Trade reconciliation, the internal audit processes performed after core trading
activities in the trade lifecycle, has long ... MAKING THE RIGHT CHOICE.
securities processing 16
Selecting a Third-Party Provider for
Trade Reconciliation Outsourcing
Evaluation of multi-dimensional criteria enables financial institutions to select the ideal partner for trade reconciliation in today’s heightened risk environment By Rajesh Ranjan and Rishabh Gupta, Everest Group rade reconciliation, the internal audit processes performed
T
With these market transformations, it became apparent that the
after core trading activities in the trade lifecycle, has long
legacy business processes and workflows that had been established
been a key component of BPO in the capital markets, and the
for trade reconciliation were not suited to the volatile trading vol-
heightened focus on risk in today’s operating environment has only
umes and increasingly diverse portfolios of the new trading environ-
served to increase the relevance and importance of trade reconcilia-
ment. Furthermore, a return to growth would be difficult to achieve
tion. Consequently, the selection of a BPO partner for trade reconcili-
on the foundation of the legacy processes.
ation requires attention to criteria well beyond cost. Trade reconciliation business processes had evolved within financial institutions as disjointed processes, with different business units and brokers following different reconciliation standards and using different systems.
Consequently, financial institutions have started to evaluate the possibilities for centralization and standardization of the trade reconciliation process.
MAKING THE RIGHT CHOICE
The recession following the global financial crisis underscored the
The trade reconciliation market is complex and is dominated by play-
fragility of this disjointed approach to trade reconciliation. As trading
ers that offer a wide variety of solutions, from people and process
volumes become more volatile, fund managers became increasingly
models to turnkey technologies. To choose the right outsourcing
concerned about the operational risks involved in trade process-
partner in this market, financial institutions require a multi-dimen-
ing. Seeking new sources of revenue, financial institutions began to
sional view of service provider capabilities.
move beyond their traditional markets into new markets while us-
While cost saving is the primary objective of outsourcing and the
ing a greater variety of financial instruments. From the standpoint of
main criterion for selecting a service provider, when selecting a third-
trade reconciliation, these global markets and instruments became
party outsourcing provider for trade reconciliation, financial institu-
a new source of complexity, even as trading in complex securities
tions should consider as part of the decision four other key dimen-
and derivatives declined due to concerns over risk and transparency.
sions: People, Process, Technology, and Relationships.
n
Rajesh Ranjan, Vice President leads the BPO research practice at
Rishabh Gupta, Senior Analyst and the lead
Everest Group. He has more than 12 years of experience in the
analyst for BFSI BPO focused research at Everest
industry, and is a sought after speaker at outsourcing conferences
Group. Within BFSI, he covers covers BPO for
and events. He also has a large number of research reports and
banking, capital markets, and insurance, and
industry publications to his credit. His areas of expertise in BPO
has published a large number of reports, articles,
span Human Resources Outsourcing (HRO) and BFSI Outsourcing.
and viewpoints on industry-specific BFSI BPO.
1. People Success in BPO for trade reconciliation requires sourcing of quality talent. One of the biggest differentiators between providers is the demonstrated ability to train the workforce on essential industry knowledge. New associates should be able to quickly learn the “language” of the customer, especially with regard to the technical and operational details of the securities markets.
3. Technology A state-of-the-art reconciliations engine forms the backbone of service delivery. Investment in technology can create substantial differentiation across solutions and service providers. Key attributes of a good technology solution include scalability to support volume growth across clients; flexibility to support multi-asset, multi-currency, and multi-geography trades; and configurability to adapt to different clients and
Additionally, retention of key employees is a
broker environments.
primary determinant of customer satisfaction.
2. Process The service provider should be able to deliver a range of value-added services beyond
Technical innovation is also
Multi-Dimensional View of Service Provider Capabilities
necessary to reduce manual intervention when dealing with different trade desks among brokers (e.g., developing automated scripts to parse data from PDF trade files sent via e-mail).
core trade reconciliation services. Examples
Service providers are
include FX and cash management, collateral
increasingly exploring the
management, data warehouse initiatives, dashboard reporting, risk management reporting, real-time performance
delivery of a standardized “software-as-a-service” solution to
reporting, and start-of-day packages.
small and mid-market clients. If the financial institution is look-
The service provider should be able to support integrated
ing for a standardized solution with integrated technology, this may be a good option to consider.
operations across the middle and back offices.
4. Relationships Obtaining timely access to trade and position files from brokers is an important aspect of trade reconciliation services, making it critical for the service provider to develop relationships with large and small brokerages alike. Typically, brokerages have limited incentive to share standardized information unless the service provider has a large number of mutual clients, which creates collective bargaining power. Another challenge for a service provider is ensuring multiple relationships within the same brokerage, given the differences in operations and file formats across trade desks. The financial institution should carefully evaluate the service provider’s ability to handle complex relationships across multiple brokerages before making a selection. Cultural fit between the financial institution and service provider is another important criterion to look at closely. An outsourcing relationship requires close coordination between trading operations units and the service provider, and cultural differences can often create divergence between expectations and results even on daily operational coordination.
n
Trade Reconciliation: an important post-trade auditing activity Order Initiation
Order management
Pre-matching
Trade execution
Matching of trades
Trade allocation
Exception handling
Clearing and settlement
Trade reconciliation
Report generation
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