Same-day affirmation could save €200m a year

Brussels debate highlights misalignment of incentives as reason behind lack of automation

LONDON/BRUSSELS – A new report shows that automation of the trade verification process improves settlement performance for securities firms in Europe and reduces operational costs and risks, with benefits to end-investors.

The Omgeo-commissioned report by Oxera, a European independent economics consultancy, and Omgeo, was launched at an event in Brussels where leading industry figures discussed the findings and examined how increased efficiencies in the middle office play a crucial role in making Europe a more competitive financial market-place.

The key findings of the report included: automated same-day affirmation (SDA) processes lead to reduced operational risk and improved settlement: settlement failure rates for clients with automated trade verification processes can be as much as 50% lower than for non-automated clients; operating costs are reduced through automated SDA as it allows a larger volume of trades to be processed without a corresponding increase in costs – mainly middle-office staff – and risk. Efficiency gains from adopting automated SDA also translates into lower transaction costs for end-investors, and the benefits are enhanced through the market-wide adoption of SDA, according to the report. It also states that trade verification and SDA should be part of European policy debate, and that there are a number of ongoing initiatives aimed at building efficiencies in the European post-trade landscape. The report concludes that trade verification, and how to improve this process by working towards automated SDA, should form part of the policy debate.

Commenting on the report findings, Simon Haggerty, managing director, UBS, said: “Same-day affirmation is arguably the single most important initiative to progress cross-border securities' productivity and risk management. Oxera's paper provides timely focus on this topic. By representing the financial benefits of SDA to the market so clearly, it provides a compelling logic for all manual parties to automate. I welcome the debate, in regards to how best we can move the European market forward in this space.” “UBS still dispatches several million fax confirmations a year. In our experience, trades with such non-automated clients have a settlement failure rate twice as high compared to our automated clients,” he added.

Leonie Bell, managing consultant at Oxera, said: “The trade verification process is still conducted manually by many market participants in Europe, in particular on the buy side, and there is currently no uniform practice and often not even a target to complete the process and affirm trades on trade day.

“Our research suggests firms adopting automation to achieve SDA can expect significant reductions in the risks and costs associated with trade verification and other post-trading processes, and an improved settlement performance. There are also further benefits for other parties in the value chain. Given these findings, the question is what steps should be taken for the market to realise maximum benefits.”

Marianne Brown, president and CEO of Omgeo, said: “This report by Oxera shines a light on a critical, but previously overlooked, part of the trade lifecycle. Much focus has been given to the pre-trade/trade space with Mifid, and to the back end of the trade lifecycle with clearing and settlement, but the middle-office trade verification process, which provides a vital link between the front and back office, has to date, been ignored.

“This report highlights the dangers to the industry in terms of risk and cost of not adopting automation of trade verification and SDA, particularly in times of market turmoil as we are experiencing currently. We hope these findings will create a call to action and bring this issue to the fore of the European policy agenda in order to create a more efficient community in Europe.”