Is Your Confirmation Matching System Delivering the Goods?

With ongoing improvements in the quality of SWIFT messaging and initiatives such as continuous linked settlement (CLS), treasury departments have a number of tools available for proactively controlling settlement risk. While these tools offer automated support for a wider range of financial instruments, that’s often not enough. Such tools also must adequately address both exceptional trades and cases where market practice fails to adapt to specific standards.

Since the introduction of automated confirmation matching systems, there always have been transactions that simply do not fit standard processing flows. Often this is due to the fact that different confirmation methods are used when dealing with banks, non-banks or brokers. For example, most inter-bank trades are confirmed via SWIFT, corporate customers confirm via CMS, Internet, fax, e-mail and telephone, and inbound broker confirmations come through the BART network. And while an increasing number of trades today are being confirmed and settled through CLS, the majority of banks still prefer to log into one system to see the full lifecycle picture of all confirmation activity among the bank, counterpart, broker and CLS bank.

In other instances, common market practice has dictated that instruments such as non-deliverable forwards (NDFs) be confirmed via faxed “long document” confirmation letters. Also, due to in-house treasury system limitations, precious metals trades are frequently sent via SWIFT as MT300 Foreign Exchange Confirmation messages instead of the proper message type – an MT600 Precious Metals Confirmation. And many banks confirm banknote transactions by sending MT399 Free Format messages. The list goes on and on.

Given that the exception has in fact become the rule, the internal systems and operating procedures of many banks cannot support such a dynamic environment – a situation over which bank regulators have become increasingly critical.
It’s true that most banks have implemented some type of confirmation matching software. While many banks have developed in-house systems, they have not been particularly successful, since such systems typically address SWIFT processing while ignoring other business activities such as exceptions handling and investigations. Also, a large number of legacy systems still in operation simply do not offer the features that are demanded by today’s dynamic business world.

Therefore, the question is not whether confirmation matching software is necessary, but what to look for among available offerings.
Key Success Factors for Confirmation Matching Software
Ideally, a confirmation matching solution should provide a proactive method to control both settlement and operational risk. Sounds pretty simple. But in order to achieve this, the perfect confirmation solution should offer the following range of features.

Depth of Coverage: Today’s confirmation matching solutions should support not only instruments such as foreign exchange, foreign currency options, money market, derivatives, and precious metals confirmations, but also the “ugly” parts of the business process, including non-SWIFT confirmations, NDFs, and telephone and broker confirmations. To complete the picture within a single application, the system should also employ CLS and CMS matching status.
Real-Time Operation: The window of opportunity to confirm a trade – from the time a contract is executed until payments are triggered – is very short. As a result, there is tremendous pressure on back offices to employ proper controls to ensure that trades are confirmed as quickly as possible.

Exceptions Handling: Given the maturity of SWIFT, a large percentage of trades should be confirmed automatically. However, the real focus should be on trades that do not automatically match. Dealing with exceptions isn’t the exception to the rule, which is why it’s extremely important to get a system that follows through when a trade, in fact, is not a match. The ideal solution, therefore, should provide a range of exception handling capabilities such as:
- Exceptions prioritization
- Integrated internal and external investigations / replies
- On-line audit trail
- Automatic chasers (SWIFT, fax, mail and e-mail)

Online History: Since it’s impossible to know whether a person involved in an investigation is going to be around at any given time, a good confirmation matching solution should avoid the need of relying on individual knowledge, but rather record each and every historic event relating to a transaction. This coverage should include a complete history of cancellations, amendments, user actions, investigations, and replies for both current trades as well as those being investigated in the coming weeks or months.

Learning Mechanism: The majority of exceptions occur due to the manual typing of settlement instructions as free format text rather than as BIC code. The ability of a confirmation solution to identify and learn from such error patterns (e.g. by automatically learning a range of synonyms) improves its matching capabilities significantly over time. This could also include, for example, cross matching a proper MT600 Metals Trade with a similar matching transaction sent via MT300 format. A reconciliation system should be viewed as a value-added, mission-critical component to any straight-through processing workflow.

Ease of Use: User screens should be logical, simple and intuitive, providing everything that users need at their fingertips. In order to operate the system, personnel should not be required to be SWIFT experts or to have intimate knowledge of BIC codes or field tags.

Multi-Entity System: The ability to leverage a single software license across a bank’s multiple branches, whether for centralized or decentralized use, can significantly cut IT and operational costs.
Integrated Solution: By including counter-party (SWIFT and non-SWIFT) confirmations, broker confirmations, CLS, CMS, chasers, and investigation capabilities within a single solution, users do not have to log into and out of myriad systems each time they want to perform a different function.
Feedback Capabilities: The system should provide feedback to various host systems for confirmation status updating in order to complete the process and release payments.

State-of-the-Art Offering: With rapid technological changes continuously impacting the trading world, it is imperative for confirmation matching systems not only to offer real-time matching capabilities, but also to keep up with new and evolving market initiatives.

The Required Solution
The inclusion of this array of features enables a confirmation matching solution to mirror a logical treasury operations workflow and simply be an extension of that flow. While it may appear that all confirmation matching products cover the entire range of capabilities mentioned above, that is simply not the case. Most either offer just a few of these features, or require the purchase of optional modules or separately installed systems in order to access such features.

When purchasing their next confirmation matching solution, treasury departments should look for comprehensive solutions that include these capabilities. As this is very much a replacement market, banks should also look to a vendor with a demonstrated track record of replacing systems installed by other major confirmation matching solution providers.

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development