How FMI providers can lead a new wave of collaboration within Post-Trade Capital Markets

Financial institutions have faced many challenges in recent years concerning their post-trade processing. Despite efforts, it’s proven difficult for market participants to navigate these obstacles while improving efficiency and controlling costs. In this article, we examine industry challenges and discuss why it’s time for further collaboration across the market. We also explore why sharing expertise and costs across the industry benefit participants and unpack what Financial Market Infrastructure providers (FMIs) must do to create a shared industry solution.

Reducing the Cost of Post-Trade Processing in a Challenging Environment

Financial institutions in the post-trade ecosystem have faced challenging circumstances in recent years. Amidst geopolitical shocks and market volatility, institutions have aimed to comply with new regulations, enhance resiliency, and transform processes, all while controlling cost bases. To meet these demands, they’ve sought to leverage a combination of offshoring capabilities, process re-engineering, and new technologies. These efforts have led to incremental results, both in terms of optimizing costs and operational efficiencies. This is because the cost of processing trades is distributed across the trade lifecycle. Cost inefficiencies are embedded throughout the value chain, and individual solutions only remove them from a small part of the process.

Little has changed since 2020, when the Bank of England noted that more than $20 billion is spent on trade processing each year, split across up to 23 services in the example of FX post-trade activities. This shows the scale of these cost inefficiencies and highlights the need for a holistic approach to tackle such a challenge.

Banks have often solved their trade processing problems on their own, resulting in duplicative efforts across the industry. In their drive towards delivering a Common Domain Model, ISDA has previously suggested that if the industry adopted common data standards and addressed fragmentation, there would be an estimated 80-85% reduction from the dealer cost base of approximately $3.2BN . To mutualize costs, the widespread market adoption of standards and automation best practices will be necessary. Banks must look to central industry players such as market utilities and FMIs. These central players can deliver an impact by spreading costs and sharing infrastructure across the industry.

Making the Case for FMIs

FMIs are in a unique position to offer products and services centrally and at scale. The Bank of England Post-Trade Task Force supports this, highlighting that industry coordination mechanisms are required to overcome industry wide challenges. Therefore, operational and cost efficiencies would be best enabled by FMIs delivering a community build for three reasons:

• Scale and community – FMIs serve a broad network of clients, meaning they are in a unique position to encourage and drive industry-wide standardization.
• Expertise – FMIs bring awareness and understanding; they are experienced in helping firms navigate regulatory change. They possess the in-house capability to commercialize that experience in post-trade product management in a way which more commercial competitors cannot.
• Resilience – Recent market volatility means strategic moves from market participants need to be underpinned by a more conservative risk appetite; FMIs carry systemic importance and have always been held to high standards to provide market-leading resilience.

With these natural advantages, FMIs have been pivotal to operational advancements of the industry. However, they have not been without their own challenges, prompting them to evolve and adapt. Their history has been punctuated by three notable waves.

The first wave was the catalyst for the original FMIs, driven by industry participants looking for capital efficiency leading to the rise of trading venues and CCPs. The second wave was regulatory driven, where following the Financial Crisis in 2008, firms were mandated to use their products and services, creating tailwinds for central infrastructure providers. A third wave of activity was more commercially motivated, as market participants sought a better ROI from these providers, giving rise to the development of third-party vendors such as AcadiaSoft and TriOptima. These vendors provided more competitive and technologically innovative offerings. It should be noted, there were also some less successful ventures including attempts to develop centralized KYC services. However, FMIs are still well positioned to lead a new infrastructure-led wave of community-built initiatives.

A Potential New Wave of Collaboration within Capital Markets 

FMIs are ready to take the lead for the post-trade community and drive the collective effort to solve common problems by identifying their priority needs. For large-scale market infrastructure-led solutions to be successful, a detailed understanding of their clients is required. Regular outreach exercises, coordination via product design forums, and knowledge of participant processes all provide immense value here. An analysis of pain points and data collection will be critical to understanding how technology should be used to create efficiencies.

Once achieved, solutions will need to cover three bases. Firstly, any services provided will need to be valuable, demonstrably addressing the challenges of financial institutions and reducing their cost bases, both in the short and long-term. Secondly, FMIs will need to demonstrate how their solutions are viable and can be implemented during an era where many firms are undergoing large-scale platform modernizations. Finally, any solution will need to be simple, and clearly framed to encourage board level buy-in of the strategic initiative. The challenge of driving cost out of the Capital Markets ecosystem is considerable, but through collaboration, there is a path forward for the industry.