More than half of buy-side firms are unable to reconcile transactions in real-time, an important function that will be vital for meeting impending regulation, a study has found.
The report, authored by transaction solutions provider Gresham Computing, found 60% of buy-side firms, interdealer brokers and investment banks had not yet begun real-time reconciliation for any asset classes, and did not expect to be in a position to move to real-time reconciliation by the end of 2013.
With new rules under the Dodd Frank Act in the US and Basel III, additional reconciliations will be required between different systems to ensure margin calls from central counterparties are met in real-time. Failure to deliver collateral to satisfy margin calls may result in the wrong amount being delivered, causing possible failed transactions and increased manual work loads.
Globally, Basel III is the latest attempt to ensure banks are adequately capitalised, and will require dealers to hold risk-weighted capital against the assets they hold on their books. This will make it more expensive for brokers to provide liquidity using their own balance sheets, with some expected to exit the market altogether.
Around 44% of firms surveyed believed there would be delays to inter-system reconciliation needed to meet new rules in the US and Europe, due to the limitations of existing systems.
The study questioned approximately 20 companies based either in New York or London, half of which were buy-side firms, and suggested the wave of new regulation facing institutional investment firms will cause delays in updating systems. The study also found that 43% of firms were forced to bypass the main reconciliation system and set up manual work-arounds through software including Microsoft’s Excel and Access.
Neil Vernon, development director for Gresham Computing, said financial institutional across the world were having trouble preparing for the suite of new rules that will be enforced in coming years.
“The vast majority are struggling to on-board new financial transactions in a timely and cost-effective way and many are still using workaround in Excel. New regulations are not putting them under pressure to put in place enterprise-trade solutions that allow rapid on-boarding of new financial products as well as real-time reconciliation,” said Vernon.