DTCC survey reveals several key challenges that emerged as market volatility surged throughout 2020
23 April 2021 US
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Although buy and sell-side firms’ post-trade operations (Ops) and operations technology (OpsTech) proved largely resilient during the pandemic, several key challenges emerged as market volatility surged throughout 2020, according to a whitepaper by the Depository Trust & Clearing Corporation (DTCC).
The whitepaper, which was conducted with assistance from McKinsey & Company, examines how capital markets operations responded during the COVID-19 pandemic and where market participants are focused in a post-pandemic future.
Cash fixed income and cash equities were most impacted by the pandemic-induced market volatility, with 30 to 35 per cent of firms across the buy-side and the sell-side reporting operational post-trade processing challenges in these asset classes.
From a processing perspective, settlements/payments and collateral/valuations were impacted the most, with 58 per cent of sell-side firms reporting challenges in settlement and payments during the peak of the pandemic.
Meanwhile, buy-side firms typically experienced less disruption to post-trade processes than sell-side firms due to simpler operational models, with the sell-side reconciling breaks and settling trades across hundreds of counterparties.
According to the whitepaper, feedback from market participants is overwhelming that they have passed the test of supporting unprecedented trading volumes at a time when nearly all Ops and OpsTech professionals were working remotely.
While some firms may have targeted areas to address and further automate in their post-trade lifecycle, two topics are likely to continue to inform strategies across the industry over the coming period.
DTCC predicts this will be the future of working from home, which remains uncertain, and the move toward shorter settlement times.
By focusing initially on a move to T+1 for US securities, firms can reduce counterparty risk and cut margin requirements, therefore lowering costs and freeing up liquidity for the benefit of market participants and individual investors, the paper explains.
that in order to move from T+2 to T+1, complete industry engagement is needed, DTCC’s Murray Pozmanter, head of clearing agency services and global business operations, recently noted.
The survey also highlighted that while the pandemic did not create an impetus for change in Ops and OpsTech due to largely resilient operations, a consensus emerged around where firms should focus next.
It was noted that sell-side and buy-side firms are aligned on the need to further simplify and standardize a subset of post-trade services which were hardest hit.
For the sell-side, these include making enhancements to reconciliations and confirmations capabilities, while the buy-side prioritised an increased focus on fails and collateral management.
According to the paper, more than half of firms who responded to the survey plan to increase capacity, build new capabilities or re-engineer post-trade processes.
Respondents highlighted the need for a continued focus on shortening settlement cycles due to the impact of the unprecedented trading volumes and volatility on liquidity and margin.
It was also identified that more than 50 per cent of firms plan to increase capacity in support of these processes.
DTCC found the stigma around working from home and productivity no longer exists, with many firms planning to retain part of the remote and flexible working model post-pandemic across post-trade operations.
Michael Bodson, president and CEO at DTCC, comments: “During, and in the immediate aftermath of the COVID-19 pandemic, the industry remained resilient, with buy and sell-side firms working seamlessly to support unprecedented volumes and ensure uninterrupted trading for clients and underlying investors.”
However, Bodson suggests opportunities remain for further optimising post-trade processes across the capital markets.
The impact of the pandemic continues to unfold, firms must keep their focus on delivering continued improvements to efficiency, while reducing risk, Bodson explains.
He adds: “At the same time, to unlock new sources of value and remain relevant to clients, a focus on innovation will be essential. The industry will need to embrace collaborative approaches, common processes, best practices and deploy operating models that continue to meet the evolving needs of market participants.”
The whitepaper, which was conducted with assistance from McKinsey & Company, examines how capital markets operations responded during the COVID-19 pandemic and where market participants are focused in a post-pandemic future.
Cash fixed income and cash equities were most impacted by the pandemic-induced market volatility, with 30 to 35 per cent of firms across the buy-side and the sell-side reporting operational post-trade processing challenges in these asset classes.
From a processing perspective, settlements/payments and collateral/valuations were impacted the most, with 58 per cent of sell-side firms reporting challenges in settlement and payments during the peak of the pandemic.
Meanwhile, buy-side firms typically experienced less disruption to post-trade processes than sell-side firms due to simpler operational models, with the sell-side reconciling breaks and settling trades across hundreds of counterparties.
According to the whitepaper, feedback from market participants is overwhelming that they have passed the test of supporting unprecedented trading volumes at a time when nearly all Ops and OpsTech professionals were working remotely.
While some firms may have targeted areas to address and further automate in their post-trade lifecycle, two topics are likely to continue to inform strategies across the industry over the coming period.
DTCC predicts this will be the future of working from home, which remains uncertain, and the move toward shorter settlement times.
By focusing initially on a move to T+1 for US securities, firms can reduce counterparty risk and cut margin requirements, therefore lowering costs and freeing up liquidity for the benefit of market participants and individual investors, the paper explains.
that in order to move from T+2 to T+1, complete industry engagement is needed, DTCC’s Murray Pozmanter, head of clearing agency services and global business operations, recently noted.
The survey also highlighted that while the pandemic did not create an impetus for change in Ops and OpsTech due to largely resilient operations, a consensus emerged around where firms should focus next.
It was noted that sell-side and buy-side firms are aligned on the need to further simplify and standardize a subset of post-trade services which were hardest hit.
For the sell-side, these include making enhancements to reconciliations and confirmations capabilities, while the buy-side prioritised an increased focus on fails and collateral management.
According to the paper, more than half of firms who responded to the survey plan to increase capacity, build new capabilities or re-engineer post-trade processes.
Respondents highlighted the need for a continued focus on shortening settlement cycles due to the impact of the unprecedented trading volumes and volatility on liquidity and margin.
It was also identified that more than 50 per cent of firms plan to increase capacity in support of these processes.
DTCC found the stigma around working from home and productivity no longer exists, with many firms planning to retain part of the remote and flexible working model post-pandemic across post-trade operations.
Michael Bodson, president and CEO at DTCC, comments: “During, and in the immediate aftermath of the COVID-19 pandemic, the industry remained resilient, with buy and sell-side firms working seamlessly to support unprecedented volumes and ensure uninterrupted trading for clients and underlying investors.”
However, Bodson suggests opportunities remain for further optimising post-trade processes across the capital markets.
The impact of the pandemic continues to unfold, firms must keep their focus on delivering continued improvements to efficiency, while reducing risk, Bodson explains.
He adds: “At the same time, to unlock new sources of value and remain relevant to clients, a focus on innovation will be essential. The industry will need to embrace collaborative approaches, common processes, best practices and deploy operating models that continue to meet the evolving needs of market participants.”
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