Asia-Pacific Post-Trade Operations: “Automation is Critical”

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While Asia-Pacific is often touted as fertile ground for expansion by fund managers, broker-dealers and their asset-servicing providers, a range of bottlenecks remain in how trade details are acknowledged before settlement.

In fact, Asia-Pac fund managers tell FinOps Report, newcomers may be surprised by additional operational and staffing costs to cleanup trades that don’t settle on time. Even worse, higher costs could result in the volume of trading activity failing to meet their projections if pass-along costs affect the performance of Asia-Pac investments.  A potential shortening of settlement cycles to two days (T+2) would only exacerbate the difficulties, as will the cross-border influence of regulatory measures such as the US Dodd Frank Wall Street Reform Act, Europe’s AIFMD, and the global Basel III Accord.

“Automation is critical on multiple levels. If we want to compete with the US and Europe we need to catch up,” says one operations director at an investment management shop in Hong Kong.

That catch-up means eliminating all emails and faxes in favor of electronic middle- and back-office systems connected to either proprietary or local post-trade communications networks, or Omgeo’s Central Trade Manager (CTM). Other possibilities: communication using the SWIFT network or FIX message types. Of the five Asia-Pacific based fund managers who spoke with FInOps Report in Hong Kong and Singapore, two are using the FIX protocol to communicate post-trade instructions with broker-dealers and three are relying on Omgeo’s CTM.

To gain efficiency and control costs in post-trade operations, some fund managers and broker-dealers are turning to custodians as outsourcing providers. A handful, such as HSBC, BNP Paribas Securities Services and Citi, are only too eager to help out. Alternatively, those wanting to retain the post-trade communications process in-house can consolidate post-trade operations into a single model and technology platform. Such an option is now used by half of the respondents to a recent survey released by post-trade communications service giant Omgeo.

More than 90 percent of the 100 buy and sell-side C-level trading operations and post-trade operations executives responding to Omgeo’s survey, done in conjunction with InsightAsia Banking & Finance Consulting, say automation is critical. The greatest shortcoming in the post-trade processing equation in Asia-Pac is in the trade confirmation process.

With respondents scoring the automation of  their post-trade operations on a scale of 1 for the least automated operation and 10 as the most, the average score for trade confirmation was only 6.9 for equities and 5.2 for fixed-income. Automation of the confirmation process, which takes place after trade allocation provides a final check that the details of a trade are correct, varies greatly by industry sector and market. “Large brokers and investment managers may deploy sophisticated systems, whereas smaller firms are more likely to employ staff to check and verify individual trades,” says the Omgeo-commissioned report entitled “The Asia-Pacific Post-Trade 100.”

Post-trade matching received a higher average score of 7.3 for equities and 6.1 for fixed-income. Many global buy- and sell-sell side firms rely on Omgeo’s CTM platform, the SWIFT network or FIX message protocols for matching, particularly in cross-border transactions, or they could depend on direct gateways to custodians. Matching trades through a third-party central approach, automatically guarantees trades are confirmed so the only task left is exceptions analysis and processing.

Among the 13 countries evaluated, Australia led the pack with an 88 percent overall rate of automation for equity transactions and a 69 percent for fixed-income. India, Hong Kong, Singapore, mainland China and Japan also fared reasonably well, while Taiwan, the Philippines and Vietnam lagged behind.

Country Differences

Here is some more granular breakdown by market. With many of the largest financial firms in Australia relying on third-party or internal systems for automated trade confirms, the average respondent scored of 9.2 out of 10 for equity transactions and 6.8 for fixed-income transactions. India ranked second in equities with a rate of 8.6, but only 5.4 in fixed-income. The reason: although large brokers use local vendor or proprietary systems, “eyeballing trades” is still common in the fixed-income market, says the research report.

Similarly, mainland China scored an 8.0 in equity transactions and 5.7 in fixed-income trades, benefiting from the central market infrastructure China Securities Depository and Clearing Corp. (CDSS) confirming domestic trades with fund managers directly and third-party systems used for cross-border trades. Japan scored 7.7 in equities and 6.1 in fixed-income transactions with cross-border deals relying on automated central matching platforms such as Omgeo’s CTM. By contrast, post-trade communications remain paper-intensive for domestic trades based on confirmation requirements set by Japanese trust banks. Philippines and Vietnam scored the lowest among the countries evaluated with a heavy reliance on paper-based communications between fund managers and broker-dealers.

When it came to post-trade matching, the rankings mostly parallel those for confirmation. Australia also leads the pack with a score of 8.6 in equities and 7.8 in fixed-income transactions. India, which relies on three domestic messaging systems, followed with a score of 7.9 in equities and 5.2 in fixed income.  Singapore and Hong Kong, relying on Omgeo, FIX, SWIFT and proprietary systems, also have relatively high scores — Singapore with 7.6 in equities and 7.0 in fixed-income; Hong Kong with 7.7 in equities and 7.4 in fixed-income.

So much inefficiency may offer a paradoxical silver lining. “As settlement cycles shorten globally, as new regulations are implemented and as the region opens up to increased fund flows, the resulting complexity means that the imperative to automate the middle and back office will grow,” suggests the study. “While outsourcing is seen by some respondents as a solution, it does not abrogate firms of their compliance responsibilities and in some cases can increase risk.”

Bottom line: the prospect of declining business may overwhelm resistance to change, especially if competing firms can offer better service and better returns. The pressure to automate — which will only increase if T+2 is on the horizon — puts Asia-Pac firms in the same boat as Western firms that are gearing up for a faster and less forgiving trade cycle.