Post-Trade Processing: Explained

The Lifecycle of a Trade

• Pre-Trade: This stage involves client onboarding, transaction cost analysis, and pre-trade risk controls. Well-implemented client onboarding can help institutions develop strong client relationships, minimize risk, and satisfy regulatory requirements.
• Execution: With the advent of technology, most trading now takes place electronically. Electronic communication enables buyers and sellers to execute orders in fractions of a second, regardless of their geographical location.
• Clearing and Settlement: After a trade is executed, the next steps involve clearing and settling the trade. This process ensures that the trade details are accurate and complete before settlement. The National Securities Clearing Corporation (NSCC) plays a pivotal role in this stage, providing clearing, settlement, risk management, central counterparty services, and guarantees completion for certain transactions involving equities, corporate and municipal debt, American depository receipts, exchange traded funds (ETFs), and unit investment trusts (UITs).

Key Players in Post-Trade Processing

• DTCC (Depository Trust & Clearing Corporation): DTCC is a leading player in post-trade processing. It clears and settles virtually all broker-to-broker equity, listed corporate and municipal bond, and unit investment trust transactions in the U.S. stock market. DTCC's NSCC provides comprehensive services from pre-trade to trade capture, including trade processing and settlement through DTC or other settlement locations.
• ALERT: ALERT is an electronic alerting system that facilitates the communication of settlement instructions between buy-side and sell-side clients. It ensures that sell-side clients receive updates on settlement instructions from the buy-side via an electronic alerting process, expediting processing by linking buy-side account codes to sell-side internal account numbers.
• TradeSuite ID: This is a U.S. domestic industry-standard post-trade processing service that automates the electronic distribution of trade details between counterparties. It facilitates electronic settlement and regulatory compliance, making it a crucial tool for brokers and investment managers.

Trends in Post-Trade Processing

• T+1 Settlement Cycle: The move to a T+1 settlement cycle has significantly improved post-trade processing in the U.S. market. According to DTCC, the affirmation rate has increased to 95%, ahead of the recommended 90%, and fail rates have decreased compared to the T+2 settlement cycle. This transition has encouraged market participants to adopt best practices, reducing pre-settlement risk and improving liquidity.
• Automation and Efficiency: The industry is moving towards greater automation to streamline post-trade processing. Technologies like Real-Time Trade Matching (RTTM) enable dealers, brokers, and other market participants to automate the processing of fixed income securities trades throughout the trading day.
• Risk Management: Central bank services provided by NSCC mitigate risk by guaranteeing completion for certain transactions. This ensures that even in the event of a counterparty default, the transaction is completed, maintaining market stability.

Conclusion

Post-trade processing is a crucial component of the financial markets, ensuring that trades are executed smoothly and efficiently. The latest figures and data highlight the importance of automation, risk management, and industry standards in this process. Key players like DTCC, ALERT, and TradeSuite ID play a vital role in facilitating electronic settlement and regulatory compliance. As the market continues to evolve, the need for efficient post-trade processing will remain paramount, driving innovation and collaboration among industry participants.