In the past year, industry discussions have been focusing on the importance of increasing straight through processing (STP) and managing cross-border nuances in post-trade processing to seamlessly transition to shorter settlement cycles. When a settlement cycle is compressed, uninterrupted and automated end-to-end processing ensures that transactions flow seamlessly in the post-trade-settlement processing chain, with a higher level of accuracy. The post-trade processing chain includes allocation, confirmation, matching and settlement instruction enrichment prior to settlement.
Time pressures and automation aside, there are other showstoppers that can cause a delay in the processing workflow. Specifically, it is critical to ensure the accuracy of transaction details and settlement instructions to facilitate trade matching and to help ensure settlement certainty. Industry accepted standards help to provide transparency, consistency, and a common framework to facilitate communications and collaboration.
Related: Navigating Beyond T+1
Why standards?
With the US, Canada, Mexico, Argentina, Jamaica, Peru, and India having successfully transitioned to T+1, it is anticipated that other markets will follow suit. The need for precision is critical when processing significant transaction volumes to minimize delays associated with inaccurate information or trade details. And this is where standards, based on industry-agreed formats, enter the picture: to help ensure timely trade settlement.
Among the many standards that are available to provide greater transparency and alignment in the post-trade lifecycle, is the Unique Transaction Identifier (UTI) a distinct alpha-numeric code with up to 52 characters that market participants can leverage. While the UTI is new in the cash securities market, it has already been widely adopted for the reporting of derivatives and securities financing trades.
How does the UTI help?
There is value in adopting a common identification like the UTI for securities. To start, it improves communication efficiency with all parties to a trade. When a unique identifier is used, the distinct information associated with the trade will remain throughout the trade lifecycle. As such, the full status of the trade, tagged with the specific UTI, will be available to all parties in the post-trade processing chain to enable monitoring and the tracking of trade movements. This allows for timely detection, communication, and resolution of any potential trade issues, helping to achieve faster settlement.
By increasing settlement accuracy and efficiency, the UTI plays a key role in helping to strengthen operational resilience. Settlement instructions that are attached with the relevant UTI can be quickly identified and paired when moving downstream to accelerate matching at the central securities depository (CSD) level.
In view of the often-manual process of determining the status and location of a trade, the UTI can help to reduce communication time and costs with counterparties. For example, firms that leverage the UTI can quickly source pertinent trade information such as the quantity of securities traded, the International Securities Identification Number, and other details to be shared and communicated with trading counterparties. Given that there are close to 40 CSDs and more than 200 custodians and sub-custodians in Europe, the UTI becomes even more important due to the continent’s dispersed cash equities markets, as searching for a trade can be complex when compared with single markets.
Industry observers have indicated that managing trade exceptions – an operational pain point that can occur at any stage of the trade lifecycle – remains a common industry challenge. This issue is elevated in a compressed settlement cycle where every second counts. Failure to fix exceptions rapidly can result in failure to settle trades on settlement date, exposing firms to risks. With the UTI, trade exceptions can be quickly identified.
What are the considerations?
While it is clear that implementing the UTI can help improve post-trade processing in an accelerated settlement timeframe, people and resources are required to make it happen. Because the UTI is characterized by a 52-character field, it may not only be challenging but expensive for settlement chain participants still using legacy mainframe systems to implement changes to existing infrastructure to accommodate the UTI. All things considered; market participants should not let operational obstacles stop them from exploring solutions to embrace the UTI in the future.
What is needed for mass acceptance?
For any industry standard to deliver on its designed value, broad use is essential. Specifically, all post-trade entities must be able to deliver and accept a UTI to gain transparency, track trade status and mitigate operational risks. Firms should incorporate the UTI as a standard data point into the post-trade processing workflow for block trades, and separate UTIs for each trade allocation. In addition, counterparties in the settlement processing chain – including custodians, agents and CSDs – should build functionality to consume UTIs on inbound instructions and include the same UTIs on outbound instructions or status messaging.
While it is still early days, the UTI is steadily gaining traction as leading market infrastructures like DTCC and Swift are supporting its adoption. Hong Kong Exchanges and Clearing (HKEX) is mandating a UTI for Synapse, its settlement platform for Northbound Stock Connect, as a common reference in the settlement process.
With continued industry support and the acknowledgement of the universal value of the UTI – to reduce cost, facilitate exception management, provide greater visibility and transparency into the value chain, broad scale adoption of the UTI should be introduced as industry best practice to manage accelerated settlement cycles globally.
This article was originally published in Regulation Asia on July 19, 2024.