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2012 Top International Operations Executives

The More Things Change, The More They Stand Out
 |  DIANA CHAN: Shaking Things Up, In European Clearing |  CHRIS REMONDI: Increasing Information, Reducing Risk |  NEERAJ SAHAI: Marrying Large-Scale Technology With Boutique Service |  KEVIN MILNE: Making an Exchange Succeed By Working With Rivals |  THOMAS ZEEB: Gold Standard in Securities Processing |  CHRISTOPHER JAYNES: Cutting Out the Custodian Bank |  PATRICK COLLE: Going Global, But Not Everywhere |  TONY FREEMAN: Targeting Two-Day Settlement

TONY FREEMAN: Targeting Two-Day Settlement

December 20, 2011
By Chris Kentouris

Freeman agrees that fund managers may have a long way to go but insists that not all are ill- prepared. He has plenty of figures to back his claims. Trades are affirmed the day they are executed about 85 percent of the time in Europe and more than 90 percent of the time in Asia-Pacific. That is almost double the figure in the U.S. market at about 50 percent.

But that still leaves about 20 percent of trades unaffirmed on trade date in Europe. The biggest culprits -- fund managers in France, Germany, Italy and Spain. That pretty much encompasses most of the continent. UK fund managers are pretty automated

Just what will motivate fund managers to change? There is a clear correlation between same-day affirmation and trades settled on time but without a clear grasp of the costs of a failed trade fund managers are unlikely to take action, according to Freeman.

A more likely approach: Freeman cites the 10 British pound sterling fee which drivers must pay to enter the city of London. "The decision has really decreased traffic so increasing costs by creating fines is pretty effective," he predicts.

Although fund managers do reimburse counterparties for any mistakes in their part in failed trades, those penalties are ineffective. The EC has proposed that securities depositories fine members which fail to settle trades on time and if that comes to pass, custodian banks and broker dealers will likely pass along those costs to fund managers.

Yet another incentive: mandating a specific date for implementation. "Financial firms don’t normally allocate the appropriate budget and resources until a deadline is set," says Freeman

Surprisingly, fund managers have shortened the pace at which they execute orders using smart-order routing systems and algorithms. Trades executed in seconds can now be done in milliseconds. But when it comes to the back office snail mail still exists. That slows down the settlement process, particularly when cross-border trades are involved.

Market benefits aside, Omgeo has plenty of financial incentive to ensure that T+2 occurs. It offers a central matching service called Central Trade Manager which allows fund managers and broker-dealers to centrally match trades. Omgeo will migrate all of the 700 fund managers using a legacy electronic confirmation service called Oasys Global by 2012. That legacy system only allows for locally matched trades.

Freeman would not disclose just how much Omgeo stands to profit from a shortened European settlement cycle. But he insists that signing up to use the CTM is well worth the cost. The same-day affirmation rate for fund managers using the CTM is as high as 90 percent, he says.