From vaccine passports and passenger locator forms to virtual restaurant menus, the world has seen a proliferation of matrix barcodes – better known as quick response (QR) codes – containing locator, identifier or tracker data that points to a website or application. This digital maturation has occurred due to a demand for efficiency and accuracy.
The cash securities market may be on the verge of a similar move, as market participants and post-trade infrastructures consider the creation and industry-wide adoption of a Unified Transaction Identifier (UTI). This initiative, which will be the subject of my forthcoming Sibos talk, would enable the tracking of a trade as it travels through its lifecycle towards settlement finality. In short, UTIs for cash securities transactions would deliver the benefits of transparency and traceability, enabling all parties to a transaction to track the status of any given trade.
Currently, identifying the status and location of a trade is often a heavily manual process which takes considerable resource, as it requires all the constituent components of a trade to be provided, including the ISIN and the name/quantity of securities traded. To further complicate matters, there may also be identical cash security trades in the same system, as the same stock may have been traded between two of the same counterparties at the same price and size, which makes identification of any given transaction even more challenging. A UTI could help with this process.
The forthcoming Central Securities Depositories Regulation (CSDR) Settlement Discipline Regime (SDR), scheduled for implementation in February 2022, has also created a need for the creation of a UTI, which would be critically important in case of a trade exception. It would allow a problem trade to be identified and highlighted quickly with the relevant counterparties and the exception management process could be expedited, enabling settlement finality to be achieved more efficiently. Further, the creation of a UTI will become even more crucial if the buy-in rule of SDR is eventually implemented, because use of a UTI will enable market participants to establish, with speed and accuracy, what the status of a particular trade is, help to identify a failed trade and order a replacement trade more quickly. In this instance, the UTI would also help central securities depositories (CSDs) to identify which trades have failed and therefore what needs to be bought in.
In addition to the regulatory imperative, an additional driver for a UTI in Europe is the highly fragmented nature of the cash equities market infrastructure. There are more than 40 central securities depositories and over 200 custodians/sub-custodians, which make it even more challenging to track where a trade is in the system. This differs from the post-trade infrastructure in the US and in some markets in Asia, where the systems are more centralised. However, for counterparties that are trading European stocks in these markets, the imperative is just as strong.
While the benefits that a UTI would deliver to the cash securities market are undeniable, the challenge with the creation of a UTI is the need to gain consensus around adoption across the industry. While the use of UTIs is common practice in derivatives and financing markets due to the implementation of transaction reporting, in the cash securities market there is a much larger post-trade network through which the transaction passes after trade execution. For a UTI system to be workable and deliver the intended efficiencies, each one of these post-trade entities would need to be able to accept a UTI. This could potentially mean systems reconfigurations and updates for custodians, sub agents and CSDs, as well as order management systems (OMS) platforms and middleware providers, which is not a small task.
The implementation of UTIs in the cash securities market will be a hot topic at Sibos this year, as the adoption as an industry-wide initiative would undoubtedly have a transformative effect on post-trade efficiency levels. However, the benefits do not stop there. While it will not be an easy task to complete, the benefits of a widely adopted UTI in the cash securities market are significant, and should create the incentive the industry needs to implement it.