Central matching platform adoption has lagged in Europe, similar to underinvestments in capital markets operations and technology. But this is a key component of settlement efficiency and speed; without it, the move to T+1 in Europe could cause pain for market participants. There are multiple providers in the market and now is an ideal time for due diligence on the offerings.
In a recent report, we argued that T+1 presents an opportunity for European firms to upgrade their operations and infrastructure across the board; both ourselves and the UK Accelerated Settlement Taskforce (AST) contend that now is the time to get budget. Onboarding to matching platforms is one part of this conversation.
Under T+1, firms will need to perform trade allocations, confirmations and matching on T+0 to allow enough time for settlement by T+1. A complex set of activities need to take place so trades are matched before they can settle at the central securities depository (CSD). Matching is a major cause of failed trades in Europe, accounting for almost 50% of CSDR penalties, according to Euroclear.
Pre-settlement matching platforms can provide significant benefits as they ensure trades match before being sent to the CSD, according to ESMA. They drive standardization of data fields, automation and help reduce trade breaks. The UK AST recommends firms use electronic platforms for matching and ESMA recommends firms improve automation around the process.
The move to T+1 in the US went smoothly in part because 70% of trade volumes are captured by the DTCC’s Institutional Trade Processing suite, which includes their central trade matching platform, CTM®. Firms could use one matching platform, knowing that the majority of their counterparts also use it.
In Europe there is greater fragmentation of central matching platforms. Platforms are offered by vendors including DTCC, MarketAxess and Broadridge. According to DTCC, its CTM matching platform has been operating in Europe for nearly 20 years and covers over 30 European markets across equities and fixed income. It is used by over 450 buy side firms domiciled in the UK and EU and processes just under 28 million transactions a year across European markets. This compares with average volumes of 700,000 securities transactions per day processed by the T2S European settlement platform in 2023. It is not clear what kind of volumes other providers are matching in Europe and what overall market uptake of matching platforms is.
This fragmentation means buy side firms and brokers may need to onboard with multiple matching platforms as there could be a lack of interoperability. This would reduce the benefits of matching platforms and divert resources from other areas where firms can modernize post trade processing.
Like most other parts of T+1 planning in Europe, market participants should start considering their options now for pre-settlement matching and engage in discussions with solution providers, as electronic matching will be a key component in improving standardization and reducing fails in the move. Otherwise, the duplication of effort in setting up with multiple engines would reduce part of the presumed benefit of T+1 in driving market efficiencies.
Providers should interoperate, or collaborate like DTCC and Thomson Reuters did with the Omgeo post trade processing utility. Hopefully some of the North American work for T+1 settlement will ease this process for larger institutions. Still, complexities abound, and early action is the best strategy.