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DTCC Asset Services Update

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1 DTCC Asset Services Update
Dan Thieke Managing Director October 23rd, 2012 [Classification]

2 Executive Summary Continued focus on enhancing DTCC’s core systems and controls to ensure a high level of risk management for both DTCC and our customers. Over 70% of the 2012 IT budget is on the upgrade of the core corporate actions platform as well as improving the internal control environment (similar % for 2013). Rationalization of fee structure to provide customers with a simplified and transparent fee model that is aligned with the underlying costs. Demonstration of thought leadership by driving market practice, such as the adoption of ISO messaging for corporate actions, and leading a multiyear effort to fully dematerialize the U.S. financial markets.  Upgrading of the core platforms will allow Settlement & Asset Services to harmonize the user interface across all of DTC and eliminate the aging legacy applications used for messaging and communicating with clients. Collaboration with clients and industry stakeholders to identify additional opportunities to improve transparency, reduce risk and lower costs. DTCC Confidential (Yellow) 2

3 Environmental Assessment - Trends
Industry Trends Continued push for standardization to increase straight-thru-processing Harmonization of global market practices Outsourcing of processes continues, expanding into areas considered core competencies, as pressures increase to reduce expenses. Industry collaboration to devise cost effective solutions to challenges Asset Services trends to note: Increased complexity of Corporate Action events and their taxability New issuances down from historical levels, however overall outstanding amounts issued have increased from the prior year P & I payment volumes have been lower due to a decline in issuances of structured securities Increased pressure on service providers to reduce costs Compliance with new and changing regulations (i.e. FATCA) Regulatory and Risk Trends As security instruments become more complex, DTCC’s risk exposure is increased by the caliber of suppliers that we are dependent on for services (e.g. microcap issuers, transfer and paying agents) Further need for transparency across the value chain, to both end investors and other key stakeholders including regulators The need to monitor risk exposure to TAs that participate in the FAST Program P & I payment finality DTCC Confidential (Yellow) 3

4 Strategic Plan - Themes
Strengthen the core – Drive standardization and upgrade legacy technology Continue the process of modernizing DTC’s core systems by upgrading the underlying technology and aligning with current standards and market practices Reduce risk by minimizing exposure to key staff by combining multiple platforms to achieve standardization across support areas Drive the standardized use of ISO messaging for Corporate Action processing Continue to introduce XBRL technology Identify opportunities to reduce costs and minimize risk (enterprise) across the business unit Determine specific functions that could be reassigned to support high risk functions or areas of growth Evaluate optional services to determine strategic fit and profitability Execute multiyear dematerialization plan to eliminate the costs and risks associated with physical certificates still outstanding Pursue implementation of DRS for restricted securities, i.e., Networking for Equities (NFE) Expansion of services Tax Relief expansion into new markets, new investor and security types. Allowing greater transparency on proxy and tax services (i.e. Stock loans) Continue to work with participants to enhance the services provided by DTCC GCA Offering – Inclusion of DR servicing Fees and Additional exchanges added for the Derivatives Service Improve the Client Experience Expand on implementation of CA browser and settlement web DTCC Confidential (Yellow) 4

5 Corporate Actions Reengineering
Adopt & Support Market Practice Maintenance of a Global Standard Enhanced Data Elements Schema Validation Published updated ISO Adoption Guides (Feb 2012) Published SR 2012 Schemas & Documentation Present at Industry Forums ISITC XSP Conference SIFMA Corporate Action Forums Infrastructure & Networks * DTCC SMART NETWORK SWIFT NETWORK Customizable Subscription Options Flexible End of Day / Intraday Option (April, May 2012) New Message Protocols (June 2012) New Browser Web Based (Corporate Action Announcements Deployed Nov 2011) Replace aged PTS/PBS Corporate Action Applications (Starting Q2 2014) One tool to manage all Corporate Actions from start to finish (Starting Q2 2014) Eliminate aged processing methods XBRL Technology Pilot Issuers (Citi, BNY Mellon) Complete Build of Interface (March 2012) Deploy XBRL Technology (July 2012) Patrick narrate, team explain Enhanced Delivery of Corporate Action Data to Clients Implement ISO Messaging (Nov 2011) Implement New Data Model (Nov 2011) Unique Corporate Action ID for Each Event Requirements for Lifecycle Messages (Feb 2012) DTCC Confidential (Yellow)

6 Client Facing Improvements
ISO Benefits Flexibility – both in terms of its content and tailoring of output. As new corporate actions are developed, the messaging standard can change to meet the demands of the business, not the other way around. XML Syntax – due to its widespread support, XML allows for easier processing and more efficient yearly maintenance. Schema Validation – used to confirm that each data element is populated with a valid value. Greater Straight-Through-Processing (STP) – corporate action events will be announced using a data model that conforms to market practice, which also contains less narrative or “free text” and more fielded and tagged data. Unique Corporate Action ID for Each Event – can be tracked through the life cycle of the event – from announcement, to entitlement, to election, through to payment. Enhanced Data Elements – a more comprehensive and granular number of data elements, which allows for greater accuracy and, ultimately, less processing risk on the part of the customers. Maintenance of a Global Standard – In defining a data new model for U.S. and global corporate actions, DTCC worked closely with SWIFT, (ISO 20022's registration authority), the Securities Markets Processing Group (SMPG) and the International Securities Association for Institutional Trade Communication (ISITC. These were reviewed and approved by the Securities Standards Evaluation Group (CA SEG), a group of international industry experts who accept or reject changes to the ISO standard’s repository. The yearly standards process requires DTCC to constantly review, scrutinize and maintain its standard to ensure compliance with market practice. This in turn will lead to less ad hoc maintenance and instead institute a systematic approach to the business rules driving the file formats, not the other way around. One User Interface Provide a unified browser based client interface that allows clients to manage their entire corporate action (CA) lifecycle, from announcements through instructions to payments. Provide easier submission of WINS inquiries by providing a link that auto-populates the CA Details on the WINS inquiry. DTCC Confidential (Yellow)

7 Progress to Date ü ü ü ü ü ü ü ISO 20022 New Data Model Nov 2011
New Browser Implemented ISO Corporate Action Announcements Implemented New Data Model Implemented New Browser Implemented Message Delivery over SWIFT Network Nov 2011 ü Pilot Pilot Firms Receiving ISO messages from DTCC Production System Three (3) Pilot Firms have gone live with ISO messages in 2012 Nov Ongoing ü Client Adoption Additional Clients adopting to ISO throughout 2012 Jan Ongoing ü Updated Message Client Documentation Published Updated ISO Message Specifications, Schemas and “Deltas” to Support Annual SR 2012 Changes Published Updated Client ISO Summary Guide Feb 2012 ü Client Subscription Options Flexible End of Day / Intraday Option New Batch Message Protocols: SMART (FTP/NDM) and SWIFT (FileAct) Apr/May/June 2012 ü XBRL Implemented XBRL Functionality into Production July 2012 ü Infrastructure Upgrades Upgraded DTCC’s SWIFT-related network infrastructure and hardware June - August 2012 Market Practice Enhancements Mandatory / Voluntary Indicator Project August 2012 ü DTCC Confidential (Yellow)

8 Phase III Distributions Timeline 2012 - 2014
Phase III Distributions Pilot Testing Phase III Distributions Parallel Production Testing 2014 Full Deployment 2012 ISO Pilot for Distributions Full Lifecycle ( Testing ) Sept Entitlements & Processing - Sample ISO Messages Webinars, Documentation, & Training for Browser Dec Distributions Elections - Sample ISO Messages Pilot Parallel ProductionTesting of ISO20022 Entitlements & Payments 2013 Jan - Mar Deploy ISO Distributions Entitlements & Payments (Q1) Participant Registration Process for new browser Jan - Mar Browser Available for Distributions Client Testing Participant’s adoption of new browser July - Dec ISO testing begins for inbound Distribution elections (test environment) Q3 2014 Deploy ISO Messages for Distributions Election April 2014 Deploy New User Interface for Distribution Processing DTCC Confidential (Yellow)

9 Documentation & Mapping
For inquiries: DTCC Confidential (Yellow)

10 Post Payable Adjustments - Background
Structured Securities PPA’s decreased significantly from Decreases during this period were closely tied to DTC Working Group Recommendations from 2006 and 2007: Changed the deadline for receiving rates to PD-1 from PD-2 Categorized structured securities into two classes: Conforming & Non-Conforming Established non-conforming “exception processing fee” for underwriters at closing of new issuance – rebate fees to holders Distributed Paying Agent Report Card evaluating timeliness & accuracy of rate submissions 10 DTCC Confidential (Yellow)

11 Historical Experience
All Active Eligible Issues at DTC by Issuance Year Post Payable Adjustment* Breakdown First Quarter 2012 Number of All Active Eligible Issues at DTC Year of Issuance 2012 Q1 PPAs by Issuance Year Issuance Year Apx # of Issues # of PPAs* 2005 and Prior 55K 3,560 2006 25K 1,192 2007 20K 2,578 2008 to Current 9.5K 648 Total 109.5K 7,978 * Post-Payable Adjustments are calculated at CUSIP level by payment date DTCC Confidential (Yellow)

12 Current Experience All Structured Products Post Payable Adjustments During June 2012 Total PPAs: 783 Less Than 90 Days Between 90 and 120 Days Between 121 and 180 Days Greater Than 180 Days Total PPAs 260 59 107 357 Percentages 33.21% 7.54% 13.67% 45.59% * Post-Payable Adjustments are calculated at CUSIP level by payment date DTCC Confidential (Yellow)

13 DTC Response to Increase in PPAs
2011 Industry group convened to review proposal to pass principal PPAs on to the next payable date. Proposal deemed too complex. DTC submitted SEC rule filing in April 2012 limiting PPAs to 60 calendar days after the payment date from the current one year threshold Benefits of shorter timeframe: Reduces the inherent risk with payment reversals/promote payment finality Compels all parties in the chain to evaluate and minimize the challenges associated with principal and income adjustments Drives focus on the root cause(s) of the post-payable adjustments DTC convened a Post-Payable Adjustments Task Force comprising agents, participants, the ABA , the Association of Global Custodians, SIFMA Corporate Actions Committee, and the CREFC (Commercial Real Estate Finance Council) to: Identify root causes of structured-securities PPAs Offer potential solutions to prevalent causes Increase level of transparency in the processing chain Amended filing in August based on Task Force recommendations DTCC Confidential (Yellow)

14 Amended Filing Key Points and Implementation Dates:
Effective Jan 1, 2013: All new issues submitted for DTC eligibility to include servicer and calculating agent details. All PPA requests must also include PPA reason code, issuance date, instrument, issuer, servicer and calculating agent. Effective July 1, 2013: DTC will begin tracking and making publicly available report cards on Issuer PPA performance. Effective Jan 1, 2014: DTC will no longer process PPA requests through the settlement system beyond 180 calendar days after the initial payment date. Effective July 1, 2014: DTC will no longer process PPA requests through the settlement system beyond 120 calendar days after the initial payment date. Effective Jan 1, 2015: DTC will no longer process PPA requests through the settlement system beyond 90 calendar days after the initial payment date. DTC agreed to work with the industry to investigate the development and potential operation of an industry proposed adjustment claims repository. DTCC Confidential (Yellow)

15 PPA Task Force – Next Steps
Further refine identification of adjustment causes Identify “non-controllable” adjustments e.g., Court ordered Deepen understanding of sources of document ambiguity Compare different types of structured securities Prepare background for dialogue with ASF Continue monthly review of adjustment causes and sources Ongoing beginning with July Notify all issuers of upcoming notification requirements at time of eligibility – Important Notice Develop concept of “Claims Adjustment Repository” Increase processing transparency - at time of request for adjustments DTCC Confidential (Yellow)

16 FATCA FATCA stands for the “Foreign Account Tax Compliance Act” which became law on March 18, The goal is to reduce U.S. tax evasion by improving the information available to the IRS about the offshore accounts of U.S. persons It requires foreign financial institutions (“FFIs”) to provide information to the IRS identifying U.S. persons invested in non-U.S. banks and securities accounts and non-financial foreign entities (“NFFEs”) to report substantial U.S. owners DTCC Confidential (Yellow)

17 FATCA’s Teeth NEW 30% punitive withholding tax levied on “withholdable payments” made to non-participating FFIs and NFFEs Withholdable payments include all U.S. source income and gross proceeds from the sale or disposition of any property of a type that can produce interest or dividends from U.S. sources DTCC Confidential (Yellow)

18 How will FATCA impact DTC?
Withholding on Gross Proceeds DTC would have to withhold 30% on gross proceeds (sale of U.S. securities, maturities, redemptions etc.) paid to non-participating foreign participants Will require massive system enhancements to perform withholding and information reporting on gross proceeds Current system can only handle withholding on income payments (i.e., interest/dividends) DTCC Confidential (Yellow)

19 FATCA Plan The overwhelmingly majority of our non-U.S. participants are Qualified Intermediaries (“QIs”) QIs must become FATCA compliant DTC anticipates that most, if not all of its non-U.S. participants will become FATCA compliant DTC is looking into the possibility of changing its membership requirements to require all non-U.S. participants to be FATCA compliant DTCC Confidential (Yellow)

20 Canadian Declaration Forms Effective 1/1/2013
Current EDS Process: Does not require participants to collect any specific tax documentation from beneficial owners in order to receive a reduced rate of withholding tax To elect a reduced rate, participants can generally rely on the address rule (country of residence of the beneficial owner) New EDS Process on 1/1/2013: Require participants to collect a beneficial owner declaration form or the equivalent information from customers prior to electing a reduced rate of Canadian withholding tax on income paid through DTC Refer to Important Notices B# , B# and B# for additional information DTCC Confidential (Yellow)

21 Stock Loan Income Tracking Project
Project will provide transparency to Lenders and Borrowers DTC currently takes on the U.S. tax withholding obligation of the Borrower by ensuring the appropriate tax gets withheld on U.S. substitute dividend paid to a non- U.S. Lender DTC participants (Lenders and Borrowers) generally do not know the status of each other for U.S. tax purposes Provide transparency between Lenders and Borrowers by disclosing the tax status of each other for withholding purposes *the proposed initiative does not cover the borrow fees and the rebate on the cash collateral as these are settled directly between Borrowers and Lenders DTCC Confidential (Yellow)

22 Stock Loan Income Tracking Project
Provide Borrowers with reports that show Withholding tax rate applied on each substitute dividend paid to the Lender The amount of tax withheld, if any Year-end summary report by Lender that shows the total amount of substitute dividend paid along with the amount withheld and remitted to the IRS Substitute dividends paid to U.S. Lenders for 1099 MISC reporting purposes Project will start in mid 2013 DTCC Confidential (Yellow)

23 French Financial Transaction Tax
March 14, 2012, the French Parliament adopted a Finance Bill n° which introduced a transfer tax on transactions with shares of listed French companies (the "FTT") with a market cap of more than 1 billion euros A further Finance Bill was adopted on July 31, 2012 which increased the rate of FTT to 0.2% and made specific reference to American Depositary Receipts (“ADRs”) The implementation date of the FTT is August 1, 2012, except for ADRs, for which the implementation date is December 1, 2012. DTCC Confidential (Yellow)

24 French Financial Transaction Tax
Tax is generally assessed on the basis of the net buying position with regards to intra day transactions and certain corporate action events DTCC participants (or their clients) that believe that they are subject to the FTT will either pay directly to the French tax authorities, or they can select a member of Euroclear France. This latter option would probably be the preferred option of some participants that have already implemented the FTT in their European branch DTCC Confidential (Yellow)

25 Initial Feedback on Dematerialization White Paper
DTCC has received written feedback from fifteen stakeholders: Two Trade Organizations Twelve Clients One Transfer Agent A number of additional stakeholders have contacted DTCC and will be providing feedback in the near term Feedback has been supportive with varying degrees of concern based on each respective constituency: Clients are reinforcing their dependence and appreciation for DTCC’s centralized role, while indicating which services they rely on Trade Organizations are supportive but voice concern over ensuring cross stakeholder representation and DTCC acting unilaterally DTCC Confidential (Yellow)

26 Initial Feedback on Dematerialization White Paper
DTCC has received written feedback from fifteen stakeholders: Two Trade Organizations Twelve Clients One Transfer Agent A number of additional stakeholders have contacted DTCC and will be providing feedback in the near term Feedback has been supportive with varying degrees of concern based on each respective constituency: Clients are reinforcing their dependence and appreciation for DTCC’s centralized role, while indicating which services they rely on Trade Organizations are supportive but voice concern over ensuring cross stakeholder representation and DTCC acting unilaterally DTCC Confidential (Yellow)

27 Next Steps Solicit feedback from all industry stakeholders by 10/30/2012 Conducted client outreach survey with top 20 users Review and analyze stakeholder feedback: Commence in depth industry dialogue with cross representation from all industry stakeholders by 12/2012 Identify initiatives to pursue by Q Leverage industry forums and identify work streams by Q4 2012 Continue discussions with the Transfer Agent community through the DTCC Transfer Agent Broker Working Group (Ongoing) Publish results of feedback from stakeholders by end of Nov 2012 Prioritize deposit options at DTCC DTCC Confidential (Yellow)

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