4th Theme of SIBOS: Simplifying Integration

The lack of common standards between firms’ systems means that integrating them takes longer and is more difficult and expensive than it should be. To connect to another firm’s platform often requires software to act as the gateway and middleware to transform messages to the type the other platform requires. This issue became more pronounced after Lehman Brothers’ failure, with counterparty risk high on the minds of fund managers and their investors. Increasing the number of prime brokers was a logical step and the creditworthiness and capital strength of institutions are key differentiators.

The chart shows this effect in Europe, with notable changes in prime brokers’ market shares since 2008. The marketshare of the ‘Others’ category has fallen by three quarters, as funds have moved their business to the larger prime brokers. The shares of the top five brokers are also more evenly distributed, as hedge funds have diversified their assets among two or more prime brokers. The ability of the universal banks to offer other services, such as custody and fund administration, has also increased their attractiveness to the hedge fund community.

The issue from a post-trade systems perspective is that an investor with several prime brokers may have to communicate differently with each one, making it a real challenge for systems to cope. Firms would therefore benefit from using common standards as much as possible. A modern post-trade system should accept open messaging standards such as SWIFT and FIX, and allow users to upload multiple file formats, normalising the data so they can bematched. Firms can then work in the way that suits them, irrespective of the way their counterparties operate.

A post-trade system should also enable users to interact with it in the most efficient and effective way, catering for each market constituent. A large executing broker or algorithmic trader may process thousands of trades each day and will want the fastest technology and best information through real-time messaging and straight-through processing. A small hedge fund, in contrast, may want to keep its technology investment to a minimum. With only a small number of daily trades, its needs would be met by a web-based system that allowed manual uploads. Post-trade systems need to cater for both ends of this spectrum.