TRADE DATE + ? SETTLEMENT

The greater the number of days between trade and settlement dates the greater the risk of failure and higher costs to industry participants

It appears that the global industry has chosen Trade Date + 2 (TD+2) as the new standard for trade settlement. Does this make sense in 2013? I don’t believe so….The standard should be trade and settlement the same day (TD+0).

Why does it take longer than a day to settle a trade? Most trades are executed in automated markets. Today there are central securities depositories, so physical certificates don’t move as they once did in the “old days”. And investors wire funds on a same day basis to, or maintain balances with their, brokers to effect settlement. So, why do we need more than a day to settle a trade?

I appreciate that the migration to TD+0 will greatly impact investors, operations, industry infrastructure and technology organizations. But it is time for the global industry to admit that each incremental reduction introduce risks and doesn’t really deliver the benefits that TD+0 will.

Any reduction in the time between trade and settlement requires global coordination to avoid havoc for investors and industry infrastructure organizations. It seems that it is simpler to do this once and limit the inherent risks from multiple reduction cycles.

In addition, all participants will need time to plan and implement the operational and technology changes to support the new schedule. This includes investors, brokers, banks, custodians, prime brokers, central securities depositories, clearing corporations and the regulators.

What are your thoughts about this?

Agree….or ….. disagree – why?

 

              Is there a better way?

COMMON BACK OFFICE – IS IT TIME?

I am amazed by securities industry firm’s technology budget allocated to post trade activities. Granted that these activities are critical, but the fact is that there is very little value-added that differentiates one firm’s process versus another’s from an investor or industry perspective.

A shared back office (SBO), established as an industry owned utility can internalize and process all these activities delivering efficiencies, reduced risk and considerable cost savings. Additional benefits of a shared back office include;

1. Free up capital, now allocated to back office technology projects, for client service enhancements and revenue generating products and services

2. Improve post trade process efficiencies

3. Reduce the number of transaction processed

4. Ease the transition to a shorter time between trade and settlement

5. Generate timely and accurate metrics for industry participants and regulators

Though this would be a major change, the industry has faced similar challenges with great success. This change is similar in scope to the establishment of Central Securities Depositories (CSD). This resulted in brokers and banks moving physical securities from their vaults to the CSD so that the certificates could be immobilized. This was a step towards eliminating movement of physical stock certificates between industry participants.

This change appears to be a “win, win” for the industry. Of course we need to select the organization that would provide the service and define responsibilities of the members and service provider.

             What do you think about this - If no, why not - If yes, it should it be 
              provided?

        What organizations should coordinate development of this service?

                  What are the benefits and / or downside?

BUY-SIDE - LEFT OUT IN THE COLD

Why has the Buy-side been left out of a process that reduces transaction volumes and protects the securities industry via time-tested risk mitigation processes?

That the buy-side doesn’t participate in the post trade date process, that protects street-side participants and ensures timely and accurate settlement, is an oversight by the industry as well as the regulators. Post trade processes evolved, from the early 1970’s, originally driven by the paper work crunch of the late 1960’s. Today these processes ensure that the industry is safe and capable of supporting substantial growth in trade volumes. These processes include trade comparison, trade netting and settlement.    

But the infrastructure only protects the street-side which leaves buy-side participants outside the process. In turn this exposes the street-side to risk of settlement failures and the need to process additional transactions volumes.

There are alternative methods of buy-side participation; one where the investor would become a member and participate directly. Another is having the investor’s Custodian or Prime Broker represent the investor and participate on their behalf. Both alternatives would require some accommodation by the industry infrastructure and the Buy-side but it would be a “win-win” for everyone.

What are your thoughts?

Do you agree…..or…… disagree?

                             What are the benefits or disadvantages?

HOW DO WE IMPROVE BUY-SIDE TRADE AFFIRMATION RATES? – UNITED STATES

The current affirmation rate for institutional trades is about 80% in the US. In this day of no-or low touch trading and automation this is an anomaly and delays trade life-cycle process improvements. In addition it may be contributing to higher costs.

It’s crucial that the industry, both buy-side and sell-side participants, address the issues that are blocking a 100% affirmation rate. This will deliver control and cost benefits to all participants and make the process safer and timely settlement predictable.  

What drives the Buy-side lack of interest in proactively participating in a process that ensures that the trade will settle as expected and at the same time adds a level of safety to the process? This raises certain questions:

Why isn’t the Buy-side motivated to participate in this process?

Do they understand the importance of the confirmation / affirmation process?

What needs to be done to achieve 100% affirmation by T+!?