Challenges to Global Financial Markets

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The financial services sector is undergoing rapid changes on a global basis. The NYSE reported an increase from US $382 billion (13,015,000 trades) in 1980 to US $11.2 trillion (221,040,000 trades) in 2000. Global equity markets are also growing at a fast speed, with the number of global security trades doubling every three years. Whereas in the US the volume of equity transactions has increased 17 times since 1980, 20% of these transactions were related to cross-border trades (Baker, 2001). Financial markets in other countries are, by no means, isolated from the developments in the major global markets. For example, reported in its 2001 fact book, the Australian stock market has achieved an average daily trade volume of 58,718 trades valued at US $1.55 billion and is expected to show continued growth from local as well as global institutional and retail players.

Percentage-wise, current estimates of online cross-border security trading volume are only in the 5-7% range and predominantly by sell-side users; yet online systems will continue to increase in importance as additional buy-side institutions overcome their hesitation and recognize the benefits of Straight Through Processing (STP) and order execution (Platt, 2001). Platt predicts that 10–15% of buy-side clients will be using online systems within the next 12 to 18 months and the growth trend will continue with no ceiling. "The ability to process cross-border security trades efficiently, with minimum manual intervention and fewer mistakes, not only supports larger foreign exchange institutions, but also allows smaller volume institutions to compete in a lower spread environment," (Platt, 2001, p. 18). Though they present tremendous opportunities and potential, cross-border security trades also bring about problems and challenges to financial institutions (Adams, 2003).

In the United States

As far as end investors such as pension funds, mutual funds, and corporations are concerned, today's cross-border, post-trade securities processing environment increasingly represents poor value and dead weight on performance. Intermediary firms, such as investment managers, brokers, custodians, and clearers suffer from high fixed costs in the form of incompatible databases and manual procedures (Kirby, 1999). With every prospect of cross-border security flows doubling every two or three years, there is a significant and growing level of risk exposure that needs to be managed. There are also significant inefficiencies in cross-border transactions across firms, as 70% of such transactions are currently performed using manually intensive methods. This has led to a failure rate as high as 15–20%, and caused delays in 60% of such trades. These failures are caused by data re-entry, lack of standards, delays, handovers, frequent manual intervention, and other breaks in the security transaction workflow. As a consequence, 40% of fund managers' back office cost may be attributed to reconciling these transactions. While cross-border transactions are more exposed to settlement risks and inefficiency, domestic transactions are not exempt from them. According to the securities industry association, under the current T+3 settlement cycle, approximately US $1.8 trillion worth of trades remain outstanding everyday. There is a growing consensus on the need to increase productivity and efficiency by reducing operational costs, mitigating risks to participants, and eliminating volume sensitivity to enable the business to grow (Kirby, 1999).

As an effort to reduce transaction failure and operational cost, the US security industry plans to move from T+3 to T+1 settlement cycle in mid-2005, followed by one year of processing and testing period. The T+1 effort, however, presents the security industry with one of the biggest challenges, the challenge of having to create a global network that processes millions of transaction instantly, that must interface with thousands of companies, and that cannot afford to crash (Hoffman, 1999). The T+1 effort will require security industry players to completely re-engineer a significant portion of their trading processes as well as their underlying infrastructures. Trade groups such as the Securities Industry Association have already begun forming working groups of different firms to brainstorm how to attack these issues.

One initiative that would help support T+1 is referred to in the industry as Straight Through Processing (STP), which is proposed to be used for cross-border trades to speed up settlement, reduce risk, facilitate the US' move toward T+1 (Massaro, 1999) and improve transaction efficiency. A group called the Global Straight Through Processing Association (GSTPA), which is made up of 40 firms, plans to build a global network to promote the more efficient flow of information to brokerages, custodians, and other firms involved in cross-border trade processing. Streamlining the information flows will reduce the number of failed cross-border trades by opening up connectivity among participants involved in post-trade, pre-settlement securities processing. According to GSTPA, a reduction in processing time would reduce US $280 billion daily from being exposed to operational risks in the US Achieving the goals of the more specific STP initiatives will be one of the top trends in investment-management technology for a few years to come.

In Other Countries

In other countries outside the US, such as in Australia, the pressure is mounting in the same magnitude. With rising trade volumes and cross-border security transactions, key players in the Australian financial markets will need to develop capabilities to cope with challenges. Based on a case study by KPMG Consulting, in Australian financial institutions, about a third of the total failures [1] in the business process across banking, insurance, capital markets, and investment management sectors may be related to the lack of STP. While a significant number of breaks in business processes have been solved through various initiatives such as process re-engineering and cost reduction, a broader assessment of STP readiness needs to be carried out to precisely identify potential STP "hotspots" in the processes. These failures (hotspots) arise because of the complexity of the interactions among brokers, manufacturers, banks, custodians, financial consultants, and other third parties. These "end-to-end" business processes are highly fragmented and frequently require manual intervention, handling and dealing with system incompatibilities. According to Elliot and Briers (2001), in the financial industry, the "state of integration between a bank's internal systems is a real issue. Banks lacking the capacity for STP recognize the need to build that capability."

Likewise, many Southeast Asian countries are currently at T+3 and undergoing movements toward STP. In the case of Malaysia, after the consolidation of the banking industry, new banks launch to automate and to re-engineer their processes to achieve STP. Financial institutions are in the process of adopting new systems to enhance data management, to integrate data and business processes, and to manage transactions across their entire life cycle (Alok, 2002).

[1]Failures include value and non-value based transactions.



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Advanced Topics in Global Information Management (Vol. 3)
Trust in Knowledge Management and Systems in Organizations
ISBN: 1591402204
EAN: 2147483647
Year: 2003
Pages: 207

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