DTCC Connection

Leveraging NSCC’s Universal Trade Capture (UTC) format, DTCC is working with the industry to standardize two fields that will enable brokers to better track and reconcile their stock buys and sells in real time.

The new standards will help streamline and automate brokers’ reconciliation process and further put them down the path to more easily comply with the shorter T+2 settlement cycle slated to take effect in September.

Exchanges and a number of Alternative Trading Systems (ATSs) are targeting a rollout this quarter. BATS has already implemented the new standards. “We’ll have the vast majority of trades [covered] this quarter,” said DTCC’s Tim Garrett, Director, Product Management, Equities Clearance.

Bill Kapogiannis, Executive Director, Product Management, Equities Clearance, said the new standards fit into DTCC’s strategic priorities of reducing risk and increasing efficiency for the industry. “This initiative is a prime example how we continue to focus on improving our core processing and enhancing our client’s capabilities to streamline their back-office trade reconciliation process, with a focus on risk mitigation and standardization.”

The new standards grew out of the UTC industry working group, which still meets and provides input to DTCC on a variety of issues. The UTC rollout was finalized just two years ago. UTC harmonized the data in the trade feeds that DTCC received from the various exchanges and clearing firms.

“Once we converted all exchanges to UTC input, we focused on ways to leverage the new technology and common platform to help customers,” Garrett said. “There was a new capability that we could take advantage of.”

DTCC and the working group partners identified two fields in the UTC record format that the brokers and submitter exchanges should use. The first relates to the client order ID field that is passed along from the broker to the exchange and then onto the UTC. This information allows brokers to link up an order to an exchange execution record and clearance record.

Meanwhile, an exchange-assigned execution ID is also passed on to UTC in the same record, so a client can look at the two fields and see the original order, as well as the execution that occurred on the trade.

Currently, exchanges and ATSs either don’t include the ID fields, and if they do, the ID fields are not reported consistently in their designated data fields. Both instances hinder automated reconciliation due to the lack of uniformity.

The new standards will enable brokers to more easily track child orders from the original order, a task that has become increasingly common with the widespread use of algorithmic trading. In algorithmic trading, orders are broken into many smaller trades.

To illustrate the problem, Garrett said that if brokers don’t have order IDs, and they are faced, for example, with 30 trades of the same security and trade size at the same time and price, it can be very difficult matching up the original order with the executed transactions. “This will take the guess work out of the reconciliation process for brokers,” Garrett said.

The biggest beneficiaries of the new standards will be the tech-savvy firms that perform their reconciliations in real-time, Garrett said. Conversely, those that wait until the evening or T+1 don’t know if they have a break until the next day and may modernize their systems to take advantage of the standards. “This will allow all to more easily reconcile and understand if there’s a difference in clearance versus their trade or if something never made it to clearing,” he said.

By streamlining the capture of trade details as near to execution time as possible, disparities can be identified and rectified earlier, thereby speeding the reconciliation and exception management, he added.

For their part, firms that are more tech savvy and don’t have as many breaks will benefit from enhanced validation and the ability to more quickly get to a break.

Migration to the new standards may be more challenging for ATS, or dark pools, because

many have to change their systems to accept and deliver the trading information in the new standard, Garrett said.

Most of the largest ATSs are expected to come on board in Q1 – that includes the top five ATSs, which represent about 70% of trading in these off-exchange venues.