2011: Regulation, Transparency & Optimism

Marianne Brown, president and CEO of Omgeo, looks into her 2011 crystal ball and sees two significant developments: the implementation of a harmonized T+2 settlement cycle in the European marketplace, and industry participants coming together to establish an open-door policy to improve transparency across the industry .

As our global economy continues its slow pace to recovery, the financial services industry is moving into 2011 with ongoing prudence. Although it's hard not to be optimistic with the US economy expanding at a better-than-expected rate, financial services professionals are, understandably, still cautious.

For 2011, cautious optimism about the real economy looks to be balanced by a slew of upcoming regulations and new financial laws. I anticipate two major operational issues will be in the spotlight for financial professionals in the coming year:

T+2 Likely in Europe
First, it appears highly likely that Europe will move to a harmonized T+2 settlement cycle. At a recent industry event in Brussels, participants confirmed that the business case for T+2 makes sense, that harmonization across markets is urgently needed and that the industry is committed to make it happen.

This will inevitably have an effect on the US and I anticipate there being quite an active debate around the steps that the US may need to take in order to keep pace. After all, it was the US that considered a potential move to a T+1 settlement cycle back in the late '90s.

Financial firms and regulators will be identifying the necessary steps and building blocks to move to T+2 - including investments in middle- and back-office automation and addressing inefficient trade-processing practices that slow the trade life cycle down.

According to a recently released Omgeo discussion paper on settlement efficiency and operational risk, a country's settlement efficiency can be directly tied to whether market participants actively achieve same day affirmation (SDA). SDA is essentially when an investment manager and a broker-dealer agree to all trade details on the day a trade is executed. According to the findings, settlement efficiency is 26% higher for the top countries by SDA rate than the lowest countries, with Asia leading the globe and the US falling short. The results clearly demonstrate that trades affirmed on trade date have a much higher chance of settling on time and are far less likely to fail, reducing firms' operational risk.

Open Door Policy
Second, in 2010, regulators, legislators and industry participants will band together to implement an open door policy across the industry. As we enter a new decade, we will continue to see progress toward increased transparency across the trade life cycle - pre-trade, trade and settlement.

While past eras seemed to accept "ignorance is bliss" attitudes, the future will yield a time where transparency of information is critical and a must. It is now up to market participants and industry regulators to determine how to best decipher and use the vast amounts of data at their fingertips. For years, the middle and back office have struggled to standardize their systems so that information could be translated into actionable best practices. At the same time, regulators and investors are demanding increased transparency. Now is the time to uncover, analyze and action data across the industry.

Global regulation is just the tip of the iceberg as we move into 2011. From harmonized settlement cycles to OTC derivatives reform and more, financial firms must continue to look at their risk exposure holistically and reassess their operational efficiency across the life cycle of a trade. The good news is that we appear to be on track and the industry is ready to respond.

This is not going to be a quick journey, but with the support of regulatory authorities and the willing participation of the industry, I anticipate that steady progress will be made. Regulation is an effective way of driving market efficiency. We are all humans at the end of the day, and unless forced to adapt new behaviors and processes, necessary changes and investments might not be made. This is the era of risk mitigation, transparency and data quality - the right focus areas for our industry.

By Marianne Brown, president & CEO, Omgeo