Buy-Side Market Participants to Benefit from Reduced Counterparty and Systemic Risk as Members of GSD
NEW YORK — December 2, 2013 — The Depository Trust & Clearing Corporation’s (DTCC) wholly-owned subsidiary, Fixed Income Clearing Corporation (FICC), has filed a proposed rule change with the Securities and Exchange Commission (SEC) to establish minimum financial requirements for Registered Investment Companies (RICs) – buy-side market participants – which would allow such firms to become members of its Government Securities Division (GSD). Enabling RICs to become guaranteed service members of GSD will reduce risk, enhance efficiency and increase transparency of the market by capturing a larger portion of activity from both current and new members. RICs are key participants in the market served by GSD.
“We are pleased to offer buy-side firms the benefits of GSD’s netting services and the advantages of a central counterparty, which help firms reduce risk, enhance transparency and lower costs in the trading of U.S. Government securities,” said Murray Pozmanter, Managing Director and General Manager of DTCC’s Clearing Services. “With both existing and new members submitting trades to GSD, a broader, more centralized view of the market will also help regulators monitor a firm’s exposure to these financial instruments.”
As GSD members, RICs will benefit from the GSD netting services and the related operational efficiencies of a central counterparty (CCP), which provides a guarantee of completion on eligible trades, even in the event of a member default. Other membership benefits include: a guaranteed trade at the point of comparison; guaranteed settlement with FICC as the central counterparty; automation and centralization of collateralization of counterparty exposures; daily risk management services; centralized liquidation of a failed counterparty, reducing the potential for market disruption; reduced settlements which will in turn reduce operational risk; lower operational costs; automated coupon tracking, and a complete audit trail of submitted activity and automated reporting.
In addition to the benefits that RIC firms would receive as members of GSD, broadening the GSD membership pool will help better protect the safety and soundness of the overall U.S. financial system by offering:
- Decreased settlement and operational risk as transactions for a greater number of members will be netted subject to guaranteed settlement, novation and independent risk management;
- More efficient use of collateral as the CCP will have a more holistic view of actual risk the netting members have in the asset class;
- Lower risk of market disruption in a liquidation as a result of having a more complete view of the failing counterparty’s actual positions, therefore eliminating unnecessary market activity between the CCP clearing organization and non-members;
- Increased transparency to the regulators;
- Fully collateralized market risk, with uniform margin methodologies applied to the marketplace; and
- In some instances reduced liquidity requirements for the completion of settlements between market participants.
Currently, RICs are included as a membership category in the GSD rules, however, the proposed rule change establishes their minimum financial requirement of $100 million in net asset value, enabling them to begin utilizing GSD’s Tier Two Netting membership type. Because RICs are legally prohibited from participating in loss mutualization, such members are only subject to loss allocation based upon their trading activity with the defaulting member that resulted in a loss.
Pending regulatory approval, RICs will have the ability to become members of GSD. RICs will not be permitted to utilize the GCF Repo® service, which falls within the scope of GSD services. As DTCC continues to work collaboratively with tri-party banks and supervisors on tri-party reform, it will revisit opening this service to the RICs.
RICs are also currently eligible to become members of the Mortgage-Backed Securities Division (MBSD). MBSD membership enables firms to fulfill the Treasury Market Practices Group (TMPG) recommendations for margining of forward-settling agency mortgage-backed securities (MBS) transactions, with which firms are expected to be in compliance by the end of the year.
MBSD and GSD are divisions of DTCC’s subsidiary FICC.
DTCC has operating facilities and data centers around the world and, through its subsidiaries, automates, centralizes, and standardizes the post-trade processing of financial transactions for thousands of institutions worldwide. With 40 years of experience, DTCC is the premier post-trade market infrastructure for the global financial services industry, simplifying the complexities of clearance, settlement, asset servicing, global data management and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, derivatives, money market instruments, syndicated loans, mutual funds, alternative investment products, and insurance transactions. In 2012, DTCC’s subsidiaries processed securities transactions valued at approximately US$1.6 quadrillion. Its depository provides custody and asset servicing for securities issues from 131 countries and territories valued at US$37.2 trillion. DTCC’s global trade repositories record more than US$500 trillion in gross notional value of transactions made worldwide.