For want of a nail, the battle was lost-and often, the simplest thing is why a settlement is botched. That’s the philosophy of Omgeo officials, who have just released a new version of their Omgeo Alert product, a database for the communication of global settlement and account instructions.
Omgeo Alert SSI Lift Out is designed to ensure that settlement instructions and account data are correctly entered. The product update is designed to establish multiple levels of authorization for the creation and deletion of all (FX) foreign-exchange and cash settlement instructions.
Omgeo’s new effort, the result of client comments, comes at a time of numerous complaints about bad trade information. Some 30 percent of trade failures are the result of inaccurate settlement instructions, industry observers say. These typically include mistakes such as not including required participant ID at the depository or getting an account number incorrect, Omgeo officials say.
Their new product requires that all the fields in the product comply with global settlement standards, Omgeo officials say.
“We have also added functionality called data authentication. That means that clients can have two or three parties involved in the entry and authorization of any new or edited cash or foreign-exchange instruction before updates are communicated to counterparties,” Mark Bouchea, director of Omgeo’s SSI product development, told Traders Magazine. SSI stands for “standing settlement instructions.”
Data authentication, he adds, is a very important point for clients because it means every important field will be properly filled out and sent out to the correct official. The latter also ensures that settlement information stays in the right hands.
“Clients are increasingly security-conscious. They want to make sure that they have the oversight into account and instruction changes, and they are enforcing that oversight with a tool suite,” Bouchea says.
New tool account sweeps are needed, says an industry observer, who agrees that the 30 percent settlement failure rate is a legitimate estimate.
“What happens is writer’s risk. That’s when the investment manager opens up new accounts,” says George Reis, an industry consultant to SIFMA. He is familiar with the product.
“Information is entered manually, and often there are problems at the investment manager or the broker-dealer level,” he says. And that has become “a significant factor” as to why settlement problems happen, Reis adds.
Omgeo Alert’s new feature might lessen the problem, Reis notes. The problem of delayed settlements raises costs and can anger those on both sides of a trade, clearing executives say. For instance, Omgeo estimates that a middling or big broker-dealer can run up $1 million a year in additional settlement costs owing to failed trades. However, Reis says, the ultimate solution will only come when the industry adopts the straight-through-processing standard (STP).
Merely the efficient use of computers for transaction processing, STP enables the entire trade process for capital markets and payment transactions to be conducted electronically, without any manual intervention. This could, in theory, reduce the settlement cycle from T+3 to the same day. Some have questioned whether STP can be achieved everywhere. That’s because some firms are unlikely to find the cost/benefit in reaching 100 percent automation.
Utility DTCC and Thomson Reuters jointly own Omgeo.
Omgeo has some 1,200 global broker-dealers using the Alert systems. Investment managers doing foreign-exchange and cash settlement instructions are the first ones using the updated version. Future versions of Alert will apply for fixed income and derivative products, according to Omgeo officials.
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