Automation Could Reduce Fixed Income Settlement Fails

A 2012 study by Omgeo found that fixed-income markets have trade failure rates as high as 7% globally, costing the industry up to $300 billion annually. Omgeo believes that automating what has largely been a manual process can significantly reduce this failure rate.
By Jake Safane(2147484770)
A 2012 study by Omgeo found that fixed-income markets have trade failure rates as high as 7% globally, costing the industry up to $300 billion annually. Omgeo believes that automating what has largely been a manual process can significantly reduce this failure rate.

As opposed to equities, fixed income relies more on voice trading, where only about 40% of trades are executed electronically according to trading technology provider InfoReach. After execution, the post-trade process also relies largely on manual processes, says Kevin Arthur, director, fixed income markets, at Omgeo.

Before a trade can properly settle at depository, “all of these other steps after execution where buyer and seller come to meet in the marketplace where the exchange is agreed upon, once that happens, there’s a whole bunch of middle and back office activities that have to be done seamlessly and flawlessly,” explains Arthur.

Some of those activities include matching the economic details of the trade, and some include matching settlement instructions, such as whether the custodian or prime broker will handle settlement.

“There’s quite a bit of static data that have to be all right, in addition to the economic data, the matching details, for it to flow down during the 72 hours after execution,” says Arthur.

By introducing platforms that automate matching and settlement instructions, failure rates are likely to drop. “The first step is really to automate your post-trade process,” he says. “We do see a lot of customers that are either a) still manual or b) automated for only some of the fixed income products. Within the fixed income label, there may be 26 different security types.”

In order to discourage settlement fails, the Treasury Market Practices Group (TMPG), a working group sponsored by the Federal Reserve Bank of New York, has started to impose fines. But rather than being such a disincentive to fail, says Arthur, “really what it’s done is open people’s eyes to the failure problem to really look at this in the most serious light possible.”

And while change will not come overnight, he says, market factors will lead the way like it did for equities. “Necessity is somewhat the mother of invention in the equity space,” says Arthur. “Today the volumes are just so high; they grew so much in the ‘90s that you had to automate to keep up with the scale of the equity volume. So within the bond markets, historically they’ve been lower volume, higher ticket…but I think the bond markets have changed [following the financial crisis]…embracing change in processes has been evolutionary.”

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