IT Challenge: Settlement

The Challenge: For financial services firms, moving away from batch processing is still a challenge. The DTCC's new inventory-management system offers delivery flexibility and helps firms find efficiencies and increase automation in the settlement process.

When Richard Camardi, vice president and settlements manager at Jefferies & Company in New York, first heard about the new Inventory Management System (IMS) from the Depository Trust & Clearance Corporation (DTCC), his first thought was, "Leave me alone." But, when a colleague prodded him, he read a little more about it and was quickly converted. Now, Camardi spends his time spearheading its adoption and trying to get other broker-dealers on board.

As the DTCC's latest offering for the trust and settlements crowd, IMS introduces manufacturing and just-in-time delivery philosophies to broker-dealers in the management of their clearance and settlement cycle.

Think of all those trades waiting to be settled at the end of the day as inventory from the day's production or trading activity. The situation is similar to that of a manufacturer: Goods that were produced on the factory line during the first shift are ready to be delivered at the end of the day. While a manufacturer sends its inventory to various customers, a broker-dealer delivers its trades to the DTCC, where they go through the next stage of the process - clearing and settlement.

Thinking Outside the Batch

IMS is designed to break the current batch-cycle mentality that plagues the settlement process, in which everything currently is sent out in bunches with little thought to priority. According to company literature, IMS gives banks and brokerage firms greater control over their trade submissions for settlement by providing a broader selection of inventory-management options - including the ability to determine when and how the inventory is sent forward in the settlement process - something that has been lacking at the broker-dealer level.

"It allows you to customize what deliveries you would like to deliver and when," explains John Kiechle, director, DTCC project management. It does so by providing tools for firms to create profiles to help them manage the order and timing of their deliveries, which Kiechle says is a step forward in the industry's move toward greater straight-through processing.

Jefferies & Company's Camardi especially likes the flexibility IMS offers when it comes to managing his delivery roster. It allows him to bump important clients up the queue and manage the timing of deliveries better, he asserts. In addition, he can reintroduce items that were dropped and give them priority when they are reintroduced. "You want to get your drops back out there as soon as possible," he says. "It gives us the benefit of managing our inventory a little bit better than we've been able to in the past."

Another feature he favors is the ability to exempt certain stocks from the process by simply calling up a menu, so logistical problems can be avoided with such things as new or hot issues. In addition, "You can see the totals right on screen with this system, and it gives you a lot more flexibility to change from today to tomorrow if you see a change in business needs," he adds.

All this delivery flexibility, Camardi says, saves him money. "One of the things we saw right off was the ability to control our deliveries going out at night," he says. "One of the problems we had in the past was too many deliveries to CNS [continuous-net settlement] in the night cycle. For every 100-share piece [order] that would come in, there would be a delivery, and there would be a charge for it. IMS has helped us to reduce the number of deliveries and therefore the number of charges," Camardi says. He adds that it's about 25 cents cheaper to send items during the day than at night. Multiply that by 10,000 transactions, he notes, and the savings can be sizable. However, he explains, "It will vary depending on [a firm's] business."

The DTCC clears most of the trades completed on the major U.S. and regional stock exchanges and electronic communications networks (ECNs), which amount to more than $1.4 trillion in trades daily.

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