Omgeo, the global standard for post-trade efficiency, announced today that although progress has been made in improving trade matching rates in Canada, an operational plateau has been reached, according to a recent industry survey commissioned by the firm.
The survey, conducted by Stratix Consulting, included interviews with the heads of operations departments from 19 Canadian investment management firms with CA $10 billion or more in assets under management (AUM), totaling in CA $1.1 trillion AUM.
According to the survey, approximately 70% of respondents identified legacy and antiquated systems and processes as roadblocks to increased operational efficiency. The findings also demonstrated that Canadian investment management firms need to further invest in technology, with more than 40% of respondents indentifying a need to introduce new technology to improve middle- and back-office processes. The projected increased use of complex products and cross-border trading, a greater focus on risk management, and increased client and regulatory demands for transparency were key factors driving the need for improvement in operations.
The Canadian Securities Administrator's (CSA) regulatory rule NI 24-101, which currently requires 90% of institutional trades to be matched by noon on T+1, has driven many of the recent improvements in operations, with the Canadian market achieving the highest settlement efficiency rates in the Americas. Over 70% of respondents reported that NI 24-101 contributed positively to reducing failed trades and settlement errors. However, in order for this positive trend to continue, market participants acknowledged the need to embrace increased levels of post-trade automation more broadly, including central matching. Driven by the aggressive move to a T+2 settlement cycle in Europe, Canadian firms highlighted a need for further investment in straight-through processing (STP) technology, with central matching technology viewed as the most significant way to improve matching rates and promote settlement efficiency.
Key findings of the study include:
• Improvement in operations processes will benefit the middle- and back-office: Nearly 94% of respondents mentioned a need to look at STP, reconcciliation and operations process improvements in order to reduce risk, improve trade matching results and enhance the efficiency of the middle- and back-office.
• Trade matching solutions could be used more broadly to minimize risk, especially in fixed income and other asset classes: 63% of respondents are using trade matching solutions for equities. However, only 53% do so for fixed income and 5% or less for other asset classes.
• Upgrades in technology to grow business: Allocating budget to technology upgrades will enable the middle- and back-office functions to keep pace with the front office, ensuring the ability to handle diversified investments in exotic instruments and across borders, as well as further automate equities and fixed income transactions.
• Central matching identified as a way to improve settlement efficiency rates: Canadian investment managers highlighted central matching as the most effective way to accelerate the trade lifecycle.
Commenting on the survey findings, Matt Nelson, Director of Market Intelligence at Omgeo, said, "Although Canadian investment managers have made great strides in trade automation, there are still areas of opportunity. NI 24-101 was a key driver of this efficiency, but market participants - 94% of respondents - cited a continued need to look at STP, reconciliation and operations processes to reduce risk and increase efficiency. We applaud Canadian market participants' candor and their continued focus on investing in middle- and back-office technology, including central matching."
Bob Smythe, Principal Consultant at Stratix Consulting, added: "The increased pressure from regulators for transparency and the need to diversify into trading of complex products is driving the need for more automation among Canadian investment managers. In order to address this, investment managers should implement STP that incorporates automated order management systems, trade matching, risk management, accounting, reporting and data management solutions, amongst other things."