Taking on TMS Fragmentation

Trading enterprises have bounced back from the downturn and have begun to focus on IT refreshes and financial technology projects put on hold for two years. Firms are thawing out IT and operations budgets just in time to deal with the fragmentation issue. In addition, as a general rule, firms regularly review the incumbent technology that supports their treasury functions with an eye to the platforms they could be using and how new approaches would impact their organisations. This time around, they will have to direct their IT resources at the new demands of a global economy in recovery, market volatility, more compliance and government scrutiny, and emerging economies.

Ultimately, the systems they keep, build or acquire must offer superior efficiency, performance, risk management and compliance – achievable goals that will get buy-in from key decision-makers.

Accepting the Challenge

The good news is that in the aftermath of the crisis firms know firsthand what they need to do and are starting to tackle the fragmentation challenge, as Nigel Rayner, a research vice president at Gartner recently pointed out.

“The current funding constraints facing many enterprises means they need better cash management, real-time understanding of their credit and risk profile for liquidity management, and reporting tools to help them identify risk exposures across the enterprise,” Rayner said. “Yet too many organisations rely upon fragmented systems, spread sheets and manual processes, and corporate treasury systems are an increasing area of focus and investment for mid- and large-sised enterprises looking to improve the effectiveness of their treasury function.”

Those advocating the end of fragmentation will have to make the case to decision-makers that an overhaul will yield a positive and compelling net present value (NPV). In fact, advocates are poised to make a very strong case that the proposed consolidation will bring the greatest value possible for trading transactions – unprecedented enterprise-wide efficiency. The much-needed unification of the front, middle and back office systems will yield faster transactions, fewer costly errors, improved risk management and better compliance. Traders, risk managers and operations staff will get real-time access to comprehensive functions that will help them fine tune their transactions and strategies. At the heart of this new efficiency will be a streamlined flow of trading data to the front, middle and back offices.

Achieving these seamless data links will be worth the challenge because of the benefits they offer:

  • Maximised trading operations.
  • Greater transparency to minimise enterprise-wide risk and exposure.
  • Improved credit and market risk limits.
  • A clearer view of market sensitivities.
  • And tighter integration between core activities and back-office operations.

Building a Coalition

Long before consultants, IT suppliers and independent contractors are called in, those driving defragmentation will have to build a coalition within the firm for platform consolidation. In a very real sense, the global economic crisis helped make the case for those pushing for reform. As many will recall, toxic assets challenged chief financial officers (CFOs) and treasurers at corporates and risk managers, trading room staff, and compliance officers at banks and trading firms to find a way to compile a complete, enterprise-wide view of a firm’s total risk. Incumbent risk management platforms and desk-by-desk risk assessments fell short.

That full view was also hampered by the many independent trading units within firms that maintain separate systems – some of them covering the same risk areas. This blocked the visibility needed for a complete view and prevented an aggregation of the numbers across asset classes that would have provided a single, comprehensive risk profile of the enterprise.

A key step then is getting buy-in from these trading units and access to the data of their incumbent systems, if not more. The heads of these important profit centres must be consulted on a regular basis and they should be persuaded to take part in ongoing efforts that address the fragmentation issue.

Those driving these efforts will have to persuade the trading unit leaders that it’s in their best interests to support a far more efficient transaction and risk environment for global treasury management. They will need assurances that an overhaul will not detract from their income streams but might actually improve them. For instance, much tighter data integration with back office support systems such as state-of-the-art accounting has an inherent advantage over loosely linked, disjointed platforms. Data in real-time helps avoid lost trades as well as expensive fixes, thus boosting bottom lines for all. Integrated accounting capabilities also assist trading units and financial executives facing a growing list of complex regulations and reporting requirements. In such a demanding environment, where non-compliance penalties can be severe, firms will welcome the security, transparency, accuracy and precision that tight integration to accounting platforms will bring.

Building a coalition to fight fragmentation within a firm can be done. The key is getting all sides to speak to each other about the challenge, what must be improved and how they will benefit. It’s important for firms to fully explore all of the related issues and arrive at a viable plan to successfully resolve the fragmentation issue. A common pitfall is the sidestepping of contentious issues, which results in the creation of a blueprint for what is already in place.

Tangible Rewards

Once a coalition is formed, the consolidation can begin and the advantages will quickly become apparent. The peace-of-mind factor, for one, will be bolstered because firms can begin to rely on a hub that will help them effectively deal with inevitable matters of risk and compliance. In addition, trading, risk and operational responsibilities can be completed in less time by eliminating the effort spent resolving the challenges caused by fragmentation. This allows firms to focus their key staff on more value-added activities.

The tighter integration to come will boost response times and enable firms to move fast when markets swing up or down. With fragmented systems, it’s very difficult, if not impossible, for firms to measure and manage their exposure and risks across assets swiftly. By ending the delays caused by fragmentation, firms can react faster to trading opportunities and improve their bottom lines.

Pulling together the key elements of a global treasury management systems (TMS) and putting them in one place will yield other tangible rewards:

  • A better ROI on trading, risk and operations deployments.
  • A lower total cost of ownership (TCO) for global TMS.
  • Tighter controls over operations.
  • Easier audits.
  • Higher rates for straight-through processing (STP).

A More Robust Architecture

Also, as firms consolidate systems, the groundwork can be laid for the new flexible data backbone that will bolster the efforts of the trading, risk and operations constituencies of a trading organisation. This new architecture will help firms keep pace with demanding markets, form a more complete risk management picture, and stay current with new government regulations. Firms can also revamp or replace systems at their own pace.

Ultimately, a more robust architecture helps to:

  • Create a data repository that provides in-depth support for front, middle and back office functions.
  • Facilitate book structure, system parameters and static data.
  • Bolster long-term transaction management and risk strategies.

Already, there are good signs that many firms are taking the fragmentation issue seriously. They see the wisdom of consolidating systems to handle all of the facets of risk. Banks and corporates, for instance, have started to focus on typical risk coverage areas – cash, interest rates and foreign exchange. These firms are also preparing to include commodity risk, which presents new challenges because it is closely tied to market volatilities. At the same time, trading firms are reviewing how improvements in their risk strategies will benefit their customers who have legitimate concerns about the firm’s risk and exposure levels.

As trading enterprises begin to deal with the fragmentation issue, they will be looking for alternatives to the status quo. They will want a solution that will avert extremely challenging situations such as the unexpected discovery of toxic assets.

A key sign that they have found the correct architecture will be when live market prices can feed real-time positioning systems and firms can see onscreen the impacts that markets are having on their organisations immediately. They will know then that they have ended fragmentation and built a 21st century IT architecture for trading.


Related reading