The outbreak of intense volatility that hit global markets last month marked the first major test for global derivatives clearing members since the outbreak of Covid-19 in February and March 2020.
While there were several reports of defaults and vast margin calls going out across the industry, the operational resilience of GCMs was put through a rigorous test and demonstrated the progress that has been made since the spring of 2020.
Back then, several GCMs were overwhelmed with the volumes resulting in trades going unbooked and severe operational stress across the industry.
In inaugural Clearing Management Insight Report, a new quarterly report from Acuiti based on a survey of Senior Executives from across global clearing members, we took a deep-dive into what had changed and what still needs to change on the long road to operational resilience.
The survey was completed before the Russian invasion of Ukraine but pre-empted the greater ability of GCMs to deal with volatility spikes. Overall, almost all firms that took part in the study reported that their business were either significantly (30%) or somewhat more resilient than in March 2020.
This resilience emanated primarily from investment in technology and increased efficiency in internal processes cited by 38% and 31% of respondents respectively as the biggest drivers of improvement.
Investment in post-trade has been the major focus in this respect. Every firm surveyed said that they had either invested recently in post-trade or were planning to do so. Around a fifth of respondents had already made major investments and most of the others were in the process of doing so.
Aside from greater resilience in post-trade, a major focus for firms is in achieving greater front-to-back efficiency. Today, many firms operate complex technology infrastructures in which trades are passed between systems with high levels of manual intervention, creating the risk of human error in normal times and operational overload in times of market stress.
The result of this, the study found, is that less than a third of firms achieve the industry best practice of more than 98% no-touch STP rates on an average day.
Better front-to-back integration was a strategic goal for 97% of respondents to the study with 82% saying it was very important to their approach to investment. The main reason for firms seeking greater front-to-back integration was the ability to scale up their business during busy periods followed by reducing the overall cost of ownership and better customer service.
While the clearing industry is firmly down the path towards greater internal resilience and efficiency, however, there has been less progress on many of the cross-industry issues that exacerbated the operational strain in March 2020.
Top of the list of these issues was a lack of standards for cross-industry communications, which was said by 70% of firms to be a major factor in trade breaks still. Late or incorrect allocations details from brokers or clients was the second biggest challenge, cited by 47% of respondents as a major factor.
Similarly, when it came to the allocation process, a lack of averaging standards and the timeliness and accuracy of third-party broker allocations were the top two challenges.
Intra-industry operations remain fragmented and complex, introducing risk into the system, particularly when volumes spike.
At the end of last year, the FIA launched a blueprint to modernising trading processes. The report called for the development of common data standards and processes for give-ups and allocations.
The focus of the industry over the past two years has been on internal resilience. The next phase is expanding that resilience across the industry. It will be a longer and harder path to tread but one in which will result in a significantly more efficient industry for all.
Download the full report here: https://www.acuiti.io/clearing-management-report-q1-2022/