UK domestic players. Swiss banks face further complications as they tend to deal with multiple custodians.
The research shows that among private banks there is a lack of operational efficiency when processing exotic instruments, as product complexity means that intervention from skilled employees is required to maintain control. Instruments of this nature cited were structured products, particularly the more complex fixed income instruments, such as credit derivatives.
Commenting on the research, Catherine Tillotson, partner and head of research at Scorpio Partnership, says, "We believe the client market is ripe for end-to-end straight through processing, particularly in the post trade/pre-settlement space where large cost savings and operational risk reduction can be achieved through automation."
Kevin Rideout, global head of relationship management at Omgeo, says, "This study highlights the urgent need for automation in Europe’s private banks. Manual trade processing, such as faxes and phones causes unnecessary operational costs and risks that can be avoided by increasing the levels of STP in the post trade environment. Even within the largest banks that have high levels of automation, there are still certain areas where trade processing becomes fragmented.
"It is encouraging to see that private banks are becoming increasingly aware of operational issues," he adds. "This is even more important in the area of cross-border trading where historically, there has been a higher rate of trade processing failures. As Swiss banks have a higher exposure to cross border trades than their UK/US counterparts, automating the post trade process should be of particular importance to them."