Pandemic shines spotlight on operational efficiency

DTCC has for decades been working hard to promote operational efficiency throughout the transaction lifecycle with automation and the adoption of industry standards. The post-trade giant, which clears the US equity market, was called to action in early March 2020 as news of the escalating COVID-19 virus led to extreme volatility and unprecedented trading volumes.

The DTCC clearing houses and trade repositories performed well under the stressed conditions and, looking back, the group is keen to draw key lessons from the conditions seen in March and April last year.

Matthew Stauffer, Managing Director, Head of Institutional Trade Processing at DTCC, said: “2020 put a greater emphasis on many trends and areas of focus that the industry has been looking at for the last few years, around driving greater automation and efficiency from pre-trade and execution all the way through to post trade and settlement. Last year everything was put under a microscope in Q1 and Q2 of 2020 due to pandemic-induced volatility.”

Stauffer, who is responsible for overseeing DTCC’s middle-office trade processing solutions, added: “This is less of a transformational shift in direction and more about shining a spotlight on addressing the need to achieve greater operational efficiency.”

The DTCC saw its volumes peak on March 20 2020, which exposed processing issues with many of its largest client, some of whom were forced to revert to manual processes to clear the trade processing backlog.

Stauffer said: “March 20 was a peak day for many of our systems. At that time, we were seeing a doubling of volume versus 2019 averages due to volatility linked to the COVID-19 pandemic. The doubling of volume had an impact on firms that had not invested in post trade automation or had not done the due diligence to understand why certain trades would persistently fail, whether that was with a particular counterparty, asset class or instrument.”

He continued: “As a result of the increased volume, weaknesses in post trade operation departments were exposed. In the US domestic market our role as a depository enabled us to see that volumes had doubled; however when we examined trade affirmations, we could see there was a much higher rate of trade exceptions.”

Stauffer said the DTCC noticed something interesting about the types of trades that were causing problems for clients: “Trading volumes doubled but unaffirmed trades had exceptions at three times the normal level. This meant there was a direct correlation between affirmation and settlement success because the affirmed trades had a success rate of under two times what we would normally expect.”

He continued: “We could see a clear distinction between how the market was responding under stress and volatility and how that was impacting post trade efficiency. Being able to share that finding with the industry helped us to be able to further engage around the importance of a ‘No-touch’ process approach which minimises manual intervention and helps to ensure all aspects of the trades are agreed on trade-date, thereby removing potential variables that can lead a trade to fail.”

Stauffer said clients have changed their priorities over the past year, from dealing with the immediate spike in activity to implementing changes to ensure they are not exposed to those kinds of problems again in future.

“At the end of Q1 and Q2 last year, many of our clients were focused on internal efforts, resolving backlogs and undertaking necessary reconciliation, reinforcing their operating model and team structures. As we moved into Q3 and Q4, the markets stabilised and people were able to start looking at what they strategically needed to do to improve their post trade processes and how they should prepare for the next market event.”

He added: “When we examined trade exceptions during the market volatility it was clear to see that complete and accurate standing settlement instructions (SSIs) were a clear benefit to efficient trade processing and where that was not in place, we saw a much greater rate of trade exceptions.

“As a result, we created a smart rules engine, called ALERT Key Auto Select which derives security information from our matching engine, CTM to permit smart enrichment from ALERT and define Place of Settlement, allowing our clients to establish a preference on which SSIs should be selected, identify the place of settlement and enrich a trade with that information to avoid any  ambiguity with the broker.”

Another DTCC priority that has become even more important in light of the lessons learned from the COVID-19 is the migration to a unified matching engine.

Stauffer said: “Moving the industry on to a single global matching platform through the migration of all of our US OASYS clients on to CTM has been another key area of focus for us. We announced it prior to the volatility we saw in March 2020, but it has received a lot of attention as a result of the increased  volumes and activity, because it is more efficient for our clients to operate on one technology platform and have all of their counterparties interconnected on CTM.”

Another important focus for the firm is working with the industry to prepare for Central Securities Depositories Regulation (CSDR) and specifically its Settlement Discipline Regime (SDR) which will take effect in February 2022.

Stauffer said: “All of my conversations at the moment are around CSDR preparedness. The current level of engagement across all segments from buy-side, sell-side and custodians is extraordinary. There are various levels of understanding and preparedness, geographically and across firms of different sizes.”

He added: “The global custodians have made significant investments given the role they play in supporting their clients and they are leading the way in many regards. On the buy-side, there is a lot of variation. Some buy-side firms are advanced in their preparations, while others are in catch-up mode, trying to determine what they need to implement and identifying which service providers to partner with.”

Stauffer things these preparations will take much of the rest of 2021: “This will get interesting through the remainder of the year. When we think about CSDR, it is really through two lenses: one is prevention where the solution is to avoid settlement fails, and the second is, if an exception is going to occur, how quickly can you identify and resolve it to minimise your financial exposure.”

He added: “As firms are still waiting to hear on expectations around  regulatory implementation, through to Q4 of this year, they will be assessing  how they are going to build their solutions and where are they going to rely on services like ours.”

Looking ahead, Stauffer sees an opportunity in the alignment of the DTCC collateral management business with its ITP middle office services.

He added: “When we announced the dissolution of the joint venture with Euroclear, we also saw an opportunity to bring the Margin Transit Utility (MTU) into DTCC’s Institutional Trade Processing (ITP) suite of services.

Stauffer concluded: “If you look at the end-to-end flows of the MTU, it is really providing the same capabilities as the broader ITP business, in terms of creating efficiency in collateral confirmation which will then drive greater efficiency in settlement. Also, by incorporating the MTU into ITP, we are bringing it closer to ALERT, our industry utility for SSI management, hence helping clients to benefit from our other ITP services.”