David Pearson 14By David Pearson, Head of Post-Trade, Fidessa

Already well-established for cash equities, automated trade matching, reconciliation and confirmation systems are finally extending to other asset classes.

Post-trade operations, at both buy- and sell-side firms, have lacked the investment in technology that the front office has enjoyed. Instead, it has suffered from a piecemeal approach to technology, characterised by a plethora of tactical solutions for different asset classes, especially in the middle office trade confirmation functions.

There are two deleterious consequences: First, there is uncertainty at the close of the trading day about the status of transactions; second, there is a susceptibility to errors caused by manual matching which still dominates post-trade operations for most asset classes.

These problems are exacerbated for exchange traded derivatives by the additional complexity of having three parties involved in many trades. The lack of electronic post-trade workflow between the buy-side and sell-side means that the allocation process for the broker is based on input from the trader receiving voice instructions, which is vulnerable to miscommunication.

Many buy-side firms totally rely on manual processes to reconcile and match trade details with the account statements from their brokers. Errors are detected late, and sometimes not fixed until the following day. Unmatched trades also mean that the sell-side counterparty may have to margin an open position for its client, and nor is the client sure that the risk hedge it wants is in place.

An alternative approach is to meet the problem head on and provide a post-trade functional workflow that brings all the parties together to agree the trade economics of each account allocation. However, it is expensive to introduce internally. A more viable option is to outsource the post-trade functions to a third party which benefits from economies of scale through its provision of the service to other firms.

Automated process
Fidessa offers the industry a seamless electronic and automated capability to communicate and match trade details in exchange traded derivatives, driven by an electronic stream of trade allocations direct from the buy-side.

Its Affirmation Management System (AMS), founded on industry collaboration, connects and assimilates workflows in a standardised way to support trade confirmation, reconciliation and matching.

Firms that adopt the AMS have surety of their trading positions on the actual trade date. This lowers the level of operational risk associated with holding unconfirmed positions, and also reduces the number of errors that can be introduced through manual processing. It is a business utility service-based model, which can be easily incorporated into buy- and sell-side firms’ trading infrastructure using the FIX protocol.

The AMS extends existing front office workflows into the post-trade operation, enabling buy-side firms to use the data captured at the point of order execution. The settlement phase is faster with seamless workflows integrated between front and back offices, and errors are immediately flagged in a configurable format. Moreover, the direct electronic workflow with each broker eliminates the need for a central matching facility.

It is already well-established for post-trade equities, and has recently been introduced for exchange traded derivatives. Eventually, the service will be applied to over-the-counter and repo transactions where, like exchange traded derivatives, there is little or no automated post-trade reconciliation.

Clients send allocation instructions to Fidessa who match their instructions with their brokers, who are integrated into the service for real time processing. Both counterparties will have their trades confirmed and reconciled immediately.

In addition, the AMS is flexible enough to integrate with other third-party systems. The objective is to raise the technological standards of post-trade operations to those that have already been reached at other stages in the trade cycle. There is plenty of room for other systems, but it makes sense for them to be compatible to best serve the interests of clients.

We’d love to hear your feedback on this article. Please click here


MiFID II's Impact On The Trading Desk

5 min read

MiFID II's Impact On The Trading Desk

By Fabien Oreve, Global Head of Trading, Candriam Market fragmentation and tougher trade execution reporting requirements compel greater investment...

Read More
Assembling The Best Technology Stack

3 min read

Assembling The Best Technology Stack

The traditional build or buy dichotomy is being eroded by the costs incurred to keep pace with persistent regulatory changes and rapid...

Read More