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Risk Management

10:24 AM
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John Kiechle, DTCC director of strategy implementation, lays out the depository's plans to help the industry reach T+1. However, the long-term goal of eliminating reclaims is a touchy subject with some industry insiders who fear such a model would increase their level of risk.

DTCC hopes that green will be the color of choice for the new season of settlement processing. In its IMS system, green means that trades are flowing through the depository automatically, only being touched on the deliverer's side if a problem is identified. Currently, deliverers must authorize all trades before stock leaves their inventory, which is seen as a roadblock to STP.

Yellow and red controls might be used for illiquid securities or specific deliveries that require a closer look before being authorized. Participants would also be able to transition throughout the day between passive and active authorization modes. For example, until an operations professional knows what is in their ""free box"" (the type and amount of securities that are not already client-owned and thus free to satisfy delivery of new trades) they may want to remain active -- examining each delivery before it goes out the door.

Once firms have completed their Rule 15c3-3 calculation, which tells them what inventory is available, they may feel confident enough to transition into a passive-authorization setting and allow the IMS to take over, according to the stipulations that they have entered. Some stipulations may detail which type of deliveries are to be settled first, such as stock loans or cash trades, etc. and, more specifically, the exact order in which deliveries are to be made.

Delivering the IMS is the responsibility of DTCC Managing Director of Applications Development Jacob Feuchtwanger. Currently DTC's platform is run on a mainframe using COBOL programming language on Assembler software. To offer a higher level of prioritization functionality, he says DTCC will develop Java applications on IBM's Websphere software supported by an IBM DB2 mainframe. If Java GUIs cannot support the volumes on the IMS, Feuchtwanger says C++ or COBOL could be tapped.

Outside vendors, he adds, will also be used if necessary. ""We will make those decisions as we go along. Nothing is in concrete.""

Feuchtwanger says the new system will communicate with participants and matching utilities using IBM's MQSeries messaging middleware in XML and ISO 15022. ""For day-to-day prioritization we will have GUI screens for smaller brokers. Larger ones will want to send in transaction requirements to do the releases."" Apart from conforming to the messaging standards, no major technology investment will be needed to use the proposed system, he adds.

""We are not going to use anything that will be strange to them,"" explains Feuchtwanger. ""The GUI interface and MQ are things that all firms are familiar with.""

He says that DTCC will be done with its technology analysis of the IMS by the end of the first quarter and will provide message specifications by the end of the second quarter.

Dan Conlon, senior systems director with DTCC, says the authorization piece of IMS is scheduled to be ready in the first quarter of 2003 and the prioritization piece by the third quarter of that year.

The project, says DTCC's Donahue, will be funded out of DTCC's technology budget, accumulated from fees the depository charges the industry for its services, and should not require any additional funding from the industry. Pricing for IMS services has yet to be determined.

John Panchery, a vice president and managing director of systems and technology with the Securities Industry Association, says that providing DTCC with feedback is critical. ""The proposals are great but if firms have no use for them there is no sense in developing them, so the SIA encourages firms to respond during the comment period.""

Vice President of the Securities and Investment Practice with TowerGroup Larry Tabb says ""It behooves firms to get someone to (get involved in) discussing or evaluating the settlement process because it will be dramatically affected by providing tacit authorization for all matched and netted trades.""

Before anything in the securities industry is dramatically affected, the proposed change must receive the stamp of approval from the Securities and Exchange Commission. DTCC's proposals are no different.

Following its own comment period and formulation of specifications, DTCC must submit its blueprints to the SEC where the IMS will be put out for a formal SEC comment period before being amended or approved by its commissioners.

Success, however, won't be guaranteed solely by SEC approval but rather by the number of participants who embrace the new system. In an industry dealing with huge sums of money, new and better doesn't always beat out old and reliable and, in fact, Kiechle's paper emphasizes a slow and voluntary industry migration. Northern Trust's Potter says turning critical operations over to new technology isn't something he will do lightly. ""Day one we will stick with the controls we have built in our system until we get comfortable with what DTC has done.""



(source: )

* Assembler: software that translates assembly language into machine language. Contrast with compiler, which is used to translate a high-level language, such as COBOL or C, into assembly language first and then into machine language.

* COBOL: COmmon Business Oriented Language) A high-level programming language that has been the primary business application language on mainframes and minis. It is a compiled language and was one of the first high-level languages developed. Officially adopted in 1960, it stemmed from Flomatic, a language in the mid-1950s.

* Websphere: A family of Web application server products from IBM that run on OS/390, OS/400, NT and various UNIX platforms. Websphere Application Server is a Java-based application server that supports servlets, JavaServer Pages (JSPs) and Enterprise JavaBeans (EJBs). It also includes the Apache Web server (HTTP server).

* Java: A programming language designed to generate applications that can run on all hardware platforms, small, medium and large, without modification. Developed by Sun, it has been promoted and geared heavily for the Web, both for public Web sites and intranets. Developed by Sun, Java was modeled after C++, and Java programs can be called from within HTML documents or launched stand alone.

* DB2: (DATABASE 2) A relational DBMS from IBM that was originally developed for its mainframes. It is a full-featured SQL language DBMS that has become IBM's major database product. Known for its industrial strength reliability, IBM has made DB/2 available for all of its own platforms, including OS/2, OS/400, AIX (RS/6000) and OS/390), as well as for Solaris on Sun systems and HP-UX on HP 9000 workstations and servers.

* GUI: (Graphical User Interface) A graphics-based user interface that incorporates icons, pull-down menus and a mouse. The GUI has become the standard way users interact with a computer. The three major GUIs are Windows, Macintosh and Motif, the latter being used in the UNIX world.

* C++: An object-oriented version of C created by Bjarne Stroustrup. C++ has become popular because it combines traditional C programming with OOP capability. Smalltalk and other original OOP languages did not provide the familiar structures of conventional languages such as C and Pascal. Microsoft's Visual C++ is the most widely used C++ compiler.

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