© DTCC DTCC Asset Services Update Dan Thieke Managing Director October 23 rd, 2012 1...

© DTCC

DTCC Asset Services Update

Dan ThiekeManaging Director

October 23rd, 2012

1[Classification]

© DTCC 2Confidential Treatment Requested by DTCC/DTC/NSCC/FICC Pursuant to the Freedom of Information Act

2

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)

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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


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Strategic Plan - Themes

1. 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

2. 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)

3. 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

4. Improve the Client Experience– Expand on implementation of CA browser and settlement web


© DTCC

Corporate Actions Reengineering

Infrastructure & Networks

* DTCC SMART NETWORK

SWIFT NETWORK

CustomizableSubscription Options

Flexible End of Day / Intraday Option (April, May 2012)

New Message Protocols (June 2012)

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

XBRL Technology

Pilot Issuers (Citi, BNY

Mellon)

Complete Build of Interface (March 2012)

Deploy XBRL Technology (July 2012)

Enhanced Delivery of Corporate Action

Data to Clients 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)

New Browser

Web Based (Corporate Action Announcements Deployed Nov 2011)

Replace aged PTS/PBS Corporate Action Applications (Starting Q2 2014)

One tool to manage all Corporate Actions from start to finish (Starting Q2 2014)

Eliminate aged processing methods


© 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

Progress to Date

ü

ISO 20022 New Data Model New Browser

Implemented ISO 20022 Corporate Action Announcements Implemented New Data Model Implemented New Browser Implemented Message Delivery over SWIFT Network

Nov 2011

Client Adoption Additional Clients adopting to ISO 20022 throughout 2012Jan 2012 -Ongoing

Pilot 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

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 GuideFeb 2012

Client Subscription Options

Flexible End of Day / Intraday Option New Batch Message Protocols: SMART (FTP/NDM) and SWIFT (FileAct)

Apr/May/June 2012

Market Practice Enhancements

Mandatory / Voluntary Indicator Project August 2012

ü

ü

ü

ü

ü

XBRL Implemented XBRL Functionality into Production July 2012 ü

Infrastructure Upgrades

Upgraded DTCC’s SWIFT-related network infrastructure and hardwareJune - August

2012

ü


© DTCC

201420132012

Phase III Distributions Timeline 2012 - 2014

Webinars, Documentation, & Training for Browser

ISO 20022 Pilot for Distributions Full Lifecycle ( Testing ) Sept

Dec

Participant Registration Process for new browser

Participant’s adoption of new browser

Deploy ISO 20022 Messages for Distributions Election

Jan - Mar

Jan - Mar

July - Dec

April 2014 Deploy New User Interface for Distribution Processing

Entitlements & Processing - Sample ISO 20022 Messages

Phase III Distributions Pilot Testing

Phase III Distributions Parallel Production

Testing2014 Full Deployment

Distributions Elections - Sample ISO 20022 Messages

Pilot Parallel ProductionTesting of ISO20022 Entitlements & Payments

Deploy ISO 20022 Distributions Entitlements & Payments (Q1)

Browser Available for Distributions Client Testing

ISO 20022 testing begins for inbound Distribution elections (test environment) Q3


© DTCC

Documentation & Mapping

For inquiries: [email protected]


© DTCC

Post Payable Adjustments - Background

• Structured Securities PPA’s decreased significantly from 2008- 2010

• 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

1010DTCC Confidential (Yellow)

© DTCC

Historical Experience

All Active Eligible Issues at DTC by Issuance Year

Post Payable Adjustment* Breakdown First Quarter 2012

Number of All Active Eligible Issues at DTC Year of Issuance 2012 Q1 PPAs by Issuance Year

Issuance Year Apx # of Issues Issuance Year # of PPAs*2005 and Prior 55K 2005 and Prior 3,560

2006 25K 2006 1,1922007 20K 2007 2,578

2008 to Current 9.5K 2008 to Current 648Total 109.5K Total 7,978

* Post-Payable Adjustments are calculated at CUSIP level by payment date

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43.21%

14.47%

31.29%

7.87%

2005 and Prior

2006

2007

2008 to Current

50.23%

22.83%

18.26%

8.68%

2005 and Prior200620072008 to Current


© DTCC

Current Experience

All Structured Products Post Payable Adjustments During June 2012 Total PPAs: 783

Less Than 90 DaysBetween 90 and 120

DaysBetween 121 and 180

Days Greater Than 180 DaysTotal PPAs 260 59 107 357Percentages 33.21% 7.54% 13.67% 45.59%

* Post-Payable Adjustments are calculated at CUSIP level by payment date

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33.21%

7.54%13.67%

45.59%

<9090 - 120121 - 180>180


© DTCC

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

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

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


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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


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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

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

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

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


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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


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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

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.


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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

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


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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 DTCC Asset Services Update Dan Thieke Managing Director October 23 rd, 2012 1...

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