Schroders and Legal & General Investment Management are actively involved with a number of brokers in developing a local confirmation-affirmation allocation capability over SWIFT
The global financial industry continues to grapple with increasing regulatory pressure for better management and controls in all aspects of cross-asset class risk. “Recognising that the main driver is to increase global transparency for all profiles of investors, this presents an important opportunity for global asset managers,” says Teresa Nolan who heads up SWIFT’s asset management focus in the UK-EMEA region. In their treasury, derivatives and securities middle offices, allocation and confirmation processing models are being reviewed in the context of improving operational cost and efficiency, while adapting to new compliance requirements.
Rather than embracing a central matching model, some asset managers are extracting further value from earlier investments in standardisation and automation to improve risk management, while preserving existing processes and maximising the flexibility of operating models. Leveraging industry standards such as ISO 15022 and exploiting common processes in the post-trade space, as well as tapping into communities of counterparties already using these standards and processes, allows investment managers to preserve the high STP rates they have invested considerable time, effort and money to achieve.
During 2010, a group of global asset managers initiated a buy-side group in order to share some of the processing challenges they were faced with improving – starting with removing the use of excel spreadsheets and e-mail allocations with their brokers in support of their local matching operating models. In working with SWIFT to ‘dust off’ the ISO15022 Electronic Allocation and Trade Confirmation global securities market practice document worked on by the industry back in 2000, the group very quickly came to the conclusion that the ISO standard and messages were still ‘fit for purpose’. The buy-side group approached a few of the world’s largest brokers, who had recently completed their own ISO15022 securities trade confirmation project with the prime broker community in order to formalise the initiative and build the business case to implement the allocation-confirmation-affirmation ISO 15022 messages suite.
With the goal of enhancing their current global operating models already in place, two leading buy-side firms, Schroders and Legal & General Investment Management (LGIM) will go live in 2011 with their first group of global brokers in automating their local matching process for equities and fixed income trades via SWIFT.
According to Mike Pavey, head of group portfolio services, Schroders, the main drivers are business continuity and the need for choice. “Our process is already highly automated,” he comments. “We are achieving 92% same-day confirmations on a largely automated basis and in terms of equities, our straight through processing (STP) rate is at 98%.”
For Pavey, therefore, the issue is not one of automating manual processes, but of ensuring existing levels of automation. “We depend on those levels of automation being sustained at all times,” he says. “If you’ve got 98% STP, you’re in effect only working on 2% of your transactions. If you suddenly find yourself without such an automated solution being available to you, even for a relatively short period of time, to go from 2% to 100% is completely impossible. We want to ensure that at all times we have access to an automated solution to achieve this level of STP.” Pavey welcomes the fact that SWIFT has come into the market to provide an alternative and complementary service. “In terms of addressing systemic risk, I think that’s vital,” he says.
Pavey believes his view is fairly typical of his buy-side peers. “I think we all acknowledge the dependency that we have on automated matching and there were a number of instances in the last twelve months where those services weren’t available for various reasons,” he says. “That’s when we realised how dependent we actually were.”
For LGIM, another motivation for engaging with SWIFT on this issue was a desire to maintain and strengthen the local matching model around which its operations are built. “A number of investment managers, ourselves included, have spent a lot of money setting up our infrastructure and our operating model to support local matching,” says Kelly Spiteria, manager of trade services, LGIM.
“We’ve been using this model with five of our top brokers for six years now and it works very well. We’ve never centrally matched as an organisation. We’ve always locally matched as it gives us greater control. Our STP rates are in the high 90s and that’s why we want to retain that ability.” “We find the SWIFT operating model very compatible with LGIM’s processes and procedures,” adds Lee Toms, head of operations, LGIM. “It’s a robust platform, it provides great STP end-to-end and we try to push everything through it that we possibly can. That doesn’t mean we exclude other players from the market, but we look at what the best model is for us in terms of efficiency, scalability, robustness and cost.”
Both Bank of America Merrill Lynch and J.P. Morgan are actively involved in supporting their buy-side clients in the SWIFT local matching initiative. From a broker perspective, beyond responding to customer preference, there is a benefit to improving overall automation levels in the post-trade process. “I feel that the entire industry has become focused on achieving greater operational efficiency, both to reduce the cost and to reduce risk,” says Eithne Horner, director, securities operations, at Bank of America Merrill Lynch. “Increasing levels of STP is something that can help the industry achieve this goal.” In the area of local matching allocations, says Horner, this is becoming increasingly important. “Markets are looking to shorten their settlement cycles, leaving firms even less time to complete this stage of the process,” she points out.
For Bank of America Merrill Lynch, enabling customer choice is a key consideration. “There is some automation of allocations and confirmations already available in the market, but the choice is limited,” she says. “Our clients have been telling us they need alternate solutions. Some see this as a backup option while others are reviewing their current automated solution. And there are some clients who currently allocate manually, but are looking for an automated solution that meets their requirements.”
A Bank of America Merrill Lynch project team will see the initiative through to completion, managing its business analytics and technology aspects. “We are pleased to have been involved since the start of the initiative,” says Horner. “By collaborating with SWIFT and some of our top tier clients, we are confident we can deliver a fresh choice to the buy and sell side communities.”
Schroders meanwhile is gearing up for testing in Q3 2011 and expects to be production-ready in Q4. “We are doing a significant amount of technology and business process change posttrade execution at Schroders and one of the deliverables from that programme is to provide us with the operational contingency with our matching model,” says Pavey.
LGIM already handles most of its trade confirmation and matching with its major brokers over SWIFT and is now preparing to add allocations into the mix. “As an organisation we do a lot of internal build,” says Toms. “The enhancements we have made around the allocation process have been relatively small. We’ve developed the appropriate SWIFT message to support allocations and are production-ready. We will go live as soon as our brokers can.”
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Lee Toms is Head of Operations at LGIM.
Kelly Spiteria is the Manager of Trade Services at LGIM.
Mike Pavey is Head of Group Portfolio Services at Schroders.