In Ann Magnusson, head of institutional banking, SEB’s view, “the post-trade securities business remains largely non-transparent with regards to the parties involved in a transaction.” She explained that while Standard Settlement Instructions (SSIs) are
created by two parties to a trade with the counterparty’s SSIs for settlement in the specific market, what this often means is that the counterparty’s name or any other information is not included in the instruction. SSIs remain one of the leading causes of
trade failures and trade settlement mismatches, and financial institutions should be looking at SSIs to improve matching and settlement efficiency.
This is an excerpt from The Future of the Global Financial Ecosystem 2024: A Sibos Special Edition.
Magnusson continues: “As each non-end intermediary that receives the instruction will register it in its system and then create a new instruction, with a new reference, to be sent to the next intermediary in the chain, identifying an instruction from start
to end is difficult. If implemented across the chain, the [Unique Transaction Identifier] UTI and Swift Securities View will change this. It will be possible for both parties to the trade to see the two settlement instructions, throughout the chain of intermediaries.
They will be able to identify any matching or settlement issues, as soon as they are detected and reported by any party in the chain and can thus correct the issue much earlier than they can without the UTI and Securities View.”
She adds: “Another increase in transparency could also be achieved by including all parties in the transaction chain, similar to what is done for payments. If the two trading parties, the buyer and seller, will be included in the settlement instructions
as proposed by among others, ISSA, it would be much more difficult to for e.g., sanctioned parties to trade and hold securities. The increased settlement data could also be used for more detailed analyses of settlement patterns than what is currently possible.
Whether this is legally feasible is less clear, but that may change,” Magnusson said.
Looking towards 2024, these inefficiencies are no longer feasible. For the past 20 years, it could be argued that securities processing has been driving automation and straight through processing (STP) of transactions. However, with the CSDR (Central Securities
Depositories Regulation) on the horizon
and the US and Canada moving to T+1, regulatory pressure is also driving STP. Further to this, trades should not have to fail for a failure to be noticed. In order to achieve a reduced settlement cycle that is accurate requires clean and updated reference data,
and for problems to be resolved in a proactive
manner. New technologies such as tokenisation could support this endeavour.
How can Unique Transaction Identifiers foster greater transparency and visibility?
As Magnusson suggested, the UTI can provide the level of transparency and visibility that is required by the securities industry, hopefully resulting in fewer settlement fails and better management of investigations. According to
Swift, the “UTI is a unique alpha-numeric code comprised of up to 52 characters that is assigned to a securities trade. This enables a trade to be tracked from end to end throughout the lifecycle of its settlement. The UTI is part of the ISO stable – namely
ISO 23897:2020 – and is already used in securities markets for transaction reporting purposes.
“For instance, the European Market Infrastructure Regulation (EMIR) requires one of two trading counterparties to generate UTIs for their over-the-counter and/or on-exchange derivative transactions ahead of them being reported to trade repositories. Similar
UTI provisions are in place for the EU’s Securities Financing Transactions Regulation (SFTR), which obliges financial institutions to disclose details about their SFTs (i.e., securities lending, securities borrowing, etc.) to trade repositories. In the US,
the Dodd-Frank Act introduced a UTI-like Unique Swap Identifier to facilitate swaps reporting,” Swift explained.
Swift’s involvement in this area allowed the UTI to:
- Enhance transparency for all participants across both legs of the settlement lifecycle.
- Ensure greater visibility in the transaction chain.
- Identify and resolve bottlenecks or settlement lifecycle issues more quickly.
- Reduce costs and operational risks arising from potential settlement fails.
As with any discrepancies across the financial services industry, it is better for problems to be resolved before they occur. Swift continued: “This will help firms avoid financial penalties, reduce time spent on investigations and counterparty communications
for exception management. Improved post-trade transparency also means intermediary firms are in a stronger position to field client queries about clearing and settlement more quickly. And, through consistent data, it will be easier to transmit and track transactions
between traditional and next-generation technologies, enhancing interoperability and paving the way for innovation.”
How to make the most of post-trade data with cloud, AI, and real-time analytics
Whether driven by regulations or otherwise, adoption of the UTI has already begun at several market infrastructures, and others are expected to follow. Shifts in technology and evolving investor expectations must also be taken into account, and securities
services providers must ensure that any improvements that are made foster sustainable growth, not just a quick fix. The future of the securities market will see financial institutions making the most out of post-trade data.
Today, banks lack the data access, data analytics, or data tooling required to address evolving customer expectations. Further to this, they continue to be burdened with poor data quality, data fragmentation, and legacy technology. While it is evident that
data is an enabler, it is not so easy for banks to figure out how data can be empowered by new technologies such as cloud computing and artificial intelligence (AI) to bring predictability and transparency to securities markets.
To differentiate from their competitors, securities team need to experiment and build new alpha generating strategies. This has been challenging over the last few years with tighter regulation and operational challenges, but these are all pressure points
that cloud providers can help mitigate. Cloud can help banks expand their services and capabilities to serve and attract new groups of customers. Further, cloud capabilities can effectively allow for the consumption of larger volumes of data, raising signals
from their data and making new, interesting, and better decisions from derived information for their customers.
Prior to the cloud, this was a challenge due to the historical limitations in the industry, such as the high operating costs associated with legacy infrastructure. The cloud has removed the undifferentiated heavy lifting of managing infrastructure, allowing
the focus of their human capital to be on innovation and new strategies, while leveraging AI and automation to optimise processes. Alongside this, AI can improve processes with a high degree of errors, in turn, increasing the organisation’s operational and
regulatory risk.
AI models, through supervised and unsupervised learning, can also be used to predict future error occurrences via anomaly detection. AI algorithms can also help in automated root-cause analysis based on historical and real-time data, automating risk management
and compliance across post-trade processes.
Does tokenisation have the potential to transform securities transactions and settlement?
In July 2023,
UK Finance launched a report that revealed that there are multiple benefits that can be derived from securities tokenisation, such as rapid settlement and counterparty risk reduction. UK Finance defines securities tokenisation as: “the digital representation
of real financial assets using distributed ledger technology. Securities tokenisation, and the corresponding use of distributed ledger technology and smart contracts, are a key piece of the digitalisation journey that will evolve UK capital markets.
While tokenisation has the potential to transform securities transactions and settlement, despite prominent platform launches, volume growth has not met expectations. However,
Boston Consulting Group reported that asset tokenisation could generate annual savings of $20 billion in just global clearing and settlement costs. By 2030, there is potential for the tokenised illiquid asset market to be worth $16 trillion, which would
account for less than 2% of the total notional value of public and private assets. To unlock this value, financial institutions need to be able to easily interact with multiple tokenisation platforms and blockchain settlement networks in a secure and trusted
way.
Is the industry ready for T+1?
In May 2024, the securities industry will move to T+1. In most markets, a standard trade settles two days after the date it was executed, otherwise described as T+2. Following uncertain times and periods of volatility, settlement time is being reduced to
one day, known as T+1. India became the first major economy to introduce T+1 after phasing it in from February 2022, and the US and Canada will adopt T+1 immediately in May 2024. The UK and EU are also considering a move to T+1 as well.
Shorter settlement cycles can welcome a plethora of benefits such as better mitigating counterparty risk, generating capital and leading to operational efficiencies, but financial institutions must ensure they are prepared.
Firebrand’s Virginie O’Shea explained that while most consider this change merely a removal of a day’s worth of time from the settlement cycle, firms will have to process trades in just two hours with T+1, rather than the 12 hours T+2 allows.
“Same day affirmation under T+1 will be more painful for firms who are still using manual processes. This will require firms to move to full automation. Automation on one side is not enough, as it needs to be done by everyone involved in the settlement process.”