Navigating settlement challenges for effective liquidity management in uncertain times______

Teresa Walker - Head of Australia and New Zealand

The Australian funds industry is going through a challenging time. The macro headwinds of the Royal Commission, escalating inflation, and global banking sector incidents have dented investor trust and reshaped the strategic outlook for 2023.

In Calastone’s settlement survey of Australian platforms, registries and fund managers, respondents shared their views on where and how settlements processing challenges impacted their business. We found that most respondents face significant challenges due to late cash settlements and trade-to-payment reconciliations, which can impede their ability to effectively manage their liquidity.

You can download the report here or a summary of the key findings are below.

The key challenges

The dominance of manual processes in cash settlements, as highlighted by 90% of survey respondents, is the predominant issue in the current landscape. The necessity to align payments with trades (55%) and the detrimental repercussions of cash settlement delays (35%) were also noted as widespread concerns.

We further probed firms to rank the settlement process stages based on the challenges they posed. Three areas stood out. ‘Matching fund trades to alleged cash settlement instructions’ was the primary issue for most firms, scoring a weighted average of 3.6 out of 6. ‘Reconciliation of the payment to trade process’ and ‘payment execution’ followed with weighted averages of 3.5 and 3 out of 6, respectively, highlighting them as the second and third most significant settlement process issues plaguing fund firms.

The evident disconnection between order sending, settlements, and payment activities poses a big problem, with the continual challenge of manually matching fund trades, executing application and redemption payments, and reconciling payments to trades significantly impacting day-to-day liquidity understanding.

In many instances, trading and payment processes, despite their interconnectivity, are managed by separate teams: trading and cash/finance. This division can lead to trade matching errors severely affecting payment accuracy, posing a particular challenge for reconciliation efforts, especially when reliant on manual processes. Such errors frequently result in late payments.

Three factors compound this complexity: settlement volumes, the use of multiple currencies and the use of multiple bank accounts. When respondents were queried about the number of trade payments processed each day, 25% reported an average surpassing 500, while 5% executed over 5,000 trades daily. Upon questioning the number of currencies managed, 60% of respondents indicated one or two, 15% mentioned three to five, and 25% reported handling six or more. While 70% of respondents managed one or two bank accounts, 30% managed a minimum of six with some in this group managing 21 or more accounts.

The impact of late cash settlements

Overall, late cash settlements can impact the trade and the price units are bought at. This results in additional work while a worst case scenario firms must ‘make good’ any difference with their counterparties on both sides of the trade. Moreover, late redemption payments impact an order sender’s reputation and standard of service they can give their clients while investors receive their proceeds later than expected which can impact planned business activities.

Our survey results confirm that the effects of late cash settlements extend beyond operational hindrances; they can significantly impact a firm’s reputation, cost structure and liquidity, especially during periods of market volatility. ‘Lengthy administrative burden’ and ‘poor client service’ were the primary concerns linked with late payments, with 60% of respondents endorsing this view. Following closely were ‘effect on related trading activity’ and ‘costs or penalties from missing the day’s price/value’, which were concerns for 55% of respondents.

We also sought to understand how much of settlement teams’ time was consumed in addressing cash reconciliation and other settlement queries. Over a third (30%) of respondents revealed that tackling these issues devoured up to 30% of their time. Furthermore, over one in five (21%) claimed it absorbed as much as half of their work time.

The solution

The question is how to address these issues? The consensus among survey respondents pointed firmly towards increased automation. When asked if automation of the trade to cash settlement process would enhance their operational processing, 80% of respondents agreed, with the remaining 20% expressing neutrality.

We also asked respondents to identify three specific solutions they believed would be most effective in enhancing their operational processes. ‘Streamlining payment to trade reconciliation process’ topped the list, chosen by 70% of respondents. This was closely followed by ‘trade matching’ (65%) and ‘seamless connection between order sending and settlement processing’ (50%).

Automation can support a firm’s bottom line

A digital settlements and payments process supports a firm’s bottom line, and, crucially, can enhance oversight, governance and client experience.

Fragmented processes, manual intervention, and a lack of comprehensive automation are the primary contributors to data input errors, processing delays, and a lack of real-time visibility in settlements and payments processes. The impacts vary, but at their worst, they force firms to accept unplanned and unwanted credit exposures, grapple with intraday liquidity issues, and even put a halt to some of their own trading activity. At the very least, delays in cash settlements clearly escalate costs as firms invest time and resources to investigate errors and chase payments. These delays complicate liquidity predictions, an issue that has moved up both internal and regulatory agendas, making effective governance and compliance even more challenging.

The issues outlined in the report and the resultant impact on businesses and investors are not insurmountable, given the available technology. If the process of accepting an investor’s money can occur in real-time, firms have a duty of care to ensure that the remainder of the investment process is just as seamless. In fact, leveraging real-time processing not only improves operational efficiency but also increases transparency, thereby strengthening both oversight and governance. The funds industry must strive to return customer funds as promptly as they are received, not only as a matter of efficiency but as a reflection of commitment to transparent and accountable practices.

Trust is enhanced by adopting practices that allow regulators, investors, and firms themselves to have a clear view of the transactions, ensuring compliance and fostering stronger governance. This all contributes to building resilience, sustainability, and confidence in an industry that, after all, is built on trust.

Download the report here.

White Paper: Effective liquidity and settlement process optimisation continue to be major obstacles for Australian fund firms in uncertain times

Featured articles