Published on July 22, 2024 by Nikita Sushil
Asset managers are increasingly looking to outsource trade operations to gain tangible benefits such as improved returns due to reduced fees, greater operational efficiency and quicker adaptability to the fast-changing regulatory landscape. We list below why we believe that it could be an attractive proposition for firms of all sizes.
The pandemic super-charged the trend of outsourcing...The pandemic was a seminal moment for business in terms of technology adoption and new ways of working. Outsourcing functions relating to trade operations helped asset managers significantly amid events that caused market stress and spikes in volumes. Wider bid-ask spreads, historic price swings and the operational complexity that came with traders working from home underscored the value of routing orders to third parties for execution - so much so that even large firms with in-house trading desks saw value in delegating certain parts of the process.
…and we see significant potential as trade activity grows in key markets
As Exhibit 1 shows, cumulative trade volumes of certain key stock markets grew at a robust 10.8% CAGR over 2021-23. Institutional clients' growing trade volumes contributed significantly to this trend, suggesting strong potential for growth in demand for services such as trade confirmation and settlement solutions.
The dynamic regulatory landscape increases the compliance burden on asset managers…
Trade-settlement processes have been undergoing significant development recently, requiring market participants to optimise their trade-settlement processes to comply with new regulations.
The US Securities and Exchange Commission (SEC) announced key industry changes with respect to settlements in February 2023, to shorten the standard settlement cycle for US markets to T+1, with a compliance date of 28 May 2024. Markets such as Canada and Mexico have agreed on implementation by 27 May 2024 while others such as India and China have moved to T+0 settlement. Such regulatory changes have pushed firms to consider real-time 24x5 offshoring support.
…and compliance would always be a moving target; failure to comply could mean penalties and reputational damageA comprehensive revamp of the EU’s key trade-reporting and investment rules is underway, with changes to some aspects of MiFIR-D and MiFID II requirements announced by regulatory authorities, effective March 2024.
A recent Bloomberg article states that firms that trade derivatives will soon face an overhaul of transaction-reporting requirements under the European Markets Infrastructure Regulation, known as EMIR Refit. Regulators expect firms to ensure timeliness, accuracy and completeness of reporting to their relevant trade repositories from 29 April 2024. There have been instances of national regulators in Finland and Ireland imposing fines for EMIR reporting violations on the buy side for the first time.
This posits a strong case for outsourcing compliance support and trade reporting to meet changing regulatory requirements in an efficient way, enabling asset managers to focus on other core functions.
How Acuity Knowledge Partners can helpOur service capabilities in trade operations are uniquely positioned in the industry to provide firms with extensive support in this area. We have leveraged our experience over the past 20 years to solve some of the key challenges that our clients have faced. The institutional trading ecosystem has seen a spike in outsourcing of trade operations in recent years, and with our SMEs offering technical expertise in 10+ trade-servicing platforms, our clients get to choose from a wide array of trade operations services at different stages of the trade lifecycle. This helps them simplify their operating models and focus on what they do best, while we take care of the rest.
Sources:
https://www.bloomberg.com/professional/insights/markets/eu-regulatory-outlook-2024/
https://securities.cib.bnpparibas/t1-settlement-ready/
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About the Author
Nikita Sushil has 11 years of experience in performance models and risk analytics for fixed-income portfolios. At Acuity Knowledge Partners, she leads client engagements focused on analysing risk and performance parameters for bond markets. Additionally, she contributes through her domain expertise and collaborates with the Technology and Data Science teams on various projects. She commenced her career as an analyst with Northern Trust in the regulatory reporting space and worked briefly with Societe Generale in its Fund Accounting division prior to joining Acuity.
Nikita has been a CFA charterholder since 2018 and has completed her Bachelor of Commerce from Jain University, Bangalore, India.
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