Confirmation Matching: Is Your System Delivering the Goods?
By James F. Black
April 7, 2004

Summary: Many banks have developed in-house confirmation matching systems, but they typically address SWIFT processing while ignoring other activities such as exceptions handling and investigations. James F. Black discusses the key factors to look for when selecting confirmation matching software for today’s dynamic business environment.

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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 must also 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 have been transactions that simply do not fit standard processing flows. Often this is because 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.