Virtual Transaction Matching

Having been involved in post-trade confirmation and matching for more decades than I care to remember, the thorny issue of central matching vs. local matching is still with us. The reason being is that despite the word ‘central’ appearing in central matching, in reality there is nothing completely central in the domestic or international markets. What we actually have are a whole series of matching silos that have evolved for multiple asset classes. This market structure also predefines which firms are using what central matching system. The fact is not all firms involved with the transaction are necessarily customers of a central matching organisation.

Today in the equities market there are two main protagonists Omgeo and SWIFT, both have their individual value propositions and both can be considered experts in post-trade matching. However, neither will ever be truly central, leaving FIs on the buy-side to choose which option best suits their business. So on the sell-side there is the cost burden of having to connect to both and feasibly any other ‘Central Matching’ provider. Custodians especially, carry a heavy load in this respect.

It really does not make much sense from a securities industry point of view to have multiple silos providing post-trade matching, especially as CCPs and CSDs all require a match to be able to proceed through the clearing and settlement process. There’s a whole lota matching going on!

What then could be done to create a central matching utility that is worthy of its name. The obvious answer would be by merger and acquisition. As I don’t see SWIFT being bought by anyone the possibility might be that SWIFT buys Omgeo. The reasoning being that the Banks own SWIFT and are also major contributors to Omgeo’s business, but are actually causing the pain of the cost of matching to their own businesses.

Another notion might be to create a virtual matching utility, which all central matching silos access and which can be used by Custodians and other FIs offering matching services. A cloud based matching utility would encourage firms to discard the old fashioned networks and utilise something more future proofed for the century we’re in.

Whatever happens in the future there has to be change in post-trade confirmation/matching operations and it’s a logical move to assess the benefits and costs of a merged utility and of going virtual. What do you think?