New Research Provides Snapshot of Asia’s Clearing & Settlement Practices
The first comprehensive study of post-trade processes in Asia Pacific has revealed highly varied levels of automation in post-trade processing for equity and fixed income trades across the region’s markets.
The study, published by InsightAsia Banking & Finance Consulting, a division of InsightAsia Research Group, and commissioned by Omgeo, found that reputational risk, the need to comply with increasing regulation and cost reductions are the key drivers for lifting automation levels.
Almost 95% of market participants believe improvements are required in post-trade automation, according to the research, which is based on interviews with 100 senior operations executives from domestic broker/dealers, investment managers, custodian banks and other financial services firms across 13 countries in APAC.
Matthew Chan, Regional Director of Strategy at Omgeo, said fund flow into and across the region is increasing as Asia Pacific cements itself as an important economic hub.
“Yet, according to this landmark study, the region’s financial markets feature varying levels of maturity in post-trade automation, which can have a direct impact on their ability to manage higher trade volumes and satisfy compliance requirements,” Mr. Chan said.
“Managing operational risk associated with the trade matching process is essential to ensuring financial market safety and integrity.”
Despite a growing awareness of the benefits of automation, there are major disparities in the levels of adoption and sophistication between asset classes and firm types. Overall, the level of middle office automation is rated at 71% for equities and 55% for fixed income but country-by-country variations also exist, with Australia exhibiting the highest automation levels at 88% for equities and 69% for fixed income trades. Other highly automated markets include India, Hong Kong, Singapore, Japan, Korea and mainland China which score around a tight 70-80% band for equities and 50-70% for fixed income. Markets which have the lowest level of automation are Taiwan, the Philippines and Vietnam.
The study also found domestic brokers lag their international peers in embracing trade automation, particularly for fixed income transactions where manual trade matching is more than twice as prevalent amongst domestic brokers as amongst their international peers, which carries greater operational risk.
Firms interviewed cite a number of business drivers for increasing middle-office automation, including reputational risk, regulatory compliance and cost efficiencies:
- Reputational risk: In order to manage growing intra-regional and global fund flows as well as multi-asset investing, greater levels of middle office automation is required to ensure successful cross-border settlement. In fact, one in three respondents highlighted reputational risk concerns with trade settlement failure as a reason for increasing middle office automation.
- Regulatory compliance: Firms highlighted the need to achieve compliance with global regulations and initiatives. 67% of investment managers and 53% of brokers rated this as the top driver for pursuing greater levels of automation in the middle office.
- Cost reduction: Firms continue to focus on reducing their total cost of operations, with automation viewed as a way to achieve cost reduction, according to 20% of investment managers and 42% of brokers.
Phillip King, author of the InsightAsia report, said: “The key to this study was to get senior operations executives across the 13 APAC countries to describe their automation procedures in a uniform manner that allowed objective benchmarks to be established between countries and different firm-types.”
“Automation is increasingly mandated by participants in the global financial markets, yet in emerging APAC countries, the decision to invest in trade processing automation is often a complex balancing act between the lower cost of labour, increasing risk and compliance requirements and the need for scalability and flexibility to keep up with front office activities. Trade processing efficiency is one area that fund managers look closely at in assessing a country’s investment attractiveness. Higher levels of trade processing automation can make a tangible contribution in attracting international investment over the longer term.”
Mr. Chan added: “InsightAsia’s research shows market participants in Asia-Pacific are positive about the benefits of automation. The equity markets already demonstrate relatively high automation rates for a growing market. The fixed income market at 55% automation requires attention, but this follows a similar pattern globally. The fact that nearly all respondents cite a need for improved automation suggests that the region has significant ambitions when it comes to becoming a more truly efficient market.”
The study also found that respondents are monitoring progress of industry initiatives, such as the global move to shorter settlement cycles and the ASEAN Trading Link, as additional drivers for pursuing best practice in trade processing across the region.