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DTCCs Thieke Discusses T2 and Other Settlement Issues
Dan Thieke, DTCC Managing Director, Head of Settlement & Asset Services

Dan Thieke, DTCC Managing Director, Head of Settlement & Asset Services, has almost 20 years of experience in DTCC’s settlement and asset services business. Dan recently sat down with DTCC Connection to discuss transformative industry initiatives such as T+2 and intraday settlement and technology trends like cloud computing – and their larger implications for DTCC’s businesses.

Q: The industry is nearing the finish line on the T+2 initiative with an announced “go live” for trade date September 5th, 2017. What remains to be done in these final 6 months? And is there any appetite to further shorten the settlement cycle to T+1 or T+0?

The move to shorten the settlement cycle to T+2 is intended to harmonize with global markets, reduce risk and exposure, enhance market liquidity, and increase efficiencies. DTCC has been working in close collaboration with market participants since 2013 to provide overall direction and guidance, and we are very proud of DTCC’s role in helping the industry deliver on this enormous initiative.

Now with less than 6 months remaining on the project, the pace has not lessened with the finish line in sight; if anything, we’ve escalated our work, especially now that we’re moving into the active testing period with clients. For DTCC, bi-weekly test cycles began in mid-February, and will continue right through until late August. We’ve also been holding bi-weekly industry calls to discuss test results, issues and recommendations.

While DTCC is focused on helping move the U.S. financial industry from T+3 settlement to T+2, we are already looking two steps beyond that. DTCC’s trade-capture and downstream systems have been, for many years, aligned to support expedited settlement, which occurs on a daily basis for parties that request it. Omgeo can support shorter settlement, and DTC is essentially T+0 already. DTCC’s Universal Trade Capture (UTC) service, for example, gives clients the flexibility to submit exchange trades for clearance and settlement on either a regular (T+3), shortened (T+0, T+1, T+2), or extended settlement basis across all U.S. markets. The process for same-day settlement (SDS) or next-day settlement (SD+1) depends on market practice, such as the time the trades are received – before or after 11:30 a.m. – and if the trades are eligible for NSCC’s Continuous Net Settlement (CNS).

T+2 is an important initiative in the industry, and we’re obviously heavily involved and committed. But if a client comes to us and says they need accelerated settlement, we have the capabilities to support that today, and would be happy to work with the industry to improve that process if there is interest.

Q: There’s been a lot of activity in DTCC’s Settlement business, with several long-planned initiatives from DTCC’s 2012 white paper on Intraday Settlement now nearing completion. Can you talk to some of these strategic projects – both those completed, and those that have morphed in the intervening years, and are now being reexamined?

Several years ago, we identified a number of significant enhancements that would further improve the safety and soundness of the U.S. settle¬ment system for years to come, while at the same time, more closely align the DTC settlement process to global standards. Many of the ideas proposed in that original white paper are approaching completion – and still others have evolved even further.

One of the first initiatives we completed was Settlement Matching. With Settlement Matching, clients can now resolve discrepancies intraday rather than on a next-day process, by allowing the receiver to approve the transaction prior to settlement. This project alone removed an estimated $525 billion of risk from the DTC settlement system.

Another initiatives now nearing completion is a large-scale project to process money market instrument (MMI) transactions without reversing completed transitions from an issuer failure. MMI Optimization will improve settlement finality, reduce credit and liquidity risks, increase transparency and enhance processing efficiencies. Even though we minimized changes by leveraging existing infrastructure and technology, the MMI Optimization initiative required significant structural changes to enhance our settlement model. We successfully finished client testing, and we are now moving into a phased-in implementation period throughout 2nd and 3rd quarter this year.

One project that evolved since the white paper is what we call “CNS for Value,” which modifies the way transactions resulting from NSCC’s Continuous Net Settlement (CNS) service are processed in DTC. Currently, receive and deliver obligations in CNS are settled free of value at DTC. With CNS for Value, CNS transactions would be processed as valued transactions in DTC instead of as free-of-payment transactions. We believe CNS for Value can provide our clients with greater efficiency of intraday liquidity, while at the same time, provide DTC and NSCC with better risk monitoring tools, which is why we continue to discuss this initiative with the industry.

The idea of multiple “settlement slices” throughout the day is also something we are actively exploring, which also evolved from our work on intraday settlement. Right now, NSCC and DTC members do not have use of their projected settlement credits because money settlement does not occur until the end of the day. With additional settlement slices throughout the day, clients would receive the money associated with the projected credits, and can use these funds as a source of liquidity. Intraday settlement could also allow members to give access to security positions earlier in the day promoting settlement finality.

At the crux of all these initiatives is the desire to promote intraday settlement finality and to help to alleviate some of the pain points that market participants are facing, as transactions move through the current post-trade infrastructure. We envision a future state where market participants will be able to use their balance sheet more effi¬ciently, have better access to intraday funding, and be able to reduce their costs through new economies of scale.

Q: The main concerns about using cloud technology used to be about compliance and security. How has your business strategy and thinking around cloud technology evolved?

The emergence of cloud, Blockchain and other enhanced business process automation tools provide the opportunity to create a common set of agents, standards, protocols, workflows and data stores, which can be leveraged across the industry to simplify market structure and create common practices for all asset classes.

Cloud technology, in particular, opens up some previously unimaginable engineering opportunities, turning once difficult, time-consuming tasks into solutions that can be achieved in near real-time.

We’ve seen some recent projects at DTCC that have successfully implemented cloud technology, especially coming out of our reference data business. Building on that experience, we’re now looking to implement cloud technology in the settlement business. One area that we are exploring is putting LENS (DTC’s Legal Notice System) into the cloud. With cloud technology, we are no longer bound by the physical constraints of equipment or software, which means increased scalability, data security and cost reduction.

Q: Physical processing is still a considerable part of DTCC’s settlement and asset services business. Do you think the U.S. will ever go paperless and eliminate paper stock certificates?

The U.S. has been gradually reducing the number of certificates in circulation over the past several years as more securities are issued without certificates and issuers are taking advantage of the efficiencies and cost savings offered by DRS – DTCC’s Direct Registration Service. Launched over 20 years ago, DRS allows investors to register shares with issuers in book-entry form, without needing to hold physical certificates. The larger industry effort to eliminate physical certificates – which has been running in parallel with the T+2 shortened settlement project – has been spearheaded by the Dematerialization Cross-Stakeholder Forum, a working group established several years ago by DTCC and SIFMA. This group includes DTCC members, exchanges, transfer agents, trade associations and regulators.

In order for the U.S to “go paperless,” the industry would require a rule filing from the exchanges that would eliminate the option of issuing physical share certificates for new companies that intend to be listed.

The cost savings and efficiencies from eliminating physical certificates would be significant, and would benefit both investors and the industry. It would reduce the need for investors to replace stolen, lost or damaged paper records – for example, like the recovery effort the industry experienced after Hurricane Sandy – and also reduce DTCC’s operating burden of storing and securing these certificates.