Game, Set, Match?
Though conceived in a booming economy, central-matching utilities are, finally, being born into a much different and very hostile environment.
During the late 1990s, financial institutions were riding the Internet bubble for all it was worth and people had the resources to think about improving the processes that slowed down their business.
Back then, a financial-services industry that had just moved from a five- to three-day settlement cycle began to closely examine the possibility of reducing that to a one-day cycle. The idea was that reducing the time between trade date and settlement date would reduce risk - a contention that was heavily debated, but never completely accepted, between the time T+1 was on the table and the time it fell off.
Upon closer examination, it became apparent that reducing the time between trade date and settlement would be contingent upon re-engineering the back-and-forth messaging that was taking place among the three parties to an institutional trade - the asset manager, the broker/dealer and the custodian.
That re-engineering took the form of the Securities Industry Association's Institutional Transaction Processing Committee (ITPC) model for a virtual-matching utility. The VMU would be a central, virtual-meeting place where parties to an institutional trade would send details whenever they were ready to do so - no more sitting by the phone (or fax ), waiting for that special counter party to call.
At the time, firms were willing to pony up the costs to get a central-matching utility going - some broker/dealers and custodians (the buy side never pays) kicked in $5 million a piece to get the would-be industry utility, the Global Straight Through Processing Association, off the ground. It was to be the only game in town - firms would only have to pay for one connection, while an SIA-recommended, Securities and Exchange Commission-mandated T+1 regulation would force business in the utility's direction and money into its coffers.
Back then, no one could have envisioned a time in which profits would be scant and budgets cut to the bone. But before the utility could be created, something happened that changed its chances for success dramatically. Left out of the GSTPA party, Thomson Financial ESG and parts of the Depository Trust Company banded together to form Omgeo, a company that would compete head-to-head with the GSTPA for post-trade matching.
The addition of competition didn't seem to have the effect on the GSTPA that it should have, and the venture never formed a strong sales and marketing capability. That fact, combined with removal of T+1 as the stick forcing firms to embrace central matching, and the reality that the economy had gone south for quite a bit more than the winter, all contributed to bring about the GSTPA's demise a few months ago.
Since the GSTPA had no existing business, it had no chance of survival. Born into a world in which it was ill suited to thrive, the utility resembled a Hollywood marriage - torn asunder less than a year after its entry into society.
OMGEO STILL WANTS TO PLAY THE MATCH GAME
But now, as one performs the obligatory autopsy of GSTPA, the questions that must be asked are: Does the fact that investment managers let the GSTPA wither on the vine, rather than spend the money to connect, mean the concept of central matching does not hold the compelling business case that it once seemed to? Is the economy weighing so heavily on budgets that buy-side firms would rather spend their money on more critical issues? And do advancements in current post-trade products offer such high degrees of efficiency that the improvements offered by a central-matching service are minimal?
"The GSTPA's demise demonstrates a potential lack of overall enthusiasm for central matching, which means it is unclear whether Omgeo will get its return on investment for CTM - will it be able to convince buy-side firms to make incremental investments using CTM?" asks Tim Lind, a senior analyst with Mass.-based TowerGroup.
Omgeo hopes so. The 800-lb. gorilla of post-trade processing is actively encouraging its clients to embrace its Central-Trade Manager solution to replace existing products like Oasys and Oasys Global. The question is whether Omgeo has done its job too well on those products to now sell CTM.
Currently, sophisticated buy-side clients that have embraced combination solutions - such as Oasys/ TradeMatch/NearMatch (used in conjunction with Alert and SID databases) for domestic U.S. trades or Oasys Global/AutoMatch for international transactions - are realizing over 90 percent rates of same-day affirmation with their trading counter parties. Some industry insiders say that asking buy-side firms to make an investment that will take them from 90 to 95 percent is a tough sell in a down economy.
In terms of embracing Omgeo's CTM, Dan Stroot, chief technology officer for $17.9 billion investment manager Nicholas Applegate, says he will stick with Oasys and Oasys Global for now. "Omgeo has the same problem as GSTPA in that it's hard to justify the investment of migration right now ... investment managers are in a bunker mentality."
However, Martin Pearce, senior vice president and head of investment operations with MFS Investment Management, a Boston-based firm with $115 billion under management, says his firm plans to embrace CTM when it comes on line.
Currently, he says, MFS is using Oasys Global for non-U.S. cross-border trades, combined with an internal vendor-provided matching solution. With that set-up, MFS is able to do an initial block-level match before getting into the details of allocations. The value in that, contends Pearce, is the ability to correct price in one place if there is a mistake, rather than having to make a correction in 50 or 100 different places at the allocation level.
"I believe that the best model is to block match your trade," says Pearce. "A trade is a trade and we want to block match our U.S. equities just like we do our international trades." The conversion to CTM for matching cross-border transactions makes financial sense to MFS, he says, because then it will no longer have to pay maintenance on the internal matching system, essentially outsourcing that function.
He says he hopes to be doing central matching by early 2004. Omgeo says the domestic functionality for CTM won't be available for at least eight months.
Pearce says that the benefits of central matching over local matching are clear. "When you go from local matching to central matching, you get the custodians involved earlier as well as standing settlement instructions," says Pearce. He also says CTM offers the benefits of real-time messaging, while bringing domestic and international business together on one platform.
Although Omgeo says that there are tremendous benefits of getting domestic and international trading on one platform, Richard Burdiek, a customer advocate in TRowe Price's IT group, contends that the internal costs of doing so would be very high. "Moving to one platform would require quite a bit operationally."
In fact, Gert Raeves, securities product manager at Heliograph, an STP platform provider that hopes to link firms to the CTM, says a typical connection could cost "a couple of hundred thousand dollars."
Pearce says he understands why some U.S. investment managers aren't keen on spending cash for a CTM conversion right now. "If you have a process working for the U.S. domestic market and there is no great demand because the benefit is not understood, then people feel you have to spend money on fixing problems first rather than fixing things that aren't a problem."
Unlike Omgeo, which is actively encouraging its clients to embrace CTM, and has spoken of eventually ushering all clients to the new central-matching platform, Financial Models Company President Stamos Katotakis says it doesn't matter to him whether his clients match centrally or locally.
FMC, a Canada-based post-trade solutions vendor, is looking to compete with Omgeo. FMCNet II, the next release of the company's existing post-trade communication network, will continue to support local matching, something that many in the industry feel is just fine for now, says Katotakis.
"We are happy to have clients determine what kind of matching they are going to use," says Katotakis. "We clearly feel that forcing clients in this environment is not something that anybody that has a sane approach to things wants to do. I don't think that anybody has the ability to force investment managers to act in a particular way. People only do things if it makes economic sense."
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