Depository Trust Co. Pilots International Institutional Delivery System

The International Institutional Delivery system developed by the Depository Trust Co. of New York entered pilot mode in mid-November. Backed by a powerful group of broker/dealers, global custodians and institutional clients, the IID system is DTC's answer to trans-border clearing and settlement systems offered by I.P. Sharp Associates and FITEL.

IID pilot participants include brokers Merrill Lynch, Salomon Brothers, Morgan Stanley and First Boston; global custodians Chase Manhattan Bank, Bankers Trust Co., Citibank, Boston Safe Deposit, State Street Bank and Northern Trust; and money managers Fidelity and Capital Guardian.

A variation on the DTC's domestic ID system, IID is intended to reduce the notoriously high fail rate and processing costs associated with foreign securities trading. DTC believes these improvements can achieved through standardization and automation of what is now often a manual, facsimile and telex-based process.

"We're an electronic mailbox," says Ferro, "taking in data from brokers, sending it out to customers, acknowledging instructions, and sending out deliver/receive authorizations to global custodians." All output from IID will be electronic -- no paper, no mag tapes. The fail rate for foreign securities transactions has produced numerous appeals for automation and standardization of trade confirmation and settlement practices.

Although IID facilitates the steps leading to settlement, initially it will not have any linkages to foreign clearing and depository organizations. DTC supports the initiatives of sister company National Securities Clearing Corp., to establish bilateral settlement linkages through its International Securities Clearing Corp. subsidiary. "Down the road," says DTC project leader Russell Ferro, "we would certainly entertain feeding into those bilateral settlement linkages."

While DTC will not solicit foreign participation, and initially will have no contact with foreign entities, it will accept foreign participation. The most likely scenario for participation by foreign entities will begin with the foreign affiliates of domestic brokers.

DTC is positioning itself as the not-for-profit alternative in foreign trade confirmation systems. "As far as the mechanics of the process," says Ferro, we don't differ very much from FITEL or I.P. Sharp. They exported what DTC was already doing locally." However willing DTC may be to accept foreign participation, it is not willing to accommodate foreign ownership of the user-owned organization.

The obstacles peculiar to foreign securities trade confirmation and settlement include non-standard settlement dates, non-standard periods, non-standard or non-existent securities numbers, language, and time differences. These are the issues DTC is attempting to solve with the IID system.

Domestic ID, a batch oriented system, works fine in the context of a five-day settlement cycle, but shorter settlement cycles -- as in Japan, Germany and Singapore -- and time differences demand intra-day capability.

Where the domestic ID system has a single 2 a.m. cut-off, IID will accept transactions throughout the day and do batch processing at each of three additional daily cut-offs: 10 a.m., 2 p.m. and 6 p.m. Within one hour of each cut-off, IID will generate for its customers confirmations and details of the trades as submitted by the broker. After customers review this information, they will acknowledge trades back to DTC will then produce deliver/receive instructions throughout the business day.

Aside from the three cut-off times for batch submitters, the IID system will accept transaction input online through its dedicated network of 3270 terminals or PCs with 3270 emulation. Trades input online will be processed as they are received, updating the central database immediately and making confirmations available 15 to 30 minutes later.

On the sensitive issue of securities numbering system standardization, DTC is taking a determinedly ambiguous stance, nominally backing the ISIN standard, recommending SEDOL for the immediate future, but accepting transactions under any identifiable numbering system.

The ISIN numbering standard preserves local identifiers within a 9- digit format, preceded by a two letter country code and followed by a check digit for parity. Although ISIN has gained nodding support from SWIFT, NSCC, ISCC, Midwest Securities Clearing Corp., Euro-clear and Cedel, it is not widely used. SEDOL, the standard supported by the International (London) Stock Exchange, is used by most money managers and global custodians in the U.S., according to Ferro.

To take the "ugly American" appearance off the IID initiative, the DTC helped develop the ISO format for sending deliver/receive instructions to global custodians and brokers. ISO formatted messages can be forwarded directly to a foreign subcustodians without major changes.

DTC hopes to develop a securities numbering system conversion utility and is evaluating databases from both Telekurs and Extel for use in the system.