Incorrect standing settlement instructions account for 20 per cent of all trade fails, according to research commissioned by the industry-owned DTCC (Depository Trust and Clearing Corporation. And it’s, usually, human error.
The research, undertaken by TABB Corp, found that the failed trades amounted to significant operations costs and risk exposures for fund managers and their clients.
According to Paula Arthus, the president and chief executive of Omgeo, a DTCC subsidiary: “We have always recognized that the burden of managing SSI (standing settlement instructions) data has been challenging for the buy-side. It is a labour-intensive task, which can be more efficiently managed by the global custodian community because they receive the information directly from their agents,” she said.
“It’s for these reasons that DTCC created the SSI Utility, whose main goal was to get to 100 per cent coverage of SSI data in a centralized database. A key enabler for this initiative is to empower custodians to take ownership of SSI data management by accessing and updating SSIs stored in Omgeo ‘ALERT’ in an automated fashion…
“As we see more markets moving to shorter settlement cycles around the world, we would expect greater numbers of buy-side firms to delegate the automated management of SSI data to their global custodians, which will lead to more efficient trade matching and lower fail rates.”
On a visit to Australia last week, Arthus, who is also managing director of DTCC Data Services, said that two custodians, JP Morgan and Brown Brothers Harriman, had started to use the SSI operating model, to be followed soon by two other custodians before Christmas and another three early next year. There were also “a couple of dozen” investment managers on board, she said. The new system was underway.
Matthew Chan, Omgeo’s Asia Pacific head of product and strategy, said the technology was not really new, but Omgeo was streamlining it so that custodians can provide it in different forms.
“Everyone is more interested in making savings,” he said. “They are looking for every opportunity to squeeze out some benefits… This is also changing the way people think about data – who owns it and who needs to use it… I’m not sure who coined the term ‘operational alpha’ but it’s a good description of what we and some others are helping to provide.”
In its submission earlier this year to the Government’s Productivity Commissio9n review on super, Omgeo said: “We support the inclusion of operational efficiency as a key element of the Productivity Commission’s review of the system, as we believe this is an area where there are opportunities for on-going improvement and innovation which, ultimately, serve the interests of investors and retirees in the form of lower costs and lower risk in the superannuation system and, ultimately, higher returns for the community.
“To this extent, we believe there is benefit in including ‘process’ and ‘input’ indicators (Page 11 of the Commission’s Issues Paper) as part of the mix of measures used to assess the overall efficiency of the superannuation system. In particular, the extent to which the underlying financial system features and benefits from automation and straight-through processing (STP), harmonisation of standards and best practice, and innovation generally is likely to have a direct impact on rates of return.”
In a later submission, the company said: “In the spirit of completeness reflected in the current draft report we believe the Commission should strive to include in its assessment of ‘operational efficiency’ investment functions and processes described typically within the industry as ‘middle and back office’.
“We believe this is a key part of the ecosystem in which inefficient practices can create unnecessary costs and downside risk, at the expense of end investors’ returns.
“Furthermore, while the middle and back office is often defined in terms of processes occurring within each institution, we emphasise that many critical processes happen ‘between’ organisations as part of the investment ‘supply chain’.
“Also, while the superannuation process in Australia is currently very domestically oriented in terms of focus and the end investor segment it services, it will need to be more globally oriented in future.
“As part of the Commission’s review, we suggest operational functions and processes be assessed as they occur today in the Australian market as well as firms’ readiness to evolve and embrace global best practice and operational interconnectivity with overseas markets.”
* Greg Bright is publisher of Investor Strategy News (Australia)