DTCC’s equities and fixed income clearing agency subsidiaries have a distinguished history of providing stability, soundness and certainty to the marketplace. Murray Pozmanter, Managing Director and Head of Clearing Agency Services at DTCC, sheds light on several new initiatives that will further mitigate risk for the industry and help protect the stability of the financial system.
Is the continued focus on driving down risks in post-trade processing affecting the development of new clearing services?
It is definitely shaping our thinking and approach to product development. For instance, we’ve seen an emphasis in recent years on mitigating risks resulting from technology glitches that could produce widespread repercussions on the financial markets. In particular, the Securities Exchange Commission (SEC) has made the development of pre- and post-trade risk controls an industry priority. These types of tools represent a critical first and second line of defense to protect financial stability. At DTCC, we’ve been able to use our unique position in the marketplace to develop a new tool that serves as an early warning system to alert firms to unusual or unintended trading activity across the equity markets.
The tool, DTCC Limit Monitoring, is designed to reinforce checks and balances at the back-end of the trade lifecycle while providing a more holistic view of broker-to-broker trading activity cleared from exchanges and Self Regulatory Organizations (SROs). It enables firms to set trading limits for their own trading desk as well as for other firms they clear on behalf of. If trading activity exceeds the pre-set, early warning levels or established trading limits, DTCC Limit Monitoring will generate and deliver a warning or breach message that alerts these firms to take precautionary action.
Average Daily Value
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Average Daily Volume
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What other initiatives did you pursue in 2014 to mitigate risk in the post-trade process?
One of the more exciting projects was requiring all original equity trades be submitted to the clearinghouse in near real time. In other words, no more pre-netting or batch trades. This was a massive undertaking because we serve as the central clearinghouse for the entire U.S. equity market. By moving to a near real time environment, we’ve been able to reduce counterparty risk for our clients while strengthening our own internal risk management processes. In addition, we can now disseminate trade data more quickly back to our clients so they can better manage risk for themselves or their own correspondent clients.
DTCC has always made strengthening its core clearing services one of its top corporate priorities. How did you make progress on that front last year?
One key initiative we completed was implementing enhancements to our Automated Customer Accounts Transfer Service (ACATS). ACATS has been a staple in the U.S. market for decades, but in the wake of the Lehman Brothers close-out during the 2008 financial crisis, we identified a number of areas where we could further improve processing efficiencies and reduce risks. We launched a new ACATS accounting and settlement process in 2014 that separates ACATS transfers from Continuous Net Settlement (CNS) net positions. The result is very effective protection of client assets during the transfer of financial accounts.
Another initiative that strengthens our core businesses was the rewrite of our legacy Corporate Bond, Municipal Bond, Unit Investment Trust (CMU) Real Time Trade Matching (RTTM)® application. CMU plays a central role in its respective markets by matching trades in real time and preparing them for the clearing process. CMU also supports price transparency in the municipal bond market by reporting trades in real time to the Municipal Securities Rulemaking Board (MSRB), which publishes trading data for the investing public. The CMU rewrite reduced both operational and technology risk and helped us further drive down the cost of the post-trade process.
MBS: Par Value Netting Destined
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Can you explain DTCC’s proposal to provide clearing services for the institutional tri-party repo market? Is this a game-changer for the industry?
This initiative came out of a request by the Federal Reserve several years ago to identify ways to protect the stability of the $1.6 trillion institutional tri-party repo market, especially during times of market stress. As we brainstormed ideas and sought the insight of our clients and others, we established three key objectives: reduce reliance on intraday credit, strengthen risk management practices to protect against a broad range of events, and reduce the risk that a dealer’s default could prompt a destabilizing “fire sale” of its collateral by one or all of its lenders. We determined that the best solution was to centralize the clearing and settlement of tri-party repo transactions through a central counterparty.
In 2014, we announced plans to submit a rule filing with the Securities and Exchange Commission (SEC) and an advance notice filing to both the SEC and the Federal Reserve to provide central clearing for this market. Now we look forward to advancing this initiative. We feel confident that we’re the best choice to provide this service because our GCF Repo® business has seamlessly processed repo transactions since 1998 and is the only infrastructure in the U.S. with the experience, proven technology and bandwidth to handle the processing of these trades.
Do you have enhancements planned for the mortgage-backed securities market?
Yes, we completed the business requirements in 2014 for our Mortgage-Backed Securities Division’s “MBSD Novation” initiative, which will extend the services we rolled out with our MBS central counterparty platform several years ago. This initiative simplifies the netting and settlement process and enables us to eliminate inefficient processing in our mortgage-backed securities trade management service. When this initiative goes live in 2017, our clearing agency subsidiary, Fixed Income Clearing Corporation (FICC), will step in as the counterparty to all transactions submitted and compared at the Clearing Corporation. FICC will also be the counterparty to all the pool allocations needed to complete each client’s TBA trades in preparation for the pool netting process. These are big steps to help simplify a complex process and reduce potential risks.