Who wins Central Matching or local?

With settlement cycles shortening in Europe and in the USA, there is quite a debate going on in the market as to the best form of post-trade matching. Financial Services firms on both buy and sell-side have a decision to make about what suits their business best. Central matching or local matching?

Certainly central matching has plenty of attractions and if all the transactions executed were with counterparties in the same central matching system, well it’s a no brainer from an efficiency standpoint. But there may well be concerns about monopoly and the possibility of ever increasing prices. However, central matching is still a fanciful notion in the markets, as there is no single central matching supplier that totally dominates the markets. Therefore firms will probably have to have at least dual capacity or perhaps even more?

Local matching has its attractions and with SWIFT firmly pushing into this market on the buy-side, this will form a distinctive alternative choice to other suppliers like Omgeo, who provide central matching. The concerns around cost are not as acute with SWIFT, as an industry cooperative it has a long established policy of cheap pricing and annual rebates, when possible.

The arguments against SWIFT are normally around start-up costs and for many technologists the store and forward design is an anathema to 21st Century thinking. Despite this concern SWIFT is still more than a viable alternative especially to buy-side financial institutions.

Buy-side firms will already be communicating electronically with their brokers, via FIX messaging and with ISO20022 messages so the switch to SWIFT has never been cheaper or more painless. Whilst Custodians are all long standing SWIFT users. So an ISO20022 capability is a key to opening the opportunity box!

Investment in new technology and systems to open up choice of matching supplier also looks like sound decision with the reward of an early ROI. Recently Salerio has been promoting their new solution, which enables users to choose either central matching or local matching at the transaction level. In addition, Fiserv and SmartStream also providing matching solutions, so there is no shortage of choice.

With OASYS Global due for decommissioning in 2013 and migration to Omgeo’s Central Trade Manager (CTM) there is an urgent need to plan and make a decision. There will be a cost of migration to CTM and firms might like to take this opportunity to reconsider their post-trade matching requirements. Omgeo supply many other settlement services and these may be bundled and make a switch a more difficult decision, but nonetheless a decision must be made, as there will be long term consequences.

In a perfect world, financial institutions would have the technical capability to easily switch matching providers according to preferred cost and services. Having a choice is always the most advantageous position but that requires technology investment. As the structure of financial markets will continue to change and evolve, firms really need to be strategic and plan long-term.