John Kiechle, DTCC Vice President, Settlement Services
The Depository Trust & Clearing Corporation (DTCC) – recently completed the final phase of its Settlement Matching initiative, enabling clients to reduce risk, increase financial certainty and boost intraday settlement finality.
John Kiechle, DTCC Vice President, Settlement Services, gives insight into the multi-year, four phase initiative that has fundamentally altered the U.S. settlement process for transactions in equities, corporate debt and municipal debt securities.
As an overview, could you describe Settlement Matching, and how it has improved the settlement process?
In short, Settlement Matching changed the transactional model to require receiver approval prior to a transaction proceeding to settlement. Conceptually the change was simple, but the practical application of inserting receiver approval into the settlement process for all valued transactions proved to be much more complicated, given the unique needs of our diverse client base. By allowing receiving DTC clients to maintain control over which transactions to accept, the potential credit and liquidity risk previously associated with same-day reclaims was removed.
Once settled, the transaction is considered final and no longer poses risk to DTC, our clients or the larger financial industry.
Why did DTCC decide to pursue the Settlement Matching initiative?
The settlement process had always been viewed as efficient. However, it forced DTC to provide receiving clients with the ability to return erroneous deliveries back to the original deliverer without restrictions. This return, referred to as a same-day reclaim, had the potential to override some critical risk management controls, which placed DTC, our clients and the larger financial industry as a whole at risk.
These reclaims, in addition to posing risk, typically occurred later in the settlement cycle. This undermined intraday settlement finality making same day resolution difficult. Reclaims also increased the likelihood of transaction fails which have a financial implication to the delivering client. As we considered all the steps in the settlement flow, it became clear that we needed to develop a way to further mitigate reclaim risk and promote intraday settlement finality.
How did DTCC collaborate with its clients to complete the Settlement Matching initiative?
To fundamentally alter the way securities transactions in equities, corporate debt and municipal debt securities were settled in the U.S., massive amounts of industry outreach, coordination and cooperation was needed.
Since announcing the change in 2012, DTCC has worked closely with our clients, their service providers, numerous industry working groups and regulators to devise an implementation plan. It was important for the plan to strike a balance between our goals of mitigating risk and improving intraday finality, while also providing clients sufficient time to make the changes necessary to maintain acceptable levels of settlement transaction throughput.
Were clients in favor of the initiative? If not, how did DTCC work to change their perception?
Our initial reception was mixed. Custodian clients, already happy with the current settlement model, initially realized there would be a cost to either create an automated system to “match” the transactions earlier in the day or expand their current system to make credit and instruction checks early in the day. The prevailing thought was that settlement throughput would be compromised and many transactions wouldn’t be processed until late in the day. Brokers, however, supported these changes since they were the primary recipients of these late-in-the-day same day reclaims.
The key to changing client perception was educating them on why the Settlement Matching initiative was put in place. Through education, clients understood the risks reclaims posed to DTCC and the larger settlement community, and the benefits of promoting intraday settlement finality in the settlement process.
Gradually, client perceptions shifted and the initiative became much more of a collaborative effort, with DTCC explaining the mechanics of Settlement Matching and clients educating us on the changes they needed to make in order to comply.
Could you give insight into what the initiative’s phases accomplished?
The initial phase introduced two key changes for the industry. First and foremost, all same day reclaims that were greater than DTC’s Receiver Authorized Delivery (RAD) default limit no longer bypassed our Risk Controls. Second, we reduced our RAD default limits. This initial step created a sense of urgency for our clients and helped DTC push RAD automation as an industry best practice.
Phase 2 introduced RAD profiles specific to stock lending activity. These profiles provided clients with a straight-through-processing option by allowing them to provide DTC with a standing passive approval instruction for their stock lending activity.
The next phase helped combat the incremental increase of RAD activity. A three step approach was implemented to control RAD volumes and gradually lower RAD limits to zero.
The final phase of the initiative involved having all affirmed institutional deliveries (ID) subject to receiver approval prior to settlement. Similar to phase 3, a step down approach was used to allow firms and DTC to gradually subject ID receives to the matching requirement. Specific changes were required to specifically support matching of ID receives.
Overall, how would you rate the Settlement Matching initiative?
We are very proud of the success of this initiative. Client feedback has been overwhelmingly positive, especially as they now understand why DTC could no longer support a settlement model filled with reclaim risk, and have realized intraday settlement finality creates a more efficient settlement process for them.
For more information on DTCC’s Settlement Matching initiative, visit:
DTCC Settlement Matching
Update to DTCC's Settlement Matching Initiative
Introduction of DTCC’s Settlement Matching Strikes $525 Billion of Risk and Promotes Certainty in Settlement Processing