Our CEO Matt Dolton reveals how discussing post-trade processes with several leading FCMs has revealed an interesting phenomenon…
You’ll probably be familiar with the enterprise technology term ‘technical debt’, relating to the cost deficit or disadvantages that result over time from not addressing technology shortcomings.
Surprisingly few of the FCMs we talk to, think about this in terms of ‘Rec Debt’ or cumulative niggling issues that impact the speed or accuracy of their daily reconciliations. It’s surprisingly common in the world of listed derivatives or ETD reconciliations, where small changes, improvements and fixes within the incumbent reconciliation platform are too time-consuming, can’t be commercially justified, or just get overlooked. And whilst often the individual changes aren’t critical or major, many small issues can start to create compound or cumulative ‘rec debt’ which can result in significant inefficiency or risk.
Symptoms of ‘Rec Debt’
If your ETD Recs team is having to adapt working practices or create numerous manual workarounds to cope with the limitations or snags in the reconciliations tools they use, then the diagnosis may well be a serious case of ‘Recs Debt’ resulting in sub-optimal, inefficient working practices and over-reliance on individuals.
In a recent survey with more than 60 sell-side firms, we discovered that 47% of firms are still highly dependent on key employees and manual processes to complete their ETD recs making the process slow and prone to human fallibility. *
The situation is exacerbated when vendors don’t or can’t address the minor issues fast enough and impose a commercial regime that prevents true business agility. The result is a sad decline into learned helplessness whereby firms give up trying to make their existing systems more efficient and become further mired in manual processes.
Effective reconciliations are at the heart of effective control and reporting and, although there has been significant investment across the industry, the reconciliation process for many remains too manual and prone to human error while being plagued by the data fragmentation and inconsistency that is rife across derivatives post-trade.
So, what’s the answer? It’s a commonly held view, borne out in our recent research* that automation will significantly speed up and de-risk the recs process. At the start of a new year, perhaps now is the time to tackle ‘rec debt’ and deal with those risks sooner rather than later.
Our recent research report highlights some of the issues discussed above. The report commissioned by Kynetix and based on a survey and series of interviews with executives at over 60 sell-side firms, argues that through investment in technology, data normalisation or standardisation and automation, firms can navigate the ‘data jungle’ whilst achieving a new paradigm of risk reduction and efficiency.
In the report, we set out to benchmark approaches being taken by different parts of the industry, to understand the drivers for investment and get insights into how much automation is currently being deployed to mitigate risk versus sheer numbers of manual operators and processes in derivatives reconciliations.