Post-trade tech and the back/front office

Vijay Mayadas, president, capital markets at Broadridge, discusses the biggest challenges in the back office and how post-trade technology is transforming the relationship between the front and back office.
 

What are the current specific operational challenges facing the back office?

Vijay Mayadas: A complex technology footprint is the number one challenge, particularly for larger investment banks that have built up siloed technology stacks over time with multiple vendors and homegrown systems.

As these systems have been built and added to over time, there are different types of data ontologies—ways of describing the same or similar underlying sets of data. Data fragmentation and data complexity are often the root cause as to why it is so difficult to work with and transform a lot of post-trade technology.

Continuous regulatory burdens are another challenge. The Fundamental Review of the Trading Book is one example of the more complex regulations that impact the front office and flow through to the back office. A fragmented silo technology stack makes it more difficult to absorb that kind of change.
 

Post-trade covers clearing and settlement, asset servicing, custody and reporting. Which specific areas within these activities have processes that are “easier” to automate, or to innovate?

Vijay Mayadas: Regulatory reporting is a little easier to drive more technological change because it’s a fairly siloed activity. Once you can get the data from your core systems into the right format, reporting off of that data becomes easier.

There is a lot of complex domain expertise and business logic deeply embedded in post-trade systems. It’s a real focus area: how you unlock that with more modular-based, microservices-based technology principles.

I’m seeing innovation using artificial intelligence (AI) and machine learning to predict outcomes, such as the likelihood of a trade failing. We see needle-moving projects in distributed-ledger technology and smart contracts that are creating real benefits for firms very quickly, particularly in clearing and settlement.

An example of this is how we have taken a core trading and settlement process in the repo markets and put it on a smart contract. This simplifies the way clearance and settlement works and creates immediate savings. Robotic process automation is also becoming embedded into asset-servicing technology stacks to manage the long tail of exceptions that require a lot of manual intervention.
 

The back office has typically been neglected in terms of funding. Is more money being pumped into the back office?

Vijay Mayadas: Yes, we are seeing more focus on how to streamline the back office and modernise technology stacks. All of that is driven by the macro trend of low-touch trading, electronification, margin pressure and demand for new products and new markets.

There’s a much stronger focus on figuring out what the next-generation back office should look like. The focus is on how to decommission existing legacy platforms to enable firms to get higher levels of scale and straight-through-processing benefits.
 

How does the back office provide data and insights to the front office today?

Vijay Mayadas: Back-office data is increasingly important to the front office because of the increasingly real-time nature of trading. Using back-office data to help the front office make better trading decisions and manage risk and inventory more effectively is a key area of focus.

There’s a lot of variation in terms of exactly what firms are doing to surface back-office data into the front office, but the underlying driver of constraints and opportunity is driven by the technology architecture in place.
 

How is the back office approaching its technology transformation journey?

Vijay Mayadas: Most firms we’re speaking with are trying to think of the back office holistically, so the entire trade life cycle – front, middle and back. What’s our journey to modernise that entire technology stack? How should the back office fit into that?

It’s about really understanding your target state and designing that journey in a series of very incremental steps with quick wins. Many firms are looking to avoid the big-bang type of technology transformation. Modern technology architecture really gives you the opportunity to make this journey in a more incremental manner.
 

In what circumstances is the back office using technologies such as cloud, APIs, microservices, AI and machine learning?

Vijay Mayadas: Most firms now build their new components to be cloud-ready. The cloud specifically is very beneficial if you have processes that require high spikes in computing power, but are not necessarily consistent over the course of the day. The cloud brings a lot of benefits for those sorts of complex activities, such as running a Monte Carlo simulation for a trading strategy.

I’m seeing a lot more adoption of cloud for front-office technology components than in the back office, but it is definitely an area we’ve invested in, with many of our existing components already cloud-enabled.

How important is interoperability between a firm’s front-, middle- and back-office systems and workflows?

Vijay Mayadas: Modular interoperability is very important to help firms communicate better between the front, middle and back office. For example, interoperability helps you introduce new asset classes more efficiently because you’re essentially creating a new module for that asset class, which then plugs into your existing stack. You minimise the code changes you must make deeper into the technology stack.

The key is data ontology. A common data ontology that gives you the ability to create APIs is more effective. This then provides the ability to enable real-time and much simpler data interfaces between the different systems.
 

A lot of operational processes within the back office require specialists. When performing large-scale transformation from legacy systems to new digital technologies, what methods are companies using to refocus their existing specialists to the new value-added tasks?

Vijay Mayadas: Firms are refocusing talent to drive modernization of the back office, by having teams work together in squads. So, you’ll have someone who maybe has very deep domain expertise in some part of back-office operations—and then partner them up with someone who is a forward-thinking technologist along with someone from the business. If you can get those squads humming along nicely you can actually get the benefits of technology modernization, deep post-trade domain expertise with a real business focus to create really good outcomes.

 

This feature forms part of the Transforming post-trade operations special report
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