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Sheldon Warrick
Sheldon Warrick
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The Trouble With Brazil's Post-Trade Automation in a Global Economy

As Brazilian trade volume grows, asset managers adopt technological solutions to reduce risk and improve efficiency

Sheldon Warrick, Omgeo
Sheldon Warrick, Omgeo
Capital inflows into the Latin American markets from around the world have bolstered economies and increased market activity and trading volumes. Perhaps nowhere is the impact felt more than in Brazil, where the Bovespa has reported an almost 70 percent increase in equity trading in the past three years, reaching R$810 billion ($339bn) in total value traded in 2013. The influx of foreign assets into Brazil has market participants looking to adopt global best practices in post-trade automation to mitigate unnecessary operational and counterparty risk.

While Brazil currently has sophisticated regulation and a sound settlement infrastructure in place, there are still many challenges in the post-trade area - the processes that occur after a trade is executed and before it settled - including the allocation, confirmation and matching processes. Inefficiencies in post-trade confirmation still plague many market participants, and these inefficiencies slow down settlement and increase both risk and cost.

Significant challenges arise for cross-border transactions in particular. On the sell-side, brokers have to wait for clients to finish their day, usually at market close, before they receive the allocations that they need to start their confirmation process. Frequently these allocations are received in a non-automated format like a text file. On the buy-side, firms have to send allocations to their custodians by uploading them to each custodian’s website, which is a big pain point.

The inefficiencies arise in part from the proprietary in-house mechanisms or systems Brazilian asset managers have adopted to manage post-trade processing. These systems rely primarily on phone, email and fax confirmations which are not-standardized, are transmitted via antiquated technology and are prone to human errors. When mistakes in post-trade processing are made, it slows the clearing and settlement cycle, tying up cash and securities holdings that might be better invested in the market rather than being held in a bank and depository.

Take for example a hypothetical trade occurring between a Brazilian asset manager and a Japanese counterparty. Because of time zone differences, relying on phone and fax trade confirmation may delay clearing in settlement by a day or more. During this delay, the market participants are missing out on opportunities in the FX markets to hedge currency exposure, and they carry a higher risk of post-trade failure if trade details are not properly matched. If this process were done via a matching platform, using globally recognized standards, clearing and settlement could be facilitated much faster, reducing systemic risk and creating opportunities for investment in cash and securities.

It is examples such as this that are driving a discussion about post-trade automation in Brazil. To be as efficient as possible, the Brazilian capital market participants need to adopt sound technology solutions that work globally — for both Brazilian firms trading in international markets and for firms across the Americas, Europe and Asia looking to transact in Brazil. If settlement efficiency is to have an effect on local markets and systemic risk worldwide, due to the increasing globalization of trading and investment, the effort to improve settlement efficiency and introduce automation across the entire trade lifecycle should be a global one.

Sheldon Warrick is the Global Head of Relationship Management at Omgeo, the global standard for post-trade efficiency.

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