Investment operations get back to the gym

A new wave of fitness training for investment operations is getting underway. Straight Through Processing (STP) systems achieved a certain level of effectiveness over the last 20 years, but they have been thrown a new set of challenges in recent months. These challenges will inadvertently cause a wholesale review of operating models in asset management business worldwide. With the increasing demand from securities firms for end-to-end STP reviews, SWIFT’s rapidly-growing consulting unit has developed some insight in response to this trend.

Today’s challenges:

The first challenge is the ever-increasing pressure on margins. Since the STP chain is all cost and no revenue, from the investment manager’s perspective, the objective here is simply to reduce total costs of the entire process, including the “vanilla” equity or fixed income trade that throws up no exceptions at all, as well as the cost of handling trades going through non-STP channels.

The second challenge is the preparation of processes for outsourcing. Wholesale lift-outs are decreasing in number now, but smaller-scale outsourcing of smaller packages of the operations process are becoming much more popular – but after several years of experience, it has become clear that only those processes which are already highly automated can be scaled, and therefore outsourced, profitably.

Finally, the retirement of Omgeo’s OASYS Global Electronic Trade Confirmation (ETC) platform forces a major change to Investment Management systems; the challenge for many firms is about what to migrate to, and how to make that migration cost-effective.

How investment firms are responding:

To address the first challenge, investment firms across the globe should look to see what are the most cost-effective ways of confirming, matching, settling, reconciling and servicing securities trades; and some of these firms are coming up with very interesting (and unexpected) data. In most cases, what is necessary is an alternative that is extremely competitively-priced for trade confirmation and matching.

The second challenge, about preparation for outsourcing; is answered by the ubiquitous use of standardised communications, which can help a lot with implementation, and the reduction of risks. Even more important is the elimination of foreseeable manual intervention with trade processes, as these often lead to unsatisfactory or uneconomic outsourcing relationships. Standardising message flow also makes instrumentation of these processes much easier – which is important for firms who want to continually assess the cost-effectiveness of outsourcers, as best market practice demands.

The final challenge, caused by the need to replace Omgeo OASYS Global before November 2012, is typically met in one of two ways. One which really depends on the attitude of an investment manager to the idea of moving from an ETC system based on messaging (OASYS Global) to a centralised trade matching system (CTM). A CTM is for those firms who like the idea of outsourcing trade matching.

For those firms who would prefer to continue the use of ETC messaging and to preserve the functionality of their in-house STP system, a “Global ETC” offering can be very beneficial, in fact, several investment managers have already decided to use it as their primary ETC channel. The relatively low project cost and risk of migration help to justify why this offering works.

Besides the challenges mentioned, there is also a longer-term challenge on the horizon. The EU Commission is considering mandating a move to a T+2 settlement lifecycle throughout the EU securities markets. Although this is not yet policy, it shows the way in which political and regulatory thinking is headed. With that being said, there currently isn’t a better time for a fitness review of your investment operations!