References Measures to Ensure Timely [9] Omgeo, Mitigating Operational Risk Settlement, April 2011 and Increasing Settlement Efficiency[1] Hong Kong Exchanges and Clearing through Same Day Affirmation, Limited, Consultation Paper [6] European Commission, Impact October 2010 on Introduction of T+2 Finality assessment on improving securities Arrangement for CCASS Money settlement in the European Union [10] Victoria Lynn Messman, Securities Settlement, November 2009 and on Central Securities Depositories Processing: The Effects of a T+3 system (CSDs) and amending Directive 98/26/ on Security Prices, May 2011[2] SEBI, Implementation of T+2 Rolling EC, March 2012 Settlement, April 2003 [7] Boston Consulting Group[3] ESCB, CESR Recommendation for Commissioned by The Depository Securities Settlement Systems in Trust and Clearing Corporation, Cost European Union, May 2009 benefit analysis of shortening the settlement cycle, December 2012[4] ECSDA, Market Discipline Regimes in Europe, September 2009 [8] Harmonization of Settlement cycles Working Group, Reasons why T+1[5] ECB, Settlement Fails: Report on was not considered as a valid option, Securities Settlement Systems October 2010Ganesh PadmanabhanDomain ConsultantTata Consultancy ServicesRamakoteswara Rao TDomain ConsultantTata Consultancy Services TCS BaNCS Research Journal 51
PPAs (Post Payable Adjustments)Continuing to DecreaseSeveral years ago, DTC formed a cross- P&I on payment date. More recently, the error occurred. Participants must alsoindustry working group to study the working group has suggested that, among process adjustments to their customers’severity of P&I processing problems and other things, DTC create a time limit for accounts for the misapplied principalto analyze possible solutions. The working processing Post-Payable Adjustments and associated interest. DTC has beengroup at that time focused mainly (PPAs) received from Paying Agents. contracted a number of times by theon the timeliness of rate information Association of Global Custodians to focussubmitted to DTC by paying agents Under today’s practice, DTC will process more closely on the risks associated withand recommended several changes to Post Payable Adjustments received from income adjustments and to look for waysDTC’s Operational Arrangements. Those Paying Agents for up to one year or to reduce that risk.changes were approved by the Securities after the initial payment is made. DTCand Exchange Commission (SEC) and will process the debits and credits for In 2011 and 2012 the number of PPAsimplemented in 2008. Implementation the misapplied principal or income and spiked dramatically. The annual numberof the 2008 changes resulted in a 75% participants of DTC must then process of PPAs rose from 3,957 in 2010 todecrease in late rate information and a trade adjustments against any customer 14,835 in 2011 and 19,368 in 2012. Thissignificant increase in the allocation of who traded the security since the change resulted in a significant risk and52 TCS BaNCS Research Journal
cost to the industry. DTC formed the PPA national system for the prompt and Adjustment Claim Repository wouldWorking Group to work on identifying and accurate clearance and settlement of maintain DTC’s role in supportingimplementing steps to reduce the number securities transactions. the communication of adjustmentsof PPAs. The Working Group includes and address the collection andrepresentatives (e.g., SIFMS, AGC- The Working Group continues to meet to redistribution of misapplied andAssociation of Global Custodians, among review the root cause information and misdirected P&I between issuers and/others) as well as firms representing to identify opportunities. In addition, or Paying Agents and the participantspaying and calculation agents. the next milestone outlined in the SEC holding the affected securities filing will be implemented in the coming beyond DTC’s proposed post-payableIn an effort to reduce the inherent risks months. adjustment cut-off periods. Issuers and/associated with these types of PPAs and or Paying Agents wishing to modifyto compel all parties in the payment chain The Working Group will also evaluate certain principal and interest paymentsto confront and minimize the challenges the feasibility of agent proposed DTC beyond the time period that DTC willassociated with principal and interest Adjustment Claims Repository Utility to process the adjustments may do so byadjustments, DTC will make the following facilitate communication and processing obtaining a “P&I Allocation Register”changes in practice: Effective January of PPAs by agents outside of DTC due to and making adjustments and payments1, 2014, DTC no longer processes PPA the reduced timeframes, as well as the arrangements directly with the affectedrequests through the settlement system following: DTC participants.beyond 180 calendar days after the initialpayment date. That period reduced to 120 • Define requirements and costs of There are still improvements todays from July 1, 2014, and will eventually proposed utility implement with regard to paymentcome down to 90 days from January 1, finality, but the industry has made2015. • Determine timeframes for collection significant steps in the right direction. of funds from third parties ex-DTCDTC will continue to service all court- Once distributions are announced,directed adjustments, and other • Identify remedies in cases of only DTC is responsible for collecting“uncontrollable” adjustments as defined partial collection entitlements from issuers or theirby the working group, regardless of paying agents and allocating thoseage. This change helps shift some of the • Final decision on feasibility later in payments to participants on a payablerisk associated with PPAs to the parties 2014 date. In accordance with DTCC’s P&Iinvolved in the up-front servicing of these White Paper, in early February, 2011,securities. Prior to this change, DTC would Effective July 1, 2014, DTC no longer DTC revised its current allocationautomatically debit DTC clients, leaving accommodates issuers and their paying methodology such that only thosethose clients with exposure if they were agents by processing post-payable entitlements paid and associated tounable to collect the funds from the end adjustment requests through the CUSIP-level detail by the industry cut-investor. The shift of the risk is designed settlement system beyond 120 calendar off for such payments – currently 3:00to help provide additional incentive for days after the initial payment date. p.m. ET – will allocate on the payableissuers, calculation agents, and paying date. DTC revised its P&I Performanceagents to reduce the number of PPAs,- • Effective Jan 1, 2015, PPA threshold Metrics to support this effort andespecially the older ones. will be reduced to 90 calendar days highlight those situations impacting timely allocations. DTC will measure andLimiting the ambiguity surrounding • Court mandated revisions will report to the industry on accuracy andpayment finality will remove impediments continue to be processed regardless of timeliness metrics.to, and perfect the mechanism of, a timelines TCS BaNCS Research Journal 53
The cash processing sigma levels are Timeliness Defect (External) – In conclusion…predicated on defects as defined below. Timeliness Defect (External) – Measures payments made to DTC by the DTC continues to disseminate monthlyAccuracy Defect Accuracy Defect established industry cut-off for issuers PPA data for agent root cause review and(External) – Measures the percentage and payment agents to wire funds remediation review.P&I Allocations made on the Payable to DTC, as well as payments made toDate, relative to the expected allocations DTC by close-of-business. Compliance They will also convene and continuefor the Payable Date. Precise allocations for both points in time is reflected as monthly task force meetings to discussare those where timely payment can separate sigma levels, and defects refer potential actions for further reducing PPAsbe matched to CUSIP-level detail and to payments not made by 3:00 p.m. ET in 2015.allocated to DTC participants. Defects and by close-of-business on the payableare measured as those allocations not date. In an environment where only DTC will also continue to evaluateoccurring on a payable date. A sigma payments received and matched to the feasibility of agent proposed DTClevel is assigned to the allocation of both CUSIPs will allocate, payment timeliness Adjustment Claims Repository Utility todollars and CUSIPs. is a critical measure. facilitate communication and processing of PPAs by agents outside of DTC toCalculations: Calculations: reduce the time frames further.P&I Allocated CUSIPs/Total Expected Dollars Paid by 3:00 p.m. ET/Total DollarsCUSIPs Paid for the MonthP&I Allocated Dollars/Total Expected Dollars Paid by Payable Date COB/TotalDollars Dollars Paid for the Month Thomas Ruggiero Program Manager TCS Financial Solutions54 TCS BaNCS Research Journal
Strate is the Central Securities Depository for South Africa. Strate desired to move fromphysical settlement to electronic settlement of securities. Tata Consultancy Services (TCS)developed a unique clearing and settlement system based on multilateral netting, to ensurea smooth transition. All within record time and allocated budgets. As one of the world’sfastest growing technology and business solutions providers, and a trusted partner of Stratefor over 15 years, TCS delivered an e cient and cost-e ective platform enabling them tobenchmark their solution against global best practices and standards. Also, helping Stratestay competitive by playing a signi cant role as its solution partner for all asset classes.Visit www.tcs.com/bancs to learn more or write to us at [email protected]
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