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An Asset Manager’s Approach to Managing Trade Exceptions

By George Jia, Country Manager - Greater China, DTCC | 3 minute read | May 25, 2022

Settlement exceptions can happen during the settlement lifecycle. As settlement exception processing not only consumes resources but time, China’s Penghua Fund Management, recently implemented DTCC Exception Manager to streamline settlement exception handling and gain greater visibility into the settlement status of their trades.

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Managing Settlement Exceptions

Under China’s Qualified Domestic Institutional Investors (QDII) program, participants are required to maintain either a two-level or multi-level custody structure. When there is a settlement abnormality, the information on the exception will be emailed to the global custodian and communicated to the local trust bank. This communication process is lengthy and inefficient and vital data can easily be overlooked. Exception Manager helps Penghua to address this ineffective process, leaving its team with more time to focus on problem solving.

Exception Manager provides a unified user interface, which can be filtered by multiple criteria such as trade date, settlement date and exception status. This allows Penghua’s team to manage the entire trade settlement lifecycle in one place. Because Exception Manager’s user interface contains key data required for settlement, Penghua is also able to view data across multiple custodians.

Onboarding Global Custodians

While Exception Manager is widely used by market participants in the U.S. and Europe, the solution is new to the Chinese market. As the first Fund Manager to use Exception Manager in China, it was critical for Penghua to have a thorough understanding of the platform and how the firm wanted to use it to engage with their custodians to become data submitters.

As some custodian banks may need to undergo strict internal review and authorization procedures during the onboarding process, Penghua understands that time should be set aside for multiple rounds of communication with the onboarding custodian bank to proceed to a smooth and seamless collaboration.

Leveraging Automation

"Exception Manager reduces manual intervention and fragmentation of our settlement management process,” said Penghua’s Wengao Hao, General Manager, Settlement Department. “It also allows us to manage settlement exception data in a streamlined manner and gives us the ability to quickly identify the root cause of issues to expedite resolution.”

He added, “Our QDII business is still relying on workflows that are rife with manual processes – this is not ideal or efficient. We are looking to automate all aspects of our QDII business, striving to achieve the highest ratio of automatic processing to manual involvement.”

Moving to Shortened Settlement Cycle

With the U.S. proposing a shortened settlement cycle, from T+2 to T+1, Hao indicated that it will be challenging for Penghua and other domestic asset managers with trading activities in the U.S. to process cross-border transactions when the settlement cycle is eventually condensed by one business day.

The interconnectivity of the entire trade transaction process may need to be altered to facilitate the transfer of transaction data to the back office to ensure that the correct standing settlement instructions are sent downstream to mitigate the risk of settlement failure.

Aside from other logistical challenges of a compressed T+1 timeframe, such as managing funding requirements for settling trades in local currency, an efficient communications structure needs to be established to expedite information transmission with domestic trust banks, overseas global custodians, and other parties along the post-trade processing workflow.

Enhancing Cross-Border Collaboration

Commenting on the asset management landscape in China, Hao remarked, “Today, there are still some overseas Chinese custodian banks that are not onboarded to Exception Manager. We need to build a community of Exception Manager data submitters to achieve our common goal of enhancing business processing efficiency and fostering better collaboration between fund managers and overseas custodian banks.”

He continued, “Given China’s ongoing financial reforms and the trend towards two-way opening of its capital markets – to promote inward and outward investments – domestic asset managers are now more sensitive to changes in global regulatory and industry requirements due to their involvement in investment activities abroad.”

George Jia
George Jia

Country Manager-Greater China, DTCC