How Global Broker-Dealers Can Win Japanese Domestic Clients
A look at how Broadridge is helping global broker-dealers grow their domestic Japanese business through meeting the high expectations of Japanese local funds. Many firms face challenges in submitting data to the Japan Securities Depository Center’s pre-settlement matching system (PSMS) in a timely, efficient and optimized manner.
“Timely submission of our trade reports to our domestic clients via JASDEC is essential, and Broadridge provides useful functions such as a VIP trade processing queue which allows us to make sure that any domestic trades can get to PSMS without delay,” said a head of settlement operations in Japan at a large European securities firm. “The self-service reporting modification feature allows us to reduce operational risk and speed up our operation through automation. Manual repetitive tasks such as pending settlement monitoring can be done with ease. Using Broadridge’s JASDEC Processing Solution, we can avoid mistakes and help us pin down specific settlement counterparties who we have to follow up with during tight settlement hours. We also managed to save significantly on the total cost of ownership in our settlement platform.”
Broker-dealers sometimes contend with particularly demanding end clients. Many local Japanese fund managers have strict requirements on receiving the data after it is sent to JASDEC’s PSMS.
Many require that they receive the confirmed trade data by 4 pm local time, so their appointed custodian bank (trust bank) has an hour to calculate the net asset value (NAV) of the fund in order to publish the price by 5 pm.
In cases where broker-dealers fail to meet the fund’s cutoff requirements, some buyside clients have been known to put a `line-cut` or an order stoppage with those broker-dealers as a punishment for not adhering to the fund’s strict timelines. This means they stop sending orders to that broker-dealer for a certain period, effectively starving them of revenue. In fact, certain asset managers in Japan will not even consider engaging with foreign firms who have not invested in the connectivity pieces as they consider this an inferior service for them and their clients.
Another issue that potentially hinders broker-dealers from getting the confirmed trade data to fund houses in a timely fashion is when they outsource the process to a transaction bank as a third-party clearing model.
Using the transaction bank model, broker-dealers will send trade data to their transaction banks in a Swift ISO 15022 MT message or in a proprietary format the transaction bank requires. Then, the transaction bank will adapt it to the JASDEC PSMS format and transmit it to the system.
If the data is transmitted via Swift, although Swift guarantees that it will send the message, it doesn’t ensure how fast the data will get to the transaction bank, which could potentially hold up the whole process. There is no certainty on how quickly the data will get to the JASDEC PSMS. The risk rises further if the trades require any amendments, due to incorrect data during the PSMS matching cycle, as transaction banks will not reprocess the data with priority to other instructions they receive. However, the deadline from the fund (for 4 pm) still stands.
Using a transaction bank’s proprietary format has downsides in the cost and effort to maintain such a locally unique interface. Besides the challenges of getting the data to the funds on time, the transaction bank also has a major disadvantage in the cost model, which will typically erode any commissions earned from the funds. Although this model works when there are very few trades, once there is a step up in volume, the per-trade model does not typically scale well. Using Broadridge’s model, clients have enjoyed significant savings.
An upcoming market change could also stress current processes. In November 2024, Japan will extend its trading hours to 3:30 pm, which will effectively shorten the time the broker-dealers have to process trade allocation and confirmation and then send that data to JASDEC PSMS by 30 minutes.
Using Broadridge’s JASDEC Processing Solution, broker-dealers can provide certainty to their end clients that they will get the data to the JASDEC PSMS in a timely manner.
Broadridge provides a service level agreement (SLA) to clients that it will deliver the data to JASDEC PSMS within two minutes after it receives the trade data from broker-dealers.
The trade will pass through Broadridge’s core transaction processing engine, performing various validations and enrichment processing and adding any additional information needed for settlement. Then, it will pass on the trade data to the JASDEC PSMS platform for matching.
Once it goes through the JASDEC PSMS, the trade data will be sent to the fund’s trust bank (custodian bank) for final processing.
Broadridge will only hold the erroneous trades from transmission, in cases where there is missing or inaccurate information. The platform has a sophisticated processing dependency tree to manage the trade lifecycle, holding the transmission only if essential processes fail that are required for JASDEC, thus ensuring that it gets the data as soon as possible to JASDEC and then on to the fund’s trust bank / custodian banks.
The system is agnostic, so broker-dealers that use other trade processing engines can still use Broadridge’s JASDEC Processing Solution. Broadridge can offer it as a standalone solution, and broker-dealers can link their own platforms using Broadridge’s API.
Besides providing a two-minute SLA to broker-dealers, Broadridge has also developed a delivery prioritization logic that allows broker-dealers to select which client settlements they wish to prioritize. In the case of a partial delivery from the market, the prioritized client will receive the trades first. This will essentially reduce the potential failure of settlement from particularly demanding clients.
Broadridge uses an algorithm to determine the priority of clients based on certain attributes, and broker-dealers can set a ranking that decides which clients take priority, which can be changed at any time. The solution’s web-based user screens are available in both English and Japanese and accessible from overseas, which allows the optimal utilization of the user’s global resources.
And finally, Broadridge’s clients benefit from using Broadridge’s data center in Tokyo, thus saving on costs of in-house systems, and can leverage the easy data interface into other systems they may be using in their operations.
In 2001, JASDEC introduced the pre-settlement matching system (PSMS) with the aim to reduce settlement risk by automating the post-trade matching process. Before this, institutional investors used manual processes—often involving faxes and telephone calls—to handle the allocation, confirmation, and settlement of trades in Japan.
The PSMS is a straight-through processing system that was developed using standard data message formats, network and codes. Today’s PSMS accepts ISO 20022 based messages, International Securities Identification Number (ISIN) codes to identify securities, and business identifier code (BIC) to identify participating parties, such as counterparties for trading and settlement.
In the case of domestic funds, completing trade matching on T+0 early afternoon is vital for the business flow around investment trust management, particularly when calculating and publishing net asset values for funds.