Regulation, Cost and Risk Drive Move Toward Post-Trade Automation

Regulation is the top driver of the move toward post-trade automation, according to a survey by SWIFT, while the needs for cost efficiency and risk reduction follow closely behind.

“The results were quite surprising,” says Paul Taylor, who led the work on the survey and serves as director of post-trade services at SWIFT. While everyone talks about the impact of regulation, he says, it turns out that the focus on other areas is accelerating.

The importance of these three factors varies a bit by region, with the U.S. and Asia-Pacific emphasizing risk and Europe viewing regulation as the most important. Still, these all rank very closely and are interrelated, as the survey found that regulatory reporting is the main source of cost and risk.

In terms of preparing for regulatory change, the survey found that respondents are most prepared for trade reporting and electronic confirmation of OTC derivative transactions. Meanwhile, respondents are least prepared for T+2 settlement. “[I]t was very clear that people were focused on what’s next in time,” says Taylor. So while the focus is more on derivatives this year, if the survey took place next year, “I would expect that the work going into T+2 would be a lot more prevalent,” he adds.

The second most popular response for the source of cost and risk in the post-trade process was manual communications. Thus, automation would take away a significant source of risk. At a time when people are looking for efficiency, “having better STP rates is a key angle,” says Taylor.

However, change is unlikely to come right away. Although more respondents expect their budgets to increase rather than decrease, the upfront costs of automation are a deterrent, and the majority of respondents of expect their budgets to remain the same through 2015. Taylor says that this isn’t a case of firms not wanting to increase their budgets, but rather they are unable to do so at this time. “People are having to do more with less,” says Taylor. One solution that he sees is firms reusing technology already in-house to save money, as opposed to building new systems from scratch.

In addition to the costs, the lack of a multi-asset class affirmation system is one of the key factors holding back change in the post-trade process. The survey found affirmation to be quite important, as nearly three-quarters of respondents believe that positive affirmation results in timely settlement over 90% of the time. Yet firms use an average of two and a half systems due to the lack of a multi-asset class affirmation system.

While SWIFT does not have a particular timetable for taking another survey on this topic, Taylor does expects to do another poll in a few years, at which time he expects affirmation rates to go up significantly.