Verifying Trading Partners
Keeping track of all the various business-to-business exchanges popping up these days is no easy task. Keeping tabs on all the companies and individuals who use these exchanges can be infinitely more difficult.
CertCo, a New York-based application service provider and a leading provider of risk management and security solutions for B2B e-commerce, hopes to help B2B exchanges do just that—and reduce their clients' counterparty risk in the process.
New exchanges are bringing buyers and sellers of physical and financial products together like never before. But exchanges are finding it increasingly difficult to guarantee the integrity of each and every trade they facilitate.
This is particularly important in the physical markets. When Chemical Company A goes to a new B2B exchange to deal with Chemical Company B, there's a good chance the companies have never dealt with each other before.
In the capital markets, counterparties tend to know each other much better. But that could change quickly. Because today's dedicated trading networks are expensive to maintain and limited in scope, it's only a matter of time before on-line exchanges forsake dedicated lines and venture out onto the public Internet. When that happens, counterparty risk will become a far greater issue. Anyone with a modem, after all, could claim to be a Morgan Stanley trader with big trading limits. In order to take their business to the web, exchanges will have to master the user-authentication process.
That's where CertCo comes in. The four-year-old company helps on-line exchanges ensure that their users are who they say they are—and that exchanges can suspend or revoke questionable users in real time. "Our technology enables people to know at the beginning of a trade whether the other party is carrying a valid passport,” says June Felix, chairman, CEO and president of CertCo. "Other systems only tell you if a user is on the ‘bad' list, but that doesn't mean they're not fraudulent.” Right now, exchanges largely handle this function themselves. But as trading expands and traders begin linking up with one another all around the world, that task will be far harder to handle centrally, she says.
The advantage for exchanges: cost, and the simplicity of a single-connection solution. Just like back-office processing, outsourcing counterparty authentication is usually cheaper than handling the task in-house.
CertCo offers more than just red lights and green lights, however.
Its CertGuardian program allows traders still wary of new partners to lay off their counterparty risk via insurance. "We want to be an ASP that will not only manage and monitor the validity of everybody using an exchange, but also do a risk off-lay if they want it,” says Felix. "A lot of people in the capital markets might say, ‘I'm in the risk business, I don't need to do that.' But as on-line trading becomes more dynamic and broader, this will be more important.”