How Technology Can Drive Global Accelerated Settlement
Matthew Johnson, DTCC Director, ITP Product Management and Industry Relations, joined a panel of industry experts at the Operations, Post-Trade, Technology & Innovation Conference 2024 (OPTIC) in London to discuss the role of technology in delivering accelerated settlement.
Johnson sat down with DTCC Connection to discuss key takeaways and insights from the panel discussion.
DC: Why is settlement efficiency more of an issue in Europe as compared to other markets?
MJ: The main obstacle to settlement efficiency in Europe is financial market infrastructure (FMI) fragmentation, although there have been increasing discussions about consolidating towards a single central securities depository (CSD) similar to the U.S. We need to also reduce the number of manual touchpoints and embrace automation to improve efficiency.
Related: Proposed Path for a Successful T+1 Transition in Europe
To illustrate the amount of friction points, we recently conducted a mapping exercise with a prominent FMI, a tier one broker and their custodian arm. The results showed an excessive amount of manual touch points where data can be manipulated or lost.
DC: How is “data” linked to settlement efficiency?
MJ: Unlike the front office, the post-trade landscape doesn’t scrutinize value or indicators to drive decision making. Only with complete data from execution to settlement, can we drive automation and smart decision making and ultimately settlement efficiencies.
Automation is the key ingredient for accelerated settlement cycles and we saw this clearly in the successful migration to T+1 in the U.S. Ahead of the move, we enhanced our automation providing clients with a single point of entry, creating a direct Match to Instruct (M2i) model where the central post execution match creates all of the downstream confirmations/affirmations automatically on behalf of interested parties.
We need to also reduce the number of manual touchpoints and embrace automation to improve efficiency.
Firms that onboarded this model experienced tremendous performance improvements, both in the U.S. as well as companies in Asia and UK/EU trading in U.S. securities. The knock-on effect was a 20% improvement at the confirm/affirm level.
Related: SIFMA, ICI, and DTCC Release “T+1 After Action Report”
The U.S. and European markets operate differently however, as Europe has a secondary pre-settlement matching process that exists above the CSD. If we could introduce a similar M2i workflow in Europe, we could see substantial benefits that would be more conducive to a T+1 settlement cycle.
DC: Where does resiliency come into play for an accelerated settlement environment?
MJ: Resiliency should be the overarching focus as well as the way to underpin an accelerated settlement environment. By breaking resiliency into five pillars, firms can better understand their own resilience as well as the institutions and companies they face off with or interact with.
The first pillar is Governance — managing and understanding your firm’s resilience. Second is Business Continuity Management Systems — stress and volume testing processes and architecture and determining how quickly BAU resume after an outage or break. Third, Mapping Interconnections and Interdependencies — understanding all the methods and protocols being used to connect to the market and infrastructures and agreements in place with each to understand dependency risk. Fourth, Third-party Dependency Management — knowing your vendors, their functions, and the service level agreements. And fifth, Technology and Cyber — determining the cyber resilience of both your firm and your partners. Cyber risk is one of the biggest risks for institutions today, and yet it doesn’t get enough focus from a post trade perspective.
