FMI and the Role of ABOR in Post Trade Processes

This recent Post Trade Survey from NASDAQ and ValueExchange (VX) looks at the most pressing priorities for global Financial Market Infrastructure (FMI) systems as they navigate an increasingly volatile and changing business environment. The survey cites some eye opening stats around the tech “legacy issue” across the FMI ecosystem, which encompasses exchanges, clearing houses, broker-dealers and custodians.

Of note:

• ⅓ of the FMI systems worldwide are expected to reach their end of life by 2028
• 78% of FMI budgets are dominated by legacy tech management
• Many post-trade systems are over a decade old
  
  

These metrics are compelling, though not surprising. Across the financial services industry, the reliance on aging technology is a well-known challenge. As we’ve previously cited, data volumes continue to surge, current regulatory reforms continue to bring tremendous impact, and new asset classes continue to emerge in the market. 

As the FundGuard team is known to do, we stepped back to consider this latest industry survey through the lens of fund accounting, specifically the role of the accounting book of record (ABOR) in post-trade processing, and the importance of a modern tech stack to ensure the necessary resiliency and scalability of today’s FMI systems. 

Today’s question, posed to our own Alan Schneider: “What exactly does ABOR have to do with FMIs?”

AS: To answer that, let’s consider information flow across the different FMI entities:

1. Exchanges: The trade establishes the position – initially or as its changed in the market.
2. Clearing Houses: Responsible for the timely, accurate and assured settlement of the trade establishing the position.
3. Broker-Dealer: Facilitates confirmation with the trade counterparty and confirms with the Clearing House that the trade is done.
4. Custodian: Moves cash or securities to settle the trade and keeps an ongoing record for the beneficial owner of the result.
   
   

In each of the above steps, the given trade and the resultant position are central to each participant’s role, and what better way to maintain the information about the trade and the positions than within an investment accounting record?

Each participant within the FMI ecosystem maintains some form of trade and position ledger, all for the current unique purpose the participant fills. A significant amount of the time and cost going into the participants’ activities is due to this maintenance (posting, recordkeeping, reconciliation) and the fact that we have hundreds of disparate systems doing the work.

In this sense, the ABOR – as a central repository of financial transaction data – can be crucial to FMI. By FundGuard’s definition, ABOR supports a variety of basic investment functions but is primarily designed for back-office use cases and of course key to the accurate recording and tracking of financial transactions within an FMI. 

So getting back to the original question, here is the role of ABOR in FMI: 

• Accuracy and Integrity: A proper ABOR should be able to serve as the authoritative source of financial data, reducing the risk of errors, discrepancies, or fraud in transaction processing.

• Settlement and Clearing: Understanding the clearing and settlement status of a trade and its effect on available shares or cash is the role of a custodian’s ABOR or an ABOR prepared by a manager using custodian settlement information.

• Risk Management: Within an FMI, ABOR should provide real-time or near-real-time visibility into financial positions, exposures, and counterparty risks to enable timely risk assessments and risk mitigation measures.

• Regulatory Compliance: An ABOR should be able to deliver the accurate and comprehensive information required to meet regulatory mandates.

• Reconciliation and Reporting: An ABOR should enable FMIs to reconcile transaction data with other market participants and provide the data needed for regulatory and financial reporting.

• Audit and Transparency: Having a well-maintained ABOR enhances transparency and auditability within the FMI providing a single source of truth for auditors, regulators, and internal stakeholders to review and verify transaction records.
  

Put more pithily, an accounting book of record is a foundational component of an FMI, ensuring the accuracy, reliability, and efficiency of financial transaction processing across the financial markets.

However…

As the NASDAQ/VX post-trade survey results have reinforced, the industry’s aging FMI systems are incapable of continuing to handle the unparalleled resilience and scale required to support the industry. Similarly, decades old investment accounting systems could prove to be a hindrance rather than an enabler of the above-listed processes – all the more reason why the industry must collectively shed its at-risk legacy technology models and create the transformation that is now possible with today’s innovative, new era, cloud-native technology stacks.  

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