Mostly… fixed income and cross product eTrading

December 13, 2006

Rating Your Counterparts

Filed under: Nuts and Bolts — holky @ 3:10 pm

The UK financial services industry should introduce an eBay-type ratings system that each customer or counterparty could supply after every transaction, so said Simon Culhane of the Securities & Investment Institute (SII) earlier this year – stating that the financial services industry needs better ways for customers to provide feedback, and praising the eBay customer ratings system for being a highly visible, individual feedback rating given to each member, which allows users to decide whether they trust the counterparty before committing to any deal.

“An individual’s rating is dynamic and changes according to the simple feedback received from the counterparty on completion of each transaction. The feedback is positive, neutral or negative and is usually accompanied by a brief comment,” says Culhane.  “Both the comments and the ratings are visible at all times to any potential counterparty that is considering entering into a transaction,” he adds. “It is, in effect, a simple, empirical way of measuring reputation and provides a real expression of trustworthiness.”

Culhane argued that eBay customer feedback relies entirely on individuals wanting to protect and enhance their reputation, using no legal rules or power, and draws a parallel with the financial world where reputation and trust are crucial. “What is needed is a measure of proportionality that discriminates between firms with systemic problems and those with occasional blips. Wholesale, private client and retail trades would all be rated,” he says.

Culhane says the effect on reputations when these ratings are published would be immense as counterparties and customers would be able to ascertain the reputation and integrity of a firm immediately. Firms that adopt a principled approach and actively demonstrate their fairness, honesty and integrity would be the winners.

This is actually a concept that keeps resurfacing with me in different shapes. 

While I’m not convinced that someone is going to manually rate their counterparty for each and every trade unless they trade r-e-a-l-l-y infrequently, there is something along these lines that could be achievable and feasibly offering an immediate value-add when making or demonstrating your choice of counterparty for best execution.  

Why doesn’t each settlement venue calculate the STP % rate of each firm then offer slice and dice facilities by product/currency/anything else where someone might want to see what the chances of getting STP are for the products/whatever they are interested in?   

Just imagine if you could get this kind of information from Euroclear, OMGEO …. or of course DTCC/Swapswire in the derivative space.   

Clearly, correctly attributing fault for each fail is of importance in order to give a truly meaningful rating, and that is where an explanatory text (though likely subject to legal/compliance review and release) could be of use to mitigate or praise or criticise the handling of the underlying problem..

Extending this further, where the etrading venue has electronic links through to settlement venue it could feasibly make this information avilable as part of the price discovery process.



  1. Dresdner Kleinwort: AAAAAAA++++++++++++!!!!!!!!!!! Excellent!! Would definitely trade again!!!!!


    Comment by Neil — December 13, 2006 @ 5:03 pm

  2. I can’t say I’m convinced…maybe this Simon Culhane is thinking more of retail broking than institutional financial markets.

    The frequency of trades makes it impossible for one.

    I like Holky’s idea that you can see if a counterpart is troublesome in settlement before setting up lines. That certainly has merit and should be made available by the settlement venues with permission of the counterpart. This would have to be quite general so as not to divulge too much detail of the client’s overall trading. A problem with using something too close to eBay style ratings, as transactions between a Bank & a Fund Manager are far more sensitive than those between Bill Smith selling some Fred Perry Polo Shirts he “found” in the pub car park to John Brown via eBay.

    Anyway, I’m not a huge eBay fan….I’ve been dudded a few times…. : (

    Buyer beware, indeed!

    Comment by waratah — December 20, 2006 @ 9:53 am

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