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The current global pandemic has hit the world and financial markets with unprecedented force. While firms across the financial services industry are focused on addressing immediate business needs, preliminary work has since commenced on studying post-COVID-19 recovery. At this stage, there are various models of possible economic outcomes post-COVID-19. The recovery model and pace will likely vary from market to market and as we co-exist with uncertainties, firms should continue to reflect on the opportunities and challenges that the crisis brings as they prepare for the post-pandemic world.

Sharing his observations on COVID-19 to over 200 attendees at a recent DTCC’s virtual event in Asia, Matt Stauffer, Managing Director, Head of Institutional Trade Processing, DTCC, said, “The initial period of dramatic increase in volatility across financial markets is a scenario we have not seen for a while. The volatility has translated into exceptionally high trading volume across all our processing systems – including managing margin calls – over a continuous period.”

The high-volatility, high-volume financial market conditions has exposed the vulnerabilities of firms relying on sub-optimal manual process requiring human intervention. This issue is more acute in the collateral management world as Stauffer shared that several DTCC clients have witnessed a jump of over 300 percent in processing daily margin calls. The lack of automation to handle complex and resource intensive margin workflows further exacerbated the situation.

He added, “We received lots of queries from our clients and industry associations on the impact, if any, on our operational performance and our efficiency levels during this period of market stress. We are pleased to report that in terms of DTCC’s role in supporting and serving our clients and the industry – we continue to maintain the service levels that are required of us, despite the exceptionally high volume and with over 90% of our staff working from home.”

That said, Stauffer indicated that while it is important to have the ability to support and maintain full operational processing capability during market volatility, it is even more crucial for the industry to apply best practices to cope with evolving demands.

Drawing parallels to the challenges that market participants were grappling pre-COVID-19 days to issues in the current normal, Stauffer highlighted that past pressing concerns like cost pressures, shrinking margins, lower returns are now amplified and intensified. Given resource and budget constraints, this has led to a renewed emphasis on cost-benefit analysis to choose between discretionary versus non-discretionary projects that are essential for future development plans. Stauffer recommended, “Both individual firms and the industry should look at the overall ecosystem and invest in projects that help us prepare for the next crisis.”

Resetting Business Objectives

In response to the COVID-19 pandemic, Stauffer noted that firms are using new strategic lens to reassess the optimal operating model for post-trade – from front, middle to back office. Stauffer commented, “On the broker/dealer front, a lot of focus is placed on modernizing existing legacy systems and automating middle and back office processes to better mitigate operational risk and improve operational efficiency. On the buy-side, there is a demand for clear differentiation of solutions for different target groups as challenges vary across market segments. Hedge Fund managers are now looking for more segment specific solutions to support the different trading and engagement models that they are employing for their underlying constituents.”

While the focus to date is on managing BAU activities and handling excessive volumes induced by COVID-19, Stauffer stressed that it is important to keep a close pulse on regulatory obligations that are looming on the horizon. Coming into force on 1 February 2021, the Central Securities Depositories Regulation’s (CSDR) Settlement Disciplinary Regime (SDR) has been dominating industry discussions in Europe, the US and Asia – due to its extraterritorial impact. The SDR will require non-European firms to put in place automated measures to mitigate settlement fails when trading and settling European securities. Under the SDR, market participants will be liable for cash penalties and buy-ins for settlement fails – resulting in increased focus on managing settlement and settlement finality.

Drawing Lessons from the Crisis

Offering his views on how firms can strengthen their business operations as they move beyond COVID-19, Stauffer said, “In whatever ways that the crisis has affected capital market firms, they need to recognize the immediate and long-term benefits of automation. While automation is not a new concept, its value is amplified in times of uncertainty and market stress. Automation essentially enable firms to cope and scale their business as volumes expand or fluctuate while effectively managing risks. Resources are thus relieved from labor-intensive manual processes, sifting their focus to driving the primary purpose of their business and managing trade exceptions. And that's where it's critical to have exception management solutions to help identify exceptions when they occur, assess and prioritize impact to individual firms and bring that exception to resolution before trade settlement.”

In his parting words, Stauffer emphasized, “The market volatility brought about by the pandemic has heightened the value of a no-touch workflow for post-trade processing – to enable trades to be agreed, matched, processed and settled on a single platform. Now is an excellent opportunity to leverage the right tools to succeed in the post-pandemic world.”