Intraday Settlement Compresses Trading Cycle

Terry Flanagan

Global regulators are pushing for clearinghouses and trade repositories to tighten the procedures by which transactions are settled, which is causing ripple effects through the capital markets.

According to the Principles for Financial Market Infrastructures issued by the Basel Committee and the International Organization of Securities Commissions, institutions should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, an FMI should provide final settlement intraday or in real time, according to principle 8 of the BSCBS/Iosco Principles.

The need for real-time matching across all assets “is forcing people to move upstream,” Roy Saadon, co-founder and head of EMEA at Traiana, told Markets Media. “People are moving confirmations upstream to the front office catching anything there and having the back office be a settlement agent.”

In 2013, Depository Trust Co., a subsidiary of Depository Trust & Clearing Corp., the central securities depository of the U.S., began to roll out its plan to promote intraday settlement finality and reduce credit and liquidity risk associated with reclaims via a pre-settlement matching mechanism.

Pre-settlement matching, while simple in concept, represents a major change to the DTC process which will alter the way securities transactions in equities, corporate debt and municipal debt securities are settled in the U.S., DTCC said in a report.

When fully implemented, settlement matching will enhance intraday certainty at DTC, and substantially reduce systemic credit and liquidity risk by eliminating reclaim transactions that may undercut finality.

In July 2013, DTC lowered its Receiver Authorized Delivery (RAD) default limits to $7.5 million for deliver orders (DOs) and $500,000 for payment orders (POs), requiring receiver approval of all transactions that exceed these thresholds. With the reduction of RAD limits, DTC reduced by approximately 30-40% the value of reclaims.

This lowering of RAD default limits for DOs is being phased in via three stages running through August 2014 while the reduction of RAD default limits for POs to $0 occurred on July 10. In 2014, DTCC will continue to work closely with the industry, as the remaining processing changes are implemented for RAD approval of institutional trades.

Traiana’s Harmony Securities provides same-day cross-asset trade allocation, matching and confirmations via low latency processing. The aim is to provide firms with increased flexibility in matching schema for all types of trading strategies, including combinations of cash and synthetic-equity allocations and many-to-many matching.

“Existing systems are still one for one: what I trade is what I allocate,” Saadon said. “In a world of algo trading and black boxes that model doesn’t hold water anymore. The market requires one-to-many and many-to-many matching.”

Featured image via photodreams/Dollar Photo Club

Related articles

  1. The fund manager recently announced connectivity between Coinbase and the Aladdin platform.

  2. New Emir Reporting Requirements Kick In

    MFA says proposal will impair managers' ability to deliver for investors.

  3. Jacobi Asset Management has hired an ex-BlackRock executive as its new CEO.

  4. Assets in global ETFs were $5 trillion larger than assets invested in global hedge funds at the end of Q2.

  5. Institutions can manage their bitcoin exposures in existing portfolio management and trading workflows.