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Affirmation Rates on Trade Date Improve as Industry Prepares for T+1

By DTCC Connection Staff | 9 minute listen | March 26, 2024

Take 5 and explore the world of post-trade financial services by way of new ideas, insight snippets, emerging trends, and thought-provoking questions.

In this episode, Sean McEntee, DTCC Executive Director, Institutional Trade Processing, speaks to how the industry is preparing for T+1 to be implemented in May and why affirmation rates are important as part of this preparation.


Hi, I'm Sean McEntee. I run the matching and agreements business for ITP here at DTCC. In that role, the topic of T+1 and particularly affirmations are near and dear to my heart. So, I'm here today to talk a little bit about the Affirmation Report that we published in January. We published that Affirmation Report as somewhat of a call to action to the industry, as we really do believe that affirmation and T+1 in general is truly a team sport that will take cooperation across all market participants. The good news is that in the two months since the publication of that report, where we cited a 69% affirmation rate by 9:00 p.m. on T, that rate has increased to 74.5%. A pretty remarkable result in a two-month window. We'd like to think that the message, not only in that report, but in all the client outreach that we're doing, is resonating with the industry and with 83 days to go, we're not resting on our laurels here. We'll continue the efforts and there's lots of work to be done.

So let me start right off the bat by saying that 90% affirmation rate, which we cite in the title of the Affirmation Report, got a lot of attention from SIFMA and other industry bodies. So, we want to be very clear that the ultimate goal is 100% affirmation. The reason we cite 90% is because that's the affirmation rate that we see today by 11:30 a.m. on T1, which is the current affirmation cut off and we feel like any regression from that 90% could translate into settlement fails. Which leads to another important point of clarification; we acknowledge that that affirmation is not required for settlement and that, unaffirmed trades will not necessarily fail. Unaffirmed trades settle every day and that will continue in the T1 environment.

Having said that, we do believe strongly, and we've got the data to support it, that the affirmation process does smooth out friction in the settlement process and does in fact lead to a reduction in trade fails. That's supported by a recent press release that we put out with Goldman Sachs showing that their clients who have adopted CTM’s Match to Instruct workflow are achieving a 99% affirmation rate - and that high affirmation rate has translated into a 65% reduction in fails for those M2i clients. Phenomenal results and that piece has gotten a lot of attention in the industry as well.

With that said, I want to dive into the analysis a little bit. I think we need to start with a recap of -why are we even talking about affirmation? It's a result of what's referred to as 15c6-2, the piece of the regulation which promotes the completion of allocations, confirmations and affirmations by end of trade date for transactions between broker dealers and institutional customers; this rule requires that the broker-dealer either enter into written agreements or have policies and procedures in place – this is a little bit of a tongue twister – to ensure that that allocation confirmation affirmation happens as soon as technologically practicable or by the end of trade date.

So again, we acknowledge that our read of the regulation is 100% affirmation by end of trade date. There are no regulatory penalties for not meeting same day affirmation targets, but we do believe that there are real world implications including higher cost to settle at the DTC. For example, night delivery orders are more expensive to settle than affirmed trades and probably more importantly, there could be risk of some sort of regulatory action by the SEC if a broker-dealer is not in compliance with this regulation.

With all that said, I want to dive into the analysis. I jokingly refer to this as kind of the path to 90% and when I say that I always have a visual image of John King on CNN on election night moving around electoral votes. So, for those of you listening to the podcast I'll leave you with that image as I walk through this.

So really, we break it down into different segments or pockets of parties performing affirmations, and the various rates that we see. In the paper we call out the fact that the highest affirmation rates are on prime broker trades that flow down to CNS. Probably not surprising because the prime brokers see a significant financial benefit of getting those trades into the net and they get those trades into the net by affirming by the cut-off. So, the rate by 9:00 p.m. was 81% and you know already good and we are aware that two of the top ten prime brokers are currently running batch processes after 9 p.m. and are implementing projects to move to a real-time affirmation process. We think that the move of those two to real-time will boost the overall rate 8% to 10%. So that's a great start towards the 90%.

The other area where we have a high degree of confidence is in the Match to Instruct workflow that I spoke about earlier. We're seeing affirmation rates in the 90%’s already by 9:00 p.m. for the clients live on Match to Instruct. We have a very strong pipeline of clients. In fact, in the last month alone we've brought over 50 clients live, a testament to the results that we're seeing as it relates to affirmation rates, and we think that that continued adoption will lead to an additional increase in the overall affirmation rates by May 28th.

So, where are the challenging segments? Really two areas. The biggest challenge that we see is with non-U.S. clients who may not have even been familiar with what affirmation is prior to this regulation. Many of those non-U.S. asset managers rely on their custodians to do the affirmation and, one step further, they're lumped under what we refer to as Omnibus TradeSuite ID where, the investment manager client isn't even identified on the trade suite confirm, it's their custodian’s TradeSuite ID number on the confirm.

When we issued the paper, the rate for that group was 43%. You know great news in January that increased by 8%, huge leap to 51%. So again, we think that that's kind of the message resonating and largely a result of the strong partnership between ITP and our custodian clients, who are pushing for their client base to move out from under those Omnibus TradeSuite IDs, get their own TradeSuite IDs, and bring transparency to the whole process. We think that transparency will boost rates naturally,we think there will be a 3% to 4% increase that we can realize there. And finally, we see a challenge with clients that do have their own TradeSuite ID, leverage their custodian, but may not be on CTM; for example, they may not be leveraging CTM which leads to a delay then in the instruction down to the custodian. We think that with the continued adoption of Match to Instruct and further automation of the upstream trade instruction process, we'll see another 3% to 4% there.

Again lots of work to be done, but we think there is a path here from where we are today to 90% by May 28th. We're optimistic that the goal is achievable, and we appreciate all the efforts of folks listening to this podcast and across the industry to partner with us to make that happen. I appreciate your time listening to me today and look forward to providing further positive updates as we move towards May 28th. Thanks.