by Crystal Bueno

DTCC and Omgeo are collaborating to create a new service for affirmed institutional equity trades that will streamline clearance and settlement, cut customer costs and reduce fails in this segment of the market.

Initially, it is estimated that more than 250,000 trades a day could be eligible for the proposed service, called ID Net, whose rollout is subject to approval by the Securities and Exchange Commission (SEC). DTCC and Omgeo plan to launch the service in two phases, starting with a pilot scheduled for late this year.

"We've seen a 15-20% increase in institutional trades over the past couple of years, which has also meant an increased number of steps, risks and costs in the clearance and settlement process, said Susan Cosgrove, DTCC managing director, Clearance and Settlement Group. "On top of that, pressure to reduce costs has led industry participants to demand greater efficiency. The ID Net service will address these concerns and will benefit all parties involved in institutional trading by combining and netting trades, which in turn reduces risks.

Omego, a joint venture between DTCC and Thomson Financial, is the global provider of post-trade, pre-settlement processing services for the institutional market with more than 6,000 customers worldwide.

How it works now
Unlike exchange trades and most prime broker trades, institutional equity trades do not currently flow into National Securities Clearing Corporation's clearance and settlement systems for netting. Rather, the institutional trades settle on a trade-for-trade basis.

In addition, investment managers tend to split up traditional "block trades and submit them for execution to multiple broker/dealers or electronic communication networks (ECNs), with each broker/dealer or ECN delivering the mini-blocks to custodians. The result is multiple deliveries to a given custodian for a given customer, rather than a single delivery for the total number of shares.

What will change
The first phase of the new service is anticipated to launch in pilot by year-end 2007. It will take Omgeo's TradeSuite affirmed institutional trades that are eligible for ID Net and "break them into their component parts. In other words, the broker side of the trade will be netted with the broker's Continuous Net Settlement (CNS) obligation and the bank side will be processed to/from an NSCC omnibus account. Incomplete trades will be reversed out of the process at 11:30 a.m. Eastern Time on settlement date.

The second phase of the service, which will combine multiple deliveries to the same custodian/beneficial customer, is targeted for implementation in 2008. At the investment manager level, it will take the netted trades, combined into blocks by security, customer and settlement date, and make deliveries to and from custodians, significantly reducing the number of deliveries and associated custodian costs.

Who and what are eligible
Eligibility is based on the participants, the underlying security, the type of trade and the timing of affirmation.

ID Net will be a service for members of DTCC clearing agency subsidiaries. Broker/dealers must be both NSCC members and DTC participants, and custodian banks must be DTC participants. And although not considered direct participants in the service, investment managers and their client customers ultimately receive the benefits of ID Net when participants - the settling broker/dealers and banks - subscribe to the service.

Initially, only equity CUSIPs eligible for CNS - which have also been affirmed before 9 p.m. on T+1 - will be combined in the ID Net service. Corporate and municipal bonds and unit investment trust (UIT) issues will be excluded. Also excluded are the first day of new issues, issues undergoing a mandatory or voluntary reorganization, CUSIPs with a CNS buy-in and securities appearing on the SEC's Reg SHO list.

What about Fixed Income trades?
For the fixed income side, institutional trades in mortgage-backed securities already settle through FICC's Mortgage-Backed Securities Division. Institutional trades in U.S. government securities continue to settle outside FICC's Government Securities Division, unless they are submitted through the sponsored membership program.

A customer-friendly solution
DTCC is designing the ID Net process flow to minimize technology development on the part of customers. In Phase I, banks will receive Machine Readable Output (MRO) listing the original receiving or delivering broker in the same fields that they appear today. Optionally, banks may program their systems to read the Omgeo Depository Third Party field to determine if the trade was processed through ID Net.

To brainstorm the business requirements and develop a conceptual design for this initiative, DTCC and Omgeo formed a working group of broker/dealers and bank customers in February.

"When customers came to us with this idea for a new netting capability, we saw its potential benefit as another strategic step towards more efficient settlement processing, said John Kiechle, DTCC vice president, Clearance and Settlement Group. "This is a good example of building a service that lays the foundation for the future. @

[To learn more about ID Net, contact John Kiechle, DTCC vice president, Clearance and Settlement Group, at jkiechle@dtcc.com or 212.855.3900.]