At FIA IDX London last month, operational processes, and how to enhance them, continue to be the focus for the wider market. Increased automation and a data-centric approach is top of mind to meet business, client and regulator needs. Here are our four takeaways, and a welcome update, that we took from the 3-day derivatives conference:
1. It's always about the data
The challenges organizations continue to face with data came up in each session. The data challenge varies by user, underlying need, source, required outcome and any number of additional factors. Data management is a standalone challenge and is also relevant to each of the other industry topics we discuss below.
One hot topic of conversation was data exchange. On the surface, a simple process, but it’s definitely not that easy. Central Counterparty Clearing Houses (CCPs), for example, create and send 100s of reports to their members but each CCP has its own process and format, which isn’t necessarily compatible with its peers. Increased collaboration between CCPs, and their members, is a must.
It’s not just for CCPs, however. There’s no doubt that improved data exchange between market participants and entities would have a material, and welcome, impact on post-trade processes of all types including reconciliations, trade errors and exceptions.
Combining and manipulating data was another key theme. Using CCPs as an example again, these multiple reports all include useful and important data, but too often there’s very little functionality or ability to cross reference, combine or slice it for other purposes, requiring external expertise for data extraction and reconciliation. As the market employs better tools to achieve this, the data management and data usability will increase and the operational burden decrease.
2. Trade allocations pose the largest risk in the ETD workflow
Allocations was another area in which the data issue reared its head. Arguably, allocations pose the most significant data risks and on one panel, speakers suggested that while 80% of trades include sufficient information to automate the allocation without the need for further enrichment or involvement, 15-20% simply aren’t there yet. That’s a large chunk of allocations requiring manual or other processes to be completed. Furthermore, while the DMIST (Derivatives Market Institute for Standards) 30/30/30 standard for give-ups and allocation is widely being incorporated by the market (95%), ultimately, real-time is where financial institutions want to get to. Learn more about Xceptor’s data automation platform and how you can automate your allocations here.
3. Technology is always the answer
If the issues are always about the data, inevitably the solution is always smart, effective technologies developed specifically to solve these challenges, implemented in a manner that achieves the core objective without adding additional risk or long-term costs. Not always as easy as it sounds.
But the market is working hard on this, as was evident in the many conversations and discussions covering the full spectrum of possible options such as AI, automation, increased cloud adoption and the value of no-code/low-code solutions.
Automation, in whatever form it is deployed, is naturally essential. More bluntly, without it, real time processing is a pipedream.
As new technology is integrated, financial institutions and vendors are considering how to leverage this. Cloud adoption continues to expand as the direct and measurable value of its scalability is realized in the face of ever-increasing trading and processing volumes. AI’s value to process the thousands of operational requests any firm receives daily is obvious – if the AI can search, summarize and propose a response based on the specific rules and datasets within an organization, the effort and time to do this manually almost completely vanishes.
But there are still questions about how to safely implement this technology. Certainly, AI in reconciliations is top of mind, as it is for allocations. Generative AI is set to be truly disruptive, if the market and all the players can get comfortable with the required training inputs, IP and necessary guardrails, and apply them consistently.
Low-code/no-code solutions are also gaining traction and it’s hard to argue with the benefits, most remarkably for the users. An internal IT request may take six months or more to action, whereas a well-integrated low-code/no-code option with the right governance, approvals and resilience programmes could achieve the same outcomes in a matter of weeks. With fewer people. It works in part because the end user’s understanding of data and processes has been hugely expanded with most having a much more comprehensive knowledge of how data is moved from upstream to downstream, and what happens between.
4. Nothing can be certain except death and taxes...and constantly evolving regulation
Regulators are constantly shifting their requirements as they adapt to a changing market. Regulatory reporting is currently in the middle of rewrites across jurisdictions and assets, while T+1 is in place in the US, and it really is just a case of when and how in both Europe and the UK. Data quality is a key focus for regulators and is increasingly embedded into the regulations. In a poll during FIA, 53% of respondents believe regulatory reporting is a key driver of reduced profitability – improving data accuracy and automation will naturally be key to solving for this problem.
And an observation - energy markets are getting ever busier
At Xceptor, we’ve been thinking about energy markets for a while. As they’ve matured, and expanded, the operational processes for many market participants haven’t been as sophisticated as they are within financial institution counterparties – something we have set out to change. So, it was encouraging to see the market is thriving. There are significant regulatory burdens and challenges (as always), with real world impacts for trading activities so, as with any asset class, better data and better technology including the use of automation, sophisticated reconciliations and effective, efficient and timely affirmations, confirmations and allocations is absolutely essential. Learn about the growing need for automation in energy markets.
The power to transform markets with operational processes
Ultimately, operational shifts across financial markets are core to the ongoing successful and efficient functioning of these markets even as the regulatory burden increases, volumes expand, and new asset classes are introduced. More than perhaps at any other time, the tools available to support this in the form of AI, automation and other technologies are critical to ensuring that this can all be managed without adding additional risk or long-term costs, with the added benefit of eliminating low-skilled, repetitive tasks so that operational and front office teams can prioritize adding value.
Learn how Xceptor can transform your data management and automation.