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“However, people are finding it difficult to grasp all of
their internal costs, and because the front and back-offices
remain segregated, it is difficult to have that end-to-end
view.”
Raising awareness
The Liquidnet study also showed half of back-office
respondents were not aware of what the cost of trading
would be for their organisation.
One reason for this is the difficulty of calculating costs
across asset classes. It may be relatively straightforward to
calculate accurately the post-trade costs for a listed equity
trade, but calculating the costs for a bilateral OTC swap
“Firms are now realising you need to get the best deal on all
sides of the trade.”
ALEX KRUNIC, HEAD OF SALES AND RELATIONSHIP MANAGEMENT FOR GLOBAL
BROKER-DEALER SERVICES, SOCIETE GENERALE SECURITIES SERVICES
can be more complex.
Regulations such as MiFID II and OTC derivatives
requirements have increased the volume of trades that
middle and back-office teams must deal with on an intra-
day basis, adding more checks and validations to various
processes and driving up the costs further.
There is also a new focus on settlement failure, with the
Central Securities Depository Regulation (CSDR) on the
horizon. The regulation will impose a penalty regime,
which include fines and mandatory buy-ins, for those who
fail to settle on time. The Liquidnet study showed just 12%
of respondents currently obtain real-time information on
settlement fails, limiting their ability to prevent them.
As a result, settlement costs have gone from a back-office
concern to a potential basis point impact calculation for
the front-office. Though CSDs will net the daily fines that
result from CSDR infractions in Europe, the sell-side will
likely have to bear the costs rather than pass them directly
through to the client.
“CSDR will have a massive impact on profitability, and
firms will have to reassess their settlement operations to
avoid penalties. They will need better pre-settlement data
sets to reduce fails, and to fix any problems before the
trade is due for settlement,” adds Krunic.
There are also best execution requirements, in which
firms must demonstrate to their clients that the service
provider they are selecting for all pre- and post-trade
services is carried out at the best price.
“Firms have to address the whole value chain to show
how they are going to save costs for their clients,” says
Wayne Riches, director for strategy and solution manage-
ment, FIS.
“The focus is more around what trades are costing the
most, and from that perspective, it is around the implica-
tions of technology and potential outsourcing options that
can create best execution.”
However, pick-up by asset managers to look at their
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Global Custodian
Fall 2018
post-trade costs has been relatively slow,
largely because of a lack of accurate data
sets that allow firms to compare and
contrast their clearing, settlement and
custody costs.
“People want to focus on what the
cost per trade is, and while this practice
has been around for years, there is an
increased focus on that analysis as a way
to break down the operational costs of the
post-trade environment. However, there
is no single place to pull this data from as
every broker-dealer is different with vary-
ing business models,” says Stuart Warner,
European head of product, broker out-
sourcing at HSBC Securities Services.
According to SGSS’ Krunic, the pace of
adopting post-trade cost analysis will take
time as these data sets begin to develop.
“To do so, firms will need a better data
set, and to get this they will need their
own technology to be streamlined to
capture and present it in a holistic view,”
Krunic explains.
Assessing technology
All sides of the transaction will have to
look at their technology in order to both
compete on cost and ensure they are get-
ting the best price. The Liquidnet study
explained 77% of buy-side firms are prior-
itising investment in technology upgrades
across both the front- and back-office to
ensure compliance.
Yet this is not a simple process. Many
have only just realised in recent years that
current legacy technology platforms are
not fit to keep up with complex regulatory
requirements. For broker-dealer clients,
outsourcing their post-trade operations
could become a more attractive option
to avoid the costs with upgrading their
systems.
“For banks and broker-dealers in the
post-financial crisis period, a lot have
spent their budgets on reacting to regula-
tion rather than improving their tech-
nology. As a result, updating and keeping
those legacy platforms operational has
become costly,” adds HSBC’s Warner.
“Combining the cost of regulation and
maintaining platforms, while also trying
to bring down the fixed cost of trade, you
end up at a point where outsourcing can
be beneficial where they are only charged
on a variable basis per trade.
The outsourcing of middle and back-of-
fice activities by banks has been lim-