What is the DTCC White Paper “P&I Payment Refinement”?
The DTCC White Paper “P&I Payment Refinement” is a document intended to prepare participants, issuers and agents for the changes in DTC’s P&I collection and allocation practices. This refinement mitigates the inherent risks with the current P&I allocation methodology while employing a practice that adheres to DTC’s current policies and procedures.

Read the DTCC White Paper, "P&I Payment Refinement."

What changes to the current P&I allocation methodology are being made?
DTC currently employs a methodology of allocating all P&I entitlements on the payable date unless it has specific information that a payment will not be funded. The revised practice will only allocate those P&I entitlements paid and identified at a CUSIP level and received by DTC’s cut-off time of 3:00 PM.

What types of payments are covered by the term P&I?
The term P&I refers to “Principal and Income” payments. These payments include dividend, interest, periodic principal, redemption, and maturity payments on debt and equity securities excluding Money Market Instruments (MMI).

What are the inherent risks in DTC’s current P&I allocation methodology?
DTC’s current allocation methodology allocates some entitlements before they are actually received or identified at a CUSIP level. This practice presents financial exposure to DTC should the failure of an issuer or participant occur between the allocation of an entitlement and its receipt or reconciliation at DTC.

What impact does the change in DTC’s P&I allocation methodology have on participants?
Funds allocated by DTC to participants one or more days after payable date will likely increase. As such, participants are advised to review their internal cash flow procedures which may be impacted by the new allocation practice scheduled for early 2011.

What impact does the change in DTC’s P&I allocation methodology have on Issuers and Paying Agents?
Failing to provide timely funding with automated CUSIP-level detail (in accordance with DTC’s Operational Arrangements) will result in payment to DTC participants after payable date leading to investor dissatisfaction.

When will the change in DTC’s allocation methodology take place?
The changes to DTC’s allocation methodology will become effective in early 2011.

Why is the P&I allocation methodology being modified?
The revised allocation methodology eliminates that risk described above by only allocating an entitlement once its receipt can be confirmed at a CUSIP level. This change also creates a consistent approach to entitlement processing at DTC as P&I payments will now follow an approach similar to the manner in which Reorganization corporate actions and MMI payments have long been handled.

What is DTC doing to reduce the impact to its participants?
DTC’s P&I Processing Department continues to work with paying agents and issuers to identify obstacles and solutions that support full compliance and consequently, increase “precise” or compliant P&I allocations. Other actions include:

• Communication through various industry groups to maximize coverage in this space.
• Formation of a P&I Payment Refinement Task Force with appropriate industry representatives to ensure collaboration towards this effort.
• Publication of Agent P&I Payment Timeliness and Accuracy metrics on DTCC’s website.
• Planned establishment of industry “tracking targets” for core Agents and reporting of industry core Agent sigma levels versus targets beginning January 2011.
• Expanding communication of agent payment timeliness and compliance to all agents.

What information is available to participants to assist them in their assessment of the impact on their firm?
In January 2010, Important Notice #6132-10 announced the addition of two new reports to the Corporate Actions Reports section of PBS-SMART/Search that identify current allocations occurring in a manner that is not consistent with the proposed methodology. These weekly reports provide details of all “imprecise” or noncompliant allocations for the given week and allow participants to measure the impact of imprecise allocations and maintain a history of noncompliant CUSIPs to assist in driving allocation decisions come January 2011. In addition to these newly created reports, participants also have the ability to receive start-of-day, intra-day, and end-of-day files providing information regarding allocated and unallocated P&I entitlements.

What compensation policies does DTC have in place for late P&I allocations?
To the extent that DTC has overnight use of unallocated funds, any investment earnings will be refunded to the impacted participants through the existing Monthly Refund Program. In instances where payment is received from an agent after payable date, DTC will seek interest compensation from the agent in accordance with DTC’s interest compensation policy and again, refund impacted participants through the Monthly Refund Program.

Who can participants contact if they have any questions regarding P&I or the P&I Payment Refinement effort?
Participants should contact their DTC Relationship Manager.

What can Issuers and Paying Agents do to ensure that shareholders/bondholders receive P&I entitlements on payment date?
Issuers and paying agents are urged to review their internal processes to ensure compliance with DTC’s Operational Arrangements (OA) which requires payment to DTC in same-day funds no later than 3:00 p.m. ET on payable date and accompanied with automated notification of CUSIP-specific detail. P&I Payment Performance data is also available and provides a useful tool in identifying opportunities for improvement. To learn more about P&I Payment Performance reports and how to obtain access to them, please click here: Important Notice #6132-10.

Does a low sigma or percentage regarding a particular agent’s P&I payment performance timeliness or accuracy indicate errors or poor performance of that agent?
DTC understands that there can be other factors affecting an agent’s P&I performance and the P&I Refinement Task Force’s formation of a Late and Unidentified Payments subcommittee seeks to identify obstacles and solutions that support full compliance. This subcommittee has recommended that core agents perform a root cause analysis of their late payments in order to identify and address common root causes. Some examples of these root causes includes late receipt of payments and/or payment information from issuers/servicers, late payments due to securities whose payment is dependent upon payment from another underlying security such as a DTC, and late payments from issuers who fund agents through correspondent banks. DTC will share the results of this analysis as information becomes available.

Who can Issuers and Paying Agents contact if they have any questions regarding P&I or the P&I Payment Refinement effort?
Issuers and Paying Agents can contact DTC’s P&I Cash Processing Department. For contact information, please click here.