Trade exceptions are an industry challenge that are estimated to drive operational headcount for all trading counterparties, including buy-side and sell-side firms and their agents. Trade exceptions can occur at any stage of the trade lifecycle, from trade execution to trade settlement and cannot be ignored – regardless of how infrequent they occur.
The process of exception handling is a laborious task; a single exception can create up to 30 email exchanges, bringing unnecessary operational risk that requires the attention of resources across numerous front, middle and back-office teams. The manual work required to correct these exceptions increases substantially beyond trade date, as each exception needs to be processed individually. Costs continue to rise past settlement date creating further financial exposure and involving counterparties who must manually intervene with the exception.
Why do exceptions occur?
There are various reasons for trade exceptions to occur. Incorrect or incomplete standing settlement instructions (SSIs) and missing allocations are most common from firms relying on manual processes for pre-trade matching and the management and communication of SSIs.
Exceptions can also occur due to an inefficient exchange of critical trade information as well as inadequate and fragmented visibility into trade status. This can result in delays for both detecting and resolving even the most straightforward exception. Shortened settlement cycles have amplified these operational weaknesses since there is time available to resolve an exception.
How should exceptions be managed?
When exceptions occur, they should be resolved quickly and efficiently to prevent settlement fails. Processing trade exceptions are often hindered by mistakes caused by manually handling time-sensitive exceptions An automated dashboard or platform that is accessible to all trading parties for consolidating, publishing and communicating exception management would reduce the time and effort needed – helping to drive efficiencies, greater transparency and ultimately, exception resolution.
Why Does CSDR’s SDR Matter?
Amid a backdrop of evolving regulatory obligations and rigorous implementation, it is imperative for firms to reassess current operational workflows and processes for managing trades, trade exceptions and settlement management in order to ensure compliance.
Of immediate concern for Asia Pacific firms that trade in securities settled at a European Union (EU) domiciled Central Securities Depository (CSD) is the fast-approaching Central Securities Depositories Regulation’s CSDR) Settlement Discipline Regime (SDR) – to be implemented in February 2022. The potentially huge global impact of CSDR’s SDR will require in-scope firms to establish processes and controls to mitigate settlement delays and support straight through processing (STP) to maintain high settlement rates and settlement efficiency. There are repercussions for trade failures, as firms will incur cash penalties for failed trades and also face mandatory buy-ins. Settlement exceptions are a critical component of the post-trade process and should not be ignored or overlooked.
Why is Automation the Key?
Based on the results of a recent DTCC survey with 50 firms across Asia Pacific, many firms are still relying on multiple touch points to monitor and receive settlement exceptions. Specifically, among the multiple channels for managing settlement exceptions, email and portal set up by custodians were high on the list at 88% and 69%, respectively, followed by the fax machine (8%) and Order Management System and Portfolio Management System (8%).
The survey further revealed that for firms trading with counterparties in the EU, more than half (59%) stated that the CSDR’s SDR will have some impact on their post-trade workflow. Firms are also bracing for more stringent monitoring and efficient communications with counterparties – to ensure timely settlement. Because of the SDR, operational cost is also expected to increase from additional resources needed to manage penalties and mandatory buy-ins. Given time zone differences between Europe and Asia Pacific, meeting settlement timelines will be a major challenge if processes are not automated.
Why is there a need for a centralized platform to manage trade exceptions?
While we rarely saw trade fails in Asia Pacific in the past, the same cannot be said now that unexpected events, market volatility and uncertainty have become more common. Firms should earnestly review their manual processes and older systems to ensure operational success and settlement finality. In addition to a centralized and highly transparent platform, a set of collaborative tools is also needed to identify, track and rectify settlement exceptions to expedite remediation. To prevent the same exception issue from recurring, meaningful up-to-date data and, more importantly, data analytics will pave the way in detecting the root causes and troubling trends for trade exceptions, allowing a more holistic view for solving and preventing trade and settlement exceptions.