The Depository Trust & Clearing Corporation (DTCC) White Paper production machine has spun again, and spat out another document. This one contains a masterplan to reinvent settlement everywhere and shift the world on to the virtuous path of global STP. The only problem is that it is not yet available. But when it does appear, the DTCC is promising that Straight-Through Processing: A New Model for Settlement, will set out a new vision for settlement that would will streamline securities settlement and reduce costs and risks by re-dssigning the current
system. The new model will provide customers with more centralized methods of controlling
their securities transaction processing earlier in the settlement cycle.
In addition to a new approach to transaction inventory management, the
new model also puts forth new solutions for managing the central
“Our vision for transforming settlement will result in a more streamlined, safer and cheaper settlement system — one that will be
ready for STP and T+1 and for greater integration with other settlement
systems around the world,” says Donald F. Donahue, managing director,
Customer Marketing & Development Group, who presented highlights of the
new model at the SIA T+1 Conference today. “It will also prepare the industry for increasing volumes ahead.”
Settlement is the final step in completing a securities transaction, and
includes the transfer of ownership in a security and the associated
transfer of payment for the transaction. The White Paper proposes
simplifying the current settlement system so that users have more
centralized control over their transaction inventory and settlement
processing. In addition, it is designed to facilitate deeper integration with settlement systems in other countries, as well as with other systems
in the U.S.
“This new model would benefit customers significantly because it would
give them more centralized control, and thereby more assured settlements,” Donahue said. “The industry would have a unified means of
managing settlement, which would enable individual participants to
control the order and timing of their deliveries processing through the
central system. This translates to lower risk and improved efficiency.”
Currently, many firms manage their transaction processing with late-cycle
interventions — withholding or “exempting” trades from more automated
processes, reintroducing them when they are ready for settlement, and
then, on occasion, reversing or “reclaiming” unknown transactions before
or after settlement has occurred. This disrupts automated processing and
contributes to the incidence of failed trades, which increases costs and
risk for customers and the industry as a whole.
The White Paper identifies a number of important benefits of the new
model: Inventory management — A new Inventory Management System (IMS), which
DTCC would build and operate, would be a single point of entry for all
trade-related input into the settlement system from participants,
matching utilities, vendors and other entities — including trade-related
input from the Continuous Net Settlement (CNS) system of the National
Securities Clearing Corporation (NSCC). In addition, IMS would
facilitate the processing of cross-border transaction settlements
requiring interactions with other settlement systems, as participants
would be able to prioritize deliveries to synchronize with time zone
System management — The new model proposes to improve overall
management of the central settlement system itself in two important ways.
First, look-ahead processing would reduce transaction blockages by
applying risk management controls to the net of selected receive and
deliver transactions (primarily Money Market Instrument transactions) in
each security that is settling, instead of evaluating them individually.
Second, combining DTC’s and NSCC’s settlement systems would eliminate
costs of redundant systems, lower intra-day funding requirements for
participants and their settling banks, possibly facilitate an earlier
settlement and reduce risk for DTCC.
The paper will be distributed to DTCC member broker/dealers, banks,
mutual fund companies, insurance carriers and other interested parties
later this month, and it will subsequently become available on the
company’s Web site at www.dtcc.com.
During the next few months, DTCC will compile and analyze the comments it
receives from the industry on the White Paper, and develop preliminary
product specifications as well as processing and system requirements.
The company will establish a business case for each element of the
proposed new model and acquire the appropriate level of sponsorship among
customers, industry groups and others.