With the imposition of regulatory-driven penalties for failed securities transactions, firms are more focused than ever on the need to improve post-trade processes. Baton’s Core-Collateral leverages extensive market infrastructure connectivity and leading edge technology to streamline collateral management and significantly reduce process-based fails.
The manual nature of securities processing means that failed transactions are not uncommon. Until recently, many of these fails had limited consequences. However, since the implementation of the Settlement Discipline Regime (SDR) phase of the Central Securities Depositories Regulation (CSDR), which requires firms to put in place measures to mitigate settlement delays, daily penalties or charges can be imposed for trades that fail.
This has caused significant ripples across the market, with the Bank of England’s Securities Lending committee, among others, surprised by the high volumes and values of fails.
What are the consequences of process-based fails?
A process-based fail related to collateral management will lead to a variety of sub-optimal results. It’s important to consider the flows from the perspective of each interested party across the full trade lifecycle. Each failure has a knock-on effect which will lead to either cost or resource drain or indeed both. The fail could result in the inability to meet an exposure requirement and also potentially lead to a detrimental impact on a key financial metric such as Liquidity Coverage Ratio or Net Stable Funding Ratio.
At a more simplistic level, failure to deliver the required asset may result in the inability to honour a commitment on a downstream sale, leading to buy-in costs and other settlement penalties.
“A process-based fail related to collateral management will lead to a variety of sub-optimal results. It’s important to consider the flows from the perspective of each interested party across the full trade lifecycle”
How are firms impacted?
Not only do process-based fails present challenges to operations groups required to investigate the specific fail (and, ideally, to review the root cause of the issue), but they can also lead to broader reconciliation breaks which again impose a resource drain on a variety of teams. The funding cost and friction between internal departments that will be derived from a process-based fail must also be considered.
Beyond the obvious time, resource, and cost impacts of a fail are the reputational and relationship implications. Securities transactions are made for a reason – for example, it may be that the end user requires the stock to meet a trading strategy. Failure to deliver will impact that strategy and lead to tension between the key players in the transaction. In today’s world of greater transparency, if price is not a differentiating factor then the functional capability and reliability of a party/counterparty will be considered. While this might be viewed from the perspective of the depth and breadth of product, the ability to meet commitments and uphold its end of the bargain is certainly a key factor in any firm’s value proposition.
A process-based fail can hinder the value obtained from a portfolio. Organisations seek to understand the most optimal location for an asset or may require the asset to be returned to meet an onward obligation. But has the asset in question been sold? If yes, how is it returned to the correct location? These two questions carry a variety of implications but the ultimate goal is simple: to ensure the required movement occurs within the required timeframe.
In an ideal world, firms would achieve a 0% fail rate on all transactions leading to zero reconciliation breaks. Unfortunately, however, fails will always occur, so the aim is to reduce the volume of fails and to learn from previous experience.
“A process-based fail can hinder the value obtained from a portfolio. Organisations seek to understand the most optimal location for an asset or may require the asset to be returned to meet an onward obligation”
Leveraging technology to streamline processes
It’s clear that solutions that enable higher levels of straight through processing (STP) and visibility will force a reduction in both time lags and process failures. Achieving high levels of STP reduces manual intervention and, even when trades are failing, enables potential fail cases to be detected earlier. It’s important for firms to be advised of these potential fails ahead of time rather than after the fact, by which point the aforementioned issues around cost have already kicked in.
Real-time visibility is crucial. Teams need the ability to monitor status updates and inform stakeholders of the progress of a settlement at any given point in the cycle, with the aim of minimising disruption and maximising efficiency. This can be achieved by presenting consolidated, aggregated data in an easily readable format. It’s a source of constant surprise that with so many technology advances in Financial Services, most industry participants are currently unable to monitor (and therefore tightly manage) their holdings and obligations in real time.
Whilst this represents a significant step forward it’s perfectly achievable with today’s technology. The application of new technology can improve the processes detailed in this blog post by enabling the normalisation and aggregation of transactional data. There should no longer be a need for two separate operations groups to review the same transaction based on single-sided information: Distributed Ledger Technology can enable a single source of truth and immediately share the status of a transaction based on custodian messaging, Furthermore, it can facilitate collaborative and automated workflows between a pair of counterparties.
With the introduction of T+1 time frames in 2024, settlement is going to be even more time constrained. Enhancements to processing and visibility will therefore be of paramount importance. This has been noted in many recent publicly available articles about the concerns around how organisations will cope with the shortened settlement windows. When factoring in the costs associated with late settlement penalties it’s clear that now is the time for firms to act.
“Distributed Ledger Technology can enable a single source of truth and immediately share the status of a transaction based on custodian messaging, Furthermore, it can facilitate collaborative and automated workflows between a pair of counterparties”
What form should this action take?
At a minimum, firms should review their transactional flow from front to back and actively decide if the current process is fit for purpose. If inefficiencies are found, it’s time to look at next steps. Is there a need to incrementally update an internal platform or can the time to market and efficiency be improved by reviewing the adoption of external solutions?
The focus of Baton Systems is to enhance post-trade processing and eliminate the pressures derived from the points raised in this article. Enhanced visibility and workflows are at the heart of this drive to greatly reduce, if not eliminate, process-based fails. Baton’s Core-Collateral™ solution provides up-to-date key transactional data related to status updates and timelines and enables swift remedial action to be taken where necessary. Collaborative workflows allow firms to enhance the asset flow from an accuracy and efficiency perspective. Failures can be identified ahead of time, significantly reducing the pressures caused by the challenges described above.
With regulatory pressures being the stick whilst costs and revenue deliver the carrot, there is no better time to review how to move the process for securities settlement to the next level.
“Baton’s Core-Collateral™ solution provides up-to-date key transactional data related to status updates and timelines and enables swift remedial action to be taken where necessary. Collaborative workflows allow firms to enhance the asset flow from an accuracy and efficiency perspective”
I hope you have found this blog useful in explaining how Baton Core-Collateral can improve collateral management to help prevent process-based fails. To learn more about Core-Collateral please don’t hesitate to contact me at [email protected]