by Edward C. Kelleher
Susan Cosgrove, DTCC managing director and general manager, Settlement and Asset Services, recently met with @DTCC to discuss developments in Asset Services.
Asset Services, through The Depository Trust Company (DTC), DTCC’s depository subsidiary, offers a broad range of services for custody, corporate actions, underwriting and tax services, as well as the electronic registration and transfer of securities. The Global Corporate Actions Validation Service also comes under the Asset Services umbrella.
DTC holds nearly 3.7 million securities from the U.S. and 127 other countries and territories, valued at $39.5 trillion. The value of securities settled in 2011 was $287 trillion, and the value of new issues underwritten was $2.5 trillion.
Could you talk about the benefits DTC’s new underwriting system, which has been up and running for more than a year, is bringing DTCC and the industry?
The new system has effectively made the eligibility process more transparent to our customers while streamlining what once was a very manual process. As a result, it has reduced risk by enabling underwriters to submit information to DTC electronically, eliminating the practice of having to re-key information from paper documents. This has delivered needed scalability to this market segment and advances straightthrough processing.
The reengineering is a good example of DTCC’s ability to conceptualize and implement major, multi-year projects on the industry’s behalf, working closely with customers to develop capabilities that meet their needs, reduce their risks and provide ample room for future growth. So it was a huge undertaking but well worth the effort. The new system has brought underwriters of municipal bonds, corporate equities and corporate debt issues under the same roof.
Do you see opportunities to leverage the underwriting system in new ways?
We will be monitoring the market carefully to anticipate the new, complex and sometimes unique investment vehicles that customers are developing, including certain new derivative-type products. We have to consider how DTC, through its underwriting services, can accommodate some of these newer products. We will need to understand the terms and provisions that are associated with them and understand the eligibility issues they could raise.
It’s a bit of a balancing act. We want to work with the industry in bringing new products to market, giving them the efficiencies and cost benefits that the depository provides. At the same time, we have to consider the risks of accommodating products that may not meet our eligibility requirements or may pose asset-servicing challenges downstream. We will work with customers to be as flexible as possible with new product offerings, while carefully assessing their risk profiles.
What else is on the underwriting agenda for 2012?
We will continue to focus on customer feedback to see if system modifications or further enhancements are called for, but we’re not planning any major technology developments at this time.
DTCC has been at the forefront of dematerialization – the industry’s drive to eliminate physical certificates – for more than a decade. Where do we stand?
DTCC and the industry have come a long way in reducing the volume of physical certificates, while also reducing the costs and risks associated with paper certificates. In fact, we’ve reached the point where the dematerialization drive has slowed down quite a bit.
What’s happened is that the industry and DTCC have been so successful in the push to dematerialize that we tipped the economies of scale. Remember that the fewer paper certificates we process, the higher the cost per transaction. Now the question is, do we want to continue processing physical securities at a higher price, or can we find a more efficient way to do it as we wind down the business and invest in providing additional valueadded services for DTCC’s customers?
Because DTCC and the industry are in this together, we’ve decided we need to get the industry involved in the solution. So we’re preparing a white paper with recommendations for addressing this issue, which we’ll distribute in Q2. We’ll spend the remainder of this year soliciting industry feedback and, with that input, we plan to map out a threeyear strategy that we’ll begin to execute in 2013.
How will that plan affect DTCC’s custody service? Will you be “downsizing” the vault?
No, our custody service is too important to our customers. Custody is not a core competency for them, but it is for DTCC. Firms don’t want the overhead and responsibility that come with physical processing – the costs for labor, space and the security measures. In fact, custody is a growing business for DTCC with more firms coming to us to store and protect their physical securities.
What is the status of the corporate actions reengineering initiative?
DTCC’s corporate actions reengineering is another multi-year initiative that will upgrade and replace the more than 60 legacy systems currently supporting corporate actions with a single new platform capable of handling increasingly sophisticated types of securities.
In 2011, we supported the successful implementation of Phase 2, the new ISO 20022 corporate actions announcement messages. This followed a robust pilot program with leading corporate actions users, including BNY Mellon, Brown Brothers Harriman, JPMorgan Chase and National Financial Services LLC. The pilot tested all event types for corporate action announcements.
We put the ISO 20022 messages into production in November 2011 and the pilot firms are now conducting parallel testing. We’ve gotten lots of feedback on the new messages from these firms, and we will begin onboarding additional customers this year.
The pilot also tested the new browserbased interface for corporate actions, which got a thumb’s up from customers. The browser’s enhanced functionality will dramatically boost firms’ operational efficiencies. It will incorporate all event types in one system and encompass the entire corporate actions lifecycle, from announcements through instructions to allocations.
What are your plans for corporate actions reengineering in 2012?
We have a lot on the agenda. Along with onboarding new clients for the 20022 announcement phase, we’ll introduce new subscription options and message protocols to provide customers greater flexibility in handling such announcement volumes and conduct a series of webinars and training sessions on the new browser.
The major undertaking for 2012 will be the launch of our pilot for Phase 3 of the initiative, which is the distribution’s full lifecycle and includes messages for entitlements, elections and settlements. Early on, we’ll be posting preliminary ISO 20022 distribution message specifications and asking for industry input with a plan to post the final documentation in June. We expect to launch the pilot in September 2012 and continue testing through November 2013.
We need a lengthy pilot because distribution messages require extensive testing – much more than testing done for announcements, which are generic messages transmitted to all customers. With distributions, each customer will have unique messages based on information such as position holdings.
Could you talk about headway on the XBRL initiative?
We’re making progress.
XBRL was initially designed for financial statement reporting to enable issuers to electronically tag information in a standard, electronic format, providing a more accurate picture of financial instruments. Now, DTCC and the industry are leveraging XBRL for corporate actions processing.
We continue to work with XBRL US and SWIFT to align XBRL technology with the ISO 20022 standard. In the second quarter of 2012, we will begin accepting announcements in XBRL form to support the processing of dividends for American Depositary Receipts with depositary banks, including Citi and BNY Mellon. This pilot will help demonstrate to the industry and issuers the many benefits that come with XBRL, including reduced costs and risk.
FATCA – the Foreign Account Tax Compliance Act – has been in the news lately. Will it have any impact on DTCC’s Global Tax Services?
Yes, it certainly will impact our Global Tax Services.
FATCA is intended to detect and deter offshore tax abuses by U.S. taxpayers through increased transparency and enhanced reporting. Its ultimate goal is to obtain information on offshore accounts and investments beneficially owned by U.S. taxpayers.
We are currently analyzing the regulations and considering whether it makes sense to build the massive system enhancements that we would need to manage the FATCA withholdings, or whether we leave that responsibility with our customers. Stay tuned. @