Oxera, one of Europe's foremost independent economics consultancies, and Omgeo, the global standard for post-trade efficiency, today announced the results of research on the automation of European trade processing. The report is being launched at an event in Brussels today, where leading industry figures will discuss the findings and examine how increased efficiencies in the middle office play a crucial role in making Europe a more competitive financial marketplace.
The Oxera report shows that automation of the trade verification process* improves settlement performance for securities firms in Europe and reduces operational costs and risks, with benefits to end-investors.
Key findings of the report include:
- Automated Same Day Affirmation (SDA**) processes lead to reduced operational risk and improved settlement: settlement failure rates for clients with automated trade verification processes can be as much as 50% lower than for non-automated clients. The findings of the report suggest a direct correlation between SDA and reduced trade fails as well as mitigation of costs associated with rectifying these fails. These costs include the various risk exposures (e.g. position risk), the increased funding requirements that come with greater uncertainty in the settlement process, and claims, penalties or other direct costs associated with trades that settle either late or not at all.
- Operating costs are reduced through automated SDA: automation enables a larger volume of trades to be processed without a corresponding increase in costs and risk, therefore allowing firms to maintain the same level of staffing in the middle office irrespective of trade volumes. In addition, automation reduces the rate of failed trades which means fewer costs downstream in record-keeping, reconciliations of settlement instructions, corporate actions, claims handling and other functions required to resolve failed trades.
- Efficiency gains from adopting automated SDA translate into lower transaction costs for end-investors: reducing risk and costs borne by investment managers, broker/dealers and custodians in the trade verification process could be reflected in lower prices and therefore result in lower transaction costs for end-investors and beneficial effects on liquidity.
- Market-wide adoption of SDA enhances the benefits: increased risk reduction and cost efficiencies would be especially read cost eead eead cost efficiencies would be especially realised by individual firms if automated trade verification and SDA were adopted industry-wide. At present, those market participants that have switched to automated trade verification are not realising the full benefits where counterparties continue to use manual processes.
- Trade verification and SDA should be part of European policy debate: there are a number of ongoing initiatives aimed at building efficiencies in the European post-trade landscape. The report concludes that trade verification, and how to improve this process (i.e. towards automated SDA), should form part of the policy debate.
Commenting on the report findings, Simon Haggerty, Managing Director, UBS, said: "Same day affirmation is arguably the single most important initiative to progress cross border securities' productivity and risk management. Oxera's paper provides timely focus on this topic. By representing the financial benefits of SDA to the market so clearly, it provides a compelling logic for all manual parties to automate. I welcome the debate, in regards to how best we can move the European market forward in this space."
"UBS still dispatches several million fax confirmations a year. In our experience, trades with such non-automated clients have a settlement failure rate twice as high compared to our automated clients."
Dr Leonie Bell, Managing Consultant at Oxera, said: "The trade verification process is still conducted manually by many market participants in Europe, in particular on the buy-side, and there is currently no uniform practice and often not even a target to complete the process and affirm trades on trade day.
Our research suggests that firms adopting automation to achieve SDA can expect significant reductions in the risks and costs associated with trade verification and other post-trading processes, and an improved settlement performance. There are also further benefits for other parties in the value chain. Given these findings, the question is what steps should be taken for the market to realise maximum benefits."
Marianne Brown, President and CEO of Omgeo, commented: "This report by Oxera shines a light on a critical, but previously overlooked, part of the trade lifecycle. Much focus has been given to the pre-trade/trade space with MiFID, and to the back end of the trade lifecycle with clearing and settlement, but the middle office trade verification process, which provides a vital link between the front and back office, has to date, been ignored.
"This report highlights the dangers to the industry in terms of risk and cost of not adopting automation of trade verification and SDA, particularly in times of market turmoil as we are experiencing currently. We hope that these findings will create a call to action and bring this issue to the fore of the European policy agenda in order to create a more efficient community in Europe."
Read the full Oxera report:Download the document now 2 mb (PDF File)