Tensions set to rise in post-trade securities arena

Post-trade tensions in the securities industry are likely to increase in 2013, according to Virginie O’Shea, an analyst with research and advisory firm Aite Group.

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Post-trade tensions in the securities industry are likely to increase in 2013, according to Virginie O'Shea, an analyst with research and advisory firm Aite Group. 

Her assessment, part of a study from Aite on the top 10 trends in institutional securities & investments, sees "a confluence of regulatory and market pressures" combining to increase tensions between buy-side and sell-side in the broker-to-asset-manager communication process.

The US and European regulatory push to move OTC derivatives trading and clearing onto electronic platforms and the introduction of much more onerous requirements around capital, collateral, liquidity and risk management have pressured financial institutions to operate in a much more timely and efficient manner at a time when volumes are down and margins are thin. Supporting buy-side firms that have not invested in automation could prove cost-prohibitive for brokers, says O'Shea.

Additional regulatory pressures meanwhile are various. O'Shea identifies six of the most prominent: the introduction of a financial transaction tax in numerous jurisdictions pushing up the cost of trade settlement; the extension of equities reporting requirements to fixed income and derivatives under MiFID II; the requirements of Basel III; the need imposed by the European Market Infrastructure Regulation (EMIR) in Europe and Dodd-Frank in the US to interact with new market infrastructures such as trade repositories and CCPs in the OTC derivatives markets; preparation in Europe for T+2 settlement as required by the Central Securities Depositories Regulation; and preparation for the launch of TARGET2-Securities in 2015.

Headcount reduction among large brokers and asset managers has limited the ability of these firms to apply the requisite resources to tackling the implications of regulatory pressures on the post-trade process, says O'Shea. The problem is exacerbated by the persistence of manual intervention. "High usage levels of fax, email, File Transfer Protocol submission and telephone communication remain for the process of confirming, allocating and affirming trades between brokers and their buy-side clients," said O'Shea. "A large global brokerage firm told Aite Group that manual processes are currently involved in 15% to 20% of its overall allocations. If brokers and asset managers lack the staff to throw at the process, then other, more automated processes will have to be considered in order for these firms to be able to conduct business as usual."

Reporting by Richard Schwartz