Philippe Chambadal, CEO, Smartstream

Philippe Chambadal, CEO, SmartsStream

Philippe Chambadal, CEO of middle- and back-office processing technology provider SmartStream, discusses the post-trade landscape and the regulatory and operational challenges facing market participants.

Click here to view an edited video of the discussion

Q: Policy-makers and regulatory bodies have been paying an increasing amount of attention to the entire lifecycle of a trade in recent years. How is the regulatory environment affecting post-trade processes at the moment?

A: The financial crisis has highlighted some deficiencies and some gaps in the system, so now regulatory bodies – from the US and UK to the Bank for International Settlements and regulators in Singapore and Japan – are very insistent on achieving better transparency. They want to achieve this by getting real-time access to data and, in general, they want the banks to report intraday on their cash positions as well as to get close to T+0, which will settle trades intraday.

Q: What kind of issues are these goals likely to cause market participants in the coming months?

A: Inside the back office of many institutions, both buy-side and sell-side, there is still a lot of fragmentation in terms of systems. There are still a large number of manual processes, as well as many legacy and batch systems.

As a result, some of these institutions only know their cash position at 10:00 the next day, and that’s too late. Heads of operations need to rethink or revisit how the back office functions, and to move from batch processes to more real-time processes – or at least offer snapshots of positions throughout the day.

There is also a need for a view across asset classes. I think there is still a lot of fragmentation not only between systems, but also between desks. So firms often have a view of their position or risk for US equities, or US fixed-income products, and then they have another view in the UK. I think the regulators are going to force institutions to re-tool, so that the banks can access their positions across all asset classes and across all regions, in a much more timely manner.

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This is an edited version of the discussion from The Banker's Exclusive Masterclass Series. Click below to view more:

Q: What other challenges are market participants facing?

A: Cost is a huge issue. The price of processing trades varies immensely – over-the-counter trades are still hugely expensive to process, for example. Another factor is that while in some markets volumes have actually risen during the crisis, the transaction amounts have been smaller. These higher volumes going through the system have put further stress on to the middle and back offices. So there is a need to move, not necessarily to real time, but to obtain better scalability and to deploy infrastructure whose costs can move up and down in line with the volumes in the markets.

Everybody has an interest in these changes. For the banks, pressure from the regulators will help them justify the investment. But the banks themselves also recognise the need to have a real-time view of their risk. So I think the re-tooling is badly needed, and has been for a couple of decades. Historically, there has been a major underinvestment in back-office infrastructure, but that has been changing over the past couple of years. I think the regulators are just nudging the institutions to get in shape much faster.

Q: What is driving that move towards intraday processing, and why have things not been moving as fast as some in the industry might like?

A: It’s transparency, improved view of risk and better controls. You don’t want to be sitting on a trade that takes three weeks to settle because your own or the counter-party's systems are slow or fragmented, or because there is some dislocation in the process.

In terms of managing risk, it's crucially important for the banks to get as close to T+0 as possible

As for the speed of change, banks have layers of systems in place that have been built up over 30 or 40 years – these sometimes number in the thousands, or even in the tens of thousands. It is very, very hard to move from that sort of high-level fragmentation to a more unified arrangement. We are working with the large banks to create internal utilities, or shared services that can support post-trade processes.

Q: Why do banks need to invest in post-trade technology?

A: Beside the regulatory factors and the need to manage cash better, I think the banks need to improve client service – that is a big part of it. If you are a prime broker, or perform an asset management or fund administration function, then allowing clients to have a better view of their position, better-reconciled trades and better timeliness in terms of the post-trade process can only increase levels of client service. Obviously client satisfaction follows right behind. It can offer a real competitive edge. Client service is not something that you can just fix once: it is a continuous process, and the banks are continuously investing in improving it.

Q: How can banks begin to achieve this?

A: I believe that all of these issues, from regulatory requirements to fixing the cost of processing trades and eliminating fragmentation, start with managing data properly. If you don’t have proper reference data, and if you don’t have proper corporate actions, counter-party risk or settlement instruction data, nothing good is going to happen downstream.

But conversely, if you have proper reference data, proper management and proper counter-party and corporate actions data, then you can drive very clean, very efficient processes downstream.

Q: Exchange-traded derivatives (ETDs) have been the subject of significant regulatory focus recently. What trends are you seeing there?

A: As regulators and exchanges try to take over a lot of the over-the-counter markets, starting from the clearing side, there is obviously a big wave of volumes moving from over-the-counter to exchange trading. That has yielded a new level of complexity in terms of managing exchange feeds. If you go from managing half a dozen feeds coming from the large vendors, to managing the same exchange feeds plus an extra 200 feeds coming through exchanges, the level of complexity increases exponentially and the cost of processing these feeds is very, very high.

We are seeing a huge opportunity for the big banks and large-volume players, as well as large money managers and hedge funds, to source data directly, but to have a company pre-manage those feeds and get the data 99% of the way to them. This will allow these firms to line up the feeds, create the data dictionaries, clean up flows and work with a single dataset sourced from all of these information vendors and exchanges. This can drive a more efficient process.

ETDs are a critical operational area and one we are focused on both in terms of the data accuracy and the subsequent reconciliation of the trade.

Q: What kind of developments do you expect to see in future in the post-trade space?

A: We strongly believe that having a system that can pair clean data with a very efficient process throughout the trade lifecycle is the only way forward in the post-trade space. If you go to the next step and get that process externalised, either through utilities that enable all the business units of a bank to run off a single trade lifecycle, or by externalising these utilities themselves, everyone concerned will win hugely. The cost of trade is going to collapse, the time to process trades is going to collapse and you just gain general efficiency, which again is good for Wall Street.


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