Central Trade Matching Grows in 2013, But Lack of Automation Still Threatens Buy Side

The number of buy-side firms seeking to automate their trade matching processes has grown significantly this year, with many firms now centrally matching their trades.

Omgeo Central Trade Manager has grown its community by 17% in 2013, driven mostly by the move towards shorter settlement cycles, CSD regulation and penalties for fail trades. This year, Omgeo has added 220 investment management and broker-dealer clients worldwide to its platform for the central matching of cross-border and domestic equity, fixed income, exchange-traded derivative (futures and options) and contract-for-difference transactions. Over 1,500 firms worldwide now use Omgeo CTM, including 655 investment managers and 866 broker-dealers.

Yet despite these numbers a significant portion of the buy-side industry is yet to be automated, says Tony Freeman, executive director, Industry Relations, Omgeo.    

“20% of the buyside is not automated in the post trade area. For a T+2 settlement cycle, everybody—all the big players, custodians, sub-custodians and brokers assume you have to be automated in the middle office because you effectively have until the end of day on T+1 to get your trade to the CSD and then onto Target-2 Securities (the harmonized platform for securities settlement in the Eurozone). So that 20% of the market that is not automated are going to struggle and its coming next year because Euroclear have announced the date of October next year as their T+2 cycle.

“CSD regulation says everything has to be implemented by January 2015 so the fourth quarter of next year is the last opportunity for all 28 European markets to be automated. So Euroclear Belgium, France and the Netherlands have announced a date of October 16 this year, and the Nordic markets will move on the same day, so it looks like the whole of the market will move to T+2 in October next year.”

The lack of automation among many buy-side firms will surely trickle down to the funds that will have to pay those extra costs, Freeman adds.

The growth in the Omgeo CTM community has come from an expansion across geographies and asset classes, including new exchange-traded derivative (ETD) functionality and an increasing desire for firms to standardize all post-trade processes on a single platform. To date, 35 clients have signed to adopt ETD functionality on Omgeo CTM.

Omgeo CTM community growth has also been partly driven by a multi-year migration of clients from Omgeo’s legacy local trade confirmation service, Omgeo OASYS Global, to Omgeo CTM. Upon completion of the migration project in June 2013, over 500 broker-dealer clients successfully migrated to Omgeo CTM. Same-day affirmation (SDA) rates on Omgeo CTM average 94%, versus locally matched trades with same-day affirmation rates ranging from just 36% in the U.S. domestic market to up to 72% for cross-border and non-US domestic transactions.

Tim Keady, managing director of Sales and Solution Delivery at Omgeo, said: “The migration project has been successfully completed due to the commitment and partnership Omgeo shares with our client community.

“At the same time, we have seen significant interest in best practice post-trade processing across the globe, and in particular in Japan as well as emerging markets such as those in South East Asia and Latin America. We remain focused on building partnerships with market participants in these locations and around the world to streamline and standardize post-trade processes and reduce risk.”

The retail markets of Asia Pacific have made major strides in automation, echoes Nellie Dagdag, executive director for sales and solutions delivery in the Asia Pacific  “We have 95% same day affirmation for Japanese clients as they are keen on zero tolerance for anything that fails,” she says.

“There’s been no incentive to increase automation in the post trade space—now there is as there will be financial penalties. As the providers of post-trade securities services, custodians will be the trigger for behavioral change.”