In a recent study conducted by DTCC, the findings show that capital markets operations held up well during the pandemic-induced volatility and shift to remote working, writes Marie Chinnici-Everitt, DTCC Managing Director and Chief Marketing Officer. The research, however, also exposed some vulnerabilities which market participants need to address, including specific areas in the post-trade process, such as settlements/payments and collateral/valuations, Chinnici-Everitt explains in this article.
Wild swings in asset prices, record trading volumes, staff suddenly forced to work from home – the past year has certainly been unprecedented for market participants as they’ve managed the impact of the Covid-19 pandemic. To put the volatility into context, the VIX index, or Wall Street’s “fear gauge”, jumped from a reading of around 12 in January 2020 to 65 in March 2020 amid significant selloffs across markets. Trading volumes skyrocketed, on many days reaching two or three times the pre-pandemic average.
The good news is that capital market operations held up remarkably well during the height of the turmoil, with little disruption; however, there are inevitably lessons to be learned. This was supported by the findings of our recent white paper, “Managing through a Pandemic: The Impact of COVID-19 on Capital Markets Operations”, based on feedback from buy-side and sell-side firms and conducted with research assistance from McKinsey & Company. It found that, while firms’ post-trade operations (Ops) and operations technology (OpsTech) proved largely resilient during the pandemic, several challenges emerged.
The study found that cash fixed income and cash equities were most affected by the pandemic-induced market volatility, with 30-35% of firms across the buy-side and the sell-side reporting operational post-trade processing challenges in these asset classes. For the sell-side, the size of the firm also mattered when it came to asset class; for example, larger firms had no issues with cash equities, unlike some smaller firms. Despite these difficulties, the majority of firms were able to process volumes quite effectively and avoid long-term disruption.
"As a result of these challenges, it is clear that opportunities remain for further optimizing post-trade processes across the capital markets."
More specifically, from a processing perspective, settlements/payments and collateral/valuations were affected the most, with 58% of sell-side firms reporting challenges in settlement and payments during the peak of the pandemic. Buy-side firms typically experienced less disruption to post-trade processes than sell-side firms due to simpler operational models, with the sell-side reconciling breaks and settling trades across hundreds of counterparties. As a result of these challenges, it is clear that opportunities remain for further optimizing post-trade processes across the capital markets.
First on the optimization list is the need to simplify and standardize the sub-set of post-trade services which were hardest hit. Trade processing platforms were put to the test across firms, and exposed weaknesses in underlying platforms and technology. For the sell-side, these include making enhancements to reconciliations and confirmations capabilities, while the buy-side has prioritized an increased focus on fails and collateral management. And the majority of all firms plan to increase capacity, build new capabilities or re-engineer post-trade processes.
Second, market participants also highlighted that they expect to see a continued focus on shortening settlement cycles due to the impact of last year’s sky-high trading volumes and volatility on liquidity and margin. This is significant given that DTCC, in collaboration with the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI), is leading efforts to shorten the U.S. securities settlement cycle to T+1 and working with the Industry on next steps.
Another area that impacted firms around the world was the sudden transition to a work-from-home operating model, including those professionals working in the post-trade Ops and OpsTech functions. In most cases, this was achieved almost seamlessly, within a matter of days, due to firms’ ability to implement tactical changes to operating models. And, as the pandemic progressed, the stigma around working from home and productivity waned, with many financial firms now planning to retain part of the remote and flexible working model post-pandemic across post-trade operations. That said, several firms reported concerns about their employees’ ability to sustain performance and materially longer daily working hours over the longer term, as well as the impact on their wellbeing.
While the study illustrated that capital markets operations held up well during the pandemic-induced volatility and shift to remote working, it also exposed some vulnerabilities which market participants need to address, including specific areas in the post-trade process including settlements/payments and collateral/valuations. In order to capitalize on these opportunities, the industry will need to embrace collaborative approaches, common processes and best practices and deploy operating models and technology solutions that continue to meet the evolving needs of the industry.
This article was originally published in TabbFORUM on June 16, 2021.