Failure Isn't An Option for Franklin Templeton
Failed transactions can cost firms thousands, say fund managers
June 15, 2009
Cleaning up a transaction that fails to settle on time can cost anywhere from a few hundred dollars to a few thousand depending on its complexity and whether it takes several hours or several days to resolve.
The cost of such failures can be significant for a fund manager such as Franklin Templeton Investments, the San Mateo, Calif., global fund manager with $421 billion in assets under its roof. About a half a percent of the 68,000 equities transactions it executes each month fail to settle on time. In addition, about two percent of its 13,000 fixed-income transactions don't settle up on time.
Officials at Franklin Templeton declined to specify their cleanup costs, but other fund managers who spoke with Securities Industry News on the condition of anonymity say they allocate at least $10,000 a month in labor costs, fines and other fees to fix failed trades.
Like many fund managers, Franklin Templeton relies on a central matching service from Omgeo called Central Trade Manager to acknowledge the details of a trade with its broker dealers and custodian banks. But that doesn't always prevent a trade from failing to settle. Broker-dealers might not have delivered the securities or custodian banks might have received the wrong settlement instructions.
In February, Franklin Templeton opted to ease its burden with an online service called FailStation, which aggregates information on all failed trades and puts them at the fingertips of investment managers on a Web portal, the instant they occur. The service is provided by a two-year old company, Middle Office Solutions, based in New York.
Preventing trades from failing is an ideal scenario but even keeping track of when they happened and who was responsible can go a long way to reducing errors, lowering operational costs and speeding up repairs of transactions.
Now all Franklin Templeton operations staffers have to do to track all failed transactions is ask all its broker-dealers and custodian banks to send the information directly to Middle Office Solutions and its FailStation.
"We needed to know what went wrong, how much cost is involved and determine how further fails can be prevented," says Stuart Gunderson, supervisor of global trade services for Franklin Templeton.
It wouldn't have been such a difficult task if only one broker-dealer or one custodian bank were involved, but Franklin Templeton has 200 broker-dealers and more than 100 custodian banks to deal with.
The fund manager would receive dozens of faxes, phone calls and emails from its broker dealers and custodian banks and third party administrators, none of which provided the information in a consistent fashion. Operations teams would then have to retype the data into an internal application which would calculate just how many fails happened on a given day, which broker dealer or custodian was involved and in which market the transaction failed.
The process was time-consuming, says Gunderson, and did not give Franklin Templeton's operations staff the flexibility to slice and dice the data. Neither did Franklin Templeton always have sufficient time to prevent a trade from failing to settle.
"By using FailStation, Franklin Templeton has been able to increase the productivity of its operations staff," says Gunderson. "We can now put more emphasis on pre-matching of trades before settlement date and have the real-time trade status for many markets showing what action was taken."
