In an effort to automate settlement for more transactions and prepare the securities industry for an even shorter settlement cycle, the Depository Trust Co. is proposing to bring commercial paper trades into its Institutional Delivery system.
Brokers now use ID to confirm institutional equity trades to money managers they trade for, or with custodian banks that act on behalf of money managers. The investors, in turn, affirm the broker messages, which triggers settlement at DTC.
Most commercial paper already settles at DTC on trade date through the depository's delivery-versus-payment mechanism. But though the DVP system is automated with many banks' and brokers' in-house trade capture technology, the process requires selling banks and firms to initiate delivery of the paper to get paid through DTC. By bringing commercial paper trades through ID, the depository is proposing to automate settlement once the buyer of the paper sends an electronic message to affirm the seller's trade confirmation.
Joseph Arney, a vice president at the depository, said that the move would bring a new delivery mechanism to the CP side of the Street. However, "it's like apple pie and parenthood. It's not that people don't want it, but when," he said.
Arney said that commercial-paper issuing agents are unfamiliar with the ID system, and ID operations in firms are used to acting in a T+3 environmentnot trade-date settlement. "This will take a significant effort on the part of all the players to make it work," he said.
Several direct commercial-paper issuers, such as American Express Credit Corp., Ford Motor Credit Co. and Chevron Corp., have begun to send electronic confirmations to buyers to eliminate faxes and mailings, but buyers have yet to affirm the trades for settlement at the depository, Arney said.
DTC approached the largest of the Street's commercial-paper issuing and paying agents recently with a proposal to affirm as well as confirm CP trades, and is gathering their responses. Last year, the depository cleared and settled 99 percent of outstanding U.S. commercial paper, averaging CP valued at $764 billion on deposit at any one time.
Large paper-issuing agents included in the discussions with DTC were Goldman Sachs, Merrill Lynch, Smith Barney, Bankers Trust, Chase Manhattan Bank, The Bank of New York and State Street Bank & Trust.
Banks and brokers agreed that T+1 settlement of commecial paper over ID could prepare the industry for settling equity trades faster, but they also raised concerns about resources. One bank operations executive said that the commercial paper group expressed apprehension about the proposal, since year-2000 issues at most institutions are still far from resolved. But there are other concerns, too.
Some banks and firms have architected their technology to handle client transactions in omnibus instead of individual accounts, making the CP settlement through ID messaging troublesome. "Auto-delivery has its problems," said one of the commercial paper agents.
He said that currently his operation does not deliver off a trade until he knows it is in-house, but under the DTC proposal that may not be possible. With a buyer, a seller and an agent in between, under the ID scenario the agent risks delivering the seller's paper before all the information is in.
