FIXing the Post-Trade Communications Process

Reducing time, risk and cost. That’s the mantra the FIX Trading Community promoted at an event it hosted in New York last week when recommending its message tags and workflow be used for locally matching post-trade instructions in all asset-classes.

It’s also the beginning of a battle to win the hearts and minds of fund managers and broker-dealers, getting them to consider switching from central matching — a business model advocated by Omgeo, the industry giant in post-trade communications, panelists and attendees suggested at the February 13 gathering.

FIX Trading Community’s rationale isn’t novel. It is also used by securities message giant SWIFT which has developed local message types for local matching in its initiative coined Global Electronic Trade Confirmation. Omgeo touts exactly the same merits to using its Central Trade Manager (CTM) central matching engine to also match the details of post-trade instructions.

But just whose version of the truth is believed by fund managers and broker dealers will ultimately decide who controls the post-trade communications market. For now, it appears that the FIX Trading Community has set its sights on eroding Omgeo’s clear dominance in the US matching market — both by touting the advantage of the FIX protocol and by showing the cracks in Omgeo’s well-crafted public image.

SWIFT’s local matching solution, GETC, was never mentioned at the FIX Trading Community-hosted event. Reportedly, it has won more favor in Europe and Asia-Pacific, reflective of SWIFT’s strength in those regions. Not so in the US where FIX Trading Community can more easily leverage its ubiquitous presence in the front-office space to recruit post-trade users. Using FIX tags has become commonplace in executing trade orders and it stands to reason, the FIX Trading Community would want to extend its reach to the middle and back-office.

“Over 60 broker-dealers, hedge fund managers, investment managers and custodians are now relying on GETC,” says Paul Taylor, global head of matching at SWIFT in London in response to emailed questions from FinOps Report. However, he acknowledges that the uptick has been for non-US transactions and that most of the interest has come from the “sell-side”.

Regardless of how it is done, matching, or acknowledging the details of a transaction, is critical to ensuring it is settled on time. When a trade doesn’t settle on its scheduled timetable, fund managers and broker-dealers must spend time sorting out just what went wrong, whose fault it was, and then compensate the injured party. The failure could ultimately amount to a few hundred dollars or multi-millions of dollars depending on the size of the transaction, the asset-class and time it takes to clean up.

Numbers Speak Loudly

Omgeo’s CTM has some big numbers on its side that favor central matching. Over 1,500 financial firms, including 655 fund managers and 866 broker dealers worldwide are now using its CTM, according to Matthew Nelson, Omgeo’s executive director of strategy. Compare that to only a handful of fund managers and about twenty broker-dealers relying on FIX Trading Community’s FIX protocol and workflow format for local matching of equity trades. The FIX message types have existed for about a decade, but the workflow format wasn’t implemented until last year.

But Omgeo’s dominance has a double-edge. While Omgeo promotes central matching as more efficient than local matching, those relying on Omgeo’s legacy platforms to locally match their trades were compelled by Omgeo to migrate to the CTM by June 2013, if they wanted to remain Omgeo customers. Granted, Omgeo’s CTM has won a lot more clients since then, but the lack of initial choice troubled some fund managers and gave SWIFT and FIX Trading Community opportunity to recruit new users.

Despite having no independent figures backing their claims, FIX Trading Community officials insist their their own experiences and second-hand knowledge provide a lot of anecdotal evidence of Omgeo CTM’s shortcomings.

“Central matching depends on an antiquated approach of matching the economic details of a transaction,” according to Dave Tolman, co-chair of the FIX Trading Community’s new global post-trade working group, speaking at its panel on post-trade matching. “Local matching as proposed by the FIX Trading Community is far more efficient [than central matching] in relying on ID-based matching. FIX tags connect the post-trade messsages and a FIX identifier assigned by the fund manager that identifies the transaction.”

Attendees at the FIX Trading Community event were far more strident — and specific– in their direct criticism of Omgeo’s CTM. “Omgeo’s CTM has experienced outages, costs more than some fund managers and broker-dealers are willing to pay, and isn’t necessarily any faster than relying on local matching,” the vice president of operations at the New York-based fund management shop told FinOps Report.

The executive, who declined to be identified, said that his firm was evaluating whether to continue using CTM or rely on local matching using the FIX protocol and workflow.

While not directly commenting about Omgeo’s CTM, Hila Sanders, client relationship manager for the corporate and investment banking unit of JP Morgan in New York and a panelist at the session on the post-trade process said that a “handful” of her bank’s fund manager counterparties had already successfully used the FIX message protocol and workflow to locally match their equity transactions.

She declined to disclose how many had done so, or how many were former users of Omgeo’s CTM, but several other attendees at the FIX Trading Community event with knowledge of JPMorgan say that five fund managers are communicating with JPMorgan using the FIX Trading Community’s message tags for local matching of equity transactions. Two of those five previously subscribed to the CTM, they added.

While local and central matching accomplish the same task, to ensure that counterparties to a trade have the same understanding of the same transaction, they are also quite different in their workflow — a difference that Omgeo uses to claim the superiority of its approach. Central matching relies on two parties concurrently inputting their understanding of the economics of a transaction into a third-party platform — such as Omgeo’s — which will ensure they are the exact same or at least close enough before settlement takes place. By contrast, local matching depends on a sequential windshield-wiper confirmation-affirmation and allocation process between the fund manager and broker-dealer.

It is that cumbersome sequential process of local matching which Omgeo has consistently said could prevent so-called same-day affirmation — or affirming the details of a trade on the day it is executed. With the European Commission mandating a uniform two-day settlement cycle in Europe in 2015 and the US securities market evaluating a shorter settlement cycle, same-day affirmation could become a practical, if not legally mandated, requirement. Most European markets and the US operate on a T+3 or three day settlement timetable and according to Omgeo central matching achieves a same-day affirmation rate of 94 percent. By contrast, local matching generates a same-day affirmation rate of 36 percent for US domestic trade and only up to 74 percent for cross-border and non-US domestic trades.

Time Counts

But is Omgeo’s argument about same-day affirmation persuasive enough to convince financial firms of the superiority of using the CTM? Maybe not, exactly, based on how Sanders described JPM’s fund manager counterparties using the FIX Trading Community’s local matching tags and workflow for equities. “The trades were confirmed and affirmed in the blink of an eye,” she says.

While the presentations made by Sanders and other panelists appeared to deflate Omgeo’s argument that its CTM guarantees a quicker matching timetable, a separate issue regarding the reliability of Omgeo performance was raised by several other attendees at the FIX Trading Community event.

A perfunctory search of the phrase “Omgeo and outages” through Google shows that one consulting firm, Paragon Consulting, briefly mentioned the CTM’s outages when advocating the use of the SWIFT network and messages to locally match trades on its website. “Some asset management firms are also considering GETC from a business continuity perspective. It has been suggested that Omgeo presented some challenges in recent years in terms of resilience and reliability and there have been a number of well publicized outages that concern clients,” writes the consulting firm, which offered no specifics on when the outages took place or for how long.

Attendees at the FIX Trading Communityd event volunteered that the longest outages– six to eight hours in duration — took place between the fall of 2009 and the late spring of 2010. Far fewer outages of far shorter duration have occurred since then, they said. In response to emailed questions posed by FinOps Report, Omgeo’s Nelson says that Omgeo’s top priority is service availability. “Omgeo continues to make significant investments in infrastructure system monitoring, product development and testing, resulting in critical services surpassing targeted availability goals of 99.9 percent,” he writes. “From an Omgeo CTM perspective, Omgeo’s CTM availability was 99.9 percent for all of 2013.”

If efficiency and reliability aren’t enough to prove FIX Trading Community’s case, cost just might be. No one at the event could provide a detailed apples-to-apples comparison of the difference in using the FIX Trading Community’s message protocol for local matching and the CTM for central matching. Yet Ignatius John, one of the panelists at the session on post-trade matching, insists it could come to more than fifty percent depending on the size of the fund manager and the number of transactions matched. That’s fifty percent off US$500,000 in annual fees for a large global fund manager with US$100 billion in assets, he offers as just one example.

In his responses to emailed questions posed by FinOps Report, Nelson says it is difficult to compare the costs of what he calls “dissimilar” services. “Omgeo’s CTM provides an integrated trade management solution which solves issues of connectivity, messaging, support, disaster recovery, matching, exception management and settlement instruction enrichment in a timely, auditable fashion,” he writes. “Omgeo’s CTM clients don’t need to manage bilateral connections to their counterparties, maintain version changes to managing protocols or pay large license fees and recurring maintenance costs for local matching software, among many overlooked costs.” Still, he notes that Omgeo has developed a new pricing strategy “designed to reduce costs and overall risk in the financial market by incentivizing industry best practice.”

John has a vested interest in advocating the use of the FIX tags for post-trade local matching. Having pioneered the first FIX post-trade solution at AXA Rosenberg in 2007, he is now president of Alpha Omega Financial Systems, which recently launched its platform for communication between buy-side and sell-side counterparties. FIXAffirm, available as software or service, links to participants’ order management systems (OMS) for trade affirmations and allocations in the FIX-message format. In addition to “a top asset manager and leading broker-dealers” who were on already board at the launch last November, Alpha Omega’s partnership with Linedata extends its — and FIX’s — post-trade reach to users of Linedata’s order management system.

While acknowledging his firm’s potential financial gain, John insists that there are plenty of fund managers and even broker-dealers now sitting on the fence who will eventually join the movement toward using FIX protocol in the post-trade, pre-settlement process. “I’m very bullish on the industry using the FIX tags for the post-trade matching process in 2014,” he says. “It took us [the FIX Trading Community] fourteen months to get this far and we expect to see the fruits of our work this year.”

So does FIX’s Tolman, who is also the technology manager for Greenline Financial Technology’s professional services group. Several large fund managers and broker-dealers were at the starting gate to embrace the use of the FIX tags for local matching of equities, he says, but many smaller fund managers will follow suit. Those fund managers, in turn, will push even more broker-dealers to join the FIX bandwagon. FIX Trading Community doesn’t disclose just how many fund managers are on its post-trade matching group or who they are. Wellington Management Company in Boston is the only firm listed on its website as a participant.

John compares the merits of using FIX tags from the point of trade execution to local matching to taking a direct flight from San Francisco to New York City. “There are fewer breaks in the process,” he says. “Do I want to have to stop in Denver on the way to New York and spend more money?” Using the FIX tags for trade execution and Omgeo’s CTM for central matching is apparently akin to changing flights midstream.

Besides reduced risk, cost and time, there could be one more benefit to using the FIX message tags for local matchig. The FIX tags for local matching allow standing settlement instructions (SSIs) — or instructions on how cash and securities must be transferred –to be embedded in the FIX message tags during local matching.

Tolman wouldn’t go as far as to suggest that the FIX message tags, as currently designed for local matching, would erode Omgeo’s overwhelming dominance in the commercial market for SSIs. Neither would Steve Kelly, a consultant who first advocated the use of FIX trades for post-trade matching in 2005. “Fund managers could tap into their own internal SSI databases for the SSI information or they could still rely on the Alert database,” says Kelly, who moderated the FIX panel on post-trade matching.

Omgeo operates the Alert database and in his emailed responses to FinOps’ questions Nelson insists the securities industry is moving “away from using local databases for SSIs.” Omgeo’s work with parent Depository Trust & Clearing Corp. to develop a new user-governed global repository to store SSIs will only enhance Alert’s allure, he adds.

However, operations directors at two New York-based fund management shops told FinOps Report that because they will use the FIX tags for local matching of equities, they will no longer have to depend entirely on the Alert database to retrieve SSI transactions. The reason: they can use their own internal databases for SSIs a lot more easily.

 

Next Up

What’s next for the FIX Trading Community in its push in the post-trade communications space? With equities firmly under its belt, it is now turning its attention to other asset classes such as fixed-income securities, exchange-traded derivatives and foreign exchange transactions. The trade group has already devised FIX tags and workflow for fixed-income products, but not released the final specifications. It has also started preliminary work on exchange-traded derivatives and forex trades working with the Futures Industry Association on listed futures and options deals.

JP Morgan’s Sanders, who has been responsible for overseeing uniform standards in her bank’s use of FIX message tags for local matching, says she is already testing with one fund manager using the FIX message tags for fixed-income transactions. She also hopes to easily leverage the FIX tags for locally matching equities to other asset classes. In fact, two other fund manager counterparties of JPM are already using the tags to locally match futures transactions.

“What we [at JP Morgan] learned early on in the pilot testing for the FIX tags for local matching of equity trades is that it is important to understand and ringfence the scope of migration within different accounts, regions, systems and reference data,” says Sanders. “Only small tweaks were necessary to account for differences in regional descriptions of reference data.”

Audience members cited Wellington Management as being the first asset management firm to rely on the FIX message types to locally match futures transactions.

“It should come down to a matter of what the securities industry wants to tackle next on its agenda,” explains John in responding to a question on which asset-class, the FIX Trading Community would address next in the post-trade local matching space. “Some firms wish to use local matching for futures trades only and not equities, while other firms might be interested in fixed-income securities.” Omgeo’s CTM is already a multi-asset class platform, while SWIFT’s GETC has incorporated fixed-income transactions. According to Nelson, more than 730 investment managers, broker-dealers and other financial institutions are now using the CTM to centrally match fixed-income trades, with the US leading the way. More than 40 investment managers and broker-dealers are doing so for exchange-traded derivatives.

Regardless of which new asset class it addresses next, FIX Trading Community insists its all about offering fund managers and broker-dealers a choice when it comes to matching their trades. This could well be the year when that freedom is put to the test.

“What has changed [since 2005] is the market focus on risk mitigation,” says a reflective Kelly. “FIX Trading Community is also getting a lot better at educating financial firms on the merits of using [the FIX tags and workflow in the post-trade communications process].