This is seen as a critical enabler to achieving shortened settlement cycles,[1] an objective the European Commission is driving through its Central Securities Depositories Regulation, and about which the United States has begun discussions as well, propelled in part by research commissioned by the Depository Trust & Clearing Corporation in 2012.
At the other end of the spectrum, central matching removes much of the sequentially in the trade verification process because the counterparties involved input the relevant data independently and separately.
Furthermore, it provides a key step towards achieving full straight-through processing (STP) of trades from order to settlement, with additional risk and cost reduction implications.
If the relevant data is confirmed/affirmed and available on the trade date, records and accounts are more likely to be accurate, and valuations can be conducted in a more effective and timely manner.
Transparency is improved because the information on trades arrives at one point of entry and is electronically stored, which means that it can be more readily accessed and tracked than communications by email, fax or telephone.
It also allows individual firms to track and measure their operational performance and trade processing efficiency such as average response times for allocations, confirmations and affirmations.
The risk reductions and cost efficiencies that can be realized by an individual firm are likely to be more feasible with a market-wide move towards automation and SDA as best operational practice, because this will go further to shorten and harmonize the settlement process.
The risk reductions and cost efficiencies that can be realized at individual or bilateral level would therefore be likely to deliver greater overall benefits if more, and ideally all, firms in a given market were to adopt automated processes based on standardized or interoperable systems.
The degree to which firms in a market use automated trade verification and achieve SDA has further implications in terms of the market-wide benefits that can be realized.
In some instances, automation and the move towards SDA as best operational practice delivers most benefits if it is adopted not just by most firms within a country, but across the whole relevant economic region.
From a wider perspective, these benefits from reductions in the risks and costs borne by investment managers and broker/dealers (or other intermediaries), once these benefits have been realised by a significant part of the market, would be passed through and be reflected in lower prices, resulting in lower transaction costs for end investors and producing associated beneficial effects on liquidity and operation of markets.