‘Transforming the Processing of Fails & Other Open Obligations’

With NSCC preparing to launch its Obligation Warehouse (OW) by mid-year, Susan Cosgrove, DTCC managing director, Clearance and Settlement/Equities, recently published an article explaining how the service will work. Cosgrove discusses how the OW will provide transparency for the industry and regulators while delivering operational efficiencies, cost savings and risk mitigation to financial firms.

The article appears in the most recent issue of SOD News & Views, a quarterly publication of the Securities Operations Division of the Securities Industry and Financial Markets Association (SIFMA). The Securities Operations Division provides a forum for educational and development support to operations professionals and other members of broker/dealers, banks and investment management firms.

Below is an excerpt of the article. To read the entire article, visit www.sifmasod.org.

In the U.S. capital markets, the industry is well-served by an automated post-trade process that seamlessly clears, guarantees and settles trades that on a peak day can top 19 billion shares, or average about $2 trillion. However, regulators, policymakers and financial firms are justifiably concerned about ex-clearing trades, which are managed broker-to-broker using highly manual and error-prone processes, including phone calls and faxes to exchange information to ensure final settlement. The process is inefficient and expensive – and, more significantly, fraught with operational and counterparty risk.

– Susan Cosgrove, DTCC managing director Clearance and Settlement/Equities

When it comes to comparing ex-clearing trades, ops professionals have had limited tools to manage trades bilaterally. This has created needless operational risk for firms, as well as increased costs and diverted resources from other back-office responsibilities. The OW will close the chapter on the manual processing of ex-clearing trades by empowering ops professionals with a real-time automated service that will electronically manage these transactions and communicate a successful match to each side of the obligation….

The OW goes one step further by also automating the management of ex-clearing and non-CNS fails. Because these trades exist outside CNS, the back office faces an accounting nightmare in handling these transactions – not to mention bearing the added costs for maintaining comprehensive records and dedicating personnel to keep track of their status. The OW will help mitigate this risk by consolidating all ex-clearing and non-CNS fails in a central location and storing them until settlement. This is good news for brokers, who will gain real-time access to their fails data, and an efficiency booster for the back office, which will be freed from having to manually log and update the status of these obligations….

The OW enhances transparency by fully capturing, for the first time ever, all trading activity in NSCC-eligible securities in a central location from trade date until settlement. As a result, ex-clearing trades will no longer be invisible to all but the parties to that particular transaction. Instead, the industry and regulators will have a complete view of all open obligations traded in the U.S. marketplace for equities, corporates, municipals and unit investment trust securities – and importantly, have a central vantage point to monitor and mitigate systemic risk….

The OW is not a solution in search of a problem – it is the solution to a problem that has plagued the industry for years. For ops professionals, the OW represents an important step forward in bringing greater efficiency, cost savings and risk mitigation to the back office.