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DTCC Update July 2009

DTCC Update July 2009. Shareholder Services Association. Lori Trezza. DTCC Confidential. 1. Agenda. Dematerialization Update Security Position Reports Cost Basis Corporate Actions: Improving Issuer to Investor Communication Launch of Issuer Services. DTCC Confidential. 2.

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DTCC Update July 2009

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  1. DTCC UpdateJuly 2009 Shareholder Services Association Lori Trezza DTCC Confidential DTCC Confidential 1

  2. Agenda Dematerialization Update Security Position Reports Cost Basis Corporate Actions: Improving Issuer to Investor Communication Launch of Issuer Services DTCC Confidential DTCC Confidential 2

  3. Any Relationship to Joe Trezza? DTCC Confidential DTCC Confidential 3

  4. What has Joe Been Doing? “Honey Do” List 1. Paint 2. Organize 3. Install lights DTCC Confidential DTCC Confidential 4

  5. Trying Alternate Careers Joe the Golfer DTCC Confidential DTCC Confidential 5

  6. Trying Alternate Careers Joe the Carpenter and Gardener DTCC Confidential DTCC Confidential 6

  7. Trying Alternate Careers Joe the Master Griller DTCC Confidential DTCC Confidential 7

  8. Dematerialization DTCC Confidential DTCC Confidential 8

  9. Dematerialization Milestones – 2008 October 31st, 2008 Implemented enhancement to help reduce the number of DRS rejects and subsequent re-work December 2008 DTC SEC Rule Filing to eliminate the ability to receive a certificate on a DRS eligible and participating issue from DTC was approved NYSE SEC Rule filing to rescind ban on the unwritten policy with regards to certificate issuance fees DTCC Confidential DTCC Confidential 9

  10. Dematerialization Milestones - 2009 January 9, 2009 DTC eliminated the ability to receive a certificate on a DRS eligible and participating issues from DTC July 1, 2009 Eliminate the certificate request option on issues that are DRS eligible but not participating If a certificate is required, firms can process a Rush/Exception WT only $500 per request from DTC (plus any additional fees charged by the agent) DTCC Confidential DTCC Confidential 10

  11. Results Default to Statement For the month of May, 100% of all requests on DRS-eligible and participating issues were processed as statements In total, 86% of all WT requests were processed as statements DRS eligible but not participating issues accounted for an additional 4% of WT requests DTCC Confidential DTCC Confidential 11

  12. Current DRS Statistics – as-of June 29 Over 6,900 equity issues now DRS eligible DRS Statement or Certificate – 5,498 issues (79%) DRS Statement only – 403 (6%) DRS eligible but not participating – 1,014 (15%) DTCC Confidential DTCC Confidential 12

  13. Additional Milestones December 1, 2009 The elimination of the Direct Mail by Depository (DMD) Service for all issues Participants will either pick up certificates at DTC premises or wait to receive requested items through DTC’s Interface package This change does not impact the DMA service DTCC Confidential DTCC Confidential 13

  14. Security Position Reports DTCC Confidential DTCC Confidential 14

  15. Security Position Reports “Improving Client Experience” Pre-season communication in late summer/fall 2008 very favorably received SPR Web Enhancements Screen layout and text improvements More user tools and specific contact information provided Positive impact from steps taken to improve SPR web customer experience began to show in 2Q ’08 Staff training and customer service reinforced at weekly meetings; e-Surveys reviewed and shared on a daily basis DTCC Confidential DTCC Confidential 15

  16. Security Position Reports “More Proactive & Timely Communication” Pre-season email communication in late summer/early fall advise firms of their registered users and third party agent authorization status’ Move to new Point of Sale/Service billing process in August 09 Issuers / Trustees will be charged at time service is provided via credit card Requester will know at the time order is attempted whether it can be processed or if updated ePayment information is needed from Issuer / Trustee Added interfaces to Mediant and Inveshares DTCC Confidential DTCC Confidential 16

  17. Cost Basis Reporting DTCC Confidential DTCC Confidential 17

  18. Cost Basis Reporting The Emergency Economic Stabilization Act of 2008 contains requirements for financial intermediaries to perform cost basis reporting. The requirements will be phased in over a three year period beginning in 2011. The effective dates of these phases are as follows: January 1, 2011 for securities transactions (e.g, equities) January 1, 2012 for mutual funds and dividend reinvestment plans January 1, 2013 for financial instruments such as debt securities and options DTCC Confidential DTCC Confidential 18

  19. Cost Basis Reporting – Key Challenges Recordkeeping Existing systems will need to be enhanced to record and store basis information, including bifurcating books to distinguish between positions acquired pre and post legislation effective date. Upgrading Calculation Algorithms and Affected Systems Enhancements begin with upgrades to cost basis calculators to be compliant with the new regulations and can extend into many other systems DTCC Confidential DTCC Confidential 19

  20. Cost Basis Reporting - Key Challenges Account Transfers Financial intermediaries systems’ also require the ability to transfer and receive cost basis information on any financial transactions that involve the transfer or movement of a security from one financial intermediary to another. Corporate Action Data Issuers will be required to provide a description of the action, the quantitative effect on basis and contact information, within 45 days of the action. DTCC Confidential DTCC Confidential 20

  21. Cost Basis – DTCC Role Account Transfers Several industry committees are working with DTCC to define business requirements Input from transfer agents, SIFMA account transfer group, mutual funds Cost Basis Reporting Service (CBRS) will be expanded as the “hub” for the industry Corporate Action Data Possible opportunity to assist issuers in announcement area DTCC Confidential DTCC Confidential 21

  22. Improving Issuer to Investor Communications Corporate Actions DTCC Confidential DTCC Confidential 22

  23. Statement of Direction (DTCC, SWIFT and XBRL US) The goal is to promote straight‐through processing (STP) of information from issuers through to investors and substantially reduce the market risks and costs associated with the corporate action announcement process. To meet this goal DTCC, SWIFT and XBRL US have joined forces to improve issuer to investor communications for corporate action announcements in the U.S. market: XBRL will be implemented to enable issuers and offerors to identify (“tag”) key corporate actions data in offering documents; XBRL tags used by issuers and offerors will be kept fully aligned with the data dictionary used by the industry under the ISO 20022 global standard, and DTCC will adopt the ISO 20022 global standard for corporate action messages to U.S. market participants DTCC Confidential DTCC Confidential 23

  24. Why the Focus on Corporate Actions? Corporate Actions continues to be one of the most risky and costly areas in financial services Estimated billions in losses due to misinterpretation of data Limitations in the Current Corporate Actions Messaging Standards E.g. Incomplete list of Event Types and Required Data No Unique Identifier for the event Inefficient dissemination of data Inefficient Regulation DTCC Confidential DTCC Confidential 24

  25. Why Should You Care? Your Shareholders Suffer Intent of offer is subject to misinterpretation and errors due to manual manipulation of data Offer details are not always disseminated timely Compressed timeframes for elections Higher transaction fees for investor due to manual processing DTCC Confidential DTCC Confidential 25

  26. Many Touchpoints in the Chain Issuer / Agent Sub-Custodian B Sub-Custodian A Prospectus CSD Data Provider Y Data Provider Y Exchange Data Provider Global Custodian J Portal Global Custodian K IM / AM DTCC Confidential DTCC Confidential 26

  27. Why Now? The Perfect Storm Customer Pressure With the need to do ‘more with less’, there is customer demand for solutions that offer high STP, that align with standards and that use a universal ‘unique ID’ Financial Market Turmoil Industry Initiatives Converging on ISO 20022 Perfect Storm XBRL Maturity With the economic down turn, there is an increased focus to reduce the risks and improve transparency through any means possible, including increased regulation SWIFT is driving the next generation standard, ISO 20022 which builds upon the success of ISO 15022, and DTCC’s ‘CA Re-engineering’ project will service the entire US market, will use new ISO 20022 messages in favor of its existing legacy files XBRL has been institutionalized with the SEC mandate for the GAAP quarterly financial reporting, and with the replacement of EDGAR with XBRL-based IDEA system. XBRL for CAs, based upon ISO20022, is a solution for issuers to electronically tag data within reports directly at the source. Enforcement may be garnered via regulatory mandate DTCC Confidential DTCC Confidential 27

  28. Step 1- Drive the ‘next generation’ industry standard for corporate actions ISO 20022 creation Current ISO 15022 standards, in its present form, does not cover all CA event types, does not cover all necessary data elements and is ‘too flexible’ SWIFT Standards, infrastructure providers and Market Practice Groups are actively working with ISO to implement the next generation standard, ISO 20022 The standard will be global, all-encompassing and holistic. Missing data elements will be added, and there are a handful of structural, or level, changes that will be needed ISO 20022 enforcement DTCC will become an early adopter of ISO 20022 as part of ‘CA Re-engineering’ – a major, multi-year, project spanning announcements, elections to payments Enforcement of the standard will be achieved as existing legacy files will be decommissioned on, or before, 2015, after running in parallel with the new ISO messages DTCC Confidential DTCC Confidential 28

  29. Step 2- Implement a registration system to issue a ‘Unique ID’ and allow additional validation Unique ID DTCC will create a ‘unique ID’ process to explicitly label all corporate action announcements from the beginning, thus eliminating ambiguity in the ‘update’ process and the identification of an event between all parties It will act in the same way that static security data is referenced, e.g. ISIN We will build a registration system which will issue a Unique ID as part of the XBRL process Additional validation for the Issuer The XBRL taxonomy will map with the ISO 20022 standard and, as such, automatically includes some validation, e.g. data types The registration system will allow for additional validation, if needed by the Issuer, e.g. are rates within historical norms and are dates logical Validation exceptions will be flagged back to the issuer before allowing dissemination of the event to the open market DTCC Confidential DTCC Confidential 29

  30. Step 3- Drive issuer-based data tagging with XBRL The XBRL revolution DTCC is driving the implementation of XBRL for corporate actions, enabling issuers to electronically ‘tag’ data from within MS Word, when preparing the source document The tagged data is ‘embedded’ within the saved pdf or doc file The issuer, as they write the press release or prospectus, follows the same process as they do today, except that they tag the key data DTCC, SWIFT Standards and ISO are working with XBRL US to seamlessly align XBRL taxonomy with ISO 20022 XBRL enforcement DTCC, SWIFT and XBRL US will leverage the expanding adoption of XBRL in the US, a result of the SEC mandate for GAAP quarterly financial reporting starting with the largest 500 public companies in June 2009, to promote the implementation of the XBRL corporate actions taxonomy DTCC Confidential DTCC Confidential 30

  31. Alignment to deliver sizable benefits, from issuer to investor Benefits for Issuers • Ensures that the intent and content of the originating offer are clear to the investor, without the fear of misinterpretation due to manual manipulation • Ensures that the details are conveyed in a timely fashion • Issuers will incur marginal additional effort in tagging the data, but will follow exactly the same process as they undertake today Benefits for Financial Services • Ensures that interpretation, re-keying and manual exceptions are significantly reduced • Results in lower risk exposure caused when an investor makes a decision based on incorrect information, estimated at ~$10B pa1 • Reduces need for manual overhead, estimated at estimated at ~$10B pa2 • Lower costs and risks will lower fees to investors Benefits for Investors • Allows investors to make decisions with guaranteed accurate information from ‘source’ document without 3rd party manual interpretation • Allows for more time to respond as Custodians & IMs artificially compress deadlines to compensate for the time they need to manually process elective information • Lowers costs as transaction fees should reduce Implementing ISO 20022, a Unique ID and XBRL will eliminate significant costs and risks, and realize STP for corporate actions DTCC Confidential DTCC Confidential 31 Note 1: Oxera: “Corporate Actions: What are the Risks?”, May 2004. Extrapolation to USD by DTCC Note 2: CityIQ “Global Study of the Corporate Action Marketplace”, 2008. Analysis by DTCC

  32. What Have We Done Kick off Conference held on May 28th, in NYC entitled: Corporate Actions 2009: Improving Issuer-Investor Communication Key sponsors of the event were DTCC, SWIFT and XBRL US Brought representatives from the whole Corporate Action Announcement chain with a key note panel: Jeff Morgan, President & CEO, NIRI David Blaszkowsky, Director of the Office of Interactive Disclosure, Securities and Exchange Commission Donald Donahue, Chairman & CEO, DTCC Craig Dudsak, Managing Director, Global Transaction Services - Global Custody, Citi Julia Warren, Senior Managing Director, New York Life Investments Conference supplement and more details can be found at: http://www.dtcc.com/products/gca/improving_communications.php?lpos=lob_message&lid=globalCorporateActions_index.php DTCC Confidential DTCC Confidential 32

  33. What is Next Overall agreement to continue the dialogue Create working groups to develop a business case, representing all constituents, to bring the current paper dissemination process into the electronic age DTCC Confidential DTCC Confidential 33

  34. Launching “Issuer Services” Objectives: Strengthen Relationships Creation of Issuer centric Website Identify opportunities where DTCC can add value Come Talk With Us . . . . DTCC Confidential DTCC Confidential 34

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