Commentary

John Turney
Traders Magazine Online News

Foreign Exchange Infrastructure: Yesterday, Today and Tomorrow

In this exclusive to Traders Magazine, John Turney, Global Head of Outsourced FX at Northern Trust, discusses the evolution of the fx infrastructure and what is to come.

Traders Poll

What is your favorite movie about trading?

Wall Street

23%

The Big Short

13%

Margin Call

6%

Equity

0%

Trading Places

38%

The Wolf of Wall Street

8%

Boiler Room

7%

Arbitrage

0%

Too Big to Fail

5%

Free Site Registration

April 30, 1998

Setback for Thomson's Trade-Confirm Gambit? The Problem: Thompson ESG May Have to Create SEC-Supe

By Jeffrey L Winograd

Thomson Electronic Settlements Group's (Thomson ESG) successful fight to win regulatory approval to provide direct, institutional trade-confirmation links to the Depository Trust Company (DTC) has hit a roadblock.

The Securities and Exchange Commission has effectively stalled the plan, pending consideration of a review by the SEC that could require Thomson ESG to create an SEC-supervised clearing depository.

The latest development cast doubt over whether Thomson ESG will become the DTC's first competitor in the potentially profitable business of comparing institutional trades before settlement.

Clearing Depository

At issue is whether Thomson ESG will be allowed to provide one of the final steps in the settlement process, automatically matching trades without being required by the SEC to do so as a registered clearing depository.

The DTC in New York is the exclusive provider of institutional trade-confirmation services, largely because it is a registered clearing depository, filling current rules stipulated for providing automatic matching services.

Industry trade groups, and even the DTC, support Thomson ESG's efforts. The New York Stock Exchange and the National Association of Securities Dealers have also indicated support. (Self-regulatory organizations have filed rule amendments with the SEC to allow private vendors to enter the confirmation business.)

SEC Chairman Arthur Levitt, however, has raised some concerns on allowing private vendors to enter the clearing business outside the regulatory orbit. Levitt said he and the SEC staff will examine the issue further and issue its recommendations over the next several weeks.

His stand comes in the wake of congressional inquiries over why the SEC is considering linking institutional trade-confirmation services to a requirement that third-party vendors register as clearing agencies.

Letter to Levitt

In a letter to Levitt, two congressional securities-industry watchdogs, Rep. Michael Oxley (R-Ohio), chairman of the House Commerce Subcommittee on Finance and Hazardous Materials, and Rep. Edward Markey (D-Mass.), a member of the same subcommittee, demanded an answer.

Levitt responded to the letter by stating that his staff will examine the issue and recommend parameters for industry-wide automated matching. The recommendations will be carefully studied by the SEC.

Levitt favors competition. After a number of meetings with Thomson ESG, the DTC and other parties, he publicly stated that competition is beneficial. "I agree with Thomson that allowing vendors to compete in this area will enhance efficiency in the marketplace," he wrote the two congressmen.

However, SEC approval of the proposed rule changes will prove to be a pyrrhic victory for Thomson ESG if regulators require vendors to register as clearing agencies. For one thing, it raises a laundry list of costly, time-consuming burdens for Thomson ESG.

Levitt acknowledged in his letter to the congressmen that matching services appear to be "the next step in streamlining the confirmation and affirmation process." But he warned that matching services "may raise a variety of issues relating to the safety and soundness of our financial system."

Petition

According to a well-informed source, Thomson ESG had its eyes on providing a matching service. However, this was not at issue when Thomson ESG first filed a petition seeking SEC confirmation and affirmation approval last year.

The source said Thomson ESG "logically assumed" it would eventually be able to combine into a matching service "the two disparate functions of processing allocations and processing affirmations and confirmations."

However, several sources said it is doubtful that Thomson ESG would ever choose to register as a clearing agency. "I would guess that would just not be in their business plan," an industry observer said.

(Thomson ESG is a subsidiary of Thomson Financial Services, the parent company of Securities Data Publishing, publisher of Traders Magazine.)