ISID launches development work on a software for
T+1 securities settlement and applies for a patent
Information Services International - Dentsu Ltd. (ISID, headquartered in Nakano, Tokyo; Jutaro Takinami, CEO; ¥743 million in capital) has designed a transaction processing model for T+1 [1] securities settlement, and submitted related patent application to the Patent Agency on Sept. 20. In conjunction with this, ISID also embarked on development work that will facilitate the utilization of this new system by financial institutions. It is anticipated that this will be a full-scale T+1 compliant transaction processing system for the financial sector.
Development Background
It is currently common practice in the securities market to settle transactions three business days (T+3) after the trade date. However, the growth in pension fund assets and the international investment trend toward portfolio diversification have together spawned a global expansion in securities trading volume. Many national markets accordingly face the task of shortening the cycle from deal capture to settlement to a single business day, thereby reducing their exposure to settlement risk.
[Changing external environment]
With a view to the implementation of T+1 settlement mechanisms, Japan, the U.S. and Europe have been moving forward with work to refine and improve their infrastructure for securities settlement.
First, plans call for the consolidation or centralization of the processes for confirming transaction details and settlement terms. Parties to securities transactions currently handle these steps through facsimile and a mixture of other, non-uniform means.
- JASDEC[2] has plans to place Pre-settlement Matching System [3] into operation by the middle of next year.
- The Global Straight Through Processing Association (GSTPA) [4] has similar plans to launch a new Transaction Flow Manager (TFM) [5] next year.
Second, study is under way on adopting the standardized ISO 15022 [6] electronic message format for the non-uniform messages that are currently exchanged in written form for confirmation of transaction details and issuance of settlement instructions.
- Plans call for the settlement matching system and the TFM to adopt the ISO 15022 format for their message formats.
Third, JASDEC plans an adoption of delivery versus payment procedure (DVP) [7] for equity settlement. Also, consolidation of depositories is one of the widely discussed topics in the market.
- Study has focused on switching to the DVP procedure for securities custody and transfers after the new settlement matching system has been placed into operation.
- In the interest of improved settlement efficiency, discussion is also under way on the prospect of consolidating various securities depositories that have been set up to handle settlements involving different types of securities products.
Having systems that are capable of handing T+1 settlements will be essential
for most financial institutions now active in the securities market (e.g.,
institutional investors, securities houses, trust banks and custodian banks)
if they intend to continue trading actively in the years ahead. In the meantime,
many institutions both in Japan and abroad have been pressed to quickly
overhaul their settlement frameworks and shorten their settlement cycles.
Thus, several leading institutions now have plans to pursue new system investments
on the order of several tens of billions of yen.
ISID strategy for the securities settlement arena
Straight through processing and ISID's track record in the settlement systems
As illustrated by the list of examples below, ISID to date has been a market-leading provider of systems solutions to the financial community in such areas as securities STP [8] and settlements.
- Securities STP systems that harness middleware [9]
- Intra-day liquidity management systems that accommodate Bank of Japan real-time gross settlements (RTGS)
- Systems for management of fixed income settlements
- Systems for securities trade matching
- Systems for cash and securities reconciliation, etc.
ISID solution strategy for T+1 settlement
However, given the infrastructural enhancements and shortened settlement cycles that are expected over the next few years, the need will conceivably arise for a means of controlling the entire transaction process from trade to settlement, in addition to the middleware-based control provided by those systems that focus exclusively on inter-system links. The following cases are noteworthy examples.
- To adapt to the central services provided by the JASDEC Pre-settlement Matching System and the GSTPA's TFM, financial institutions will be expected to interact with these systems in an elaborate, real-time process. In order to achieve this, management capability of trade processing is mandatory as well as messaging middleware.
- The transition to a T+1 settlement cycle will require that all players have the speed to handle the entire transaction process from trade to settlement in one-third the amount of time currently devoted to these stages. Cutting the amount of processing time without exposing oneself to added operational risk calls for the deployment of a system environment that is capable of identifying the status of transactions at each stage of the entire process and dealing swiftly with any transactions that are found to have problems.
To accommodate the financial industry's need for systems that are capable of handling T+1 settlement demands, ISID will develop a new system for transaction process control. ISID is striving to become a total solutions provider in the securities settlement arena by rounding out its earlier-cited systems with new products of this kind.
Overview of product plan
System name: STP Engine
Target customer: domestic and foreign institutional investors, securities
houses, trust banks, and custodian banks
Projected product release date: mid-2001
Projected price range: starting from ¥30 million (Not including fees for
consulting, customization, etc.)
System overview T+1 compliant system for securities transaction settlement process control
Key system features(1) Process configuration
System processing parameters can be configured for compliance with the external settlement infrastructures offered through the Pre-settlement Matching System (JASCEC) or the TFM (GSTPA).
(2) Trade processing
The system is capable of handling real-time transaction flow from trade to settlement, in keeping with configured processing parameters.
(3) Status management
Ability to uniformly identify the status of multiple transactions at each stage of the entire process. Capable of handling trades from a variety of financial instruments, including stocks, bonds, and government bonds.
(4) Interfacing
Compliant with the ISO 15022 standard for electronic message format, assuring smooth connectivity with external systems.
Benefits of implementation(1) Because it allows for the configuration of processing parameters, the STP Engine can readily handle transaction flows compliant with central services through the JASDEC settlement matching system. At the same time, it can accommodate additions to settlement infrastructure and provides flexible links to other internal systems, effectively contributing to significant reductions in the cost of upgrading to T+1 compliant infrastructure.
(2) Utilization of a real-time processing model provides T+1 settlement speed by achieving drastic cuts in overall processing time from trade to settlement.
(3) Uniform control of process from trade to settlement allows for consolidated status control at all stages of the transaction life cycle. Ability to handle multiple types of financial instruments extends this consolidated status control to the product level.
(4) Compliance with accepted messaging standards assures seamless exchanges of electronic messages with external infrastructure and transaction counterparts.
Information on Patent Applications
Until now, T+1 compliant systems designed for the consolidated control of all transaction stages from trade to settlement were unavailable. ISID's system development and commercialization program has been rooted in cutting-edge market concepts. In seeking patents for its conceptually innovative systems, ISID aims to carve out its position as a market leader in the securities settlement field.
ISID is seeking to acquire patents primarily for a method of real-time trade processing that treats all stages of the securities transaction from trade to settlement based on the scenarios stored at configuration tables.
[*1] T+1 (T plus one)•••T refers to the trade date. T+1 indicates that a transaction has been settled on the first business day following the trade date. Although most securities transactions are currently settled on the third business day following the trade date (T+3), it is widely anticipated that T+1 settlements will become necessary as a means of reducing exposure to settlement risk. The target year for implementation of T+1 settlements is 2002 in Japan and 2004 in the U.S.
[*2] Japan Securities Depository Center (JASDEC)•••The organization authorized for securities custody and transfers in Japan.
[*3] Pre-settlement Matching System•••The matching system that JASDEC has been striving to implement by mid-2001. It is designed to provide post-trade and pre-settlement matching central services to institutional investors, securities houses, trust banks, and custodian banks.
[*4] Global Straight Through Processing Association (GSTPA)•••An organization established with financing from several leading financial institutions worldwide to oversee preparations for the implementation of cross-border securities transaction matching system.
[*5] Transaction Flow Manager (TFM)•••Name of the system for transaction processing that the GSTPA is planning to implement. It will be utilized for cross-border securities trade matching operations.
[*6] ISO15022•••A data field dictionary for securities messages. This ISO standard defines the data fields composing the electronic messages exchanged by securities industry players. It was drawn up to provide a standardized message format for electronic securities transactions. The registration authority for ISO 15022 is SWIFT, an international financial network management institution.
[*7] Delivery versus payment (DVP)••• A method of securities transaction settlement whereby the security is delivered at the same time payment is made. Compared to other methods that separate the processes of delivery and settlement, this approach is capable of significantly reducing settlement risk.
[*8] Straight through processing (STP)••• Concept of encouraging electronic transaction processes and achieving improved operational efficiency through electronic system and network interconnections.
[*9] Middleware••• Generic term for network messaging software layer that
converts between message formats, handles message routing, and performs
protocol conversion routines.
