An industry-led Post-Trade Task Force has published a damning new report which highlights key challenges where change would be particularly impactful in current post-trade processes.
“Post-trade systems and processes are the lifeblood of the financial system but these are also areas where innovation has lagged,” said David Hudson, chair of Post-Trade Task Force and co-head of digital and platform services at JP Morgan. “Failure to innovate will inevitably raise the cost of financial services and pose risks to operational resilience.”
Among issues to come under fire within the report were a lack of automation, inefficiencies around settlements and slow onboardings. Solutions including the increased use of legal entity identifiers (LEIs), standardisation and new technologies were among those touted.
Subsequently, the FICC Markets Standards Board (FMSB) has agreed to adopt the Task Force’s findings and recommendations through a new post-trade committee.
“The Task Force has made great progress over the past year to arrive at the tangible recommendations set out in this report, which tackles many of the key problems in post-trade,” Hudson added. “Knowing that we have a critical mass of market participants engaged in this initiative, I am hopeful that this will create a step change in how we think about these issues.”
Among the takeaways, the report found that sharing non-economic trade data late or manually can cause high costs and trade fails. In addition, the task force concluded LEIs are used too little and too late; and Standard Settlement Instructions (SSIs) are too often exchanged manually.
DTCC conducted a survey recently which found that 78% of respondents noted missing or incomplete SSIs as the principal pain point causing trade fails. If the global failure rate is assumed to be 2%, DTCC estimated that this would lead to costs and losses in the industry of up to $3 billion per year.
Market participants are aware of these costs but, with competing claims on resources, the losses are often “considered bearable” when the system is functioning tolerably, the report noted, leading to no firms feeling strongly enough to take action to address these issues.
The document also highlighted that if another crisis were to occur in the financial sector, then delays arising from inconsistent data will present a significant systemic risk increase to all participants as trade volumes rise. A contingent risk inherent in the current level of data consistency between participants does, therefore, exist.
As a result, the Post-Trade Task Force was created to improve the efficiency and resilience of post-trade processes and operations.
To combat issues surrounding non-economic trade data, The Task Force has recommended creating a new post-trade industry leadership group, which would be responsible for developing and promoting a set of best practices around sharing LEIs early in trade life cycles and using efficient, electronic processes for sharing SSIs.
The report highlighted that in many cases, solutions already exist. However, best practices need to be more widely adopted and solutions need to be more standardised and more interoperable.
In addition, the task force suggested that best practices could involve discussing with prospective providers of consolidated tapes for economic trade data whether their proposed solutions could also be used for non-economic trade data.
Elsewhere in the report, The Task Force highlighted issues related to client onboarding – essentially noting that current processes duplicate effort and take far too long. As it stands, individual firms require different documents from new counterparties, which in turn causes a substantial amount of additional work.
To combat these issues, the leadership group has recommended the establishment of standardised document requirements; make existing platforms more interoperable; and creating a single passporting platform.
These post-trade issues matter because they raise the cost of financial services; front-end services are built on post-trade data and if they are not operating effectively, innovation is disrupted; and post-trade issues pose significant risks to operational resilience which affects firms and regulators greatly, according to the report. Further, innovation in post-trade processes has often lagged behind other parts of financial markets, which has led to processes frequently being manual and duplicative, which can cause failures upstream which in turn cause significant problems downstream.
“FMSB taking this work forward will allow key Post-Trade Task Force recommendations to be adopted by the market at pace,” said Myles McGuinness, chief executive of FMSB.
“Through our membership, which is made up of all participants in wholesale markets, and our unique standards adherence process, FMSB is well placed to build on the Task Force’s output and embed it in the industry.”