Source: City Networks
The Automated Confirmation Service (ACS) has been running for almost 20 years transporting thousands of messages daily between brokers and banks around the world relating to 30 deal types in 8 asset classes.
On 11 Oct 2004 S.A. Money Brokers and Standard Bank took the step to embrace this technology by being the first to exchange a confirmation message in the South African market. Now 3 brokers and 14 banks exchange over 700 deal confirmations in a typical week: 75% of them being FX and 22% Derivative contracts.
What is ACS?
ACS was set up almost 20 years ago to modernise the exchange of deal confirmations between voice brokers (was there another sort at that time?) and their bank customer. The "workflow" process was to take the dealers scribbled note, type up a ticket on multipart paper and send the white copy around the City of London by messenger, who walked them between the offices several times a day. The electronic link was developed to overcome the risks and costs inherent in a manual process – but in the early days it just removed one weak link in the chain as, in most cases, despite the electronic delivery and storage facilities, the confirmation was printed off in the bank's back office and checked against the ticket the dealer had written out. However, now that ACS had captured the data electronically and the link had been made between the participants, it opened up the opportunity to automate more steps in the bank's confirmation checking process. Since then the market has embraced the concept of STP (straight through processing) to the extent that nowadays those that wish to can automate to protect the integrity of their transaction from inception to final settlement.
The South African experience
Each market develops along different lines and the SA market has worked well. S.A. Money Brokers for example has been faxing and emailing confirmations to approximately 70 FX and 20 derivative customers for a number of years.
One of the drivers for Calyon to join ACS was the service's remit to deliver within 2 hours. Ricky Gopal, Back Office Manager at Calyon, "The problem was that the deals would be confirmed in a batch at end of day – or sometimes tomorrow – by fax or by email. Our biggest issue was that in a volatile currency market, which the Rand market can be at times, if a problem is not detected until late in the day, or tomorrow, there is a risk that the deal is out of the market; so to correct it becomes much more expensive."
Some of the market players, such as ICAP, had developed their systems to link to fax and email to transmit a confirmation – but the recipient still needed to sight check them against their own records – whether reading the details off paper or the screen. In spite of their automation, ICAP are also participants as, according to Kelvin Thompson, IT Manager, "The future is STP. ACS does the job and does it well. Time will tell whether the banks are able to take full advantage of it."
Andrew Browne, Financial Director, S.A. Money Brokers agrees: "ACS provides an accurate system that ensures that all deals have been processed and agreed with counter parties – not that that was a problem before, just that this is a more efficient model and it works well." Before agreeing to become the pilot broker for the service, they considered the cost effectiveness and the efficiency, "for the system to be efficient all the brokers had to be on it other wise the banks would be adding yet another way of confirming deals," he continued, which was a major reason why they have helped promote the system to customers and the other brokers in the market. "So far we have got a positive response from our customers," he said.
The advantages of increasing the membership are echoed by Emma Huggett, Middle Office Operations at JPMorgan. "ACS will come into its own when all brokers we use subscribe, then we will be able to remove the manual steps and paper management and storage which will get rid of the associated inefficiency and delays. We wanted to join the service even though, at the time, it was not fully up to speed because we are continually looking to improve efficiency and get process control. Although the benefit is low at present we would not want it to be taken away. From a control point of view it is a big step forwards to where we want to be."
Early days yet, but has there been any benefit?
Marc Houze, Head of Treasury Operations at Citigroup was quick to respond when asked why Citigroup took up the invitation to join. "A no brainer. We need to look at the information contained in the confirmation and this is the best mechanism to do it. The information is organised and an electronic message is much better than the manual alternative – fax – which is so inefficient." All the members contacted made the same point; the value of ACS membership comes down to simple, old fashioned, business drivers of control, management and efficiency.
Emma Huggett has already experienced how the service can be of benefit. "We have had one instance where (membership of) ACS showed how it can improve efficiency. We were waiting for a Brokers confirmation on a Money Market trade that we needed before we could move the cash on that deal. The confirmation was not coming through from the Broker concerned, so we looked at ACS and there it was. Once it was agreed with the Broker, we could move the funds and we were able to do this before the fax had been received. It will be most useful in the FX overnight," she continued "as we will get earlier confirmation of deal which is essential on same-day trades rather than having to wait for the broker,"
Calyon are just as interested in the operational effects. "We have greater control and a reduction in risk on the operational side. The majority of our business is with local brokers, so it has made a big difference," says Ricky Gopal. "It has improved operational efficiency by as much as 20 to 30 percent."
So what's next?
For Andrew Browne, "This is the first step in the process. The long-term goal is for the deals to go directly to the dealers' desk."
Sean Mouton, System Architect at ABSA has a very clear view of where they will be taking this initiative. "STP opens up a wide range of possibilities. On top of the matching of confirmations with the internal deal record there are possibilities of automating the reconciliation of brokerage fees and the routing of deal confirmations done on behalf of corporate customers to their treasury operations and, through the internet portal facilities, getting them to confirm deals done. This means that there is further reduction of manual process inside the bank, earlier detection of exceptions and greater service to customers with the added benefit that the automation will only cost them some procedural changes."
It is likely that the members based in South Africa will follow a similar path to those earlier members based in other financial centres. This first step with ACS membership can indicate a start of a drive towards achieving STP earlier on in the transaction process and thus improving control and management of operational risk. In turn this has the benefit of satisfying the desire to prevent rather than cure. If there is truth in that, then establishing early detection and following up with active prevention across more of the business, can only bring cost and risk management advantages and customer service improvements.
Although the initial drivers were the "no brainer" criteria, the move to automate the communications between the brokers and banks also acknowledges that best practice in operational risk management is to simplify the process and remove manual steps wherever and whenever possible.
City Networks is pleased to welcome the 17 new members from South Africa and wishes them every success in their drive to automate. AutoConfs is a service that facilitates the exchange of trade related messages between brokers, banks and other types of financial institution (FI).
Brokers can use AutoConfs to improve the accuracy and timeliness of service to their customers. From the FI side, trade notifications can be viewed by the trader in the front office, positions are updated and confirmations from all brokers can be checked on a single screen, to increase STP, reduce risk and improve earnings.
The AutoConfs Confirmations service allows FIs to manage all its broker confirmations from a single point of control. The need to use fax and telex confirmations is eliminated via the electronic service, which provides accuracy and on-line communication with brokers to resolve differences.