Since the start of the initiative, DTCC has worked to educate clients on the need to eliminate reclaim risk and the importance of promoting intraday finality. In return, the industry actively provided DTCC with feedback on the effects that Settlement Matching introduces to their settlement process. Clients soon realized that Settlement Matching provided them with a proactive approach to resolution of discrepancies between deliverer and receiver by allowing the receiver to approve the transaction attributes prior to settlement. With this process, clients can correct issues intraday rather than on a next-day basis. Settlement represents a key step in the post-trade lifecycle, and we’re pleased with the progress we’ve made as an industry in significantly lowering risk in the overall settlement process.
This multi-year redesign aims to improve the core settlement processing displays and provide increased monitoring tools and transaction update capabilities. When completed, Settlement Web will give users a more modernized, more cohesive and user- friendly experience. To date, about 92% of all of the new functionality is available on Settlement Web.
As firms continue to adapt to the business and regulatory changes still reverberating from the 2008 financial crisis, many find themselves looking to financial market infrastructures to help address challenges related to cost and risk. Dan Thieke, Managing Director and General Manager, Settlement & Asset Services at DTCC, discusses how the firm is strengthening risk management and efficiency in settlement processing in the U.S. equities markets.
One of the most significant achievements of 2014 was gaining industry consensus on shortening the U.S. settlement cycle. What finally prompted this decision after years of debate?
After nearly two years of industry-wide discussion and engagement with a broad range of clients, the industry came to agree that shortening the U.S. settlement cycle would help to further safeguard the capital markets. Collectively, the industry – represented by the Securities Industry Financial Markets Association (SIFMA), the Investment Company Institute (ICI), the Association of Global Custodians (AGC), and the Association of Institutional Investors (AII), among others – concluded that moving to T+2 will reduce systemic, liquidity and operational risks. They concluded it would also promote better use of capital and create significant process efficiencies for market participants – all changes that represent a critical step in fostering greater certainty, safety and soundness in the U.S. capital markets.
After gaining consensus, in 2014, the industry publicly announced its recommendation to shorten the settlement cycle in the U.S. financial markets for trades in equities, corporate and municipal bonds and unit investment trust (UIT) securities. DTCC’s view is that shortening the time period between trade execution and trade settlement reduces credit and liquidity risks for both the financial markets and investors.
What are the next steps now that an agreement is in place?
We still have a significant amount of planning and work to do to prepare for the move to a shorter settlement cycle in the U.S. In speaking with organizations across the industry, we agreed to form a steering committee and a working group comprising industry leaders and experts from associations and firms representing a range of stakeholders including buy-side and sell-side firmsto drive this initiative forward. Based on our experience over the past several years, it was clear to us that the ongoing success of this project largely rests on working in collaboration with industry participants on the planning and execution of the move to T+2.
Who will lead the Industry Steering Committee?
We’re delighted that Kathleen Joaquin, Chief Industry Operations Officer for the Investment Company Institute (ICI), and Tom Price, Managing Director, Operations, Technology & Business Continuity Planning for the Securities Industry & Financial Markets Association (SIFMA), have agreed to co-chair the steering committee. This group will serve as the voice of the industry and will be responsible for overseeing the transition, driving the deliverables of the various sub-working groups, providing guidance and support to address technological and process building blocks, and communicating changes to stakeholders. The working group will be the lead on identifying and executing a tactical plan to implement the business and rule changes required to shorten the U.S. settlement cycle in a time frame that is acceptable for the industry.
The ongoing implementation of DTCC’s Settlement Matching initiative represents another major advancement in settlement this year. How is this helping to drive down risks?
It’s helping enormously. Settlement Matching is one of DTCC’s priority initiatives because it dramatically reduces reclaim risk and promotes intraday settlement finality. Prior to the Settlement Matching initiative, most reclaims were processed late in the day, making it difficult for the original deliverer to take corrective action or use the securities for other funding opportunities. We have already removed approximately $525 billion of risk from the settlement system since the start of the project in 2013. This reduction in risk represents the value of transactions that no longer pose reclaim risk to The Depository Trust Company (DTC), its clients or the industry. To date, we have implemented three out of four planned phases of the initiative, and we completed the last phase in early 2015.
The Settlement Matching initiative grew out of DTCC’s enterprise-wide efforts to identify and mitigate systemic risk. It also aligns us with the intraday settlement finality recommendations of global organizations like the Committee on Payment and Market Infrastructures of the International Organization of Securities Commission (CPMI-IOSCO).
Volume of Security Transactions Settled
VALUES ARE IN MILLIONS
Value of Security Transactions Settled
VALUES ARE IN TRILLIONS
Number of Active Security
Issues Held at DTCC
VALUES ARE IN MILLIONS
Total Value of Active Issues Held at DTCC
VALUES ARE IN TRILLIONS
In the asset servicing side of the business, how has the industry responded to changes resulting from the Corporate Actions Transformation initiative?
Industry feedback has been positive and enthusiastic because the initiative helps clients increase efficiencies while also providing them with better tools to manage their risk exposure when processing of corporate actions transactions. It also aligns the U.S. market with global messaging standards and delivers corporate actions data in a consistent, uniform format. After much industry dialogue, we recognized that we needed to respond to an ever-changing business environment and to accommodate what was becoming a global investment business. DTCC's clients had expanded their businesses throughout the world and wanted to streamline, as much as possible, the standards and formats used to communicate. ISO 20022 meets those needs and offers a host of benefits. This has been a long time coming, but it’s extremely useful.
In defining a new model for U.S. and global corporate actions, DTCC worked collaboratively with SWIFT, ISO 20022’s registration authority, as well as with the various market practice groups. Perhaps the most important benefit to emerge from adoption of the ISO 20022 messaging standard is that it provides a common language across the industry, complete with its own ever-growing dictionary, enabling businesses in the financial industry to communicate corporate action information quickly, easily and precisely. At the end of 2014, we neared completion of phase three – out of five phases – in the initiative.
Dematerialization has been at the top of the industry’s agenda for a number of years because it will reduce costs and mitigate risks. Has the industry reached a tipping point where it is no longer able to issue paper certificates?
Absolutely – the economies of scale for physical processing have been reversed. As the number of physical issuances and transactions has declined, the unit cost of processing them has risen. Dematerialization will help to lower costs, mitigate risk and bring greater efficiency to the industry, including the individual shareholder. It will also position the industry for a more seamless transition to a shorter settlement cycle in the U.S. by eliminating the manual processing of paper certificates. Processing physical certificates comes with labor costs, manual errors and storage needs – lending itself to risk, costs and slower processes.
The U.S. financial industry has made enormous progress toward dematerialization in recent years. We’ve seen an 81% drop in the number of physical certificates held in our vault since 2003, and we are working closely with all industry stakeholders, including banks, brokers/dealers, transfer agents, issuers, exchanges, regulators and industry associations to help drive the initiative forward. SIFMA also supports the push to dematerialize.
What’s been the industry reaction to the new enhancements for Settlement Web and CA Web in 2014?
The response has been very positive, and I believe it’s an outgrowth of our efforts to engage more deeply with our clients and solicit their feedback throughout the development of these initiatives. In the case of Settlement Web, we launched new functionality in 2014 to give users more options in how they handle their settlement related activity. Similarly, in the corporate actions side of the business, we organized extensive training and parallel testing with thousands of users of the new CA Web. This was critical to helping clients prepare for the upcoming changes. It also helped collect feedback that we could incorporate into the product. We’ve had very positive feedback from clients and there is tremendous interest in seeing the product expand to include additional functionality.