December 28, 2010 – As 2010 draws to a close and the new year is almost here, operations executives across the globe are trying to wrap up their reports to senior management of just what went wrong and why.

Of course, the key goal is to avoid similar glitches in the future. In doing so, middle and back-office executives have come up with a list of what they will be worried about the most next year. Bottom line: It’s where they will spend the most attention and will ask their management for extra money.

The following represents the top five expected pain points for 2011, based on interviews Securities Technology Monitor conducted with a dozen operations executives and their software vendors last week. Operations executives agreed to share the information on the grounds that neither the names of their firms nor their own be published.

  1. Getting Access to Data (to Meet Regulatory Requirements). At the core of the Dodd-Frank Wall Street Reform Act in the United States and similar legislation across the Atlantic is a greater requirement for transparency into how capital markets firms operate. This means firms will have to be able to show regulators just what transactions they executed with whom, when and for how much. That’s the data required by the U.S.’ newly created Office of Financial Research which has yet to develop guidelines on just how that data will be formatted. “Operations executives will need to determine how to cleanse the data, store it and access it in time to file the necessary regulatory reports,” says Stephen Engdahl, senior vice president at GoldenSource, a New York-based data management software firm. At issue: too much inconsistent data in too many applications in too many lines of business.
  2. Is the Price Right? How to Get Correct and Consistent Valuations on Assets. Just how to value an asset which is not traded on an exchange – like a credit default swap – is now a very big deal, post the crisis. Accounting standards boards on both sides of the Atlantic have guidelines but its up to the financial firm to prove that it has made the correct calculation. Mistakes can cost plenty in regulatory fines. “There is a concern about whether the firm crossed its T’s and dotted its I’s in terms of substantiating its methodology,” says Engdahl. “And that means understanding the product and its attributes and having a consistent methodology across business lines of how to value it.” Using different models and inputs can result in different valuations.
  3. Correctly Notifying Investors of Corporate Actions. It’s not that hard to keep track of whether or not a company will make an income or dividend payment. The problems typically arise when needing to interpret all that paperwork a company files with the Securities and Exchange Commission or another regulator about a complex merger, tender offer, redemption or other reorganization. And based on industry estimates there are more than 50 permutations of a notice on any given corporate action. If for some reason the right information is not sent to the investor and money is lost, expect to fork over big bucks to make the investor whole. “Even the smallest error in interpretation can add up to millions of dollars in compensation,” says one operations executive at a New York custodian bank. “And we just dread having to tell our chief executive officer who made the error and why.”
  4. Quickly Adapting to New Products. Trading desks are in business to make money and operations executives are in business to help them do so with as few mistakes as possible. That’s the law of the land in the financial services industry but what happens if the trading desk decides to create a custom product, such as some combination of an equity or fixed income instrument and a derivative. Its done every day of the week on Wall Street. “Operations executives have to know how to value it, what collateral requirements might be necessary, how to prepare and make payments and at the very least how to record its attributes in a securities masterfile,”says David Kubersky, managing director of New York-based SimCorp USA, a front-to-back office investment management software provider.
  5. Fixing ‘Exceptions’ Efficiently. Most trades are cleared and settle on time correctly. But it stands to reason that a few will slip through the cracks. Fixing those exceptions can cost a firm millions of dollars each year at best. At worst, nobody has a clue what to do, because there is no automation or workflow process in place designed specifically to deal with exceptions. That makes each exception exceptionally expensive to handle, since each is handled differently by a different set of hands and eyes. “It’s a combination of technology and business procedures and one wrong step can compound the mistake,” says Kubersky.

This story originally appeared in Securities Technology Monitor.

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