FICC and NSCC Strengthen Collateral Management
Both of DTCC’s U.S. clearing organizations, Fixed Income Clearing Corporation (FICC) and National Securities Clearing Corporation (NSCC), are scheduled to implement new Clearing Fund collateral requirements at the end of January. The changes establish clear guidelines for collateral requirements and give customers more flexibility for meeting them, while strengthening overall risk management for DTCC and the industry.
This initiative also standardizes most collateral rules across FICC and NSCC, and is a building block toward the eventual standardization of Clearing Fund deposits.
In tandem with implementation of the new collateral rules, FICC is rolling out an Internet-based administration capability, the Clearing Fund Management system. Free of charge, it will enable customers to actively manage their daily collateral needs. NSCC customers have had access to a similar system since 2005.
For customers of EuroCCP, DTCC’s European clearing unit, a separate set of collateral standards is in development. Currently, EuroCCP is testing its draft requirements against the portfolios and trading patterns of potential EuroCCP users.
Benefits of the changes
“Our goal is to make the collateral process easier and more flexible for customers, while strengthening DTCC’s ability to manage risk for the industry,” said Douglas George, DTCC’s chief risk officer. For instance, the rule changes help DTCC maintain a better balance in its collateral mix and the new haircut schedule addresses risk across collateral classes, according to George.
“For customers, the rule changes offer more options for collateralizing each day’s exposure, while the Clearing Fund Management system makes it easier to manage the whole process on a daily basis,” he added.
The new rules:
- Expand the types of financial instruments accepted as collateral
- Clarify which kinds of securities may be used
- Set haircuts based on the type of security and its maturity.
NSCC customers will continue to keep 40% of their collateral in cash. For customers of FICC, where the value of individual trades generally runs far higher than for NSCC, the cash component will increase to the lesser of 10% of total collateral requirements or $5 million. In addition, the first 40% of an FICC member’s collateral must be in cash, or a combination of cash and eligible Treasury securities.
For both clearing corporations, collateral beyond the initial 40% can include any combination of eligible Treasury securities, government agency securities, mortgage-backed securities or cash. However, no more than 20% of the required collateral deposit can be secured by eligible agency securities from the same issuer – and no customer can post as collateral any agency securities which it has issued.
Online collateral management
The Clearing Fund Management system gives customers real-time, Internet-based access to their Clearing Fund requirements and deposits. NSCC participants have had access to the system for several years. Now, for the first time, it will become available to FICC participants.
The system gives customers the ability to initiate and submit online requests to change the composition of their collateral by making deposits or withdrawals, or by substituting one security for another. For FICC customers, the result will be easier, paper-free collateral management, according to Jisun Burton, DTCC director, Risk Management. “Until now, FICC customers had to keep collateral records, calculate the value daily and fax any changes to us. The system will automate all of that,” she said.
What’s more, both FICC and NSCC customers will now have access to a new calculator capability (an enhancement for NSCC members).
Primer on the Clearing Fund Management System
To learn about the Clearing Fund Management (CFM) system, see the CFM Quick Reference Guide by visiting www.dtcc.com. Go to Products & Services and, on the drop-down menu, click User Documentation. Then click Participant Documentation under either Government Securities or Mortgage-Backed Securities and you’ll see the Guide. Another option is to visit www.ficc.com. Click either FICC division, then click Important Docu-ments and scroll down to Participant Documentation to find the Guide.
The calculator is one of the system’s best features, according to Jeanne Potter, DTCC director, Finance. “It gives customers the opportunity to conduct ‘what-if’ scenarios,” she said. “All the information is right in front of them. They can see immediately how substituting one kind of collateral for another would impact their Clearing Fund portfolio. They also can see what their concentration limits are and how much of a haircut each individual security will be subject to.”
A smooth transition
To assist FICC customers in cutting over to the new Clearing Fund Management system and rules, FICC implemented a one-month parallel period, starting December 24, 2007, to assess the impact of the changes. During this time, firms have been able to see what their collateral obligations are on any given day under the new requirements compared to the level and types of collateral they have historically posted.
Enhancements to the NSCC Clearing Fund Management system will be essentially transparent to customers, requiring no parallel period. @
[For more information, contact DTCC Relationship Management at 888.382.2721 or Jisun Burton at 212.855.5760 or jburton@dtcc.com.]