The Depository Trust & Clearing Corporation (DTCC) recently distributed a new white paper to the industry, titled Shortened Settlement: Omgeo, NSCC and DTC Functional Changes.
This latest Business Requirements Document (BRD), is a follow-up to DTCC’s T+2 High-Level Testing white paper that was issued in late February. The goal of this latest white paper is to guide clients, vendors and exchanges through the details of the various systems, processing and technical changes that DTCC’s subsidiaries are making to work towards the industry goal of a shortened settlement cycle on September 5, 2017.
“The T+2 changes are spread across a number of different product groups, who have all worked together from the beginning to facilitate the change to T+2 and support the industry,” said John Abel, Executive Director, DTCC Settlement Services. “We also had several of our product managers serve as co-chairs the various industry sub-working groups, and they continue to add subject matter expertise to the project. These product managers are now working directly with their ADM and support teams to prepare DTCC for T+2.”
Trade Affirmation – Omgeo
DTCC’s Omgeo subsidiary will not need to make any systematic change to the institutional trade affirmation process in a T+2 settlement cycle. However, the cutoff time for having affirmed institutional trades automatically introduced into NSCC and DTC for processing will be changed. The new cutoff time will be approximately 11:30 a.m. ET, 30 minutes earlier than the current 12:00 p.m. ET.
“From the outset, we were very much involved with the DTCC T+2 program team, led by John Abel,” said Greg Johnston, Executive Director, Omgeo Global Transaction Services. “We co-chaired one of the industry sub-working groups to evaluate T+2 impacts surrounding institutional trade matching processes, affirmation rates and SSI enrichment, and we collected feedback from the members of the team who represented the entire community of institutions, brokers and custodian banks, with more than 130 clients and vendors participating. We particularly worked to analyze clients’ post-trade affirmation rates, and with that data in hand, we really dug deep to understand the source of operational inefficiencies, to make recommendations to better prepare the U.S. market for T+2.”
“TradeSuite ID is capable of handling a variety of settlement dates,” said Gary Champagne, Director, Omgeo TradeSuite. To make the move to a shortened settlement cycle of T+2, Champagne said, involves “relatively minor changes.” These include programmatically changing a timestamp and cutoff times to stay in sync with the DTC/NSCC Settlement systems.
Champagne said the TradeSuite product team is working closely with the TradeSuite development and quality assurance teams to insure that they have all necessary requirements and test covered.
“Products like Omgeo CTM [Central Trade Manager] already deal with T+2 in a global marketplace,” said Champagne. “With approximately 87% of trades affirmed by the morning of T+1, our changes to the TradeSuite system are to now ensure we are capturing all trades. For our business, we also made a decision with the industry to align the affirmation process with NSCC’s Consolidated Trade Summary (CTS) output.”
“Based on the data and the recent improvement of affirmation performance and data quality offered by the ALERT SSI platform, we believe the industry is well-positioned for T+2,” Johnston concluded.
Trade Capture, Clearing and Reporting
T+2 settlement cycle will not require any change to DTCC’s Continuous Net Settlement (CNS) core processing (i.e. netting, allotting, and settlement). But DTCC’s equities clearing subsidiary, the National Securities Clearing Corporation (NSCC), will implement coding changes to its Universal Trade Capture (UTC) system and its Exchange Traded Funds (ETF) creation and redemption system to update the rules these systems use to assign the settlement date to transactions.
“On the NSCC side, we basically have to make a table update change in our definition of a ‘regular way’ trade. Today, regular way is defined as a transaction that settles in 3 business days. In a T+2 environment, our table rules must define regular way as a transaction that settles in 2 business days,” said Bill Kapogiannis, Executive Director, DTCC Equities Clearing. “Which is not to minimize the work and testing required of our ADM team, but the impact for NSCC and for clients is very manageable. All the work previously done in UTC, the real-time submission requirements, and building in industry standards, have positioned us well for this change to T+2.”
“The main change for Members is that most of their regular way trades will appear on the Consolidated Trade Summary (CTS) earlier in the trade life cycle. A regular way trade received by UTC on trade date will now be reported on the CTS on trade date, as opposed to T+1 today,” said Louis Lepore, Director, DTCC Equities Clearing. “But like with the UTC, there are modifications being made in the CTS rewrite project that also positions us well for T+2.”
Lepore said the new format of the redesigned CTS is expected to be implemented in Q2 2017, prior to implementation of T+2.
Representatives from NSCC’s Trade Capture, Clearing and Reporting businesses have been active participants for the past year on the various T+2 industry working groups, to ensure that all client, exchanges, trade venues, and vendor concerns are heard and addressed. One of the biggest issues on the table, which was resolved recently, was the build out of an additional test environment.
Given the duration of the T+2 test and the scope of the T+2 changes, DTCC decided in February to build out a second T+3 test environment, to operate in parallel with the T+2 test environment. To minimize the work required for clients to connect to a new DTCC test environment, the existing DTCC environment will be modified to support T+2 testing. Only clients who still need to test functionality in a T+3 environment during the T+2 testing period will need to connect to the new DTCC T+3 test environment.
“It’s not a lot of programmatic changes from our standpoint to prepare for T+2, but we consider the testing effort and the establishment of a new testing environment to be the considerable operational lift,” said Michele Hillery, Executive Director, DTCC Equities Clearing. “We are all taking the deadline very seriously, with a lot of concentrated effort across DTCC, our clients and the industry to get us where we need to be to implement T+2.”
Ex-Date Calculation for ‘regular way’ dividend processing will shift from two days prior to the record date in a T+3 settlement cycle to one business day prior to record day in a T+2 settlement cycle. Likewise, for dividends that are processed “irregular way” or announced late, the period that the dividend trades with due bills attached will also be shortened by one day.
Overall, the DTCC changes for Asset Servicing fall into the category of not being major systems overhauls, but “large enough where the changes can’t be ignored, and that holds true for the industry as well,” said Matthew Schill, Director, DTCC Settlement and Asset Services and co-chair of the Team Charlie working group.
“Settling T+2 means doing everything, even Asset Servicing, in a condensed timeframe,” he said. “Whether that is one less day to ‘cover a protect’ on a voluntary corporate action, or providing underwriting information to DTCC in a more timely manner, the move to T+2 is going to require the industry to make some behavioral changes.”
Schill emphasized the ongoing meetings with the industry to train and educate on these changes.
“Through the analysis performed during the meetings with the working group it was apparent that there was going to be an educational component when it comes to the Asset Servicing piece of a security’s lifecycle,” he said. “We need to continue working with our partners in the industry to ensure that the transition to a T+2 settlement cycle is as seamless as possible from an Asset Servicing standpoint.’”
Wealth Management Services
Effective upon the move to T+2, DTCC’s Wealth Management Services (WMS) plans to update all domestic Security Issue IDs on the Fund/SERV platform with T+3 settlement date to T+2. WMS is taking this systemic approach — performing a blanket override and update over the weekend of September 2-3 — to avoid significant client impact and burden of effort for the client.
“There’s the ability at the security level and at the transaction level to go in and define the settlement date,” said Josephine Torelli, Executive Director, DTCC WMS. “With 85-87% of transactions already settling on T+1 today, Fund/SERV was developed to be very flexible about the Settlement Date for domestic issues.”
Only if a client requests that there not be a change to the Security Issue ID’s settlement date will DTCC extract those particular CUSIPs, and not convert them to a T2 settlement cycle.
We are working with our technology team to vet how to handle those CUSIPs — for example, how we might create a spreadsheet of exceptions,” Torelli said. “Further information will be provided to clients as we work through the details.”
Representatives from WMS were also active on the working groups, with Torelli serving as co-chair of one of the working groups. “We did a lot of work upfront to understand clients’ needs and the programmatic and behavioral changes that would be required,” she said. “The considerable effort last year from the working groups have positioned us well in for this careful, focused development and implementation.”
DTCC will not require any systemic updates to accommodate the shift to settlement one day earlier.
John Kiechle, Executive Director, DTCC Settlement, said that some financial instruments and transactions – such as Money Markets and stock loans – are already settled on a same-day settlement cycle. As a result, there are relatively no changes necessary of DTCC’s settlement business to accommodate the move to T+2. And while processing physical certificates present certain procedural inefficiencies, they also will not affect T+2 settlement.
“Settlement, as the last leg of the process, is virtually immune to the upstream changes to the other DTCC subsidiaries’ changes,” said Kiechle. “There are some peripheral modifications to shorten the settlement cycle, but the message is that DTCC’s settlement business is ready for the industry’s move to T+2.”
The Functional Changes white paper is available for download at http://www.dtcc.com and http://www.UST2.com. DTCC welcomes client feedback: please contact DTCC with questions and comments at [email protected], or contact your DTCC Relationship Manager or CNS Operations at (888) 382-2721, Option 2, then 2.