Quantum leapfrogging
29 October 2014
The Asian market is taking evolution to the next step. Donal O’Brien of GBST explains the latest trend in the industry
Image: Shutterstock
As firms in the US and Europe have adapted systems to automate the trade lifecycle and grapple with fast-changing markets, the buzzword has been ‘evolution’. But many firms in Asia are using a different word: ‘leapfrogging’.
Taking a leaf out of the playbook of sectors such as the telecom industry, Asia’s financial firms have recognised that new technologies can let them jump straight to best-practice as they embrace techniques such as real-time processing, functionally aligned operations and outsourcing.
The net result is extremely high rates of straight- through processing (STP), lower costs and reduced operational risk. Asian markets are on the march again, and scalability is vital. Meanwhile, regulatory regimes in such a disparate region require firms to handle constant flux. In fact, many companies find themselves pedalling full-speed just to stay abreast of all the change. But those firms that adopt the ‘leapfrog’ mentality can gain a decisive edge.
“Tax authorities are increasingly imposing operational tax compliance obligations on the financial sector, and this trend is only set to increase,” says Martin Walker, head of securities tax at Deloitte.
“Examples include the imposition of common reporting standards for automatic information exchange and new taxes such as financial transaction taxes, both of which are expected to be introduced in the next few years. Ensuring that operational systems are ready for such developments could enable organisations to “leapfrog” those which are playing catch up.”
For anyone wondering whether Asia is still the world’s hotspot for market growth, the region’s equity and fixed income markets show an unambiguous trend. In the first nine months of the year, Asia Pacific stock markets have already risen 18 percent in dollar terms, according to the World Federation of Exchanges. Meanwhile, outstanding international debt securities issued in Asia have jumped 43 percent to more than $890 billion in the latest 12-month period, reports the Bank for International Settlements. Numbers such as these offer testimony to the strength of demand for Asian securities.
The clock never stops
One way companies in Asia are leapfrogging rivals is by moving to 24-hour operations. This has posed formidable challenges because back-office operations feature processes that require stable, or quiescent, data. Mark-to-market and corporate actions are two areas where quiescent data is critical. The traditional response has been to bring a system down for a batch run so nothing changes while a process is run. But new systems allow for snapshotting of data and moving it around a system, letting firms run processes in parallel.
Companies are also able to achieve efficiencies by aligning operations by function rather than asset class. The idea is simple: one group of people handles settlement regardless of asset class, another looks after confirmation processing, and so on. While many firms in the US and Europe have different operations for fixed income, derivatives or equity, it has long been recognised that aligning tasks by function offers scope for big savings.
But it can be easier said than done. In fact, unless your company has a consolidated infrastructure across asset classes, it’s almost impossible. Some have tried to retro-engineer operations by adding systems to existing silo-based solutions, but the cost is high and results invariably disappoint. Yet for those companies that move to 24-hour global platforms, there is the opportunity to switch to new workflow techniques with role-based activities.
Typically, these will be environments with 95 percent or more STP. In traditional operations, to address exceptions has required lists to be pulled and manual identification of fixes. But functionally aligned operations within high-STP environments can adopt a ‘push’ rather than ‘pull’ approach. Relevant issues are pushed at the right groups based on roles. What is more, those operations are frequently in different locations. Think of it in the same way that social media creates virtual communities. Instead of departments being defined by physical spaces where colleagues sit cheek by jowl, they are defined by expertise, where employees work together from far-flung locations.
Fine-grained outsourcing
Another part of the leapfrogging story is outsourcing. The concept has been around for years and the benefits are well known, with reduced costs and greater focus on core competencies among them. But some firms are going beyond custodial outsourcing. Brokers are learning they can outsource entire middle offices. It’s being talked about elsewhere, but it’s happening in Asia.
By reusing another firm’s infrastructure, a company can do more than just lower operational costs and risks. It can reduce capital requirements for clearing houses and exchanges, and that spells enormous benefits in Asia’s fragmented markets. Firms can also better cope with the regulatory change that has become a staple of market activity in Asia. Such change can be draining, adding mostly cost with few benefits. But if regulatory requirements can be pushed downstream to outsourced operations, companies can free up resources to focus on what matters: their business.
The downside to outsourcing—loss of operational control—is well known. But new technologies feature the possibility of fine-grained outsourcing. Firms in Asia are at the forefront of this trend. They can retain a view of certain parts of the production lifecycle, where they want to keep control, and outsource parts where they don’t.
Leading the charge
A good example of the new approach paying dividends is multi-contract booking, in which multiple entities are associated with a trade. A client in one country buying a stock in another may involve the trade being booked in different entities of the broker, potentially for legal or tax reasons. Settlement of such transactions needs to be as efficient as possible. By employing new infrastructures, firms in Asia are leading the way.
This is important as major markets move to T+2. Consolidated, rule-driven processing across different assets and markets allows for varying settlement regimes handled in one environment. This is a necessity in Asia and a good example of Asian infrastructure being ready for the challenges faster settlement timeframes represent in maintaining customer service and reducing market fail fees.
Markets never stop getting faster, more complex or more demanding. In such an environment, evolution may not be enough. To be in the game now requires a different mindset: a leapfrogging mindset.
Taking a leaf out of the playbook of sectors such as the telecom industry, Asia’s financial firms have recognised that new technologies can let them jump straight to best-practice as they embrace techniques such as real-time processing, functionally aligned operations and outsourcing.
The net result is extremely high rates of straight- through processing (STP), lower costs and reduced operational risk. Asian markets are on the march again, and scalability is vital. Meanwhile, regulatory regimes in such a disparate region require firms to handle constant flux. In fact, many companies find themselves pedalling full-speed just to stay abreast of all the change. But those firms that adopt the ‘leapfrog’ mentality can gain a decisive edge.
“Tax authorities are increasingly imposing operational tax compliance obligations on the financial sector, and this trend is only set to increase,” says Martin Walker, head of securities tax at Deloitte.
“Examples include the imposition of common reporting standards for automatic information exchange and new taxes such as financial transaction taxes, both of which are expected to be introduced in the next few years. Ensuring that operational systems are ready for such developments could enable organisations to “leapfrog” those which are playing catch up.”
For anyone wondering whether Asia is still the world’s hotspot for market growth, the region’s equity and fixed income markets show an unambiguous trend. In the first nine months of the year, Asia Pacific stock markets have already risen 18 percent in dollar terms, according to the World Federation of Exchanges. Meanwhile, outstanding international debt securities issued in Asia have jumped 43 percent to more than $890 billion in the latest 12-month period, reports the Bank for International Settlements. Numbers such as these offer testimony to the strength of demand for Asian securities.
The clock never stops
One way companies in Asia are leapfrogging rivals is by moving to 24-hour operations. This has posed formidable challenges because back-office operations feature processes that require stable, or quiescent, data. Mark-to-market and corporate actions are two areas where quiescent data is critical. The traditional response has been to bring a system down for a batch run so nothing changes while a process is run. But new systems allow for snapshotting of data and moving it around a system, letting firms run processes in parallel.
Companies are also able to achieve efficiencies by aligning operations by function rather than asset class. The idea is simple: one group of people handles settlement regardless of asset class, another looks after confirmation processing, and so on. While many firms in the US and Europe have different operations for fixed income, derivatives or equity, it has long been recognised that aligning tasks by function offers scope for big savings.
But it can be easier said than done. In fact, unless your company has a consolidated infrastructure across asset classes, it’s almost impossible. Some have tried to retro-engineer operations by adding systems to existing silo-based solutions, but the cost is high and results invariably disappoint. Yet for those companies that move to 24-hour global platforms, there is the opportunity to switch to new workflow techniques with role-based activities.
Typically, these will be environments with 95 percent or more STP. In traditional operations, to address exceptions has required lists to be pulled and manual identification of fixes. But functionally aligned operations within high-STP environments can adopt a ‘push’ rather than ‘pull’ approach. Relevant issues are pushed at the right groups based on roles. What is more, those operations are frequently in different locations. Think of it in the same way that social media creates virtual communities. Instead of departments being defined by physical spaces where colleagues sit cheek by jowl, they are defined by expertise, where employees work together from far-flung locations.
Fine-grained outsourcing
Another part of the leapfrogging story is outsourcing. The concept has been around for years and the benefits are well known, with reduced costs and greater focus on core competencies among them. But some firms are going beyond custodial outsourcing. Brokers are learning they can outsource entire middle offices. It’s being talked about elsewhere, but it’s happening in Asia.
By reusing another firm’s infrastructure, a company can do more than just lower operational costs and risks. It can reduce capital requirements for clearing houses and exchanges, and that spells enormous benefits in Asia’s fragmented markets. Firms can also better cope with the regulatory change that has become a staple of market activity in Asia. Such change can be draining, adding mostly cost with few benefits. But if regulatory requirements can be pushed downstream to outsourced operations, companies can free up resources to focus on what matters: their business.
The downside to outsourcing—loss of operational control—is well known. But new technologies feature the possibility of fine-grained outsourcing. Firms in Asia are at the forefront of this trend. They can retain a view of certain parts of the production lifecycle, where they want to keep control, and outsource parts where they don’t.
Leading the charge
A good example of the new approach paying dividends is multi-contract booking, in which multiple entities are associated with a trade. A client in one country buying a stock in another may involve the trade being booked in different entities of the broker, potentially for legal or tax reasons. Settlement of such transactions needs to be as efficient as possible. By employing new infrastructures, firms in Asia are leading the way.
This is important as major markets move to T+2. Consolidated, rule-driven processing across different assets and markets allows for varying settlement regimes handled in one environment. This is a necessity in Asia and a good example of Asian infrastructure being ready for the challenges faster settlement timeframes represent in maintaining customer service and reducing market fail fees.
Markets never stop getting faster, more complex or more demanding. In such an environment, evolution may not be enough. To be in the game now requires a different mindset: a leapfrogging mindset.
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