No fund manager likes to fail in his or her trading strategies. It’s bad for business.
The same can now be said for failing to settle trades on time. With profit harder to come by, fund managers must pay closer attention than ever to why their trades are failing to settle—and then take steps to prevent the failures from recurring.
“In a bull market we could afford to be a little inefficient. But during the economic downturn, that doesn’t fly with management any longer because it is eating into our bottom line profitability,” says one top operations manager at a New York investment firm.
The first blow in the fight against failures remains automating and speeding up otherwise paper-based communications between fund managers and their broker/dealers and custodian banks. Other measures: relying on workflow management, data aggregation and analysis tools from custodian banks or software firms to smooth each step of the process in matching details of trades and then clearing and settling the transactions.
Fund managers estimate that at least 2% of U.S. equity trades don’t settle on time, which is three days after the trade is executed.
That figure can be even higher for fixed-income, over-the counter derivatives and foreign securities. A failure could cost the fund manager anywhere from $10 to $100 in administrative costs alone to fix. That’s not including interest charges, which can add $5,000 to a $50 million trade.
Affirmations Are Critical
The biggest cause of failures: Fund managers either affirm their trades too late or not at all. “While broker/dealers confirm trades quickly, fund managers aren’t making affirmations a priority,” says Judson Weaver, managing principal at
“The U.S. market is unique in allowing trades which are unaffirmed to be settled at Depository Trust Company,” says Lee Cutrone, director of industry relations for
Michael Fiscella, global head of equity and fixed income cash processing for
Data Errors
Yet another reason for the trade fails: an error in the post-trade information. That could mean getting the details of the transaction incorrect or a mistake in the settlement instruction sent by the fund manager to the custodian bank. “Too often the fund manager’s operations team is rekeying information from a front-office system to a back-office settlement system when the data should flow seamlessly between the two,” says Paul Thomas, managing director of international operations for global technology firm
Daniel Simpson, CEO of
Fund managers using Cadis’ EDM software can reconcile the information from their front office to the bank’s custody platform and the corporate actions system. The software will also link the B/D’s confirmation to the fund manager’s securities lending system to verify if the securities are out on loan. Then, a message must be sent to the custodian bank to recall the securities.
To reduce errors in settlement instructions (which can also occur when there is a discrepancy in which depository should settle the transaction), Fiscella, also executive sponsor of the reference data working group of the
Close Watch on Failures
While preventing trades from failing is ideal, keeping track of when they happened and why is also important. Global custodian