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Sell-side targets greater automation in derivatives reconciliations – Institutional Asset Manager

Lack of data standardisation, outdated software and fragmented data sources are the biggest barriers to efficiency in derivatives post-trade reconciliation, a study by Acuiti has found. 

The study, which was commissioned by software provider Kynetix, surveyed or interviewed over 60 sell-side firms operational in the derivatives market and found that the reconciliation process was an increasing focus for senior executives as they seek to reduce risk and improve client service.

The results of the study are set out in a new report, Derivatives Reconciliations: “Good enough” is no longer good enough, which was released today.

The report provides a deep-dive analysis of the latest trends regarding derivatives reconciliations software, a benchmark of levels of automation and efficiency across different company types and explores the impact that investment in automation has on efficiency.

According to the report: 

• Investment in reconciliation software is on the rise driven by increased regulatory oversight and weaknesses exposed during periods of volatility during 2020.

• A lack of data standardisation caused by multiple data symbology standards is the biggest barrier to efficient recs processes

• Some 81 per cent of tier 1 banks use spreadsheets as part of the core recs process compared with 19 per cent of brokers and non-bank FCMs

• A total of 19 per cent of tier 2 and 3 banks have more than 10 manual touchpoints in their standard recs process

• Some 67 per cent of brokers and non-bank FCMs had upgraded their reconciliation software over the past three years

The study also highlights the efficiencies and cost savings that can be gained from investment in the reconciliations process.

Of those that upgraded their reconciliation software over the past three years, nine out of 10 spent less than 10 per cent of their total back-office budget on technology costs. This reduced to five out of 10 for those that did not upgrade.

The efficiency emanating from investment is also born out in the time it takes to reconcile. Of those that had invested, six out of 10 met the internal target for reconciliations to be completed more than 90 per cent of the time compared with just over a third that hadn’t invested.

“After a sustained period of increasing regulatory burden, sell side firms are recognising the need to address outdated and overly manual legacy derivatives reconciliation processes. The heightened need to reduce reliance on key personnel skills, plus the pressing need to resolve exceptions faster, has meant that FCMs are seeking cloud solutions that deliver easy resolution, day in, day out, in the fastest possible time. We’re pleased to have launched HelloZero at this time to address these challenges,” says Matt Dolton, CEO of Kynetix.

 “Over the past decade, volumes, the complexity of market structure and regulatory requirements that require efficient reconciliations have all increased substantially putting immense pressure on operations across the sell-side,” says Will Mitting, founder and managing director of Acuiti. 

He added, “All firms are targeting greater efficiency and automation but each faces unique challenges in realising these goals. While some smaller firms have been able to pull everything together into a ‘golden source’ with zero manual intervention, for larger firms the expanse and complexity of their operations means that reducing manual touchpoints and a reliance on spreadsheets can result in significant strides towards greater efficiency.”