Although T + 1 is being punted ever further into the future, even in the United States, interest in the adaptations to the market infrastructure which are necessary to make it possible was never more intense. Last month the Depository Trust & Clearing Corporation (DTCC) issued its new “vision” for the structure of the US securities clearing and settlement infrastructure in the shape of a White Paper entitled Straight Through Processing: A New Model for Settlement.
Based on consultation with banks and brokers, through the good offices of the Securities Industry Association (SIA), the document cannot be described as easy read. But then this is a facet of precisely the problem the White Paper addresses: the US securities clearing and settlement system is much more complicated than it needs to be. Although the White Paper is extremely hard to follow, it appears to identify the main obstacle to STP as the propensity of market participants to screw up automatic processing by pulling transactions off the automatic production line towards settlement, and withhold or even reverse them, late in the daily processing cycle. At present, this is the only way participants can “manage” transactions which are either “wrong” (in terms, say, of the security or the price paid) or likely to fail because the money or the securities cannot be found.
DTCC would like this management process to be more efficient. It says the problem is particularly acute in trades between brokers and institutional investors which, unlike trades between brokers, both involve custodians and are not netted through the National Securities Clearing Corporation (NSCC). The White Paper estimates that of the 750,000 transactions settled at DTCC every day, 250,000 are institutional, and that 50,000 of that 250,000 are subject to late interventions which cause them to fail. The problem also occurs in professional trades, with around 35,000 a day being bumped off the processing cycle late in the day in exactly the same way. So around a quarter of all settlements are subject to late “interventions” which make STP impossible. The result is that lots of sellers do not get their money, and lots of buyers do not get their securities. The DTCC thinks this could be changed if market participants could make their interventions earlier, and more efficiently.
The solution advanced by the DTCC is a centralised, universal tool for all parts of the securities industry to manage transactions coming up for settlement: what it calls an Inventory Management System (IMS). The DTCC would, of course, build and operate the IMS. Essentially, it would allow all parties to a trade to peer in real-time at the details of transactions coming up for settlement through a web-linked terminal, where all the transaction details necessary to settlement would accumulate gradually until everything was in place. The document seems to suggest that participants could intervene through the system to supply information or instructions to ensure trades settle, but it is somewhat obscure on this point. It sounds perilously like the original blueprint of the Transaction Flow Monitor (TFM) conceived by the Global Straight Through Processing Association (GSTPA), which may be why the DTCC is being deliberately obscure, having since forged an unlikely alliance with Thomson Financial to create Omgeo. But perhaps it is just difficult to explain.
Anyway, the eventual goal, says the DTCC, is to extend this model to all securities, derivatives and payments markets both at home and abroad. That will obviously take a while, even without the predictable complaint that the Americans are trying to take over the world, but the DTCC is clearly keen to get started. It expects to publish design specifications for the IMS later this year, and to develop both a business case for it and a development schedule before Christmas as well. But if the DTCC is to garner the support of the industry for this initiative it will have to explain its plans in plainer English than this. Comments on the White Paper are expected by 27 March.