Mitigating Risk, Advancing Innovation

DTCC is Eliminating Settlement Failure Using Automation

By Anna Reitman, Editor, Finadium, Special to DTCC Connection | Nov 21, 2019

Turning User Feedback Into Improved Market Insights
Mark Bouchea, DTCC Managing Director in the Global Product Management and Solutions Team.

The Depository Trust & Clearing Corporation is asking the market to imagine the kind of world automation is rapidly ushering in, where post-trade processing is characterized by “no-touch workflow” from post-execution to settlement finality, with a centralized golden source data and elimination of almost all fails.

SecFinMonitor spoke with DTCC Managing Director in the Global Product Management and Solutions team, Mark Bouchea, about the technology and regulation changing post-trade.

Most of Bouchea’s career has been in financial services technology, with his longest stretch at Omgeo for over a decade in addition to other financial services and technology providers. Over that time, he’s watched technology scale to the point that “true automation” is within reach.

At DTCC, that scale reaches some 6,500 global organizations in equity and fixed income, which includes repo transactions, and processes some 9 million blocks and 13 million allocations matched on a monthly basis through its Central Trade Manager (CTM), which is taking over all traffic from the traditional allocation messaging system, OASYS.

CTM, noted Bouchea, locks in settlement location on trade date, matching on the economics of the trade some 95% of the time. This is just one of the aspects expected to save buy- and sell-sides significant post-trade costs, estimated at between $6 and $9 billion annually. DTCC’s clients have been able to assess or measure a significant improvement in matching and allocation as well as pairing rates, seeing an increase in straight-through processing (STP) of a couple of percentage points.

Data Central

One of the available workflows within DTCC’s ALERT service, Global Custodian Direct (GC Direct), has the top eight custodians maintaining standing settlement instructions (SSIs) directly on behalf of their customers. “That is the ideal scenario for the industry (because) it’s being maintained in an automated fashion by the true owner of the SSI,” said Bouchea.

“Based on what brokers can realize with automation with the asset manager, what the buyside can realize individually, and when you include the custodian or prime brokerage, there’s real opportunities for everyone around STP if we can automate the components between the agreement and settlement,” he said. “Some custodians who have partnered with us have seen anywhere from a 30% to 40% reduction with us of fails for clients for whom they’ve automated.”

That means broker-dealers and clients alike can enrich and pull those details when they need them rather than store them locally, avoiding compliance risks. Moreover, when clients know exactly how they want to settle securities or particular funds, they can define rules to automatically select the right SSI at the point of trade, with the “added insurance” that the SSI is being maintained by the party that owns it, explained Bouchea.

This SSI maintenance is also at the core of creating a golden source of information, along with an LEI database being integrated with ALERT.

“Entities like DTCC can serve as an industry utility, we can serve as a kind of central focal point for the industry to leverage for additional golden sources of information,” explained Bouchea, adding that this could include other information like fees and taxes, which DTCC is currently assessing.

“Rather than storing it locally for hundreds or thousands of participants, everyone’s able to depend on a central version of that, which is where we hope the industry is going,” he said.

Keeping Score

For its key buy- and sell-side clients, DTCC has a scorecard for Institutional Trade Processing (ITP) that looks at the trade lifecycle, identifying critical components that shows each member “is doing everything they can to squeeze inefficiency and risk out of the trade lifecycle and really maximize automation,” he explained.

Some clients can be resistant to certain components. For example: if they have their own SWIFT gateway, it’s important that details come from what is match agreed with the counterparty, and those details used to instruct on settlement, not some other system that is generating potentially different details.

“What we’re proposing here is a real discipline that sees (automation) all the way through, and typically clients are responsive (but) the way that they achieve that, they may want to deal with parts of our own system plus parts of their own,” said Bouchea. Between 35 and 40 large global asset managers have completed the first round of reviews with ITP scorecards, and the analysis so far shows interest in activities such as: adding legal entity identifiers (LEI) to SSI information; getting automated with custodians; modifying trade matching practices so they are not hiding financial values from counterparties; live transaction tracking; resolving exceptions within an hour, or definitely within 8 hours; and identifying a root cause analysis process.

Regulatory drivers

A main impetus for this kind of overhaul is the looming CSDR (Central Securities Depositories Regulation), which will increase risks of penalties for failing to settle: “That particular topic has been a focus with clients: how can we help you to make sure that you avoid any of those penalties by driving more automation, using golden source of information, and, ultimately, what we call no touch workflow to achieve that,” said Bouchea.

A number of technologies combine for the rules-based engine that underpins this push to no-touch workflow, and DTCC expects to adopt advanced technologies: cloud computing in building out servicing presently, AI and machine learning for predictive analytics within the next two years, and keeping an eye on blockchain use cases that move the needle towards near-zero reconciliation.

“We are extremely interested in remaining on the forefront of some of these technology advances. We believe and agree that technology advances further allow participants to lower costs, to lower barriers for clients in achieving automation,” said Bouchea.

This article originally appeared on Securities Finance Monitor.

 

 

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