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Charlie Lek

By Charles Lek

Opening Bell. The term used to conjure up images of crowded trading floors filled with brokers shouting out orders in a sea of brightly coloured floor jackets. Today, the exchange floors present a very different picture; the roar of the pits has been replaced with the hums of servers running high frequency trading strategies. Technology has played a powerful role in shaping the trading sector, resulting in volumes beyond anyone’s imagination.

Charles Lek

Charles Lek

However, whilst the industry has poured billions into front end systems, back office software is often overlooked; as it is not perceived as an income generating side of the business. Despite higher volumes, many clearing firms still offer a light touch approach when it comes to back office processing. This can be problematic for many clients who must now comply with new legislation, much of which is client centric. Over the past few years, Lek Securities has witnessed an increase in demand amongst firms looking for technology that can handle higher volumes whilst at the same time be client focused.

One such area is found in new reporting obligations which require robust systems in place to specifically identify and report transactions. These new requirements will hopefully increase transparency in the marketplace and help in the detection and prevention of market abuse. An example of this is the European Market Infrastructure Regulation (EMIR) under The European Securities and Markets Authority (ESMA), which requires certain firms to report applicable derivative transactions to a recognised Trade Repository. Although EMIR is still in its early phase, firms must specifically identify transactions using a Unique Trade Identifier or UTI. This can be difficult for those with a light touch backend, as it requires systems which can pinpoint exact transactions in a specific file format.

We have also seen a surge in the need for backend systems in the wealth management sector due to new requirements. One such obligation has arisen from the Retail Distribution Review (RDR) which sets forth rules and regulatory guidance for advisory firms, specifically on remuneration and increasing transparency on charging structures. RDR has outlined new rules on how advisory firms should charge and disclose fees and the types of products suitable for their clients. These new regulations require wealth managers to categorise their advisers as independent or restricted, with some firms offering both services to clients. Whilst the increase in transparency will hopefully lead to a more educated and knowledgeable client, the process can be quite demanding for wealth managers who need to ensure that advisers are making investment decisions within the framework of their RDR status. The matter is further complicated when wealth managers have both types of advisers, which requires bespoke technology to ensure that the right decisions are being made for the right clients under the right capacity. This means that managers need technology that tells them two things: first, what capacity their advisers are working under and second, what investment decisions are prudent for that client.

In addition to new reporting requirements and advisory monitoring software, there has also been a rise in the need for backend software that can handle enhancements to the Client Money and Asset Rules. Client segregation of money and the safeguarding of assets requires robust accounting and control systems in order to properly administer the safeguarding of assets. Recently, in a Consultation Paper published by the Financial Conduct Authority under CP 13/5, there were discussions about the Title Transfer Collateral Arrangements (TTCA) in relation to retail clients. As a result, TTCA agreements may be prohibited from retail clients altogether. Developments are still underway, but the ability to offer client segregated accounts and borrowing facilities without TTCA will require firms to have technology that can calculate individual client balances.

Technology has always played an important role in driving the industry forward, allowing service providers to automate systems, cut overheads, and improve customer support. The introduction of the RDR, enhancements to the safeguarding of Client Money and Assets, and new reporting obligations under EMIR require a sophisticated infrastructure. In the past, many firms would simply rely on their clearing firm for support. However, with many clearers still operating a scaled-back approach, more and more firms are looking externally to third party providers. This can be a serious issue for many as it drives up overheads and also leads to a loss of brand recognition as more vendors sit between the wealth manager and the end client. Fortunately, however, the developments in Model B offerings, particularly those which are white labeled, provide a welcome solution to this – allowing firms to manage industry changes and even reduce their overall costs, while maintaining their own brand, and most importantly client loyalty.

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