Heightened market risk and uncertainty intensifying the focus on settlements automation______

Ross Fox, Managing Director, Head of UK & Europe

As firms seek to optimise liquidity and bolster their bottom lines they have started to explore ways to get control over core processes. Settlements headwinds have long been ignored but a Calastone survey identifies how late cash settlements and trade/payment reconciliations are hampering the UK fund industry with unnecessary costs, liquidity risks and creating unhappy clients.

The Calastone settlements survey showed late cash settlements and delays with trade/payment reconciliations are throwing up unwanted risks from credit exposures and a reduction in the liquidity available to support the firm’s own trading to a shortfall in cash coming in on time. These can all prevent a firm from making its own payments to counterparties or investors at the allotted time.

Respondents to the survey included asset managers, transfer agents, fund platforms and distributors, ranging from the small to the very large. More than three-quarters said late cash settlements were a problem.

This will surprise many accustomed to fully automated, straight-through processes in other parts of the financial system. But much of the UK’s fund settlement process continues to be manual.

High volumes are a challenge

The scale of the problem depends in part on how many trades a firm has to settle a day. Around a fifth of the firms surveyed said they had to settle more than 8,000 trades a day. This means multiple teams undertaking a range of manual tasks and double checking each other before making payments from different banking systems. It is high-intensity processing.

A quarter said that dealing with settlement queries and cash reconciliations took up more than 30% of their time rising to 50% for the larger firms. Difficulties in updating the trade registry and settlement calculations were the main challenges.

The knock-on effects in terms of credit exposure and liquidity issues are clearly a concern.  But so too is the damage to the firm’s standing in the market.

Late settlements can strain relations between the distributor and the asset manager. The settlement window will normally be spelt out in a service level agreement between the two parties. Repeated missed deadlines imperil future relationships.

Towards more flexible solutions

One positive from the survey: all respondents agreed that automating trade to cash settlement processing would help improve their operations.

That begs an obvious question. Given there are several settlement platforms out there, why are firms still resorting to manual intervention?

There are two reasons. First, a firm’s counterparty may not be on the same settlement platform. And, second, settlement platforms dictate the bank through which the parties will settle. Clearly, a particular firm may not wish to use that bank.

What is needed is a more flexible model – one that delivers an all-embracing digital solution, yet has the ability to interact with other platforms and allow each party to use the settlement bank of their choice.

Liquidity issue a concern

Perhaps the most worrying aspect of the survey was the number of respondents (61%) who said late payments would result in unwanted credit exposure. This can easily prevent a firm from meeting its cash obligations. At a time when the regulator has a settlement task force deep diving into this industry perhaps it is time to look at this carefully.

New rules relating to liquidity management were introduced following the collapse of a number of funds in 2019 and the market convulsions of Spring 2020. They had a number of different targets, but one was asset managers.

The Financial Conduct Authority said at the time that asset managers should have ‘access to, or can effectively estimate, relevant information for liquidity management’. The survey suggests day-to-day liquidity management can sometimes be disrupted by late settlements – which should be a matter of concern on an industry level.

Naturally, good governance is a core tenet of the funds industry. Fast, automated and flexible solutions that remove delays and uncertainties are important not just for the cost savings they can offer but for the wellbeing of the industry as a whole.

At Calastone Order Routing and Settlements we are changing how the industry can think about fund trading and settlement. Our end-to-end solution is designed to flex with every firm’s needs. This means you do not need to change your existing order routing set-up or banking relationships to get a full view of all your fund trades. You also don’t need to have your counterparties on our network to settle with them. Simplicity and coverage are key.


Featured articles