Transcript Document

DTCC Asset Services Update
Dan Thieke
Managing Director
October 23rd, 2012
[Classification]
© DTCC
1
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 20022 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)
Confidential Treatment Requested by DTCC/DTC/NSCC/FICC Pursuant to the Freedom of Information Act
© DTCC
2
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)
© DTCC
3
Strategic Plan - Themes
1.
2.
3.
4.
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 20022 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)
© DTCC
4
Corporate Actions Reengineering
Adopt & Support Market Practice






Maintenance of a Global Standard
Enhanced Data Elements
Schema Validation
Published updated ISO 20022 Adoption Guides
(Feb 2012)
Published SR 2012 Schemas & Documentation
(Feb 2012)
Present at Industry Forums
 ISITC
 XSP Conference
 SIFMA Corporate Action Forums
New Browser




Infrastructure &
Networks
* DTCC SMART NETWORK
 SWIFT NETWORK
Customizable
Subscription Options

Flexible End of Day / Intraday
Option (April, May 2012)

New Message Protocols
(June 2012)
Web Based (Corporate Action
Announcements Deployed Nov 2011)
Replace aged PTS/PBS Corporate Action
Applications (Starting Q2 2014)
Enhanced Delivery
of Corporate Action
Data to Clients
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)
Implement ISO 20022 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)
© DTCC
Client Facing Improvements
ISO 20022 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 20022 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)
© DTCC
Progress to Date
 ISO 20022
 New Data Model
 New Browser




 Pilot
Implemented ISO 20022 Corporate Action Announcements
Implemented New Data Model
Implemented New Browser
Implemented Message Delivery over SWIFT Network
Nov 2011

 Pilot Firms Receiving ISO 20022 messages from DTCC Production System
 Three (3) Pilot Firms have gone live with ISO 20022 messages in 2012
Nov 2011 Ongoing

 Client Adoption
 Additional Clients adopting to ISO 20022 throughout 2012
Jan 2012 Ongoing

 Updated
Message Client
Documentation
 Published Updated ISO 20022 Message Specifications, Schemas and “Deltas”
to Support Annual SR 2012 Changes
 Published Updated Client ISO 20022 Summary Guide
Feb 2012

 Client
Subscription
Options
 Flexible End of Day / Intraday Option
 New Batch Message Protocols: SMART (FTP/NDM) and SWIFT (FileAct)
Apr/May/June
2012

 XBRL
 Implemented XBRL Functionality into Production
July 2012

 Infrastructure
Upgrades
 Upgraded DTCC’s SWIFT-related network infrastructure and hardware
June - August
2012

 Market Practice
Enhancements
 Mandatory / Voluntary Indicator Project
August 2012

DTCC Confidential (Yellow)
© DTCC
Phase III Distributions Timeline 2012 - 2014
Phase III Distributions
Parallel Production
Testing
Phase III Distributions
Pilot Testing
2012
2013
2014 Full Deployment
ISO 20022 Pilot for Distributions Full Lifecycle ( Testing )
Sept
Entitlements & Processing - Sample ISO 20022 Messages
Webinars, Documentation, & Training for Browser
Dec
Distributions Elections - Sample ISO 20022 Messages
Pilot Parallel ProductionTesting of ISO20022 Entitlements &
Payments
Jan - Mar
Deploy ISO 20022 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 20022 testing begins for inbound Distribution
elections (test environment)
2014
Deploy ISO 20022 Messages for Distributions Election
Q3
April 2014
DTCC Confidential (Yellow)
Deploy New User Interface for Distribution Processing
© DTCC
Documentation & Mapping
For inquiries: [email protected]
DTCC Confidential (Yellow)
© DTCC
Post Payable Adjustments - Background
• Structured Securities PPA’s decreased significantly from 20082010
• 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
DTCC Confidential (Yellow)
10
© DTCC 10
Historical Experience
All Active Eligible Issues at DTC by Issuance
Year
Post Payable Adjustment* Breakdown First Quarter
2012
8.68%
7.87%
18.26%
50.23%
22.83%
2005 and Prior
43.21%
31.29%
2006
2005 and Prior
2006
2007
14.47%
2008 to Current
2007
2008 to Current
Number of All Active Eligible Issues at DTC
Year of Issuance
Issuance Year
2005 and Prior
2006
2007
2008 to Current
Total
2012 Q1 PPAs by Issuance Year
Apx # of Issues
55K
25K
20K
9.5K
109.5K
Issuance Year
2005 and Prior
2006
2007
2008 to Current
Total
# of PPAs*
3,560
1,192
2,578
648
7,978
* Post-Payable Adjustments are calculated at CUSIP level by payment
date
DTCC Confidential (Yellow)
© DTCC
11
Current Experience
All Structured Products Post Payable Adjustments During June 2012
Total PPAs
Percentages
Less Than 90 Days
260
33.21%
Between 90 and 120
Days
59
7.54%
Between 121 and 180
Days
107
13.67%
Total PPAs: 783
Greater Than 180 Days
357
45.59%
33.21%
45.59%
<90
90 - 120
7.54%
13.67%
121 - 180
>180
* Post-Payable Adjustments are calculated at CUSIP level by payment date
DTCC Confidential (Yellow)
© DTCC
12
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)
© DTCC
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)
© DTCC
14
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)
© DTCC
15
FATCA
• FATCA stands for the “Foreign Account Tax Compliance Act”
which became law on March 18, 2010. 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)
© DTCC
16
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)
© DTCC
17
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)
© DTCC
18
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)
© DTCC
19
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# 0680-1, B# 0719-12 and B#1182-12
for additional information
DTCC Confidential (Yellow)
© DTCC
20
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)
© DTCC
21
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)
© DTCC
22
French Financial Transaction Tax
• March 14, 2012, the French Parliament adopted a Finance Bill
n°2012-354 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)
© DTCC
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)
© DTCC
24
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)
© DTCC
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)
© DTCC
26
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 Q4 2012
– 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)
© DTCC
27