GC: Industry estimates put the percentage of settlement fails caused by incorrect Standing Settlement Instructions (SSIs) at around 20%. Why is it so hard to make a dent in that number?
Bill Meenaghan: We came to a similar conclusion, despite a compliance rate of over 99% with the rules we’ve introduced in the ALERT database. When we dug into it, we found that some of the problem wasn’t that the SSIs themselves had incorrect data in them, but that the wrong SSI was being used. We’ve begun working on a new feature called AKAS, ALERT Key Auto Select. Based on the ISIN, CUSIP or SEDOL of a security, DTCC will be able to derive the country and security type, which means the service can pick an SSI. Clients will be able to use these keys to default to a standard choice or add rules to choose a different SSI. AKAS will help clients manage SSI choice more effectively and reduce manual settlement errors, specifically those that are due to the wrong SSIs being used. We expect this feature to go live mid-2018.
The other main reason for settlement fails was manual SSIs, i.e. SSIs shared outside of ALERT, which are more prone to errors. We’ve been trying to get as many SSIs as possible into ALERT so that the executing brokers don’t have as many to manually input. We are working with many of our brokers to help bring those SSIs into the platform by offering our Automating SSIs Together (ASSIsT) service. The ASSIsT service is a free offering to buy-side clients who are manually providing their SSIs to their counterparties. Incorporating those SSIs that are still being delivered manually via fax or email, means ALERT will communicate account and SSI information on a real-time electronic basis as and when changes occur, out to its broker community eliminating the current manual processes that exist today. Additionally, ALERT’s Global Custodian Direct (GC Direct) workflow, which we introduced in late 2015, helps by automating the management and flow of SSIs between the custodian and the investment manager. Our ALERT for prime brokers workflow also automates the management of SSIs between the prime broker and the hedge fund.
GC: What feedback have you had on GC Direct?
BM: The feedback’s been excellent. The buy-side are extremely happy because they’re not inputting that data anymore. A couple of the custodians who were early adopters say they’ve seen huge improvements in STP rates. We’ve had the same response from the prime brokers as well.
The process was originally designed for cash and securities SSIs. We’ve just completed a release to add support for collateral SSIs and should have a custodian going live with that feature in early 2018.
The design itself has remained essentially the same with a few enhancements. When we started discussing it with the first few clients, there was a large investment manager that had some accounts in Japan, so over the past year, we’ve developed a feature that allows trust banks to be involved in the flow. The ALERT for Trustee Service connects to ALERT’s GC Direct workflow for markets where trustees are legal owners of investment fund assets. Since the investment manager in the trust bank model doesn’t go directly to the custodian, but rather via the trust bank, we allow them to monitor all the SSIs that come in.
In November, meanwhile, we released a ‘regional custodian’ facility that allows custodians primarily using anther custodian’s network for transactions outside the region they serve to interact efficiently for all the markets in which their clients transact.
GC: Is your aim to create one global SSI utility?
BM: Ultimately, we do think one global SSI utility or repository is the way to go. Most of the functionality is already in place. It’s now about adoption. We’ve got five custodians live on GC Direct, including two of the biggest four. The other two will be live in the next few months. By mid-2018, we should have nine global custodians live on GC Direct, accounting for roughly 80% of assets under custody globally. If we then include the network or regional custodian layer, that should take us to around 90%.
There are essentially two data flows that concern us: from the custodian to the investment manager and from the investment manager to the executing broker. The second bit has been automated for some time. What we’ve been discussing here is completing the automation of the first piece. Longer term, if we have this pool of SSI data available, the executing broker can make a choice whether to keep a copy internally of what they’re entitled to see or to come to us on a per-trade basis and enrich that data. Both options are available now.
