Which post-trade inefficiencies are becoming increasingly apparent and restrictive during periods of market stress?
As payments become more critical for large banks, we are noticing changes in settlement volumes, liquidity pressures, and operational challenges linked to market volatility. Typically, higher trade volumes increase risk due to volatility and intraday liquidity pressures related to margining and settlements. Additionally, the rise in trades exacerbates operational issues, such as mismatches, breaks, and strain on affirmation processes when handled manually.
There are both positive and negative aspects to consider. Increased volumes create revenue opportunities for firms with the technical capabilities to manage risk, intraday liquidity, and the additional operational demands. Real-time visibility and control are crucial in this context, exposing the limitations of legacy systems and processes. Real-time views of exposures, obligations, account balances, and reconciliation, as opposed to delayed processes, coupled with anomaly alerts, credit line usage, and counterparty risk parameters, become key differentiators for financial institutions.
How are firms adapting to T+1? Has the response been better than expected?
Firms have been actively preparing for the shift to shorter settlement cycles for US equities and bonds, driven by the need for greater efficiency and reduced risk in an increasingly unpredictable market. Many institutions are investing in process re-engineering to enable faster settlement times. We consider these changes “necessary but not sufficient” for a firm to declare success. We anticipate that settlement and RTGS systems will globally move towards T+0 for most asset classes within the next five years, further increasing pressures on risk, liquidity, and operational challenges.
We are heading towards a world where, for example, a fund in Asia must meet obligations in EUR, GBP, and USD for trades executed on behalf of clients seeking exposure to these markets. The settlement window may be just a few hours. They will need to conduct an FX transaction efficiently, settle the currencies soon after the trade, and use the proceeds to settle the next leg. In this scenario, back-office systems and current settlement venues, including CLS, will not be sufficient. Relying solely on custody banks would lead to suboptimal FX rates. Firms need to prepare for these market changes. Systems that offer real-time visibility and control will be critical and key differentiators for market participants.
What are the more pronounced bouts of market volatility challenging current liquidity management processes?
This summer has seen considerable market instability, primarily driven by geopolitical tensions and divergent monetary policies. These events have increased risk-taking in complex financial products, directly impacting companies’ risk exposure, settlements, and operational workload. Three factors exacerbate the problem: global market interconnectedness, which spreads instability quickly; the increased trading of riskier, more market-sensitive financial products, and shorter settlement times for cross-border transactions, requiring faster payment processing.
Liquidity pressures have been particularly severe in two key areas. Firstly, emerging market currencies have long struggled with liquidity, prompting businesses to stagger payments and schedule transactions to avoid exhausting available funds. Secondly, even in more stable currency markets, intraday liquidity remains a challenge. With interest rates still elevated, it is crucial for companies to maintain clear visibility of their balances and access collateral-backed funds. This creates opportunities for banks that manage cash reserves effectively. The current market for intraday short-term lending and currency exchange remains in its infancy, but we believe this area will grow significantly due to strong demand.