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The Case for More Functional, Utility-Like Trade Management Systems.

Executive Summary

In the pre-crisis era, capital market firms focused on excellence in trade execution and raising their returns through novel investment strategies that focused on generating greater alpha.1 Middle- and back-office activities were largely seen as routine tasks, with little or no effort made to optimize these processes.

The global financial crisis changed the way firms view their middle- and back-offices, highlighting the pressing need to revamp these functional areas. Overall, asset managers face relentless demand for generating greater alpha while cutting costs and increasing efficiencies. Custodians, moreover, face demand for greater transparency from clients and want to monetize their IT infrastructure to support asset managers in new ways. Meanwhile, all market players are gearing up to comply with more stringent industry regulations. Both regulations address market structure, transparency and over-thecounter (OTC) derivatives areas that will require capital market firms to add to IT spend.

As a result, asset managers are tilting toward greater automation and outsourcing of post-trade activities, enabling them to concentrate on creating new products and expanding into new markets; custodians are reviewing their service models with a view to incorporating greater levels of transparency; and brokerage firms are looking for solutions that will help them comply effectively with new regulations. Custodians and other agents also want to extend intermediation to cover securities that will move from OTC to mainstream exchanges.

Amid these changes, trade management systems are coming under stress, as firms look to greater automation to overcome a high incidence of trade failures, trade capture errors and lengthy repair queues, while also seeking ways to increase straight-through processing (STP) rates and reduce asset manager on-boarding time.

And then there is the prospect of an exponential rise in trade volumes (see Figure 1, next page). This will put further pressure on trading systems that are under pressure to meet the need for accuracy and speed, while keeping costs low.

While revitalized trade management systems are needed to plug the gaps and remove inefficiencies, the financial technology landscape is also maturing, with the emergence of cloudbased utility systems. The cloud platform is gradually gaining popularity among financial services firms, although concerns about data security and other issues still linger. We believe that cloud-based, utility-like trade management systems will strengthen the financial muscle of capital market firms by providing them with the much needed flexibility to focus on core operations.

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