Page 28 - FTF_092614

U.S. PLAYS CATCH-UP IN GLOBAL T+2 PUSH (Continued from Page 27)MATCHING ON THE TRADE DATE?“The challenge of how to deal with buy-side firms that refuse to invest in some level of automation has led to a debate in the U.S. regulatory community about whether matching on trade date should be included in client contracts,” according to Aite.The argument against including the trade date is that it would require institutional brokers “to police their clients, potentially placing them in an unfavorable position with these clients and leading to enforcement issues,” according to the report. “The contractual regime could therefore greatly increase administrative requirements and costs on the part of the institutional broker-dealer community without receiving the intended benefit.”A move to T+2 will squeeze manual processes, “and it will certainly mean that any overnight batch processes will need to be carefully evaluated to ensure they can be completed in the new time frame,” according to the report. “This pressure on STP [straight through processing] workflow could result in a higher number of settlement failures due to inefficiencies in systems or data issues, thus throwing a spotlight on certain brokers and causing reputational damage.”If U.S. regulators do not issue a mandate for the conversion to T+2, another industry effort will have to emerge to spread more automation among buy-side firms, the Aite researchers say.“The vendor community could potentially step into this area in order to transform paper-based processes to automated ones, but there is still the question of cost and who would pay for such a solution,” according to the report.ACTIONS AND BENEFITSIn addition, the report’s authors say that the buy-side community should be urged to do the following:• Evaluate and alter middle-office processes in support of trade allocation, confirmation, and affirmation that may be manually intensive or paper-based.28 • Move beyond batch or end-of-day processing to near-real-time processing capabilities.• Set up quality improvement programs to review the accuracy and completeness of standing settlement instructions data.Despite the high level of manual processing, the U.S. market seems to be more automated than the European market in terms of trade matching. Aite’s researchers say that “this is an interesting dynamic to note,” given the low levels of settlement failure experienced in the U.S. equities market compared to Europe. The analysts cite an institutional broker that has “an average of 40 percent higher manual flow for trade support processes in Europe than in the United States.”Firms in the U.S. market have a greater interest in FIX Protocol-based messaging, and a Tier-2 institutional broker interviewed by Aite points out that “the last wave of asset management clients that have connected to Omgeo CTM has been particularly interested in FIX for allocations.”The institutional broker does not have the capabilities to send allocation confirmation messages via FIX but can receive and handle FIX-based messages from clients, the report authors say. The broker “receives the FIX messages but has to send back PDF confirmations or confirmation messages via Omgeo CTM to the relevant client.”Before achieving T+2, securities firms will have to address several areas of transformation, according to the Aite Group.• “ThebiggestcostofaT+2projectwill be in the review and analysis process, where firms will need to examine all settlement systems as well as downstream systems and processes and test whether they will be able to scale to increased volume and reduced time frames caused by the shortening of the settlement cycle.”• “Ahead of any project, firms should conduct an examination of comparable settlement matching rates across different types of instrument, markets, and different types of market participant to highlight risk and cost hotspots.”• “Firmsshouldaimforimprovementin overall pre-settlement matching performance — matching an instruction for settlement as early as possible once the trade is executed will allow for operational risk reduction.”• “Settlepromptly—settlingassoonas possible once the settlement system starts operations on intended settlement day means a reduction in counterparty risk and in the number of exceptions managed each day.”• “The industry needs to come up with a solution to tackle lower-tier buy-side firms that have not and will not invest in automated settlement support.”• “Regulators and industry associations championing a shortened settlement cycle need to be cognizant of true cost and resources required to bring all broker-dealers into compliance, and phase in a realistic timeline to allow brokers to sufficiently budget and prioritize against other competing regulatory-driven projects.”— SOURCE: AITE GROUP RESEARCHFALL 2014 | FTF NEWS MAGAZINECHECKLIST FOR T+2 CONVERSION