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MiFID II Among Regulations Forcing New Looks at Old Post-Trade Systems

Traders Magazine Online News, October 27, 2017

Oren Blonstein

New regulations in the North American and European markets are changing the requirements for firms’ middle- and back-office operations. These new requirements are difficult for firms to meet, especially with systems that have grown rickety after many years or even decades of use.  

These factors, and the likelihood of more regulations ahead, are undoing the inertia that has enabled back- and middle-office systems to remain in place long past their expected lifespans. This new dynamic makes now an appropriate time for asset managers to re-evaluate their legacy post-trade systems, and perhaps begin to consider modernizing their capabilities.

This article describes the outdated middle- and back-office systems many firms still use, and highlights the regulatory changes that are stretching those systems to the breaking point. It also offers key things firms should consider as they begin to think about modernizing their middle- and back-office infrastructures.


The Legacy System Conundrum

Many asset managers today are running ‘vintage’ middle- and back-office systems. Some of these products were developed before the people now using them were even born.

That seems like an ill-advised strategy, but it’s easy to understand why these old systems live on. They support critical business functions, and replacing them involves high costs and risks.

Those high stakes made it easier for asset managers to put off difficult ‘rip ‘n replace’ decisions. Instead, for many years – even decades – they got by with making lots of small changes to their systems. Over the years, all those changes made their systems so complicated that they’re nearly impossible to replicate with other, newer solutions. That’s the legacy systems conundrum – they hang around so long that they actually become harder to replace.

But with all technologies and systems, the ride eventually ends and you have to get off. That happens when the cost of maintaining a system gets so high, and its capabilities fall so far behind current requirements that it creates competitive disadvantages. That time has arrived for many legacy post-trade systems. 

Regulatory Shift at Home:  T+2

The new SEC rule requiring the standard settlement cycle for most broker-dealer securities transactions be cut from three days to two recently took effect. A parallel rule has taken effect in Canada.

At a high level, the T+2 rule is intended to do the following: reduce counterparty risk by speeding up settlements, free up capital faster for reinvestment, and lessen the increased margin and liquidity needs that can spike during time of high volatility. It also advances the overall goals of increasing the certainty, safety, and soundness of the capital markets.

For North American asset managers, T+2 has forced them to find ways to get all the systems they’ve stitched together across their execution, confirmation, clearance and settlement processes to do everything 33% faster, and do it reliably. That’s no small feat with their legacy systems.

 

New Mandate in Europe: MiFID II

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