The biggest complaint I hear from our clients is the challenge of getting manual counterparties to automate. As the saying goes, you can only move as fast as your slowest counterparty. From the vast automated Omgeo community, we are hearing that there is increasing frustration with the slow adoption of automated post trade processes, particularly by small investment managers.
Recently, I chaired a panel on this very topic during which clients and industry contacts spoke at length about the issue, and in particular there was consensus that the credit crisis has created an environment where market participants are demanding that counterparties automate. Given the pertinence of the subject, I thought it was worthwhile outlining some of the key drivers that were discussed.
Firstly, recent market volatility has been a strong driver in the automation of trade processes. This is because in order to calculate accurate and timely P&L forecasts, market participants require trade confirmation to occur as quickly as possible. In addition to frequency, investors are also demanding much greater detail on P&L positions.
Secondly, with the mitigation of operational risk being such a priority for policymakers and regulators, industry participants are doing their utmost to implement automated trade processes in order eliminate inefficiencies. Trade failure is one such example of middle office inefficiency which absorbs large amounts of client resources as well as significantly increasing levels of operational risk. By automating the trade verification process, clients can see their trade failure rates reduced by 50%.
Finally, both the buy-side and sell-side are beginning to see that an automated middle office function is becoming a key competitive differentiator when it comes to winning clients. On the buy-side this holds particularly true for hedge funds, who are increasingly competing for institutional investors renowned for their strict due diligence process, part of which comprises an audit of middle office functions.
The key drivers the automation of manual counterparties came through clearly in the discussion as the economic crisis and the pressure to reduce risk; the threat of regulation illustrated by the proposals on OTC derivatives; and the economic incentives or cost. There has never been a time when there have been more compelling drivers for middle office automation. The message from the industry is automate or risk being left behind.