Keeping up with diversification

With US equity indexes having plummeted in recent weeks, after the Federal Reserve’s decision not to raise interest rates due to a strong US dollar and China’s economic slowdown, it is no surprise that banks are competing with each other to service US clients who want to diversify their investment mix and have an appetite for offshore investment products. Although the US economy is apparently in rude health – growing at an annual rate of 3.7 per cent from April through to June this year – investors want the security of knowing that they can diversify their investment portfolios during times of market volatility such as these. Furthermore, with uncertainty over whether the Fed will actually raise interest rates by the end of the year, it is likely that stocks will remain volatile in the coming months.

However, this changing investment landscape in the US is making tough operational demands of many banks and brokers who simply do not have the requisite post trade infrastructures in place to accommodate the efficient processing of multi-asset class offshore investment vehicles. This has been compounded by the fact that these firms are operating in an environment of increased regulatory, and indeed investor, scrutiny where transparency and efficiency are the order of the day. What is more, these same firms are having to operate under ever tightening capital constraints, and satisfy budgetary demands in the knowledge that there is no easing off in sight for the demand for efficient post trade processing.

Whilst cost control is of course key these firms are coming to realise the long-term benefits of integrating post trade processing systems into a unified architecture as a way to improve operational control and efficiency. Such improvements flow from having a fully flexible, scalable system that can easily interface with multiple front office systems and external vendors. Naturally, financial institutions hunt for improved margins and this compels them to seek out back office technologies that can help them to maintain their competitive advantage. It is for this reason why real-time, event-driven, service-orientated architecture is increasingly sought to help firms achieve very high rates of straight through processing (STP) and react to market changes in a timely manner, particularly as they relate to investor appetite for diversified investment portfolios.

CTOs are in their droves recognising that switching away from an existing post trade infrastructure need not be an intimidating task. As long as changes are made progressively, a strategy that provides modular development can consolidate business processes more effectively. In fact, some firms are adopting this modular approach by outsourcing particular functions of their post trade processes to third party providers. This allows firms to be selective, creating an optimised blend of the best of their own human resources to oversee operational processing while outsourcing the actual post trade technology. For firms who are governed by strict budgetary demands, instead of getting rid of outdated back office systems entirely, a phased approach can allow them to test outsourcing of different processes, such as settlement or reconciliations, to find the most suitable mix for their needs and those of their clients. What is more, upgrading systems to reduce manual processes, with the ultimate goal of obtaining a consolidated view of risk, can help make firms become more competitive and ease their compliance burdens.

The trend for more control and transparency in regulatory and risk reporting will of course continue. What firms must remember, however, is that hand in hand with this comes the need to be very clear about the quality of data and how figures are produced to demonstrate comprehensive and accurate reporting. As such, automating checks and balances and improving the quality and completeness of data remains a source of concern for many back office operations teams who do not have a consolidated view of their business. Discrepancies between data held in different post-trade systems can result in poor data quality and therefore impaired or delayed decisions and inaccurate regulatory and client reporting.

As US investors are increasingly looking at broader global investment horizons to achieve greater returns, brokers moving to consolidate post-trade processes act both in the interests of regulators and their customers in equal measure.