Post-trade processing: Building new models

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THERE IS SOME CONFLICTING DATA IN THE MARKETPLACE REGARDING INFORMATION TECHNOLOGY (IT) EXPENDITURE LEVELS: WHAT IS SMARTSTREAM'S EXPERIENCE HERE?

 The banks are not all equal: there are a lot of banks that have been struggling through the crisis because of the complexity of their operations, so these banks are trying to find new ways of controlling costs, reducing risk and creating a new level of efficiency in their operations. In this segment of the market, we see IT expanding.

PRESUMABLY, THERE ARE AREAS IN THE BANKS WHERE IT IS ALWAYS NECESSARY TO SPEND MONEY. IS THAT TRUE OF THE BACK OFFICE?

 The back office is where you have the highest level of manual processes, and typically 80% of the back-office function is dedicated to fixing broken trades. In certain banks you have thousands of staff processing these broken trades and that is where we can bring a new level of efficiency by automating these functions.

DO YOU THINK THAT THE OPERATIONAL INEFFICIENCIES HIGHLIGHTED BY THE FINANCIAL CRISIS HAVE MADE BANKS MORE CONSCIOUS ABOUT THEIR POST-TRADE PROCESSES?

 Yes, especially banks that have been very active in terms of mergers and acquisitions: they have really made a big push to centralise their operations and create shared services to serve all of their business units. Before, they were working independently. Now, with the crisis, they realise it was too expensive and they need to create a new set of shared operational services that can serve all units of the bank - and sometimes even their clients - through the same infrastructure.

WHICH FORCES CONTINUE TO DRIVE DEMAND FOR TECHNOLOGY IN THE POST-TRADE ENVIRONMENT?

 The major one has to do with risk management and risk controls. All of the regulators, and the governments, are pushing extremely hard to get the banks and the money managers to create better transparency and a more real-time approach to the business.

HOW DIFFICULT DO YOU THINK IT WILL BE FOR THE BANKS TO ACHIEVE THE DREAM OF REAL-TIME INFORMATION CAPTURE?

 Well, a few years ago there was something called straight-through processing and it has developed a bad name in the marketplace. And that's the endgame: the endgame is to push through all the trades in real time and achieve intra-day clearing and settlement. In some markets we are already there. The issue is more for the over-the-counter (OTC) instruments. And whenever you want to do cross-border transactions, we are very far away from straight-through processing.

AS A TECHNOLOGY PROVIDER, HOW ARE YOU ABLE TO ACCOMMODATE CLIENTS' DECREASING BUDGETS?

 What you have to prove to the banks, and the large money managers, is that you have a very fast ROI [return on investment]. If you tell them you have a one or two-year ROI, you don't get a sale. What we can show to our clients is that we can achieve a three-week or four-week ROI by bringing in a new platform. The issue for the banks is really to bring in methods where they are not exposed to the outside risks and have to wait three days for a transaction to be sorted out. Or, like in your OTC market, it takes three to six weeks to sort out a broken trade. That's clearly not acceptable.

WHAT ABOUT ADAPTING THE WAY YOU DELIVER IT SERVICES? FOR EXAMPLE, MOVING TO A SOFTWARE-AS-A-SERVICE (SAAS) MODEL AND REDUCING THE OVERALL COSTS INVOLVED?

 Yes. We launched a new product called TLM OnDemand a month ago. The notion for TLM OnDemand is to reduce the total cost of ownership [TCO] of our applications; so all of the running costs are transferred to us, and we can offer the same functionality through a hosted offering. The other big difference is in having a deployment time that might be a few months: the on-boarding of the client on the demand platform can be as little as a day, or a few weeks.

DO YOU THINK THE SAAS MODEL IS MORE APPEALING TO SMALLER ORGANISATIONS OR IS IT NOW APPLICABLE TO BANKS ALL THE WAY UP THE SCALE?

 Banks of all sizes are trying to achieve a new level of efficiency, and again it is all about TCO. If we can show to the client that they can reduce the TCO by 60% to 70% off-site, the client will use the SaaS model as much as the rest of the marketplace. The white labelling of the sales offering, for their clients, is also very important - because the banks are trying to improve their risk-management and control costs, but also to improve the client service. The hedge funds, for example, don't want to have to wait three days, or three weeks, to sort out a transaction. They want intra-day visibility of the risk, so the banks have to adapt to that requirement.

HOW DOES THE CONCEPT OF A UTILITY-BASED MODEL DIFFER FROM THE MORE TRADITIONAL POST-TRADE PROCESSING MODELS?

 If you are a bank and you are trading with a counterparty, you will have your own back office and the other side will have their back-office system; so the reconciliation happens between the two and it becomes an end-to-end problem. A bank will trade with 10,000 partners and the degree of complexity increases enormously. So our notion is that if you can process the transactions in the middle [of those two back offices], offering the same reference data, the same pricing data, the same terms and conditions data, and the same trade-processing software in the middle, then all the parties involved can look at the same data at the same time. That's a big difference - it's like an exchange, you can have a view of the book of a certain security, across all the participants, and you can see the liquidity. We're doing that on a post-trade processing side, where we can give instant visibility of all the terms and conditions, and the trade structure, in real time.

IS THIS SIMILAR TO WHAT THE DEPOSITORY TRUST AND CLEARING CORPORATION (DTCC) IS DOING WITH ITS TRADE INFORMATION WAREHOUSE ON THE CREDIT DEFAULT SWAP SIDE?

 Absolutely, and it is on an extended basis because we want to do it across all asset classes. So what the DTCC is doing has improved the marketplace enormously, and reduced the trade breaks in one segment of the marketplace. We are building a utility that is more generic.

PRESUMABLY THERE ARE BOTH RISK ADVANTAGES, AND TECHNOLOGY ADVANTAGES, IN MOVING TO THAT MODEL?

 Today, you have about 45% of trades that break, due to unmatched reference data. So by offering the reference data in the middle of the transaction, as a utility service, theoretically half of the trade breaks will disappear. On the other side, you have the trade-processing software that will allow the banks to fix a trade before it breaks. So we can identify what the break points are, streamline the trades and avoid the break.

ARE THE BANKS RECEPTIVE TO THIS TYPE OF MODEL, following THE CRISIS?

 Yes, they are. The notion of having any differentiation from managing the reference data yourself - for running your back-office processes yourself - has completely disappeared. All the banks realise this - there's no differentiation. So it is better to have matching prices, common data models and common process models to process these trades than having all these trade breaks that are enormously costly. If you bring that cost down, you're talking about hundreds of millions of dollars in savings.