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by Craig Donner

DTCC has announced plans to launch the Obligation Warehouse (OW) to automate the matching and confirmation of brokerto- broker trades that are currently confirmed and settled directly between the trading parties rather than through DTCC (known as ex-clearing trades), and to give member firms real-time access to track, manage and resolve their failed obligations.

The service, an offering of DTCC’s clearing agency subsidiary, National Securities Clearing Corporation (NSCC), will be fully functional by June 2011, with implementation beginning in March 2011 following the Securities and Exchange Commission’s (SEC) recent approval of NSCC’s related rule filing.

“The OW represents a giant leap forward in helping financial firms better manage and address the operational risks and costs associated with processing broker-to-broker ex-clearing trades, as well as failed obligations,” said Susan Cosgrove, DTCC managing director, Clearance and Settlement/Equities. “It will create a more efficient and cost-effective system that will transform the processing of these transactions, while also delivering real-time capabilities to view virtually all failed trading activity in the U.S. marketplace for equities, corporates, municipals and unit investment trust securities.”

While most equity, bond and UIT trades are fed directly to NSCC for clearing from the various U.S. marketplaces and trading platforms, currently amounting to an average of more than 80 million daily transactions, there are an unknown number of trades that brokerage firms confirm and settle directly with their counterparties. Fails in those trades were never tracked in a central location prior to the development of OW.

Real-time automated service

OW leverages NSCC’s existing systems and enhances its current fail clearance system, known as the Reconfirmation and Pricing Service (RECAPS), to automate the matching and confirmation of broker-tobroker ex-clearing trades, replacing the highly manual and error-prone processes, including phone calls and faxes, currently used by financial firms to manage these transactions.

In addition, OW will track, store and maintain certain unsettled obligations in a central location, and make these obligations available for RECAPS processing until they are settled, cancelled or otherwise closed in the system.

Transactions eligible to be tracked, stored and maintained in OW include failed or unsettled broker-to-broker obligations that are compared through OW and obligations forwarded to OW from other NSCC services, including securities exited from NSCC’s Continuous Net Settlement (CNS), non-CNS Automated Customer Account Transfer Service (ACATS) items and NSCC Balance Order transactions.

RECAPS processing of these transactions, which includes re-pricing, re-netting and allotting, will take place initially on a monthly basis instead of the current quarterly schedule. A new daily maintenance function will check the obligations stored in OW for CNS eligibility and will make adjustments for certain corporate actions. In addition, member firms will no longer have to resubmit certain open obligations to RECAPS because OW will process RECAPS on all matched fails in OW aged greater than two days. As part of the service, firms will also receive real-time updates, as well as an end-of-day report, that reflect their positions in OW.

Collaborative approach

NSCC worked closely with member firms, service bureaus as well as the Securities Industry and Financial Markets Association’s (SIFMA) Securities Operations and Data Management Sections to help formulate the business requirements and development of OW.

“This collaborative approach allowed us to drill down to learn the unique needs of the industry and develop an enhanced service that closes the chapter on the manual processing of broker-to-broker trades and the management of open obligations,” Cosgrove said. “We added new functionality and features to further mitigate risk from the system, enhance transparency for financial firms and provide a comprehensive view to better understand these obligations in their totality. @