Post-Trade Processing, Part I: Implications of a Truly Global Market

As global investing continues to accelerate, the need for a common settlement cycle, common communication conventions and common systems is growing more critical each day.

As the industry reflects on the global financial crisis of ’07-’08, the post-trade space offers a tale of the noteworthy drivers that continue to shape changes in the capital markets. In considering where the industry is headed, key drivers of market evolution such as cross-border trading activity, capital market constraints, fee pressure from clients and the resulting thinning margins must be taken into account.

Investing is increasingly a global business. While international, emerging and frontier funds are nothing new for investors in developed markets, local allocations to these strategies are growing as the share of global GDP and wealth rises over the long term. Additionally, while it is easy to fall into the trap of thinking capital is coming only from a few markets, that is not the case. Though growth may be muted, economic development, the maturation of capital markets, and the increasing wealth of local investors are all undeniable. Investors in developed markets are making allocations in developing nations in increasing amounts for the long term. And given increased liberalization, investors in developing nations are no longer limited to their domestic markets. The increasing speed of trading strategies and market activity is also pushing this evolution.

Such change has great significance for the business of trading, clearing and settlement. One major challenge is bringing settlement cycles into alignment. Developed markets largely operate on a T+3 basis, and while some have been more progressive, most developing markets generally run T+5 or longer. Continued acceleration of developed market investment in developing markets is driving a compression of these windows from T+5 to T+2. This pressures all parties involved – investment managers, their broker-dealers, the exchanges, custodians and technology providers.

The lack of common settlement cycle, communication conventions and systems mean that errors and inefficiencies are inevitable. Trading message protocols require translation into settlement messages as they pass from execution systems into middle- and back-office workflow.  This results in a lot of pain and expense for all parties. Indeed, a long-held goal of many in the institutional marketplace – moving to T+1 globally – encounters the most simple of challenges: time. As Brazil looks to settle, Australia is in bed. Nevertheless, solving for these challenges is necessary, as global investing will only increase over the long term.

Trade organizations – such as ISITC, an industry trade group focused on standards in transaction processing and related communications – are seeking to create common business standards, especially in terms of data content and responsiveness. This will streamline industry operations and promote healthy functioning of the global capital markets.

From a business standpoint, it behooves all parties – large and small – to participate in this consensus-building. With consensus, the market can anticipate the necessary evolution and greater streamlining in years to come.

Gary Probert is a managing director at Citi and a board member of ISITC.

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