Netting and Settlement Services

The Netting and Settlement service of FICC’s Government Securities Division (GSD) provides centralized, automated clearance and guaranteed settlement of eligible U.S. Treasury bills, notes, bonds, strips and book-entry non-mortgage-backed agency securities. As part of its GCF Repo® service, GSD also processes transactions involving certain mortgage-backed securities.


Through netting, the GSD establishes a single net long or short position for each participant’s daily trading activity in a given security, including all cash buy/sell, repo/reverse and U.S. Treasury auction purchases. The participant’s net position is the difference between all long and all short positions in a given security.

Who Can Use This Service

All eligible netting members of FICC’s Government Securities Division may use the Netting and Settlement service.

Benefits

The GSD minimizes risk by guaranteeing the settlement of all trades entering its net. The GSD’s guarantee is effective upon comparison of netting-eligible trades. Trades are formally compared when the GSD communicates to members that their trades have compared. The GSD communicates with its participant-members by providing machine-readable output (MRO), print image reports or online inquiry via the RTTM® Web Front End. The GSD then acts as the settlement counterparty by interposing itself between the original trading parties and becoming the legal counterparty for settlement purposes.

How the Service Works

The GSD replaces each net position with a settlement obligation for the scheduled settlement date. Obligations are settled using the Fedwire, which ensures all deliveries are made against full payment. The GSD’s netting system typically lowers costs associated with securities transfers by reducing the number of securities movements required to settle obligations. Fewer securities movements may also reduce daylight overdraft charges.

In addition, the GSD has developed risk management policies and procedures to mitigate the risk associated with clearing securities transactions.

The Netting and Settlement service facilitates efficient transaction settlement and risk management.

Compared trades meeting eligibility requirements enter the GSD’s netting and settlement system on the day they compare. For each netting participant, the system calculates the difference between the long and short positions in each security. The result is a single net long or short position for the security composed of all the buy/sell, repo, and Treasury auction purchases transacted by the participant.

The settlement process consists of two daily settlements:

Securities Settlement—Participants’ net positions in each security are converted into settlement obligations with the GSD. All securities deliveries, whether to or from the GSD’s clearing banks, are made against full payment over the Fedwire. Securities delivered to the GSD accounts at the respective clearing banks are instantaneously redelivered to participants that are due to receive securities.

The GSD assigns each security a system value to calculate the cash settlement amount of a given net position. The GSD’s system value is determined daily to approximate each security’s current market value. The difference between the system value and the actual contract amounts of participants’ trades in a given security is accounted for in the Transaction Adjustment Payment component of Funds-Only Settlement.

Funds-Only (cash-only) Settlement—Funds-Only Settlement is an aggregate cash amount that is paid to, or collected from, participants each day. It is composed of calculated values that are associated with each participant’s overall trading activity calculated at End of Day and Intraday. For Intraday Funds Settlement FICC collects forward margin on all open positions in the system as of noon eastern time using the market price as of noon eastern time. Positions that are marked include all compared trades settling on the next business day and beyond and all unsettled obligations. Intraday Forward margin is returned to participants on the next business day and accrue interest for that time period based on the overnight fed investment rate.

(See the Funds-Only (cash-only) Settlement fact sheet for more information.)

For More Information

Please contact Client Support at 1-212-855-7600, or by email at rmsupport@dtcc.com.

dtccdotcom