On Monday Omgeo announced a 47% year-on-year increase in equity and fixed income volumes processed on its post-trade services for the Japanese market. According to its press release, this emphasis both the adoption of Omgeo's Central Trade Manager (Omgeo CTM) and Japan’s growing market.
Omgeo is an international firm that helps to bring best practices to their markets and boasts 6,500 clients in 52 countries. Their vantage point gives an interesting look at the challenges and solutions trending in global markets. Japan, whose firms emphasize advanced technology, is a market particularly worth examining in light of the increased and complex pressures on their trading systems.
Business in Japan
“Japanese firms’ embrace of technology and desire to maximize efficiency is in many ways beyond comparison,” writes Nellie Dagdag, executive director for Asia Pacific at Omgeo in an email to Wall Street & Technology. “They see the benefits of automation and standardization and pursue it enthusiastically. For many outside firms, however, such high standards can be a significant challenge. Particularly amongst international sell side organizations, where Japanese asset managers’ high demands around accuracy and timeliness can sometimes be perceived as quite daunting.”
In terms of accuracy, whereas other markets are more tolerant of rounding errors, investment managers and brokers in Japan have a long established expectation that accuracy needs to be achieved to the last yen, or cent. If not handled well by an international broker, this can significantly delay the agreement of trade details such as taxes and fixed income calculations – or even result in trade failure.”
Similarly, Japanese investment managers have an extremely high expectations in terms of the promptness with which their brokers must respond and settle trades with them. This is in part cultural, but equally reflective of Japan’s earlier time-zone. As their market opens each day, local firms need to quickly close out any issues with the confirmation of international trades from the previous day in order to settle on time. This can also be equally challenging to international brokers outside Japan dealing with local buy side firms.”
For Japan, automating and consolidating platforms is key. Dagdag explains that while operations for Japanese domestic trading has long been automated, there is an increasing desire amongst Japanese firms to consolidate their operational processes onto a single platform and standard. “Increasingly, we are seeing clients abandoning multiple domestic platforms and seeking out the use of a single, centralized platform they can use for processing both international and domestic trade volumes. This brings with it efficiencies and scalability, simplifying IT requirements and introducing a greater level of predictability in the overall system.”
She adds that in recent years Japanese firms have been especially active in automating international fixed income, bringing associated systems and processes into line with equities operations. “Asset managers increasingly have higher expectations, wanting the same set of standards (such as straight-through processing) to be followed in the processing of international fixed income as they see in equities.”
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Omgeo believes the stress on consolidation and standardization is why Omgeo CTM, has seen such significant adoption in Japan over the past year. According to the press release, Omgeo CTM is the firm’s platform for the central matching of cross-border and domestic equity, fixed income, exchange-traded derivative (futures and listed options) and contract for difference trades. Omgeo is also looking to add new asset classes to the same platform.
According to the press release “Omgeo now has over forty of the country’s leading investment managers and broker/dealers using Omgeo CTM, with Japanese fixed income trades processed on Omgeo CTM more than doubling.” Furthermore, “domestic trade volumes account for 74% of transactions processed on Omgeo CTM for the Japanese community overall, up from 56% a year ago.
Dagdag added, “Our clients are actively expanding their use of automated processes across asset classes and borders. We look forward to bringing increased levels of efficiency and reduced risk to the Japanese market.”
Japan’s push to harmonize with both domestic and foreign markets using multiple trading assets is a budding trend across the global financial system. We can look to the big players and first adopters to set the tone for the trading standards.
While international best practices and consideration of social norms are always considered, along with tax rules and settlement instructions, some aspects of automation will remain universal. Central matching, for instance, is considered a commercial best practice across markets and assets, and more efficient than sequential matching.
Dagdag writes, “Across Asia, we are seeing the same standards used in post-trade automation increasingly being applied to both equities and fixed income, and a similar approach starting to be applied to the derivatives space. We are also seeing developing markets growing emphasis on adopting similar standards of automation as they see being used in more mature markets.”