Investment in derivatives post-trade set to soar

Dan Barnes
Will Mitting, founder and managing director of Acuiti.

A new study by analyst firm, Acuiti, released in a whitepaper entitled The Growing Need to Invest in Derivatives Post-Trade, sponsored by Broadridge Financial Solutions, has found that 95% of tier one and tier two banks plan to invest more in derivatives post-trade operations over the next three years than in the last three.

Will Mitting, founder and managing director of Acuiti, said: “The unprecedented volumes experienced during the spring volatility confirmed what many in the market have known for some time: investment in post-trade has lagged behind other sell-side operations. There is no quick fix to replacing core back-office technology. But firms that have invested report huge increases in efficiencies and reductions in operational overheads.”

Almost half of tier one and two banks are expecting to invest more than US$5 million over the next three years in long-awaited upgrades to post-trade processing capacity.

Acuiti found that the record volumes in derivatives markets during the initial spread of Covid in March and April 2020 pushed post-trade infrastructures to breaking point at several institutions.

This has resulted in a re-evaluation of the investment case across the sell-side and a sharp shift in attitudes to investment.
The whitepaper also analyses the current pinch points in post-trade operations and the drivers of future innovations.

Other core findings were:
• Concern over the ability of existing post-trade infrastructures to handle high volumes, and a desire to lower running costs, are the key drivers of investment;
• Brokerage payment and static data are the most inefficient processes for tier 1 & 2 banks; client and transaction reporting are the weakest areas for non-bank futures commission merchant (FCMs);
• Some 22% of overall respondents would consider fully outsourcing their post-trade operations to a managed services vendor if there was greater choice in the market; for non-bank FCMs that number rises to 40%;
• Artificial intelligence is predicted to be the technology that drives the biggest increase in post-trade efficiency over the next three years;
• Executives across the sell-side are calling out for greater standardisation of data between the FCM and central counterparty (CCP), and between the FCM and client.

The whitepaper concludes that the volatility induced by the Covid crisis represents the final warning for many firms that have long known they would need to update their post-trade technology platform but had been putting off investment on account of giving higher priority to investment elsewhere.

“Post-trade has been an overlooked segment of the derivatives industry, but advanced new solutions are available to solve issues that the industry is currently facing with incumbent technology,” says Justin Llewellyn-Jones, head of capital markets for equities, FX and derivatives at Broadridge.

©The DESK 2020