SWIFT, a financial messaging cooperative, is to join forces with six major prime brokers to develop and operate a centralised pre-settlement matching solution for equity and fixed-income trades originated by hedge funds.
The six brokers are Citi, Credit Suisse, Goldman Sachs, Lehman Brothers, Merrill Lynch and one that wished to remain anonymous.
“Presently, there is no matching of the trade details between prime and executing brokers on the date of trade. This only happens at the local settlement level,” Fabian Vandenreydt, head of the broker/dealer and pre-settlement teams within the markets division of SWIFT, told theTRADEnews.com. “Therefore, all the mismatch and trade fail issues are uncovered on the day before settlement date or on settlement date, and there is a risk and cost related to this for the prime broker.”
The proportion of settlement fails ranges from 20% to 50% depending on the complexity of the deals. SWIFT believes that by enabling trade matching on trade date or T+1 (one day after the trade date), errors that could cause settlement fails can be identified up to two days earlier than they are today, reducing brokerage risk.
After a selection process, SWIFT was chosen by the six prime brokers to provide the solution, which will be based on SWIFT’s established Accord central matching service and use industry standard messaging.
“The prime brokers wanted a utility that they could steer themselves in terms of roadmap features and timing,” said Vandenreydt. “We worked with the prime brokers involved during the last few months to define the specifications of the system, and signed a letter of intent with them at the end of July.”
SWIFT and the prime brokers are also working together to encourage the wider community of brokers processing trades for hedge funds worldwide to take advantage of the new solution.