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Top Four Reasons for Developing a Unique Transaction Identifier for the Cash Securities Market

By Matt Johnson, DTCC Director, ITP Product Management & Industry Relations | 4 minute read | March 30, 2022

Continuing compliance and cost pressures, combined with large transaction volumes in the cash securities market, have created an opportunity for the financial services industry to revamp its approach to post-trade processing. Elimination of redundancies and enhancement of efficiencies should be prioritized—and this is where standards are key. The good news for market participants is that work toward these priorities is already underway.

Related: Poll Results Show Automated Institutional Trade Processing Required for T+1

More specifically, market participants and market infrastructure providers are working towards the creation and adoption of Unique Transaction Identifiers (UTI) for cash securities transactions, which would enable all parties to a transaction to track the status of any given trade at any given time. Further, a common and unique identifier leveraged by both counterparties and their agents can reduce operational risks such as post-trade functions being applied to incorrect transactions, resulting in greater risk mitigation for the financial services industry.

In the derivatives space, UTI have been leveraged for a number of years. Stemming from the 2009 G20 Pittsburgh Summit agreement to mandate reporting of transactions to registered trade repositories in order to increase transparency in the OTC derivatives market for the identification and mitigation of systemic risk, the Commodity Futures Trading Commission (CFTC) introduced two-element identifiers called Unique Swap Identifiers (USI) for trade reporting in the US in 2012. CPMI-IOSCO then created the single-element two-part UTI—modelled on the USI, but expanded to make it more generic.

The development of a UTI for cash securities does not need to start from scratch—the UTI standard ISO 23897:2020 was created by the securities industry in August 2020 for the purposes of over the counter (OTC) derivatives reporting, and has the potential to be broadened to include other types of transactions as well.

Four benefits of UTI

The benefits of creating a UTI are significant. First, a unique identifier across all platforms would enable greater visibility into a transaction’s progress, allowing for the efficient identification of problem trades to counterparties. This capability is more important than ever, given the recently implemented Settlement Discipline Regime (SDR) which mandates that trades that settle late will be subject to a financial penalty. With UTI in place, issues surrounding a problem trade could be exchanged between counterparties more quickly, and the exception management process could be expedited, enabling a swifter achievement of settlement finality.

Second, this enablement of swifter settlement finality—made possible by UTI—could help minimise fines for late settlement such as those imposed by the SDR, it will also improve operational resilience and help mitigate operational risk—a key priority for the industry since the Covid-19 pandemic further emphasised the importance of robust post-trade practices. Greater settlement efficiency would also be advantageous to market participants as they prepare for an acceleration of the US cash securities settlement cycle projected to take effect in 2024.

Third, a UTI would significantly reduce the costs associated with trade status communication between counterparties. The current communication process of identifying the status and location of a trade is highly manual and time intensive, as it requires all the information pertaining to that trade, including the ISIN, and the name/quantity of securities traded. This benefit is pronounced in EMEA due to the decentralised nature of Europe’s cash equities markets. Tracking down a transaction in European markets is significantly more challenging than in other markets, such as across Asia and the US, given that there are more than 40 central securities depositories and over 200 custodians/sub-custodians in Europe alone.

Finally, a UTI will improve workflow processes such as the sourcing of data. This would facilitate better decision-making and the identification of any remedial action that would be needed to achieve settlement. In a recent Swift whitepaper on the topic, estimated savings from adopting the UTI, based on working group discussions, would include “a reduction in the number of pre-settlement matching and timing exceptions that require active investigation with a counterparty by 50%, as well as a reduction in the number of matching or timing fails by 90%.”

The good news is that progress is underway. The utility of a UTI is based on usage at the beginning of the trade lifecycle. We, at DTCC, are proposing that the UTI be generated in our global trade agreements platform, CTM, enabling it to be assigned at the allocation level with the first entity in the trade lifecycle. Thereafter, it would be passed to our settlements management solutions to instruct the global custodian. The custodian would capture the UTI and pass it along to the sub-custodian and depository for settlement. The UTI would then be passed back to CTM, via settlement status and confirmation messages. Such a system would enable DTCC to provide full trade lifecycle management for clients to monitor settlement and actively manage exceptions. In addition, the UTI could potentially be used to manage post-trade settlement position reconciliation issues as well as late settlement claims which are expected to rise as a result of the SDR.

There is now general consensus that the implementation of an industry-wide transaction identifier for the cash securities market would provide huge efficiency and risk mitigation benefits. In order for a UTI system to be workable and deliver the intended benefits, it is critical for post-trade entities to be able to accept a UTI. We believe the benefits of implementing an industry wide UTI are so great that the incentive for post trade providers will be there for all to embrace it.

This article was originally published in Funds Europe on March 14, 2022.

Matt Johnson, DTCC Director, ITP Product Management
Matt Johnson DTCC Director, ITP Product Management

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