The changing face of Southeast Asian operations
12 June 2013
News, Asia, Malaysia, Indonesia
By Nellie Dagdag*
Since the financial crisis, investment banks and investment management firms have been making concerted efforts to rebalance the disproportionately low level of investment made in middle and back office operational infrastructure in contrast to the large sums traditionally allocated to the front office. If nothing else, the crisis has highlighted to market participants that effective management of operational risk and protection against counterparty default is essential not only in preserving individual firms, but also in addressing systemic risk.
In high-growth markets, balancing front office and back office capacity is chiefly about eliminating bottlenecks that result in inefficiency and operational risk.
To this end, institutions are making significant progress in building efficient infrastructures that move trades smoothly from execution to settlement with little or no manual intervention. In Southeast Asia in particular, economic growth and regulatory change have enabled rapid financial market expansion. This has increased focus on the capacity of local financial architecture. In response, regional exchanges are already forming alliances to improve liquidity and drive best practice.
But there is still more to be done. From our discussions with local industry players, we know that rising trade volumes are putting increasing pressure on existing middle and back office infrastructure in many of SEA’s fastest growing markets. Market participants are aware that they are responsible for collaborating with each other in order to improve middle and back office processes, create robust and flexible systems and improve operational risk management to support volume growth.
Indeed, this sentiment was highlighted in discussions among industry representatives attending two recent Southeast Asia forums Omgeo hosted on operations best practice. Debate at the two forums focused on five areas of common concern:
Infrastructure constraints: the ability of existing systems and processes to deal with extended trading hours, increasing counterparties, greater volumes and a growing diversity of instruments and asset classes
Operational risk: the potential in existing manual processes for human error, such as mismatching trade data or using incomplete settlement instructions potentially resulting in trade failure
Capacity pressures: the increasing resource constraint of staff working increasingly long hours to record and handle high volumes of trades
Compliance burden: the impact of regulatory changes, both local and global, such as increased reporting requirements
Competition: all of these new challenges taking place at a time when there are increased competitive pressures on both markets and firms
The process of introducing greater operational efficiency and improved risk management will take time. Many of our clients in Asia have automation levels as high as 99% in equity trade processing and well over 80% in fixed income. But they acknowledge that building a community of fully automated counterparties requires cooperation and coordination across the industry. It is worth noting that Indonesia’s infrastructure providers (IDX, KPEI and KSEI) understand these challenges and have developed initiatives around automation and STP for the local market. Automation is an important step as the benefits gained from it are quite significant, particularly in a diverse region like Southeast Asia. At the forum, the benefits discussed in detail included:
Increased operational capacity, enabling firms to scale as trade volumes increase. As put by one panellist during one of our forums, “the back office must be scaled or the front office simply cannot”
Elevated adoption of automation and standardisation, enabling investment managers to be able to trade across markets in multiple asset classes with multiple firms whilst processing trades on a single platform – for Indonesian and Malaysian firms, even Sukuk bonds can be managed this way
Reduced error rates through automation, resulting in lowered risk of trade failure and associated penalties, whilst faster settlement reduces overall systemic risk
Accelerated confirmation processes, ensuring trade details are confirmed within a much shorter timeframe. For SEA firms investing cross-border, this often enables them to promote compliance with local requirements, especially in markets such as Taiwan where trades need to be confirmed on trade date
Increased use of robust platforms that deliver increased efficiency and support operational best practice, providing a differentiator for firms looking for an edge in a highly competitive environment
Now is the time for investment managers, traders and broker/dealers in the region to ensure they have the most effective risk management and operations processes in place. One panellist advised, “Firms should look at internal and external processes and ask themselves ‘Where do we want the industry to go?’ then progress with this in mind.”
Many of our clients are saying that they would like to see all market participants collaborate in creating a more efficient, coordinated, standardised and fully automated regional community. If nothing else, global events of the last few years have taught us the importance of preparing for all forms of risk, including operational and systemic. STP in domestic Southeast Asian markets is relatively low, but there is strength in numbers and growing interest from market participants across the region. The more players that get involved, the greater the benefit to all.
*Nellie Dagdag is executive director, Asia, Omgeo
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