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IT Challenge: Settlement

The Challenge: For financial services firms, moving away from batch processing is still a challenge. The DTCC's new inventory-management system offers delivery flexibility and helps firms find efficiencies and increase automation in the settlement process.

But does the industry think the DTCC's solution will transform the settlement process? Damon Kovelsky, an analyst at Financial Insights in Framingham, Mass., doesn't think so. "I think a couple of back-office personnel care about it, a few custodians care about it, and DTCC. I think it's nice - it's good, but I don't see how it's going to revolutionize settlements."

However, he concedes that "automation helps." According to Kovelsky, "It's a step [toward straight-through processing], not a quantum leap. It's a good thing. I'm glad to see DTCC is taking a very active role doing what they can to automate their end of the process."

Pam Zielezinski, managing director for operations of Archipelago Exchange (ArcaEx) in Chicago, agrees that "any time errors can be reduced, costs can be lowered and flexibility can be introduced into the complicated process of securities settlement, this is good for the industry as a whole."

IMS allows broker-dealers to catch up to custodians, says Cheryl French, first vice president in charge of the securities processing division at Mellon Global Securities Services in Pittsburgh. "From our standpoint as a custodian, we already have this technology in place that allows us to manage inventory on a portfolio-account basis. It's not a benefit to custodians as much as a benefit to brokers."

"Any time you can get things done earlier in the day is definitely a benefit. I can see it may help us in the future," she says, noting that the firm currently operates in "batch mode, so when DTCC goes to real-time mode sometime in the future, we may be able to automatically exclude those items that are prevented from being delivered."

Flexible Process Management

The IMS system has roots in a DTCC white paper from last year and a recommendation by the Group of 30 countries, known as the G30, that advocated the development of a plan for the global clearing of securities. Essentially, IMS allows firms to play a role similar to that of an air traffic controller when managing their deliveries, thanks to a profiling system that offers broker-dealers the ability to control the timing and order of delivery for the items they are processing.

For example, firms can tell the system to process institutional trades automatically unless they specifically exempt such items. This can be set based on security type, such as equities, municipal or corporate debt, and money-market instruments. They can also tell the system to automatically reintroduce items that were dropped or failed to settle in an earlier cycle.

The system is rolling out now, and more functionality will be added this year, including night delivery orders (NDO), which are those starting at 8:30 p.m., according to the DTCC. Ultimately, IMS will offer a range of options for managing the processing of transactions, including "update options," which will allow users to modify their profile settings, and "inquiry options," which will allow settlement officers to canvass the status of deliveries. IMS allows users to inquire about trades up to 21 days after settlement.

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