The financial industry, and in particular its regulators, are demanding far greater levels of insight and awareness into trade execution and post-trade risks, as well as the effectiveness of the controls in place to reduce or mitigate these risks. Compliance regulations like the Basel Accords mandate a focus on operational risks which forces financial organisations to identify, measure, evaluate, control and demonstrate effective management in this area.
Core to these risks is the impact of incorrect trade and settlement details across the whole firm. Errors can result in much higher costs and risks in other parts of the business, however there is a disproportionate focus on the cost to the operational areas handling the settlement process.
Firms need accurate trade data on trade date. This isn’t just a settlement requirement; risk control, treasury, collateral management, management information, regulatory reporting, finance and other business functions are all dependent on trades being recorded correctly.
Errors need to be identified and corrected quickly. The longer this takes:
- The greater the cost of fixing them across the firm
- The greater the risk that a decision (or lack of a decision) results in a loss or regulatory breach.
The bottom line is that, despite investment in post-trade middle office systems, in today’s world settlement processing doesn’t identify trade errors quickly enough. Batch processes and timing differences mean a minimum of several hours may lapse before issues are identified. In many cases it takes much longer – an average of 8% of trades are still unmatched on settlement date1. How can managers know that the controls they are relying on are effective when they don’t have an agreed trade? How can they be confident they are going to hit the CSDR target of 99 .5% settlement2, when currently we see around 97% in many of the liquid bond markets?
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