Omgeo aims to reduce failed trades in Taiwan

Post-trade process specialist Omgeo has committed to reducing the risks of failed trades in Taiwan, in addition to driving greater same-day affirmation across trading in multiple asset classes.

Post-trade process specialist Omgeo has committed to reducing the risks of failed trades in Taiwan, in addition to driving greater same-day affirmation (SDA) across trading in multiple asset classes.

“A recent study Omgeo conducted shows that the value of equity transactions at risk of trade failure could be upwards of US$970 billion, and the value of fixed income transactions at risk is estimated at approximately US$300 billion,” said Julie Feaunati, Omgeo’s director of Asia Pacific relationship management. “The cost of stock borrowing to avert the risk of trade failure on this scale could be as much as US$3.8 billion.”

Though still an emerging market, Taiwan is expected to see an uptick of cross border transactions and with it, a growing concern that the risk of settlement failure will increase if shorter settlement cycles are not preceded by an increase in the efficiency of the middle-office, particularly in the trade matching process, according to Feaunati.

A large chunk of post-trade processing is still done manually in Taiwan, which operates on a T+2 settlement cycle, raising the risks for both counterparties. With an inflow of global investment capital in recent years, the drive for greater market efficiency has been gathering steam.

According to Feaunati, SDA greatly reduces the odds of post-trade failure.

Countries with SDA rates of over 90%, such as India, Taiwan, Hong Kong, Japan, Singapore and Korea consistently register the most impressive settlement efficiency scores; countries with SDA rates of less than 70%, like Brazil, Italy, South Africa and the United States, consistently register below-average settlement efficiency scores, according to research by Omgeo. The settlement efficiency is 26% higher countries with the top SDA rates, compared to those at the other end of the scale.

“SDA is critical because it accelerates the post-trade process and leaves enough time to identify and address any errors and mismatches before trades are due to settle,” points out Feaunati.

SDA benefits the entire industry, argues Feaunati. “It leads to better settlement certainty, which is good for the buy-side, sell-side and custodians. All parties to a trade want it to settle on time and for money to change hands. To be successful though, brokers and buy side participants must be automated.” 

BlackRock adopted Omgeo’s Central Trade Manager in Taiwan in April 2011, gaining it traction with several local broker-dealers and helping to boost automation.

More advanced markets in Asia, including Hong Kong, Singapore, China and Japan, as well as emerging ones, would also benefit from increased post-trade process automation, suggests Feaunati.

“The benefits can be expected to translate into lower costs for end-investors; reductions in the risks and costs borne by market participants would be reflected in lower prices, resulting in lower transaction costs for end-investors and producing associated beneficial effects on liquidity,” says Feaunati. 

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