I’d like to share one of my favorite stories. Many years ago, a consultant was asked to review the Euroclear urgent unmatched process as there were lots of fails. The consultant sat with the two members of the team to review the process. The first step was to print the report (I told you it was a long time ago!). Next, the report was split in two, one for each member of the team. The first person started at top, with the A’s and the other at the end with the Z’s. The consultant then asked what happened when they got the middle…the response “I don’t know, we’ve never made it to the middle”
This simple story describes a poorly defined process, manual work preparation, no prioritisation, no real-time data and no measurement of success. In short, it was neither effective, efficient, nor optimised: the latter is going to be key in the move to T+1.
How much less time will you have?
Upon initial examination, the transition from T+2 to T+1 may seem like a complete elimination of one day or 100% of the post-trade process. However, upon closer inspection, the impact is not as drastic as it initially appears. According to the Association for Financial Markets in Europe (AFME), in a T+1 environment compared to T+2, the actual reduction in time available for settling trades amounts to approximately 83%. This calculation considers the one-hour window after the market closes on the trade date, the one-hour window before settlement begins in the morning, but does not include the trade matching process, which can commence shortly after trading, once the trade reaches the back-office.
Nevertheless, even with a slightly extended timeline, companies may face challenges in meeting the compressed deadlines with their current operating environment. They will need to optimise their operations accordingly.
Why optimised and not effective or efficient?
The term “effective” refers to a process successfully achieving its intended objectives and producing the desired outcomes. As Peter Drucker famously stated, “There is nothing so useless as doing efficiently that which should not be done at all.” In other words, efficiency alone holds no value without effectiveness.
“Optimised” goes beyond effectiveness and aims to maximise efficiency, productivity, and performance while attaining the desired outcomes. The higher the level of optimisation, the better prepared a firm is to navigate the new T+1 timelines.
To assess the degree of optimisation, measurement becomes crucial. Dr. H. James Harrington, a pioneer in performance improvement, emphasised that “Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.”
The measurement of optimisation is accomplished using a maturity curve, ranging from 1/ Initial, 2/ Repeatable, 3/ Defined, 4/ Managed, to 5/ Optimised. A lower score on this scale indicates a lower level of optimisation, making it more challenging to adapt to the T+1 environment.
Regardless of whether a firm operates on the “buy” or “sell” side, it is likely that “optimised” and “Initial” firms will represent the minority when considering a normal distribution or bell curve. Typically, though not always, a firm’s size is the primary factor influencing its placement on the curve, with larger firms positioned further along the optimisation spectrum.
If your operations are at an “optimised” level, you are unlikely to face significant challenges. Your processes are clearly defined, optimised, and scalable, eliminating the need for handoffs. You utilise no-touch exception workflow tools with low-code/no-code configurability, and all communication is seamlessly integrated within the workflow technology. Performance measurement and continuous process improvement is ingrained in your organisational culture.
On the other hand, “initial” and possibly “repeatable” firms rely heavily on manual processes, requiring frequent intervention throughout the trade lifecycle. Much of the work conducted lacks value, such as pre-task preparation, identification, and prioritisation. The current status of activities is not adequately linked to the trade record. These firms heavily depend on subject matter experts, utilise end-user desktop applications, and face time-consuming and costly training requirements.
How do these maturity levels manifest in the securities post-trade environment?
In “initial and repeatable” firms, the typical approach involves utilising a Central Trade Matching (CTM) utility and relying on the user interface (UI) of agent banks to identify the status of trades. Swift messages may be fed into a queue or an Excel sheet, requiring users to manually identify any issues. The UI may be used to modify and address trade and instruction exceptions. Additionally, amendments made in the trading and post-trade systems may need to be performed independently in both systems. “Managed and optimised” firms, directly modify trades in the source trading system with amended, cancelled, or rebooked trades seamlessly flowing into the post-trade system and the CTM without any human intervention.
In “defined” firms, the output from the CTM and agent banks’ processes is integrated into their post-trade systems. They use workflow tools embedded in the technology to expose any failures in the process.
“Managed” firms take exception management a step further by implementing tools across not just the back office, but also the middle office and even the front office. Business rules are in place to route processing failure exceptions directly to the team responsible for resolving the issue, eliminating the need for transportation of information. For instance, economic differences are directed to the middle or front office, while SSI (Standard Settlement Instructions) issues are directed to the operations teams responsible for obtaining SSI from clients.
Finally, “optimised firms” have achieved a high level of zero-touch processing by leveraging artificial intelligence (AI) and machine learning (ML) technologies. Tasks such as identification, checking trading records, communicating with clients, and interpreting responses are automated using these technologies. All internal and external communications are embedded within the exception management tool. In the event of a process failure, these firms focus on identifying and addressing the root cause to ensure it does not occur again. For example, they prevent agent banks from repairing incorrectly instructed trades. Real-time positions are integrated into securities financing and asset servicing functions, eliminating the need for agent bank autoborrows. Sophisticated algorithms manage inventory in this optimised setup.
Do more, with less and quicker
The truth is, there are very few, if any, firms that can truly be classified as “optimised.” Most will fall somewhere between the “repeatable” and “managed” levels of maturity. Considering the distribution on a bell curve, the lack of optimisation poses a real concern in operating in the T+1 timelines. Even if your firm ranks higher on the maturity scale, the problems faced by your counterparties can quickly become your own.
Additionally, T+1 is happening against the backdrop of both cost cutting and a historic lack of investment into operations. For many years, capital spending has been directed to regulation and business growth whilst headcount has been reduced.
Recently, Cathy Wright from ISITIC Europe CIC addressed the inefficiencies in post-trade operations, pointing out factors such as long-term persistence, cost opacity, and insufficient regulatory focus as contributing causes. I fully agree with her assessment.
To construct a persuasive business case for securing investment, it is essential to confront the challenge of cost opacity head-on. This requires a comprehensive understanding of the organisation’s current optimisation level and a clear comprehension of the true meaning of an “optimised” state. Armed with this knowledge, potential savings can be identified, and the value of investing in optimisation can be effectively demonstrated. By achieving a higher level of optimisation in post-trade operations, firms also gain a competitive advantage, facilitating seamless scalability, enhanced comprehension of client profitability, and the ability to make well-informed business decisions. This positions them ahead of the curve, bolsters operational resilience, and empowers them to seize emerging opportunities with confidence.
Oh, and if you need any Euroclear trades looked at, I’ve still got the ruler that the Ops guy used to measure the height of the urgent unmatched report.