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Despite fundamental changes to the frontend of the capital markets, middle and back office of the trade has remained largely intact in the past decade. The inherent complexity of post-trade process makes it both a legacy stronghold and a goldmine of potentials. And in this sense, most financial services companies are both the implement and the victim of the current arrangements. Technology advancement, however, offers new possibilities and in some cases, as we will see, heralds changes that are on the way.
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Read moreThe growth of market size and trading volume means that the infrastructure of the capital markets in Asia-Pacific need to upgrade. While the front office of trading organizations is typically lean and therefore less impacted by a spike of volume, the middle and back office have felt the mounting pressure from higher requirement on the processing speed and volume. But required changes go beyond speed, as the market is also becoming more complex. Market participants not only need to keep pace with a fast-growing trading volume and increasing complexity but are expected by their clients to enhance reporting services too. Asset managers, banks, and insurers have been under increasing regulatory pressure to enhance the trade-related accountability and are making higher demand of the sell-sides they work with.
A fast-growing market and a more demanding client base have exposed several operational weak points of the industry’s current operations. As volume and complexity keep growing, this will increasingly become a bottleneck of the industry. For institutions and retail investors alike, lack of speed results in capital being locked up, and exposes them to more counterparty risks. The current operations to process trades is costly too. Various estimates put the global post-trade processing cost at US$20-40 billion a year (and counting). Speed and costs aside, market participants are also exposed to more operational risks. Last but not the least, more stringent regulatory requirements also mean that institutions are more likely to see compliance issues.
Despite the challenges, the technology development has provided the industry with possibilities to make the post-trade processing cheaper, faster, and better. More firms are rethinking their post-trade operations and trying new ways to upgrade them.
For most established companies, modernizing the legacy system is a politic, if expedient choice. The systems are still working and are mission-critical. The agility and flexibility coming with microservices and native cloud technologies are of considerable worth in modernizing the legacy systems.
Some of the financial services companies may decide to build a new solution by themselves or try to acquire such capabilities through deals.
Many companies in the Asia-Pacific region find themselves in expansion mode, and thus may find new solutions more appealing a choice. More trading asset classes and cross-border fund flows give both sell-side and buy-side institutions the justification to upgrade their middle and back office.
This is made more urgent by the quick geographic expansion of the business.
Most of the challenges faced by the industry will persist unless the industry is willing to change. Capital market participants will have to deal with heightened regulatory requirements, pressure on margin, intensifying competition, all while managing growth rate unique to the Asia-Pacific market. Nevertheless, they do not have to continue to deal with these challenges the same way they used to. And it is the new way of doing business that will carry them far despite those seemingly insuperable obstacles.
