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18th January 2024 | Insights

Derivatives reconciliations: the path to perfect

In 2021, Acuiti was commissioned by HelloZero to conduct a study into derivatives reconciliations processes across the sell-side. In the wake of the covid-19 pandemic and the associated unprecedented level of volumes and operational disruption in listed derivatives markets, we found reconciliations were in need of investment.

Investment in post-trade had long been de-prioritised as budgets were focused on front-office efficiency and speed of execution and risk management. However, the test of the pandemic proved the importance of back-office resilience and accelerated a trend towards viewing efficiency as a front-to-back consideration and post-trade as a key source of operational weakness.

As a result investments in reconciliations were at the forefront of many firms plans in 2021.

In Q4 2023, we worked with HelloZero to find out how far the industry had come since 2021 in improving the efficiency of derivatives reconciliations.

Back in 2021, manual processes remained prominent while few firms had fully automated their derivatives reconciliations and many still remained dependent on spreadsheets for core processes.

Two years on, there has been significant progress across the market. Of the firms that took part in the survey, 39% had fully automated their reconciliations processes, including 44% of tier 1 banks.

Despite the advances, there is still some way to go on the road to efficiency. One area of improvement for many lies in the continued use of spreadsheets for reconciliation.

A third of the network still reported using spreadsheets as part of their core recs process, while only around a third had removed it entirely from their reconciliations process.

Challenges also remain for firms when it comes to capacity. Over a third of respondents said that their platform frequently struggles with high volumes. The ability to add new processes and instruments also continues to be a challenge for many firms.

Investment in reconciliations is an ongoing process for the sell-side. But priorities have changed since 2021. While risk reduction remains a key theme for firms today as it was in 2021, shortening settlement times and increased capital efficiency have become significantly greater areas of focus, reflecting a welcome move to optimization.

However, there is still some way to go to a fully automated environment across the market. Firms still reported capacity issues during volatile markets and challenges in adding new products or processes.

The latest report also found that investment in reconciliations is slowing. This is partly a result of the success of investments to date. But it presents a risk as volatility and volumes are only going upwards.

Another risk for firms that reduce investment is the loss of a competitive edge as their rivals continue to invest. Reconciliations have moved from being a mundane back-office process to an edge. For firms that continue to invest, that edge will sharpen.

To read the full report, visit: https://hellozero.com/the-path-to-perfect