DTCC Connection

Nov 28, 2017 • DTCC Connection

How Does DTCC Netting & Settlement Reduce Risk and Cost for the Industry?

Michael McClain, Managing Director and General Manager, Equity Clearing

Ask the ExpertSince the early 1970s, the efficiencies and low costs associated with DTCC’s centralized infrastructure are credited with attracting the flow of investment capital to the U.S., which helps fuel our entire economy. Capital flows to the markets where price is most competitive, risk is best managed, and efficiency is greatest. International investment in U.S. securities reflects, in part, the perception that the U.S. economy is stable and that the dollar, despite its up and downs, is sound. But there’s ample evidence that overseas investors are also drawn to U.S. markets because the financial system here is more efficient, more liquid, and operates at lower cost than other markets worldwide.

Every business day in the United States, investors execute hundreds of millions of securities transactions, exchanging money for shares of stock, bonds, mutual funds, and other financial instruments. One of DTCC’s primary roles in the industry is netting — the automatic process of offsetting a firm’s buy orders for a particular security against its sell orders for that security. Netting consolidates the amounts due from and owed to a firm across all the different securities it has traded to a single net debit or a net credit. By netting down or reducing the total number of customer trading obligations that require the exchange of money for settlement, DTCC helps to minimize risk and free up trillions of dollars of capital each year that their customers can use for other investment purposes. Every day, DTCC nets down these trades and payments among its participant firms, reducing the value of payments that need to be exchanged by an average of 98-99%.

Centralized netting and settlement has dramatically increased the efficiency of U.S. markets by reducing the capital requirements and overall risk. DTCC’s centralized multilateral netting, novation, and settlement of nearly every equity trade have contributed to making the U.S. markets the deepest and broadest in the world.