With the upcoming T+1 settlement change, determining the right affirmations model will be critical in getting the most out of the new deadline.
Here’s what you need to know:
What is an affirmation and why is it important?
An affirmation is the process in which trade instructions and confirmations are verified by the two parties of the trade to allow for eventual settlement in the DTCC. With a shortened settlement cycle, the SEC has implemented certain rules to support best practices in a shorter time frame.
The SEC’s rule 15c6-2 promotes the completion of allocations, confirmations, and affirmations by the end of trade date for transactions between broker-dealers and their institutional customers. As a follow up, the SEC has also adopted a new rule requiring broker-dealers to either enter into written agreements as specified in the rule or establish and maintain written policies and procedures reasonably designed to address objectives related to rule 15c6-2 as soon as technologically practical.
How are trades affirmed?
There are two main approaches when it comes to how trades can be affirmed. One model engages a custodian for support across the affirmation process and the second model is direct affirmations, also known as self-affirmation, where the asset manager or financial institution (or a third party) affirms the trades directly.
Is regulatory reporting only required for SEC regulated firms? How do reporting requirements differ for direct affirmation vs custodian affirmations?
Yes, those firms who are Registered Investment Advisors (RIAs) are required to provide reporting on trade allocations and affirmations to the regulator. When managing direct affirmations, this will mean the affirming party will need to manage their records and provide them to the regulator when requested. With custodian supported affirmations, custodians can provide data on the custody perspective of the affirmation results, but the RIA still has the responsibility to answer the regulatory needs.
What is required of affirmation status reporting and what tools are being used to support?
Affirmation status reporting requires investors to consistently record and maintain records of allocations, confirmations, and affirmations, with each data point requiring a date and time stamp.
For those that are performing affirmations with a custodian like BBH, online reporting provides timestamps detailing the received instruction, the DTCC’s trade confirmation time from the custodian, when the trade was matched to a confirm, as well as when it was accepted.
What is a TradeSuite ID and what role do they play in the affirmation process?
Affirmations can only be completed if the party to the trades have a TradeSuite ID as this is the only mechanism in the U.S. market. This ID is required to code an account for affirmations at the custodian which allows the DTCC to match up electronic instructions between a buyer and a seller. When a broker sends a confirm to the custodian, they quote the Investment Advisor’s Trade Suite ID (amongst other details) for the trade in attempt to pre-match.
How do you set up a TradeSuite ID?
Clients can obtain a TradeSuite ID from DTCC. Without a TradeSuite ID, there is no opportunity for affirmation in the marketplace. TradeSuite IDs are a one-time set up that can used at all custodian banks to support the affirmations process.
Investments Advisors need to work directly with the DTCC to obtain a TradeSuite ID, BBH cannot apply for on behalf of a client to DTCC.
When is the U.S. affirmation cut off deadline and what are the benefits of affirming trades on time?
The DTCC cut off time for U.S trade settlement is 9pm ET. BBH’s instruction deadline is 7.30pm EST on T0 to allow for time to meet the DTCC 9PM EST T0 affirmation deadline.
TradeSuite IDs automate the communication of trade details between parties, allowing for accelerated settlement, and lower likelihood of failure to settle. Having the right affirmation process in place will encourage settling transactions on time, reducing the risk of higher costs or trade failures.
Next steps for affirmations under a T+1 timeline:
BBH recommends working with the DTCC to set up your own Tradesuite ID (where needed) so it is ready to use before the May 28th 2024 conversion date. This process may require testing before the conversion date as well as updated contact lists/trees in case of escalations or urgent support for trade processing around U.S. settlement deadlines.
