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A Better Way to Manage Trade Exceptions

by Hasan Rauf, Executive Director/Head of Business Development – APAC, DTCC | November 6, 2019

A Better Way to Manage Trade Exceptions
Hasan Rauf, Executive Director/Head of Business Development – APAC, DTCC

In a study conducted by the TABB Group across a broad range of investment managers, it estimated that mid-sized investment managers could reduce their exception management overhead by between US$1 million and US$2 million annually through automation.1

Anecdotal evidence shows that the challenges arising from trade exception management are not restricted to any one country or region. In late 2018, DTCC asked operations professionals from firms in Singapore, Hong Kong and Australia about this area, and 82% emphasized manual processing challenges when resolving trade exceptions.

When asked which activity consumed a significant amount of a firm’s time managing and monitoring trade settlement, we found that more than half (59%) spend a significant amount of time manually monitoring trade settlement and identifying and correcting exceptions, costly and resource-intensive tasks. The findings also highlighted the need to review existing post-trade processes in order to develop a more streamlined way to prevent trade failures.

Consequences of trade failures are significant. In fact, one industry publication reported that a global failure rate of just 2% can result in costs and losses of up to US$3 billion.

So, what is the way forward? In the absence of a centralised industry platform, manual intervention remains a key method of resolving trade exceptions. Additionally, trade matching data is often consumed and processed from disparate systems adopted by various counterparties and market infrastructures, which can conceal the root cause of trade failures.

Based on our work with the industry, we’ve uncovered that, on average, one trade exception can result in a chain of up to 30 emails, introducing unnecessary operational risk for market participants. Our clients have disclosed that pain points in the middle and back offices are most often caused by: email (82%) being used to communicate between counterparties, followed by missing or incomplete standing settlement instructions (75%), manual processes in post-trade matching (73%) and incorrect settlement locations for either party (71%).

A common platform leveraged by market participants could address the current state of trade exception management and provide users with the data and collaboration functions needed to reduce the time and effort related to resolving trade exceptions.

Ideally, all firms in the trade lifecycle would leverage a common platform to communicate in real time and resolve post-trade exceptions. This includes buy-side firms, custodian banks, prime brokers, outsourcers and their underlying clients, broker/dealers, clearing brokers and other settlement agents, ensuring a global view of “at risk” trades and eliminating the need to manage multiple counterparty feeds. The common platform would provide custodian banks with visibility into their clients’ trades and create a more proactive exception resolution process, ultimately reducing the number of failed trades. Effective collaboration using the data within the platform would enable faster issue identification, accurate reporting and timely resolution of trade issues.

While middle and back offices have made progress in automating complex work flows and processing higher volume of trades, more needs to be done to extend trade matching, enrichment and settlement notification capabilities to reduce trade exceptions and support minimal touch processing. Market participants have the potential to eliminate errors and move one step closer to minimum or zero client intervention, allowing trades to simply settle. With automation at the tips of our fingers, accelerated settlement timelines in effect and increasing transaction volumes, now is the time to close the remaining gaps in post-trade processes.

1Standing Together: An Instruction to the investment community, TABB Group, 201