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."
The global fund manager's decision to sign on with FailStation followed its centralization in October 2008 of most of its exceptions processing work for global settlements in Poznan, Poland. That means a single team is now responsible for monitoring fails or potential fails rather than multiple decentralized units in Fort Lauderdale, Florida, Rancho Cordova, California, Short Hills, New Jersey, Edinburgh and Singapore.
Gunderson declined to quantify the cost savings or the reduction in failed trades using FailStation, but noted plenty of operational benefits. "We can run various types of statistical analysis from FailStation to identify the root cause of failed transactions and ensure these issues are resolved to minimize the risk to both Franklin Templeton and its brokers," he says.
FailStation pulls together data on failed trades or transactions that have the potential to fail. The transactions, after they are sent in from the settlement systems of broker dealers and custodian banks, are viewable on a secure Web portal built on Microsoft.net technology and an Oracle database. FailStation presents the information in a single consolidated report, so when the operations team at a fund management shop logs onto Middle Office Solutions' website it can get a complete picture of failed transactions and which ones might fail.
"FailStation shows the information in an easy-to-read format with real-time visibility," says Gunderson. "From a risk management perspective, we are able to see which broker dealers, custodian banks and markets pose the greatest challenges."
Reports can also be customized. "The fund manager can ask for the failed transactions to be highlighted by broker, custodian bank or market," says Steven Greenfield, chief executive officer and co-founder of Middle Office Solutions. "The manager can also compare the broker dealer and custodian bank's explanation of the reason for the failed transaction on a side by side basis."
Using FailStation, fund managers can also prevent transactions from failing to settle based on information provided by the broker-dealer or custodian bank of a potential problem that has arisen prior to the settlement date of the transaction.
Greenfield claims that other fund manager users of FailStation have saved more than $300,000 annually from cutting the number of potential failed transactions and speeding up the cleanup time. Some fund managers use the service only to keep track of failed transactions.
Services such as FailStation will become popular as fund managers move to keep better tabs on their failed transactions in the U.S. Treasuries, predicts Dayle Scher, research director of the investment management group at TowerGroup in Needham, Mass.
Not doing so will cost plenty. The Treasury Market Practices Group (TMPG), the professional organization backed by the Federal Reserve Bank of New York, has recommended that as of May 1, firms responsible for failed trades be fined at least $500 per trade. Fund managers will need to determine who is responsible for paying the penalty and file a claim with the broker-dealer to collect the penalty. This is a process Greenfield says can be managed by FailStation.
Handling the "fails" process for U.S. Treasuries alone manually can cost a single firm about $75,000 annually based on half the time of an operations executive, according to Scher."Most fund managers still rely on Excel spreadsheets and emails from broker dealers and custodian banks to manage their failed" transactions, she notes. "Preparing for compliance with the TMPG recommendation is a first step to fails and claims management that may have been avoided or neglected in the past by investment management firms."
So far, Middle Office Solutions has nabbed about twenty fund manager clients who pay a fixed monthly subscription fee based on the number of investor accounts using FailStation and the number of regions where information is distributed.
About eighty custodian banks and broker dealers have their data on FailStation and can receive the same reports as their fund manager clients. The custodian banks and broker-dealers are charged a monthly subscription fee based upon the number of fund managers who are their clients.
At A Glance
COMPANY: Franklin Templeton Investments
HEADQUARTERS: San Mateo, CA
ASSETS UNDER MANAGEMENT: $421 billion
PRODUCTS: Mutual funds, retirement planning services
OBJECTIVE: Keep track of failed trades and potential fails
TASK: Replace rekeying of data with a Web- based service
RESULT: Operational savings from cutting the number of failed transactions and speeding up the cleanup time. Dollar amount not disclosed.
