Post-trade still struggling from underinvestment, but purse strings are opening

When compared with the front office, evolution in the back office has been slow…to say the least. But things are starting to change as more firms realize that although those workflows and systems work today, they may not work as well in the future. As the markets faced greater volatility—in part due to the pandemic, which led to an increase in trading volumes—post-trade systems and workflows are beginning to feel the pressure. 

Over the past year, firms have been innovating to future-proof their back-office systems and are finding that it’s vital to facilitate a better flow of data. Below are a few examples: 

Data visibility, the main driver for change

“If it ain’t broke, don’t fix it.” Why mess with things when systems and workflows work just fine?

The fear that a workflow or part of a system will break is not something that can be simply brushed aside. These are critical systems, and back-office infrastructures are highly fragile and sensitive to change. If one part of a system fails, it could result in the loss of millions of dollars. 

So, the fear of change is real. Still, some believe that change within the organization should be driven by the back office. 

Nick Gordon, CEO and co-founder of London-based startup Adnitio, said, “Banks and asset managers are starting to realize that if we can reduce our costs in the middle and back office, that could give the front-office staff some new ways to either cut costs or find additional alpha.” 

Gordon set up Adnitio to help banks have visibility into their end-to-end process across the middle and back offices by processing each data event in real time and providing users with a live, up-to-date view of traffic and activity. 

It’s a highly complex space, and [seeing how that data moves across systems] has always been the challenge

Nick Gordon, Adnitio

“The whole idea behind the company is that you can get all your business data out in real time, tracking it end-to-end with zero impact on your underlying systems. What that means is you don’t have to go through any change management; you’re using existing applications to basically stitch together the lifecycle of your transaction as it moves across your systems from the post-execution point, all the way through all your settlements, funding, process payments, FX, netting, and so on,” Gordon said. “It’s a highly complex space, and [seeing how that data moves across systems] has always been the challenge.”

But beyond cutting costs or contributing to revenue generation, firms have another reason to strengthen their post-trade processes: regulation. 

For example, the UK’s Financial Conduct Authority has issued its rules and guidance on requirements to strengthen operational resilience in the financial services sector. Firms have until March 31, 2025, to show the FCA that their critical systems can perform within impact tolerances and that they have made the necessary investments to operate consistently.  

While that may not necessarily mean replacing or even upgrading legacy systems, it does mean that firms need to understand how data flows across existing systems better.

That process might help firms focus any innovative projects in areas where problems exist rather than create new ones by introducing new architectures. 

Cloud and APIs for post-trade

Banks, asset managers, and even exchanges are embracing the move to the cloud. That move started with front-office trading platforms and then to risk systems in the middle office. But as cloud architectures enter back office territory, it can be a tricky maneuver due to the hodgepodge of systems tied to myriad applications. So, some vendors are helping firms to figure out where to start.

One area that could be a good place to start is position management, according to Danny Green, head of international post-trade at Broadridge. This is because it is an area where multiple systems are performing the same function. 

“In theory, you could deliver a general position management component, and then ultimately switch it off from all of the multiple systems,” he said. “By doing that, you get to have a global position management capability quite quickly. So instead of replacing the entire system, you start with replacing position management, but everywhere.” 

That would allow firms to have visibility of global positions in real time, and provide that data via APIs from the back office to the front office. 

Also, in most cases, it is easier to start something new in the cloud rather than migrate a legacy platform to the cloud. James Marsden, managing director and head of post-trade business for Asia-Pacific at Broadridge, said legacy platforms often come with code that has grown over 20 or 30 years. Some of these platforms and applications still run on the Cobol programming language.

“They’re older, they’ve got a lot of logic and nuances that are not as easily migratable to cloud infrastructures,” said Neelesh Prabhu, managing director of architecture and enterprise services in information technology at the Depository Trust and Clearing Corporation (DTCC).

This means that firms have to execute on any modernization efforts in small increments. This is where APIs play a part—provided they’re done right. Using APIs, banks can move small processes/pieces to the cloud, and in doing so, de-risk the programs in question. 

“It’s the idea of using the API as a construct of encapsulation and the cloud to bring functionality quickly,” added Prabhu. The key to these platform conversions though, is that both the business and technology teams need to work together. The design of the API needs to make sense in the business context. 

A corporate actions opportunity

One area within the post-trade function that has recently made some progress is corporate actions. While still quite manual, efforts have gone into streamlining the process, and for some, that resulted in shortening the time it takes to process corporate action events. 

An example of this is BNP Paribas Securities Services, which has successfully shaved three to four hours from the time it took for its ops team to process corporate action events per day.

As part of its strategy to automate corporate actions functions, the bank implemented the Australian Securities Exchange’s (ASX’s) real-time corporate actions straight-through-processing (STP) feed. 

The feed delivers corporate actions event notifications to investors in an accurate, comprehensive, and timely manner. 

“Someone had to put it into a template, review it, validate it with a four-eye check, and input it into the system. But all of that has now disappeared,” Mark Wootton, regional head of local custody and clearing for Asia-Pacific at BNP Paribas Securities Services, told WatersTechnology.

Before using the STP feed, the bank’s corporate actions events team split the work into different buckets. For instance, companies whose names began with letters A through D would be managed by one corporate actions employee in the ops team, while companies beginning with E through G would be handled by another team member, and so on. 

We’ve fully automated the [corporate actions] reconciliation process using robotic process automation, and the beauty of having a staff member that is a bot is they can work around the clock

Mark Wootton, BNP Paribas

Then, as part of the workflow, employees would log on to both company registry websites and the ASX site to download a “daily diary” to contextualize and summarize large amounts of corporate actions information. 

For example, if a company announces a dividend, it comes as a 60- to 70-page PDF that the corporate actions team has to read and then translate into one message that can be sent to clients. 

Now that BNP Paribas uses the STP feed, it can also focus on innovating other parts of the corporate actions process. For example, as a custodian, BNP Paribas needs to collect clients’ instructions on the event, reconcile them, and send that information to the relevant share registry. 

“We’ve fully automated the [corporate actions] reconciliation process using robotic process automation, and the beauty of having a staff member that is a bot is they can work around the clock,” Wootton said. BNP Paribas has built two bots that fully automate the corporate actions reconciliation process.

Demand for corporate actions data

In line with the flow of data from the back office to the front, there is now more demand for corporate actions data from the front and middle offices. According to Virginie O’Shea, founder and CEO at Firebrand Research, this is due to the push to track more governance data as part of ESG. “Plus, the ongoing volatility and downturn in the market have increased focus on corporate events of note—when a corporate moves an event, it can even give you clues as to upcoming bad or big news,” she said. 

It is important for portfolio and fund managers to know details about corporate action events, such as the stock-split ratio, when a dividend was declared, or whether the amount increased. But as it turns out, they don’t necessarily have access to the feed the back office consumes.

Even if they did, the data might be in a format that is difficult for a layperson to digest. 

So, Exchange Data International (EDI) decided to launch Readable Corporate Action Notice (RCan), which allows users to read corporate action notices the same way they read the news. 

Jonathan Bloch, CEO at EDI, said this opens up the possibility for people in the front and middle office who don’t necessarily receive corporate actions feeds to read about what is happening in the corporate actions world. 

The problem with the fielded information is that it doesn’t necessarily contain all the details in a flowing way, so you don’t really get the narrative

Jonathan Bloch, EDI

He added that many large institutions use ISO 15022 datafeeds as the standard is used in the back office for corporate actions processing. But the challenge is that the information in an ISO 15022 message is presented in fields. 

“The problem with the fielded information is that it doesn’t necessarily contain all the details in a flowing way, so you don’t really get the narrative. That’s OK if you’re processing the data, but if you want to know from an inquisitive point of view what has occurred, it’s very different,” he said. 

RCan presents the information in a readable format, such as, “‘X’ company announced a dividend today of ‘X’ amount to be paid on ‘X’ date.” 

RCan covers 45 corporate events, including dividends, mergers and acquisitions, new listings, and stock splits. It aggregates corporate actions from over 150 exchanges globally. Bloch said EDI used machine learning to put the aggregated corporate action events data in a readable format. 

Amplifying corporate actions data

Data giant Bloomberg has been on a two-year mission to revamp and relaunch its Bloomberg Corporate Actions solution. The service focuses on ingesting and cleansing corporate actions data, which runs the gamut from stock splits, capital changes, distributions and cash dividends, mergers and acquisitions, rights issues, and spin-offs.

Bloomberg’s recent investment into Corporate Actions has centered on making data more complete on its side while delivering that information to clients in a more timely and accessible manner, according to Maureen Gallagher, the company’s head of enterprise reference data. 

“When we look at how we approach our corporate actions, we really look to have the best coverage that we can from that announcement. And to do that we’ve continued to invest in a team of corporate actions analysts across the globe who work to normalize these highly-complex and non-standard corporate action announcements to have an ease of integration point for our customers,” she said. 

The team of analysts is distributed across geographies and employs a follow-the-sun model, which allows for announcements made by Asia-based companies during their business day to be ingested, cleansed, and delivered to US-based clients while they’re asleep, and vice versa. 

On the technology front, Bloomberg has upgraded its datafeeds and established a consistent way to consume and interact with corporate actions data regardless of which Bloomberg product a client is using. 

At the same time, it has also made its corporate actions data available through APIs such as Hypermedia, the company’s Rest API that allows access to any capability or data that is accessible through the Bloomberg Enterprise Access Point, and Bloomberg Query Language, an API that Bloomberg launched in 2019, which allows users to run analytics in the Bloomberg cloud via Excel. 

“We don’t just want to solve a single use-case,” Gallagher said. “Our goal is to help support everything from trading use-cases to portfolio maintenance. It could be backtesting trading strategies or other back-office accounting and corporate actions processing workflows.”

DLT for the win? Wait to see

While the Australian Securities Exchange (ASX) has come under scrutiny for the many delays in replacing its Clearing House Electronic Subregister System (Chess) with a distributed-ledger technology (DLT)-enabled platform, to its eventual bowing out of the project, some firms are still persistent in proving DLT’s usefulness in post-trade.

One such example is the Asian Development Bank (ADB), which is working with R3 and a few others on a prototype for cross-border securities transactions using blockchain. 

As a technical expert, we need to provide a good technical foundation, step by step

Satoru Yamadera, ADB

Satoru Yamadera, advisor for ADB’s economic research and regional cooperation department, said, “As a technical expert, we need to provide a good technical foundation, step by step.” 

Yamadera added that the role of central banks and central securities depositories is figuring out the technical requirements of the network, which includes determining how many transactions need to be made in one day, or one minute. 

“We are not the ones to harmonize or standardize [those requirements], but at this stage, we think our proof-of-concept (PoC) will give the central banks and CSDs at least the minimum technical foundation so they can move to the next step,” he said. 

In late January, ADB—which assists its members and partners by providing loans, technical assistance, grants, and equity investments to promote social and economic development—launched a PoC with blockchain providers R3, ConsenSys, and Soramitsu and Japanese IT giant Fujitsu, to find out the extent to which blockchain technology can facilitate cost reduction and efficiencies in multi-currency, cross-border securities transactions. 

The project centers on bringing efficiencies to the clearing and settlement process for intra-regional cross-border securities transactions in the Association of Southeast Asian Nations (Asean)—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam—plus Japan, China, and the Republic of Korea (Asean+3). 

Still the jury is out on blockchain’s long-term viability in the wholesale capital markets.