Omgeo: Tricks of the trade – Tony Freeman
As the volatile financial market evolves to become more strictly regulated and increasingly electronic, much change is in store for post-trade operations. Tony Freeman, executive director of industry relations at Omgeo, outlines how its efficient post-trade processing capabilities and lifecycle management solutions can help banks at this unpredictable time.
Future Banking: The requirements of the global financial community are forever evolving. What are the major challenges you foresee in the next five years, especially in respect to post-trade operations?
Tony Freeman: Major regulatory reform of the global financial markets, market volatility and the increased 'electronification' of trade transactions - promoting smaller trades and higher volumes - pose some of the largest challenges to trade processing in post-trade operations. The increase in processing burden, even for smaller institutions, will become overwhelming and will make manual processing a near impossibility.
Increasingly, market participants want to make sure that their trades are affirmed as quickly as possible as a means of mitigating risk. The continued, widespread use of manual processes, such as email and fax, is problematic for individual firms and the overall industry. Market participants can only be as fast and efficient as their counterparties, and unless there is an industry-wide push for greater levels of automation, there will continue to be inefficiencies and increased risk in the trade lifecycle.
Can we talk about any new industry-leading products and solutions developed by Omgeo?
Changes in post-trade processing are shaped by clients' needs and regulators' requirements. We continuously adapt our solutions to ensure they are developed in line with industry and regulatory developments and responsive to clients' needs. An example of this is Omgeo's move into providing OTC derivatives collateral management capabilities through our Omgeo ProtoColl service. This service enables clients to better manage their counterparty risk and optimise their collateral use.
In addition to this, over the past year, we have diligently worked with our community to further enhance the value of Omgeo ALERT, the world's largest database for settlement and account instructions (SI). We recently announced new capabilities within ALERT, including SI Compliance Scan - where clients can measure the quality of their SI data by identifying, reviewing and correcting invalid instructions. This new functionality enables users to reach 100% compliance more quickly. In fact, nearly 80% of all SI instructions stored in ALERT are now compliant. We plan to build on these improvement rates with our community.
We also launched a new service for hedge funds, and their executing and prime brokers, which represented a new model for the central counterparty clearing of OTC equity transactions. The pan-European equities matching and central counterparty clearing (CCP) service links Omgeo Central Trade Manager (Omgeo CTM), our central matching solution, with EuroCCP's CCP service, which clears and settles pan-European cash equity trades. The service allows executing and prime brokers to clear hedge fund transactions, streamline the processing flow and mitigate the counterparty risks associated with institutional cash equities transactions.
Tell us more about Omgeo's 'value proposition'. How do you distinguish your services from those of your competitors? What drives your major customers towards Omgeo?
Omgeo's value proposition is based on reducing our clients' total cost of ownership and lowering their operational and counterparty risk. At a time when firms' margins are shrinking and regulation is increasing, we have found this proposition to be well received. We work tirelessly to offer our clients a compelling total cost of ownership compared with manual processes, local matching and point-to-point connectivity. The central nature of our solutions promotes an efficient process with instant connectivity to over 6,500 global trade counterparties.
We have found that more and more participants are turning to automation to increase efficiency and reduce costs. No longer can the industry allocate staff to a manual problem or offshore to low cost labour areas. While there is a time and place for adding resources and offshoring, over the past five years we have seen a significant move towards automation.
Omgeo's solutions significantly promote straight-through-processing (STP) and our clients tell us that the cost of processing an automated STP transaction is much lower than processing a non-STP trade. In fact, this year, we saw 40% year-over-year client growth on our Omgeo CTM central matching service (as of Q1 2011). Today, over 600 investment managers and broker-dealers worldwide have adopted Omgeo CTM to process an average five million total allocations a month.
What can you tell our readers about errors to avoid when putting in place strategies to enhance post-trade, pre-settlement trade management?
Regulatory reform in the financial markets is currently at its most active. Clients know that reform is happening, and they know that this will result in significant changes in the financial markets infrastructure. In turn, they recognise that their own systems and processes will have to be reviewed in line with the evolving landscape.
Firms need to ensure that the systems and strategies they implement are flexible so that they can be adapted to new processing requirements. It is important that firms choose service providers that understand their business requirements and potential growth plans. As firms grow - both in terms of expanding across asset classes and geographies, and as their trade volumes increase - they need a strategy for post-trade management that includes a flexible, reliable and robust post-trade infrastructure.
What are the next significant changes for post-trade infrastructure?
The global financial crisis of 2008 acted as a catalyst to market infrastructure changes. The next significant development in the post-trade space will be the move to a harmonised T+2 settlement cycle in Europe, as well as changes to the processing of OTC derivatives on both sides of the Atlantic.
The European Commission advocated T+2 as the favoured settlement cycle for Europe in its consultation paper on the regulation of central securities depositories. It is predicted that this will happen within the next three years. The smooth transition to T+2 will be dependent on a number of important operational and environmental prerequisites, and if the goal of shorter settlement cycles is to be achieved, market participants will need to re-engineer operational processes and create higher levels of post-trade automation.
OTC derivatives reform will see most bilaterally cleared products move to central clearing. In turn, this will likely result in processing complexity in the post-trade collateral management space, as firms will have to manage their collateral in a new 'mixed' bilateral and centrally cleared environment.
What are the key problems right now for market participants looking to mitigate risk and ensure adherence with the most pertinent regulations?
The default of Lehman Brothers highlighted the issue of counterparty risk and the importance of firms having a consolidated view of their exposure on a near real-time basis. Market participants know that exposure to a high level of risk can cause firms both financial and reputational damage. There is an increased pressure from policymakers, regulators and investors to manage, report and mitigate this risk.
The challenge for market participants is to demonstrate that they have both an accurate and holistic view of their risk exposures, together with timely and accurate reporting on an institution-wide level. Automation of trade processing across the lifecycle is the only way to achieve this.
What's next for the post-trade industry?
Regulation will ultimately be the biggest driver of change. In the US, regulators will have to enact 243 rules in Dodd-Frank Act, conduct 67 studies and issue 22 periodic reports across topics such as OTC derivatives, systemic risk and transparency. Europe continues to focus on post-trade market infrastructure reform as a means of mitigating operational, counterparty and credit risk via MIFID, EMIR and CSD regulation.
This includes harmonising the practices of central securities depositories and settlement cycles, implementing interoperability in cash equities clearing, and reforming the execution and processing of OTC derivatives, which will all place increased pressure on companies' middle and back-office operations.
To be successful, market participants will need to work closely with global policymakers, regulators and their peers to ensure that standards, workflows and processes are developed in line with market needs.