Speeding up affirmations is one of dozens of recommendations operations and technology managers at fund management, broker-dealer and custodian banks will find if they read through the 164 pages of an implementation playbook just issued by a T+2 industry steering committee (T+2 ISC) before the close of 2015. Yet it might be the most critical one to follow because it could make or break whether trades are settled on time.
Trades which are affirmed the day after they are executed stand a better chance of settling by T+2 than those which aren’t, which is why early trade affirmation needs to become industry practice. “When the US moves to a two-day settlement cycle, instead of the current three day timetable, trade affirmation must take place by noon EST the day after the trade is executed at the latest to realize the straight-through-processing benefit.” says John Abel, vice president of settlement and asset services at Depository Trust & Clearing Corporation (DTCC). “An even better option is affirmation on the day the trade is executed.”
As the US market infrastructure, DTCC owns clearinghouse National Securities Clearing Corporation (NSCC) and settlement house Depository Trust Company as well as the post-trade communications service provider Omgeo. Currently, all institutional trades which settle on T+3 must be affirmed on noon EST on T+2 with the exception of those which flow through a system called ID Net. Those must be affirmed as of 9PM EST on T+1. ID Net, a joint service of DTC and NSCC, combines affirmed institutional trades with other trades that flow through the NSCC’s continuous net settlement system (CNS).
The concept of earlier affirmation of trade details by buy and sell-side firms is not new. It has been discussed in the US market for several years, but the Securities and Exchange Commission’s endorsement of a move to T+2 by the third quarter of 2017 has made the move a practical necessity. “The regulatory priority means that firms can now move ahead with their T+2 preparations with greater certainty and to that end can rely on the playbook to provide a timeline of what needs to get done by when,” says Tom Price, managing director of operations at the Securities Industry and Financial Markets Association (SIFMA), a member of the T+2 ISC organized by DTCC. SIFMA and the Investment Company Institute (ICI) commissioned the white paper written by global consultancy Deloitte. Also participating on the T+2 ISC are the Association of Global Custodians, Association of Institutional Investors and the Securities Transfer Association.
The recommendation on trade affirmation appears on pages 37 to 39 of the T+2 document, which the SEC requested in September that the securities industry produce by year-end. Although the T+2 ISC does not recommend any specific methodology for how trade affirmation should take place it suggests that firms ensure systems and reference data related to trade matching are included in inventories for configuration, examine upstream system data and process changes to ensure they do not interfere with the process for trade matching, determine changes to processes related to trade matching, coordinate changes to processes related to trade matching with internal and external stakeholders, develop test plans for trade matching, and schedule and execute process change for trade matching.
Take Your Pick
Trade matching can take place through one of two means: local matching — that is, the sequential process by which fund managers and broker dealers communicate the economic details of a trade with each other — or central matching using a third-party platform to match trade details input by the fund manager and broker-dealer. Once the trade is matched or affirmed, settlement details can then be added before it makes its way to a securities depository for settlement. Until recently, matching platforms Central Trade Manager and TradeSuite ID operated by Omgeo were the only ones approved by the SEC for post-trade matching.
With the SEC recently approving two new players to the arena– Bloomberg PTS and SS&C Technologies’ SSCNet — fund managers and broker-dealers will have a choice of third party platforms to confirm and affirm their trades in addition to the incumbent Omgeo’s CTM and TradeSuite ID. However, the details of just how the additional matching services will be linked to DTC for settlement of affirmed trades have yet to be worked out.
What are fund managers and broker-dealers doing to ensure their matching capabilities are up to speed for a T+2 settlement cycle? Operations directors at five fund management and broker-dealer shops would not disclose which matching service they currently use or intend to use, but all acknowledged that trade matching was a priority to the T+2 swat teams they had formed. “We will be addressing what percentage of our trades are affirmed on trade date, why the remaining trades are not, and what can be done to cure the problem areas,” one operations manager at a fund management firm tells FinOps Report. “We are speaking to our broker-dealers about how to improve the process on their end as well.”
Broker-dealers, as well, are keeping closer tabs on their fund manager clients. “We will be monitoring the percentage of trades they affirm on trade date and T+1 to figure out where improvements must be made,” says one operations manager at a US broker-dealer.
What are those improvements? A combination of behavioral and technological changes. Automation can only go so far if communication of trade details isn’t viewed as a time-sensitive priority by counterparties. Likewise, all of the local and central matching procedures need to be tested to ensure that they work correctly and can meet a shorter affirmation timetable, says Price.
“For smaller fund managers which rely on custodian banks to do the post-trade matching work for them, it will be critical to determine what internal systems changes must be made for a shorter timetable,” explains Martin Burns, chief industry operations officer of the ICI, the Washington, DC group representing the fund management community. “Larger fund managers who do the matching work on their own will likely have already adjusted because of Europe’s move to a two-day settlement cycle in October 2014.” He could not estimate how many fund manager members already affirm their trades on either trade date or the day after, but says it is a “large” percentage. Omgeo cites a figure of of over 60 percent on trade date for firms using either CTM or TradeSuite ID.
If fund managers and broker-dealers think they have enough time to adjust their post-trade matching processes, they had better think again. The DTCC is planning a six month testing period beginning in the first quarter of 2017 and ending in the third quarter of that year to include its members, US exchanges and institutional matching providers.”The goal of the end-to-end testing is to ensure that street-side and institutional matching can take place quickly enough for the trade to be settled on the T+2 timetable,” explains Abel. It stands to reason that DTCC will have worked out the terms of how Omgeo’s new matching competitors will link to DTC by then.
Here is how industrywide testing would work: Brokers will execute test orders on one or more exchanges, which will forward test trade information on executed orders to the trade capture system of NSCC’s CNS system and finally to the DTC for settlement. “Buy-side trade processing will be included in the test. We expect buy-side firms and brokers to pair up and process institutional trades through one of the institutional matching providers,” says Abel. “The affirmed test trades will then be automatically submitted to DTC’s test systems for processing.”
The specific date in the third quarter of 2017 on which the two day settlement cycle will become effective has yet to be determined, but Abel and the other members of the T+2 ISC have come up with a sense of when T+2 shouldn’t take place. The first effective day cannot occur on a holidays or peak volume times in 2017, such as days when quarterly earnings reports might be released or option contracts expire.
The T+2 ISC has also not determined what specific criteria it will use to determine whether market players are ready for a two-day implementation cycle after the results from the industrywide test have been evaluated. But one thing is certain. “Once the timeline for T+2 has been determined, it will be set in stone and there will be no turning back,” says Price. “It’s time for firms to be benchmarking their overall activities against what has been recommended by the T+2 ISC.”