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Pioneering securities tracking to tackle settlement fails

Pioneering securities tracking to tackle settlement fails

30 January 2024 | 5 min read

As the costs of settlement fails rise, the industry is increasingly using the Unique Transaction Identifier (UTI) to enhance end-to-end transparency across the securities settlement chain.

When you order a lift through a rideshare app, you can track just about every step of the journey in real time. Not only does the app tell you when your car will arrive, but it notifies you if there are any delays or problems along the way.

Yet our ability to monitor securities settlement transactions, which have a much higher value, has – until recently – been quite limited. This lack of transparency increases the risk of trade fails, as problems may go undetected until it’s too late.

Trade fails not only cost the industry billions every year, but they exacerbate market risk as well.

Fails happen for several reasons. While higher transaction volumes triggered by volatility are a major factor, operational issues are also to blame. These include things like issues with inventory management or matching discrepancies caused by inaccurate or incomplete standing settlement instructions.

Simon A.X. Daniel
By having greater visibility into the transaction chain, you can identify and resolve bottlenecks or settlement lifecycle issues more quickly. This reduces costs and operational risks arising from potential settlement fails.
Simon Daniel Product Manager, Swift

Eliminating trade fails is a matter of urgency

The number of fails is expected to increase as more countries roll out T+1 settlement cycles. And addressing this is now a major focus across the industry.

“With the US, Canada and Mexico adopting T+1 in May 2024, there will be a lot less time to resolve trade and settlement exceptions,” said Ana Lotharius, Director, Institutional Trade Processing Product Management & Americas Industry Relations, Depository Trust & Clearing Corporation (DTCC), speaking at Sibos 2023 in Toronto.

Other markets, including the EU and UK, are consulting on T+1. India, which phased in T+1 in January 2023, is already talking about potentially introducing T+0 from October 2024.

“In the US, under T+1, you will have one day to allocate, confirm and affirm a trade, and then send it to the DTCC before the 9pm cut-off time. If you’re an asset manager who does the bulk of your executions at market close, then you will have five hours to get those steps done. That will not be possible for firms who are reliant on manual processes,” added Lotharius.

Regulation is also expected to make trade fails even more costly, particularly if settlement efficiency doesn’t improve. “The threat of mandatory buy-ins is looming under the Central Securities Depositories Regulation Refit,” said Mike Clarke, Global Head of Product Management and Head of the UK&I Region, Deutsche Bank. “Our focus now has to be on driving down the number of trade fails as much as we can.”

Automation is essential

Moving away from manual processes will be essential to avoid settlement fails and fines – especially in a T+1 environment.

One way you can achieve better automation is through adopting the Unique Transaction Identifier (UTI).

“The UTI is an alpha-numeric reference that is unique across all trading counterparties and generated during the trade confirmation process,” said Simon A.X. Daniel, Securities Product Manager, Swift. “Once generated, both buyer and seller have the same reference and this is passed down the custody chain.”

The UTI is not a new concept, and is already used to report details of derivatives and securities financing transactions to trade repositories under existing EU regulations.

By extending it to settlement transactions, it allows all parties in the settlement chain – fund managers, brokers, custodians, and CSDs – to track and monitor trades. “Similar to CUSIPs, the UTI is a common language, which brings transparency into the lifecycle of the entire trade,” said Sam Farrell, North America Head, Torstone Technology.

How the UTI can help reduce fails

“By having greater visibility into the transaction chain, you can identify and resolve bottlenecks or settlement lifecycle issues more quickly,” explained Daniel. “This reduces costs and operational risks arising from potential settlement fails.” 

The UTI is therefore critical in helping automate the post-trade operating model.

It will also make it easier to transmit and track transactions between traditional and next-generation technologies, enhancing interoperability and paving the way for future innovations.

Industry-wide adoption is key

“The key to the UTI’s success is using it. And we should all look to adopt it,” said Deutsche Bank’s Clarke.

“We’re putting the UTI at the heart of our transformation strategy over the next few years to make sure it is used in every market where we operate in, as we make the transition to shorter settlement cycles. To make this work for us, it has to be driven by adoption throughout the value chain,” he continued.

After all, you’re only as strong as the slowest link in your transaction chain. Which is why all firms should be looking at the significant benefits that the UTI can bring to them.

“We encourage financial institutions who are currently using the UTI to be public about their use cases and highlight the advantages which they have reaped from it,” noted Farrell. “This will be vital to moving the argument for the UTI forward.


This article first appeared in TabbFORUM in January 2024.


The Unique Transaction Identifier and its value in securities settlement

Learn more about the UTI and how it can benefit you.