Mark Bouchea, DTCC Managing Director.
Trade failures caused by incorrect standing settlement instructions (SSIs) have long been a frustrating part of life for market participants. In fact, industry estimates show that around 20% of settlement fails are caused by incorrect SSIs. This number is fueled largely by firms using manual processes for the management and communication of settlement instructions.
While the financial services industry is focused on distributed ledger technology (DLT) as the future of managing and sharing data, the opportunity exists now to end the cycle of frustration associated with SSI processing by leveraging a centralized utility.
With a DLT platform, data is stored, updated and accessed by users locally. Alternatively, with a centralized SSI utility, such as ALERT®, SSI data is stored, validated and updated in one place, and quickly communicated out to enrich an in-flight trade or distributed downstream to the many consumers of the data to access locally.
This effectively creates a “golden source” of the SSI data, providing confidence to its users that, as long as the data is maintained in the central database, the most up-to-date and validated version can be accessed and used to create an authoritative settlement instruction.
There is universal agreement across DTCC stakeholders in the position that the most efficient model for managing SSIs through a centralized utility is the custodian managed model—one in which the global custodian, regional custodian or prime broker is the owner and maintainer of SSI data. To support this model, ALERT created a workflow called Global Custodian Direct which allows Global Custodians to electronically manage SSIs on behalf of their buy-side clients.
We currently have seven global custodians live on GC Direct, covering more than 700,000 settlement instructions, and we have been getting excellent feedback from users. In fact, one of our large custodians has seen a 54% reduction in fails directly related to their use of GC Direct. One of our buy-side participants has reduced their SSI-related fails to close to 0%. That equates to significant cost savings across the board and positions GC Direct as another impactful measure helping firms avoid the cost of settlement fail penalties related to the Central Securities Depositories Regulation (CSDR) coming into effect in 2021.
While we are making huge strides in the direction of a completely automated custodian managed SSI model, the slower uptake and migration of underlying clients puts us anywhere from three to five years away from a model where global custodians and prime brokers are maintaining the majority of SSI data—a timeline which most industry participants say is not acceptable.
We’ve asked ourselves many times: What more can we do to incentivize those manual buy-side clients on to ALERT? And how can we help custodians accelerate their adoption and client migration?
One solution we presented is our Automating SSIs Together (ASSIsT) service, a free offering where DTCC will help to load into ALERT those SSIs that are still being delivered by fax or email allowing the communication of account and SSI data without the burden to clients of inputting it in the platform the first time themselves. Another option we are assessing comes in the form of a Broker SSI Liftout, where DTCC provides an operational lift and takes over maintenance of manual client details by leveraging ALERT.
We’re confident that rallying manual clients to adopt the ALERT tool, and getting 100% of Global & Regional Custodians onboarded through GC Direct, will help fully automate the process and get the industry to the target state of one global SSI utility.
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