The tipping point for cross-asset, agile post-trade processing

Posted by Brian Collings on Feb 25, 2021 8:46:10 AM
Brian Collings
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Better Client Servicing Hinges upon an Efficient, Adaptable Cost-effective Back Office as Digital Assets Become Mainstream.

Banks across both developed and emerging markets can gain significant operational advantages over their peers, by streamlining their back office operations to better manage flow and over-the-counter trading in a single platform.

The benefits are clear; more streamlined risk analytics, real-time feedback into front office processes and aggregated position keeping allow for a nimbler and more dynamic trading operations. They also support the increasing demand for cross-asset trading support from buy-side firms. As digital assets become more mainstream, incorporated into trading by institutional investors and wholesale banks, the breadth of instruments traded is moving into entirely new areas.

When engaging with these clients, speed and accuracy are real value adds. Processing trades efficiently is crucial to supporting optimised risk management, hedging and client servicing. However, this can be very challenging for firms to achieve if they are using legacy technology and product-based post-trade siloes.

Breaking with evolution

The evolution of trading operations within siloes has happened organically. While equity and FX markets became increasingly electronic over the past decade, front office platforms evolved to support trading algorithms and order routing based upon trading for those specific markets, including any local nuances in delivery vs payment models, primary exchange and alterative venues and margin requirements for trading. Transaction cost analysis built up as a post-trade element to be fed back into pre-trade decision making.

Conversely, trading across over-the-counter (OTC) markets has become electronified in a far less consistent manner. Trade execution typically carries a greater blend of both voice and electronic trading.

These different patterns of trading have shaped the variety and maturity of market structures, with trading systems mirroring those nuances to become highly tailored by asset class.

Now trading has reached a tipping point. Sell-side firms are seeing very tight margins in flow products which typically execute orders at high volume and speed. Those instruments which have developed high-volume throughput built on straight-through-processing have necessitated a significant technology spend, are seeing shrinking returns.

OTC markets, which include illiquid derivatives and cash fixed income products have more complex post-trade processing for several reasons: the instruments’ own characteristics which include tenor, credit ratings and interest rates; the lack of automation in trading, which reduces the flow of post-trade data; and the additional capital charges these instruments carry on banks’ balance sheets. While these instruments typically offer better margins for secondary trading the ability to automate trading and processing is far more complex and expensive, making them a more challenging operation.

Banks need to step past the organic evolution of post-trade systems, led by front office development, and engage in the strategic development of systems, designed for leaner and smoother cross-asset capabilities.

For the investors and wholesale banks whom they service, getting access to a single view of trading activity is invaluable. As these clients are also faced with tighter margins and greater cost controls, there is a real pressure to support a digital workflow in capital markets.

The modular approach

Tying older legacy platforms together will not deliver efficient processing and reporting. The complexity of trading process and workflow has created widening gaps between systems and their ability to interoperate. These can be patched over approach to create bespoke bridges, feeding data across the sprawling architecture, but this increases inefficiency and risk.

A one-size-fits-all approach to processing will not support the many varied instruments that are traded by banks, ruling out the adaptation of monolithic legacy architectures that were developed for a single asset class.

Only a post-trade solution that is built using cutting edge components will support multi-asset processing, by compartmentalising the tasks within a larger interoperable system.

This modular design approach allows a single system to handle each instrument within a discrete workflow, while flowing data into an aggregated view of risk. Moreover, it can be developed for a single instrument, to replace the existing post-trade technology, and then be built out, module by module, to replace older legacy systems.

The most immediate impact of this approach is to improve performance of the front office through better back office processing. Clients can be better supported with data from securities servicing such as settlement, they can be provided with pricing for trade more rapidly and they are less likely to suffer settlement failures and margining challenges.

New approaches to development allow for comprehensive understanding of the bank’s risk position, creating a centralised risk book to trade from, and reduce the cost and complexity of the post-trade model. Getting a holistic picture of positions and risk exposure via single platform that can create a consolidated picture both for the bank and clients.

A single modular platform also lowers costs significantly by reducing the skill sets and vendor licensing needed to manage what is typically seen as a cost centre.

A call to action

As trading of OTC instruments becomes more electronic and ultimately automated, STP in the back office will become increasingly prevalent, and post-trade processing will need to adapt to this new reality. Digital assets need new trading connectivity, risk models and post-trade processing.

Building a modular post-trade architecture will set the groundwork for handling these changes with a flexible, cloud based platform that significantly reduces the fixed costs and ownership overheads seen with legacy systems today. The gap between high-touch and low-touch trading between assets is decreasing each year, making the deployment of a single model for post-trade a priority for leaders in capital markets.

About Torstone Technology

Torstone Technology, a leading SaaS platform for post-trade securities and derivatives processing. We simplify the complexities of post-trade, by connecting global financial industry expertise with post-trade technology innovation. Combining many decades of investment banking expertise with in-depth global financial market and technology industry knowledge, we offer agile, secure, scalable, and cost-effective solutions. Torstone’s Cloud-based, award-winning Inferno technology enables global financial firms to reduce costs, achieve greater operational efficiency, drive revenue growth and minimise risk.

We are a fast-growing company headquartered in London, with offices in New York, Toronto, Hong Kong, Singapore, and Tokyo.

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Topics: Cloud, Legacy, Cross-Asset, Data, Capital Markets, Risk