Posted on 24 June 2022
Trade Settlement Teams: Imagine an Empowerment Tool for Decision Making
Featuring Juliana DeBlois from Alter Domus
Ask anyone who works in the secondary trade settlement market how far the technology has come in the past decade, and they’re likely to respond, “What technology?” The truth is that trade settlements are still conducted manually – and sometimes at a pace that is comparable to internet dial-up.
The slowdown, according to Juliana DeBlois, Head of Trade Settlement for Alter Domus in North America, is due mostly to the market’s reliance on email. When agents and trade closing teams are seeing thousands of messages coming in and going out of their accounts each day, there’s bound to be significant holdups. And unless changes are made, things are only going to get worse. After all, with expectations for syndicated loan trade volume to hit a record high in 2021, using a trade and settlement process that hasn’t changed much in 20 years doesn’t exactly shout productivity.
DeBlois knows it’s not easy being manual in an increasingly automated world; neither is adopting new ways of doing things. But getting up to speed is essential to improving back-office efficiency and decreasing secondary trade settlement risk, she says. And the best way to do that is through a single
platform that avoids email overload, reduces human error, and shortens trade settlement time.
Cut the Time , Reduce the Risks
The sheer volume of emails may be bogging down trade settlements, but it’s not the only factor inserting risk into the process. As DeBlois notes, with some parties entering into dozens of new trades each day, and trades remaining open a month or longer on average, the number of unsettled trades handled by a closing team at any one time can multiply quickly. The risk of operational error when tracking the status of each open trade in spreadsheets is obviously
quite high, yet that is exactly what many have been doing for years.
“Anytime you use a manual process in a world run by technology, you’re going to have an increased chance of risks. And that holds true for the secondary trade settlement market,” she says.
What are some of those risks?
- Defaults: Because the timeline between the trade date and settlement date can be so long, parties are exposed to the risk of their counterparty declining or defaulting on the trade.
- Unpredictability: The fact that buyers don’t know the settlement date makes it impossible to understand their cash requirements – and that may cause liquidity to become an issue in some trades.
- Operational: Relying on manual processes increases the risk of human error because it's so difficult to keep track of all the moving parts of a manual trade settlement.
- Communications: “The sheer volume of emails that occur during a trade settlement makes it almost impossible to keep track of what’s been done and what needs to be done,“ says Deblois. She says that it makes it necessary to constantly reach out to an agent or counterparty to determine the status of the trade. What’s more, inadvertently sending an email containing sensitive information to the incorrect party could have serious consequences.
- Lack of transparency: A lack of transparency means that it’s not always apparent why a trade is not closing, and that can bring unneeded stress. Parties will wonder if the counterparty doesn’t hold a sufficient position, the KYC is still pending with the agent, or if the buyer hasn’t given consent. The lack of transparency could result in defaults or denials that may not have occurred if the party had access to the data.
Technology to the Rescue
While technology providers have made some preliminary efforts to help trade settlement teams organize and view mounds of data in a way that improves
both process and productivity, not all have hit the mark. For DeBlois, decreasing settlement times will take a tool that can provide transparency into risk, help traders determine where the inefficiencies are, and provide real-time access into each trade.
It will also take the market realizing that they need to move beyond emails and spreadsheets.
“I think the most important question people should ask themselves is what technology could do to improve the process,” she says. “Not in some esoteric way, but in the day-to-day activities of the team.”
For instance, her team has begun using a single, easy-to-use platform that performs the following functions, and it has been a game-changer:
- Records and tracks the status of all open trades, including any pending items and responsible parties.
- Automatically sends reports to all parties and gives them the ability to format and send the report downstream.
- Calculates the daily cash availability based on each day’s potential trade settlements.
- Eliminates the risk of email mishaps by generating and sending emails to pre-determined parties while keeping a record of them.
- Acts a repository for executed trade settlement documents.
- Uncovers the reasons for delayed settlements by aggregating the metrics and identifying trends from all tracked data.
The Ultimate Goal
The secondary trade settlement market
is notoriously slow to change, and that’s
because it doesn’t involve cookie-cutter
transactions or other types of deals that
can neatly fit into a box.
But, DeBlois says, that doesn’t mean
the process can’t be improved by
rethinking bits and pieces of the process
and changing the way things are done.
With a few tweaks, she says, technology
could be leveraged not only to improve
efficiency but also to decrease risk
and, ultimately, empower better
DeBlois says that the ultimate goal
in any new technology should be to
reduce the amount of time between the
trade date and the settlement date and
streamline the process to make it easier
for all the parties.
“The right technology will make it
possible to function at a greater rate of
efficiency while operating in a mostly manual world. And that is what I call