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June 3, 2013

''We Can Do Better''

How clearing and settlement standards can be improved

By Gregory Bresiger

Clearing Quarterly & Directory, a supplement of Traders Magazine, recently caught up with Omgeo's Tony Freeman and spoke with him about what the clearing industry can do better. As director of industry relations, he focuses on working with the industry to improve settlement efficiency and reduce risk. His company works with investment managers, broker-dealers and custodian banks.

The securities industry, with all the talk of going to a T+2 standard, is moving toward better clearing and settlement standards, but it still has a way to go in improving them. If better procedures were used, the trade failure rate could be lower. Those are some of the opinions of Tony Freeman, director of industry relations with post-trade processor Omgeo.

What is going wrong? Why do trades blow up? Standing settlement instructions, or SSIs, are often the problem because they are not updated frequently enough.

According to Omgeo research, "39 percent of sub-custodian banks and 23 percent of global custodian banks and investment banks cite inaccurate SSI data as the most significant cause of trade failure in the major market, with many firms leveraging manual SSI processes. Market participants reduce this risk by adopting automated SSI solutions, enabling them to share accurate and compliant data automatically worldwide."

Tony Freeman

Freeman says the industry can do a better job of decreasing the number of failed trades.


More trade details should be available sooner, Freeman says, before the trade is settled. For instance, he says that American markets have a poor same-day affirmation (SDA) rate-a T+0 standard. The SDA is only 46 percent. That is half the rate of many other advanced markets.

In a recent paper, Omgeo officials noted that while trade speeds have consistently improved, clearing and settlement speeds haven't kept up. Indeed, clearing and settlement procedures are falling behind trading.

"Why, in 2013, does it take milliseconds to execute a trade, but three days to settle a trade in the United States and in other major markets around the world? The most likely answer is simply because that it is the way it has always been. Surprisingly, some operational processes, which originated in a bygone era of physical certificates and limited technology, are still in use today," the Omgeo paper said.

Manual processes, Freeman believes, should only be allowed to survive in the short term. How should that be achieved?

Freeman prescribes a combination of regulatory pressure and technological innovation will drive automation and standardization. But in the short term, the industry must work on a system that today still has too many failed trades.

CQ&D: Is it true that, after all the system upgrades and changes of the past years, 10 percent of equity trades today can still fail?