As we enter a new decade some recognisable themes are emerging around risk management, transaction visibility and how to manage operational costs without impacting customer service or client retention.

Sound familiar? Well the truth is that many firms, of all sizes, are continuing to struggle with their infrastructures, often spending the majority of their resources fighting fires. These come in the form of mergers and acquisitions, the consequences of which are still being unravelled years down the line and new regulatory requirements. During the last year this has been exacerbated by budgetary concerns and resourcing issues.

But while 2009 will be remembered as a tough year, much of what happened was expected and predictable, with the mounting job losses, bank failures and budgets being slashed. As we enter 2010, things are decidedly murkier because although there are signs of a recovery and some banks are profitable again, the growth is still in its infancy and there are bound to be further shocks to the system.

If one thing is certain it's that the fallout from the financial market meltdown has led regulators to ensure that risk management is firmly on the radar for all financial institutions. In talking to clients and prospects in the run up to Sibos in September and the subsequent months there are two significant issues that firms are looking to address with projects in the year ahead: nostro cash management and corporate actions.

Show me my money

The regulatory response to the financial crisis has placed more onerous requirements on banks to prove they are managing their liquidity. From next year, this will mean stricter reporting requirements as well as more sophisticated stress testing.

The challenge faced by internal bank cash managers is the poor quality and timeliness of the data they are forced to base decisions on. Internal data is often compromised as a result of the compartmentalised nature of banks, the use of multiple systems and a high dependence on manual processes and batch information.

Global banks need to know their fully reconciled cash positions at least three times a day, as well as at the end of the day. This is to avoid incurring overdraft charges, or unused facility costs, on their nostro accounts and to avoid duplicated trades, extra staffing costs, and ensure they can invest reserves overnight.

End of day information is stale. According to Celent research, as recently as 2007 only 20% of surveyed European banks were able to rely on real-time information, with 55% intending to by 2011. Real-time data is critical to being able to move away from the traditional reactive cash management in nostro accounts. A proactive, real-time approach helps to eliminate the costs of incurring unnecessary settlement and risk exposure in the market.

In the current environment it is vital to have visibility into cash positions to make the most use of internal liquidity. Any idle balances must be available quickly and efficiently to make up for any shortfalls and avoid the use of costly overdrafts/borrowing facilities. The bank's investment policy also needs to be taken into consideration, and has to contain the appropriate risk parameters, check and controls to avoid exposing the bank to liabilities it cannot cover.

By tracking and monitoring surplus positions in real-time, using automated account sweeping and removing the reliance on costly intra-day borrowing to boost liquidity, banks can make more effective investment and funding decisions provided by greater visibility into cash movements.

As a result, banks reduce their operational risk through real-time reconciliation of payments and same day exception identification and resolution.  It also achieves cost reductions both through more profitable cash management and the retirement of multiple legacy systems.

Taking action on event processing

The second trend is an increased interest in corporate actions projects. Event processing has often been viewed by firms as a huge challenge offering less strategic benefits than processing new instruments, or changes being forced on firms due to regulatory compliance. Consequently automation projects have been put on the back burner in favour of other projects driven by a mandated ‘go live' date and have remained an expensive, risky and inefficient back office operation.

As a result, corporate actions automation has tended to be reactive - it's only when something has gone seriously wrong, causing an operational loss or customer service issue, that a project has been given priority.

The financial market meltdown has led regulators to ensure that risk management is firmly on the radar for all financial institutions. Recognising that corporate actions processing is consistently regarded as the most risk intensive component of back and middle office processing, this focus has placed corporate actions firmly in the spotlight for a multitude of firms, many of whom acknowledge that the growing impetus to automate is a direct result of the current environment.

The risk of a loss arising from corporate actions processing traditionally occurs during the event capture and election management stages of an event. Considering that a handful of vendors have developed specialised solutions to comprehensively eliminate that risk, the current environment is ideal for back and middle office departments to present a persuasive business case to senior management.

This argument is persuasive as the current market conditions have given more weight to the historical business drivers for automation: to reduce operating costs, improve customer service and to reduce a firm's exposure to risk. With consolidation of financial institutions on a global basis, there is mounting pressure by investors and customers for firms to become more efficient and thus more competitive.

Automation of corporate action departments helps to lower headcount and also to reduce the amount of time it takes to process each event. While this provides an immediate ROI, it also permits firms to disperse information to their clients, both internal and external, far more quickly and accurately.

With regulators workings towards ensuring financial institutions improve their risk management practices and maintain have sufficient liquidity, firms can no longer afford to maintain the status quo. This alone is a fundamental and ongoing driver for automating corporate actions and improving nostro cash management. BT

Richard Cummings is executive vice president at SmartStream Technologies