Bill Meenaghan, Executive Director of DTCC’s Omgeo ALERT
According to industry estimates, nearly 30 percent of financial trades fail due to inaccurate standing settlement instructions (SSIs). The incorrect instructions are largely fueled by firms using manual processes to manage their internal SSI database.
SSIs provide the details on how and where funds and securities are to be exchanged on settlement date. The type of information carried by an SSI can differ based on country and asset type. In general, though, all SSIs include standard information, such as the custodian and sub-custodian account numbers and the depository code. Other data includes currency code, security type and place of settlement. An accurate and complete SSI helps reduce the risk of a trade failure and associated costs with having to investigate and resolve the failed trade.
In 2014, The Depository Trust & Clearing Corporation (DTCC) began work on creating the SSI Utility, with Omgeo ALERT® acting as the foundation to this concept. ALERT enables a community of investment managers, brokers-dealers and custodian banks to share accurate account and SSIs automatically worldwide.
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Streamlining Manual Processes
Investment managers who do not use ALERT, forward SSIs to brokers as email attachments and brokers have to rekey all the SSI data into their system. ALERT takes these manual steps out of the process and helps to create efficiencies, reduce risk and lower costs, according to Bill Meenaghan, Executive Director of DTCC’s Omgeo ALERT. “You have personnel costs incurred with updating SSIs on an internal system as well as the costs of operating and maintaining your SSI technology infrastructure,” he said. “Manually updating SSIs from PDFs adds the element of risk from human error by keying in the wrong information.”
The majority of SSIs are added to ALERT by investment managers, who receive the SSIs from the custodian. Most SSIs are still entered manually by investment managers. ALERT allows users to set up or edit accounts and either link these accounts to a set of existing instructions or create a new set of instructions. These arrangements can be saved as “models” in ALERT. With thousands of accounts attached to a single settlement model, this arrangement can significantly reduce the effort required to maintain individual accounts.
ALERT recently introduced its third-party enrichment application programming interface (API) to enable clients and vendors open access to SSI data on a real-time, per transaction basis, over a secure network. The API is live for vendors and will go live for existing brokers and investment managers in July. The open API has been designed to ensure ALERT can accommodate future industry initiatives and standards.
Clients utilizing ALERT in conjunction with DTCC-Euroclear GlobalCollateral Ltd. can update their accounts with collateral SSIs. This enables clients to use ALERT to automatically enrich their trades. The margin transit utility (MTU) will know what margin to move, but not where to move it, so the SSIs will be attached to the margin details and used to instruct the margin movement.
Some SSIs are uploaded directly into ALERT without having to rekey the information using the Global Custodian Direct (GC Direct) functionality that went live in 2015. This feature allows the custodians acting as the source of the information to electronically manage SSI updates on behalf of the investment managers.
The Industry SSI
Last month, DTCC announced that ALERT reached more than six million settlement instructions – up 16% since the end of 2014 and exceeded expectations for growth, according to Meenaghan. The achievement positions ALERT to continue delivering on its goal of creating a single, global SSI utility to consolidate SSI information and allow brokers to consider retiring their internal SSI databases.
In addition to equity, fixed income, money market and derivatives (exchange traded and over-the-counter) support, ALERT holds more than 906,000 FX/cash settlement instructions with a compliance rating of over 99%. The compliance rate is how many SSIs in ALERT pass the industry and community rules that ALERT uses. This prevents the addition of an incomplete SSI. Legacy data from before the rules went into effect accounts for the non-compliant 1%. Meenaghan noted the goal is to bring all SSIs held in ALERT to 100% compliance with market practice rules. The rules can vary by market and there are rules for all markets with a depository, not just the U.S.
Due to the critical nature around the timeliness of FX trades, more financial institutions are automating their FX post-trade operations and the number of FX SSIs is expected to continue to grow significantly, as global custodians and prime brokers adopt the service following the introduction of global custodian and prime broker automation capabilities in ALERT in April 2015. The release, included the GC Direct feature, which allows global custodians and prime brokers to be able to take on a more proactive role in SSI maintenance, with DTCC working with both groups to help drive uptake across their client bases. Since then, Brown Brothers Harriman and J.P. Morgan were the first two custodians to go-live on GC Direct while six prime brokers have implemented ALERT for prime brokers supplying SSIs to hedge funds.
“For brokers, the infrastructure cost to manage their own internal SSI database is very expensive,” Meenaghan said. “Over the course of 2016, ALERT will aim to extend coverage of client SSIs in its database, moving towards the SSI Utility’s goal of 100% coverage, which will allow brokers to consider retiring their internal SSI databases.”