DTCC proposes new settlement model

DTCC proposes new settlement model

The Depository Trust & Clearing Corporation (DTCC) is drafting proposals for the construction of a new transaction inventory management system, designed to streamline securities settlement by creating a single point of entry for all trade-related data.

The proposals are set to be released in a white paper, "Straight-Through Processing: A New Model for Settlement," under which the current settlement system would be redesigned to provide customers with more centralised methods of controlling their securities transaction processing earlier in the settlement cycle.

The new system would also facilitate deeper integration with settlement systems in other countries, as well as other systems in the United States, says DTCC.

Donald Donahue, managing director, customer marketing & development group, who presented highlights of the new model at the SIA T+1 conference in New York, says: "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."

He continues: "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 then leads to disruption of automated processing and contributes to the incidence of failed trades.

The white paper proposes 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 prioritise deliveries to synchronise with time zone differences.

The paper also details that 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.

Furthermore, 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, believes the industry body.

The white paper will be distributed to DTCC member broker/dealers, banks, mutual fund companies, insurance carriers and other interested parties later this month. During the next few months, DTCC will compile and analyse the comments it receives from the industry on the white paper, and develop preliminary product specifications as well as processing and system requirements.

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