SettleSmart for Capital Markets

SettleSmart helps with Trade Settlement exception management and early fail detection using Prediction models

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Inspiration

SettleSmart is a Trade Settlement exception management solution that helps investment and brokerage firms effectively manage Settlement fails.

Settlement “exception” refers to a trade transaction that can potentially either fail due to certain instruction mismatches on the buy or sell side of the trade, where trade has to be settled on Trade date+2 days in general (called T+2 cycle).

There a huge demand for end-to-end automation in settlement processing, however with multiplying asset classes, venues and cross border trades the gap is widening leading to increase in Settlement Fails

A key regulation is coming into force from Feb 2022 named “CSDR’s Settlement Discipline Regime” it aims at bringing high levels of standardized settlements by imposing cash penalties and mandatory buy-ins for failed trades.

Research indicates that roughly 5% of trades have breaks in post trade settlement and a failure rate of just 2% results in costs and losses to the tune of 3 billion dollars.

SettleSmart combines Pega’s powerful smart investigate framework with machine learning and intelligent automation capabilities to predict trade failure and resolve exception in an automated fashion while being in total control of the day-to-day trade outstanding.

What it does

Following are key features of the solution implemented

  1. Using Machine learning model for early detection of Potential Settlement Failures, instead of delayed exception leaving little or no room to avoid penalties
  2. Settlement Exceptions life cycle handling, both Straight through process and Manual processing
  3. Rich Dashboard & Analytics, which gives Settlement Manager real time view of what’s going on due to limited time constraints of T+2 settlement cycles, T+7 Mandatory buy-in.
  4. Duplicates processing and actions, if exception cases are created for same Trade Reference
  5. Single pane of glass view to understand what’s happening with Exception
    • Trade and Settlement details, get a view of various parties involved in Trade settlement
    • SOX compliance – for IN / OUT messages, with respect to Exception
    • CSDR view for penalty calculations, after T+2 day
  6. Swift messaging In / Out for Market Interoperability with various financial institutions
  7. Mandatory Buy-In cycle initiation, if Trade is failed to settle within given timelines

How we built it

One of the primary building block of the solution is 'Smart Investigate for Securities' framework, which has predefined process flows, SWIFT messaging infrastructure for market Interoperability, duplicate case handling, data model for various entities like Security, Settlement, Trade, Parties (like Security info, Clearing House info, CounterParty both Buy/Sell) etc

For use case of Potential Failure identification, we used Customer Decision Hub for Predictive analytics on Trade data.

Real time integration with NASDAQ and NYSE for pulling intraday trade prices to keep the Risk management team on the top of the exception and overall live risk position

In addition to these, to fulfill various use case categories like Dashboard reports, 360 view of case, CSDR, Mandatory Buy-In etc., we have used various rich features like Reports, charts, Case management, UI, Decision rules, Service Level Agreement, Get most urgent etc.

Challenges we ran into

  • Being able to develop a deep understanding of the nuances of a very complex ecosystem of Trade Settlement
  • Pulling real life and enough trade related data for building the predictive model fail identification from Kaggle and UCI portals
  • Building a regression model to predicting the outcome of the trade failure
  • Pulling real time Stock Price and calculating live risk position at any given moment
  • Extending ‘Smart Investigate for Securities’ (SI for Securities) for the needs of SettleSmart, as ‘SI for Securities’ doesn’t fully cover wide range of features, we are looking for.

Accomplishments that we're proud of

The team is very proud of the fact that it’s one of the very few solutions directly positioned for the Feb 2022 CSDR regime and BFS Industry Solution Group (ISG) has shown promise in taking this to the market.

From the first request where the team tried to understand, if Pega would be a fit to bringing a working solution to the recognition of the Capital Market leaders in Cognizant in 3 month is some we are very proud of.

What we learned

  • Truly industry leading capabilities can be achieved with just a handful of motivated team members who have the right guidance and support on business and technology front
  • Once again Pega’s ability to spin applications using its industry frameworks make it extremely quick to demonstrate business value, this has been a keen feature in turning the needle with BFS Capital Markets team

What's next for Settlesmart - Trade Settlement Exception management system

  1. SettleSmart is currently under review by BFS Capital Markets and ISG team to be introduced to a friendly Banking client to test out the features
  2. Secure resources/investment to build out the larger MLP aspect for a comprehensive market entry platform
  3. Go to market with a fully developed MLP min 6 months in advance of the Feb 2022 CSDR regulatory guidline
  4. Further enhance individual modules
    • Fails Prediction : Enhance the Settlement Failure Prediction model based on the actual historic Trade data
    • Enhance STP : Further reduce the manual intervention to resolve the Settlement failure case and enhancing the Straight through processing for additional scenarios.
    • SWIFT/ Network Integration: Enhance support to Various MT and SWIFT messages to meet the integration needs with external Trading systems, Clearing house and Custodian systems.

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