A custody operation’s ability to successfully comply with the worlds T+1 initiatives will greatly impact the core processing streams of its own operations but even more so of its clients. T+1 requires clients to be capable of delivering same-time trade advices upon trading to custodians for matching and settlement by their clients in a local market. The addition of timezone factors will even more than before ensure a requirement of same-time and not batched over-night processing. The requirements for straight through processing (STP) will never have been more important than for T+1.
As firms move towards real-time processing the role of messaging becomes increasingly critical. In the real-time STP environment, information needs to be processed and distributed on a transaction basis. SICOVAM’s batch settlement process on ‘liquidation day’ would be a good example of this old method which is now being replaced by the eventual rolling settlement system of which T+1 is the current global goal. Though few batch settlement operations exist in compared size to rolling settlement these days.
Trading trends, especially in the US, reflect the fact that electronic connectivity is now the norm for equity & bond trading and that sophisticated order management systems are being introduced across the marketplace to support this. As clients become more sophisticated they will continue to demand more information on a timely basis.
The simple throwing of extra bodies at the processes will not work (or at least the inefficiencies will increase) and the requirements for 24 hour processing or at least office coverage will increase as international clients attempt to rebook trades at 3am on day settlement day. Among many other things the end-to-end process needs to support same-day affirmation and to meet the deadlines, much of the processing will need to be real-time or near real-time. Many firms still do their core processing (books and records, clearance and settlement, accounting and valuation) in an overnight batch environment and this outdated process will soon need to be changed for a more timely one. Most large investment managers have invested in a number of tools and technologies to get their processes done and over time they have assembled both home-grown and vendor systems for this purpose (not to mention the use of spreadsheets in Excel…).
In Increasing the STP outside of the firm, clients will or have been discovering a need to patch together their own internal processes for STP to be truly successful. Unfortunately the term STP has often been understood as “hands-free” and the coming of T+1 will require it to be not just hands-free but “same time” too!
The free flow of information and real time processing is paramount to a custodian to do its job and keep its systems working and most major custody operations have a far more advanced system than their clients. By being technically advanced, custodians have the perfect opportunity to ensure that any clients re-tooling could them as part of their overall strategic STP policy. Often the STP and associated quality of a custodians system has been seen as a selling point to potential clients, with the coming of T+1 it is no longer a selling point, it is a must have. Investment Managers should step warily before considering a relationship with any custodian not fully geared up for T+1 STP.
While many investment management firms attempt to address these STP challenges, through expensive (and often risky) systems replacement strategies that permit transactions to be updated real-time, there are alternatives that use integration, message broking, and routing technologies to achieve the same effect as real-time. These of course will often be outside of a usual work flow and the benefits of, for example, a Virtual Matching Utility (VMU) – a system for matching your trade to a counterparties outside of the normal settlement system, need to be considered against a background of continued exchange based matching enhancements and the service provided by your custodian.
Finally, or to conclude, the move to T+1 will, for many investment houses, stimulate changes in their operations procedures and systems reviews as well as of course their batch and STP capabilities. For many companies it will demand yet another step closer to true STP.
Gary HARAN DOYLE is a independent consultant and business analyst specialising in custody and work flow systems.