Even as regulation is dramatically changing the global post-trade environment, leading market participants in Asia are staying ahead by embracing and shaping operational best practice, argues Clare Fraser, managing director of strategy at Omgeo.

Even as regulation is
dramatically changing the global post-trade environment, leading market
participants in Asia are staying ahead by embracing and shaping operational
best practice, argues Clare Fraser, managing director of strategy at Omgeo. The
firm – founded in 2001 – provides post-trade processing solutions to automate operations
and reduce risk in areas such as equities, fixed income and derivatives. This
area is part of the “plumbing” of the financial system: an area which tends not
to get much attention until there is a problem. But it is crucial for the
smooth functioning of the wealth management industry. The editors at this
website welcome this contribution on a complex but vital topic.

Competition,
cost pressures and regulatory change continue to drive decisions among capital
markets participants worldwide. In today’s challenging market environment, the
argument for investing in operational infrastructure to lower risk or implement
industry best practice often goes unheard among more immediate calls to cut
spending or meet increasing capital requirements. This is often the case even
when investment translates into direct cost savings and increased efficiency in
the longer term.

Investment
in certain industry best practices, such as automation of the trade
confirmation process, leads to fewer failed trades, lower costs, and reduced
risk. Yet without immediate incentive, regulatory or otherwise, some firms
sometimes lack sufficient motivation to invest in these areas in order to reap
these long-term benefits. Like going to the gym, we know we should do it and
that it’s good for us, yet sometimes it is impossible to self-motivate unless
incentivised in the short term.

However,
some clients are taking immediate steps now. Leading industry players are
moving ahead with implementing industry best practice in Asia,
not only to stay ahead of the regulatory curve, but to remain more competitive
and shape industry best practice. This drive for process improvement benefits
the market overall, with post-trade automation and standardisation creating
market efficiencies that in turn result in higher returns for investors.

Same-day affirmation

One
way to measure post-trade efficiency is to track same-day affirmation rates.
SDA refers to the verification of trades on the same day they are executed
(T+0) and is becoming widely recognised as an industry best practice.

According
to a study commissioned by Omgeo, securities trades verified on the day of
execution have a much higher chance of settling on time and are less likely to
fail. In fact, settlement efficiency in countries with SDA rates of over 90
percent – India, Taiwan, Hong Kong, Japan, Singapore and Korea – is 26 per cent
higher than in countries with SDA scores of less than 70 per cent – Brazil,
Italy, South Africa and the United States. Many Asian markets lead the way in
SDA, especially for equity trades.

On
the other hand, SDA rates for fixed income trades in Asia,
as well as other regions around the world, remain stubbornly low. Many segments
of the Asian fixed income market continue to rely on manual processes such as
spread sheets, faxes and emails. 
However, the market realises the opportunity to streamline operations in
this area, and there is continued dialogue and strong agreement that industry
participants need to work better together to bring greater levels of automation
to Asia fixed income in order to both establish and shape operational best
practice for that market.

In
practice, some firms are further along that journey than others. In markets
like Asia, automating the trade confirmation process through the adoption of
existing vendor solutions enables firms not only to reduce risk and costs
sooner and on their own terms, but also to focus their resources on other areas
of business complexity that this market undoubtedly presents, such as a myriad
of stringent know-your-client requirements that exists across different
jurisdictions in the region. This gives some market participants a competitive
advantage over firms that wait for regulation to shape improvements to how they
manage their post trade operations.

While
regulation can be an efficient way to drive market-wide change and would
generate a welcome improvement to the current global post-trade environment, it
is leading firms like these that are not only investing in industry best
practice ahead of the curve but indeed driving it and, in the process, ensuring
the markets in which they operate are more efficient and
that their clients are better served.