The latest version of the FIX protocol negates the need for banks and fund managers to use central matching facilities, such as Omgeo, in order to achieve straight-through processing for securities. Frances Maguire looks at the potential.When the Global Straight-Through Processing Association (GSTPA) went under at the end of last year it left not so much a void as a monopoly. The only contender left standing in the industry drive to move to central matching of order allocations, confirmations and settlement was Omgeo, the joint venture between Thomson Financial and the US’ Depository Trust and Clearing Corporation.

But in April, the securities industry must have breathed a quiet sigh of relief that at last there was a viable alternative to central matching. Financial Information exchange (FIX), an internet-based protocol originally designed to exchange pre-trade information between broker and fund manager, has been enriched to incorporate post-trade messaging – many believe it could seriously question the need for Omgeo’s Central Trade Manager (CTM). With the introduction of allocation instruction messages, new confirmation messages and an explicit standing settlement instruction message, FIX 4.4 could enable buy-side firms to achieve straight-through processing for securities with bi-lateral matching.

Financial effects

Early indications are that FIX users will save on costs, but regardless of whether or not this is the case, even Omgeo followers must see that a serious alternative will prevent unreasonable fee hikes.

According to John Wilson, a director at London-based consultancy CityIQ, use of the new FIX functionality could save the securities industry $100m annually. Switching to FIX from Omgeo would save the average firm $125,000 per year, more for firms with larger volumes, he estimates.

The attraction of using FIX 4.4’s new post trade functionality is that, once installed, there are no trade confirmation costs – swapping upfront costs for the pay-as-you-go model put forward by Omgeo’s central matching engine. According to Mr Wilson, the costs firms are paying today for trade confirmations in Omgeo (see table) would be wiped out. “Most FIX networks charge by bandwidth and not messages, hence adding in allocations and confirmations will have little, if any, impact on communications cost,” he says.

Gareth Bevan, director of business strategy at Misys, is a little more measured in his belief that FIX 4.4 will deliver considerable cost benefits to the securities industry. He says: “It only makes sense for those firms with high transaction volumes. FIX has quite high implementation and testing costs for each counterparty. Yes, the network and FIX engine have become commoditised but switching to FIX is labour intensive. Even if both counterparties are using FIX you still have to data map and define content because the openness of FIX means that you will not necessarily be speaking exactly the same language. Admittedly, once set-up, costs are very low because there is no fee per transaction.”

With Omgeo, there is one link and one protocol for all securities counterparties, which means less staff and less cost in managing multiple links. With FIX, the firm has to manage the process internally but the long-term cost of ownership is lower – high set-up costs but, no matter how much volumes goes down the network, there are no transaction fees. To this, Mr Wilson says: “Firstly, firms would have to do this point-to-point testing anyway for front office activity and, secondly, firms always have the option to choose a hub-and-spoke FIX network whereby they test with the hub only and then become certified with everyone else.”

No matching engine

By implementing FIX 4.4 with its post-execution messages, a firm is effectively opting to exchange central matching with bilateral matching as there is no matching engine with FIX. Mr Bevan says: “For a buy-side firm it essentially means replacing central matching with exception processing. This is not a great leap because, either way, you still have to manage the process.”

He likens the two alternatives to settling a personal bank statement. Either you do it yourself by finding every cheque stub and receipt and ticking them off, or you could pay someone else to do it for you. But you still have to provide the cheque stubs and receipts, and if there is an exception, you have to still do the legwork and find the missing receipt.

Mr Wilson agrees that large firms are, in effect, matching bilaterally. “Prior to the existence of Omgeo’s CTM, to use Global Oasys effectively, most of its buy-side clients had to install a local matching engine to compare their internal trade records against broker confirmations. Hence most large firms already have these facilities. We are specifically suggesting that firms could route their FIX confirmations into existing local matching engines that they use today.”

For Richard Hughes, managing director of Omgeo in London, the two complement each other. “It is not an either/or choice. FIX is a protocol and you can’t compare a protocol with a full service provider.” That said, Omgeo will accept FIX messages and later this year will launch Deal Time STP, which will allow for the automation of allocations earlier in the trade cycle and enable firms to process trades, from inception through to settlement, using a single connection. This will also enable investment managers to send automated FIX allocations to broker dealers on Omgeo, irrespective of the broker dealers’ current ability to process FIX allocations.

Omgeo is also looking into how to increase traffic from smaller fund managers, at a lower cost. It has launched Omgeo Allocation Manager, a jointly sponsored initiative with Credit Suisse First Boston, JP Morgan, Morgan Stanley and UBS Warburg in the US. The initiative is a web-based trading system for investment managers to submit allocations to the Omgeo CTM. Omgeo Alert is also being offered as a bureau service that investment managers can access through an outsourced solution.

Attaching settlement instructions to allocated trades, which is what Alert does, is at the heart of the whole FIX 4.4 debate. Citigroup was an early user of FIX and is in the process of upgrading its capabilities. In common with other major brokers, it will have to support both FIX and Omgeo for post-execution processing to meet the varying demands of its clients.

Buy-side developments

On the buy-side, firms like Gartmore have been developing a FIX engine alongside their Omgeo development and are unwilling to swap one for the other. FIX 4.2, to which these firms had built, already provided post-trade messaging. One of the main differences of FIX 4.4 is it now enables users to attach standing settlement instructions to the allocations, in many ways mimicking what the GSTPA was trying to do.

Simon Leighton-Porter, vice-president, equity business management at Citigroup, says: “The introduction of FIX 4.4 has increased the blurring of the lines between front and middle office processing now that order instructions, pre-allocations and warehousing instructions can be sent on the same FIX message. The potential for real-time enrichment of buy-side allocations with settlement instructions and net money presents brokers with challenges and advantages in equal number.”

He says that discussions are taking place with software vendors, investment managers and custodians about a scheme whereby custodians would update a Standing Settlement Instruction (SSI) database held within the investment managers’ own processing environment. These SSIs would be used to enrich allocation messages sent to brokers from investment managers, thus achieving much of what GSTPA set out to do but at a fraction of the cost. Work is under way to define message and data guidelines to avoid the standards free-for-all which has dogged the securities industry for so long, he says.

Alan Plom, head of operations at Gartmore, agrees. “We, as fund managers, want to get out of this middle ground. A viable model could be based around custodians populating such an SSI database. While this would not entirely remove the fund manager from sitting in the middle of the process, as would have occurred with a central utility approach such as the GSTPA, it would remove the maintenance of such a database from the fund manager and therefore the liability of getting it wrong.”

Matching debate

Furthermore, there is the debate about central matching. Mr Leighton-Porter advocates STP Lite, with which the brokers are advocating bilateral matching using FIX messaging for smaller players that are not part of Omgeo – although Omgeo would by far prefer to get them on board by accepting FIX messaging. But why would a smaller player invest in both?

Julian Baines, investment servicing manager at Royal London Asset Management, believes central matching should remain part of the equation. “We should all be moving towards the central matching of trades which will, in time, then drive a consistency of standards and hopefully lower the number of standards that we have to adopt. Local matching, while it continues, will increase the number of standards and the legacies, and make to move to central matching actually more difficult.”

But for the users, the Gartmores and Citigroups of the securities industry, it appears that nothing is going to happen fast. In the long term, Omgeo and FIX 4.4 could sit comfortably side by side, with smaller users using the pay-as-you-go model and larger users, with most to benefit, using FIX 4.4 for allocations, through a SSI database. Either way, both agree that an alternative method was needed.

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