Allocations, give-ups still industry's main post-trade problems - report

The derivatives industry is more resilient now than it was four years ago at the start of COVID but firms are still concerned about allocations and give-ups in times of market stress, a report has concluded.

Acuiti published on Friday 'Futureproofing Derivatives Post-Trade: Building Operational Resilience Across the Market' in partnership with tech firm OSTTRA which polled 57 buy and sell-side firms on their post-trade infrastructure.

The report found the industry is better equipped to deal with volatility now than in early 2020 and this was demonstrated a year ago as firms dealt effectively with the aftermath of the mini-banking crisis caused by the collapse of Silicon Valley Bank.

But the industry still has work to do, according to the Acuiti report which suggests allocations and give-ups in exchange-traded derivatives (ETD) remain two crucial areas of concern.

The report concluded: “Allocations were cited by a majority of respondents while give-ups were also seen as an area that still required improvement. These were two of the major causes of the disruption in 2020.”

Almost two thirds of respondents to the Acuiti report said allocations were a key concern while nearly a half of firms said they were worried about give-ups.

The Acuiti survey found sell-side entities such as banks and brokers are more concerned about post-trade bottlenecks despite significant investment in the past four years.

The sell-side, however, was more bullish about the industry’s 30/30/30 proposals to streamline allocations and give-ups in light of the March 2020 post-trade backlogs caused by extreme volatility and volumes when operations teams were adjusting to working from home.

The Acuiti report found: “For the industry to achieve its ambitions in ensuring the timeliness of allocations and the subsequent reduction of risk, it is essential that the buy-side is fully engaged.”

The paper cited the work of the Derivatives Market Institute for Standards (DMIST) established by trade body FIA in 2022 to tackle the issues which contributed to the backlogs that formed after the onset of the COVID pandemic in 2020.

Joanna Davies, managing director at OSTTRA, said: “Addressing the complexities of ETD allocations and give-ups is crucial. This survey reveals that 63% of respondents recognise allocations as the most significant remaining risk in the system. Additionally, just under 50% believe there is work needed on give-ups. Whilst the DMIST proposals provide a robust foundation to address this challenge, the survey indicates that there is more work to be done.”

DMIST appointed on Tuesday a chair to its newly formed sponsor board and published its strategic blueprint for the year ahead.

The body published in June last year the standards that define how firms execute and allocate trades, known as the 30/30/30 rules.

The standards mandated that clients allocate instructions to their executing brokers, the executing brokers pass trades to the clearing broker and the clearing broker books the trades against the relevant client account each within 30 minutes.