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Prime Brokers Tap Swift for Same-Day Matching
August 7, 2008
Financial messaging network Swift announced Wednesday that it has been selected by a group of the world’s biggest prime brokerages to build a centralized pre-settlement matching solution for hedge funds’ equity and fixed-income trades. The service will allow funds’ prime brokers and executing brokers to match trade details on the day of a transaction.
Currently, “there is no matching on trade date between prime brokers and executing brokers,” said Fabian Vandenreydt, head of the broker-dealers and pre-settlement teams in Swift’s markets division. The participating brokers--Citigroup, Credit Suisse, Goldman Sachs, Lehman Brothers and Merrill Lynch & Co.--will being pilot-testing the system in the fourth quarter.
Hedge funds typically notify their prime brokers about their executions at the end of the trading day, said Vandenreydt. The prime brokers then match the trades with those they receive from the funds’ executing brokers, an ad-hoc process that involves serial reconciliation between disparate systems and often manual work. With the new system, settlement fails could be identified up to two days earlier, according to the La Hulpe, Belgium-based cooperative.
Most trade-related discrepancies including fails are discovered on the day of settlement or one day prior, Vandenreydt said. By moving the process to a centralized system that offers same-day matching, Swift and the brokers aim to reduce the cost and risk of mistakes that occur from sequential communications between multiple counterparties--funds often engage several executing and prime brokers for transaction services.
“Prime brokers need to manage feeds from several executing brokers and executing brokers need to route trade confirmations to several prime brokers,” noted Vandenreydt. “This process complexity is best managed by a central system, which is the most cost- and risk-effective method, versus each party having a local matching system.”
The solution will be based on Swift’s Accord, a trade matching, affirmation and exception-handling system for foreign exchange, money market and over-the-counter derivative confirmations for asset managers, brokers, corporations and banks. The new platform will use the International Organization for Standardization’s (ISO) message formats.
“We are delighted to have been chosen by this group of major prime brokers to provide a pre-settlement matching solution to the equity and fixed-income markets, in addition to our existing FX matching capabilities,” said Gottfried Leibbrandt, head of markets at Swift, in a statement.
Swift and the prime brokers are working to encourage the larger global broker community that services hedge funds to adopt the new solution and standardize matching processes. Swift said it was tapped to create and run the new solution following “a competitive selection process” but would not name the other parties involved. The participating primes could not be reached for comment.
Last month, Swift and the Depository Trust & Clearing Corp. (DTCC) said they are working together to develop ISO 20022-compliant XML messages to allow market participants to connect to DTCC’s Alternative Investment Products (AIP) platform via the Swift network. AIP, which is scheduled to begin testing this quarter and will be offered through DTCC’s National Securities Clearing Corp. subsidiary, will offer processing and settlement services for alternative investment vehicles to broker-dealers, fund managers, administrators and custodians and is intended to make the products more widely accessible.
“The announcement that the organizations are working together on standards for alternative investments has been welcomed by the hedge fund industry,” said DTCC spokesperson Crystal Bueno in a statement.
