News Center
Press Room
For Release:
Immediately
Contact:
Edward C. Kelleher
DTCC
eckelleher@dtcc.com
212.855.5301
The Depository Trust Company Will Change the Way it Processes P&I Payments
White paper says processing changes will reduce risk for the industry
New York, November 30, 2009 – The Depository Trust Company (DTC) will change the way it handles principal and income payments (P&I) on more than 3.5 million securities it services beginning in 2011, according to a DTC white paper published today. The paper, titled P&I Payment Refinement: A Move to Further Reduce Payment Risk says the move will help reduce risk in the allocation of more than several trillion dollars annually.
DTC, a subsidiary of The Depository Trust & Clearing Corporation (DTCC), collects and allocates cash entitlements due on DTC-eligible securities on a daily basis. The P&I payments include dividend, interest, periodic principal, redemption and maturity payments. In 2008, DTC collected and allocated more than five million payments totaling more than $3 trillion.
“There will be a major change in how we process P&I payments as we sunset our current practice and transition to a methodology that reduces risk for the industry,” said William B. Aimetti, president and chief operating officer of DTCC. “We are reaching out to our customers and other stakeholders to help them prepare for 2011 and to solicit industry input and collaboration as we move forward on this change.”
Under the current practice, DTC “collects and allocates virtually all payments on their scheduled payable dates – including those that may be paid to DTC after established intraday cut-off times or received without the detail needed to allow a payment to be paired with its specific CUSIP number,” the paper states. (A unique CUSIP number is assigned to all securities issued in the United States.) In 2009, DTC has allocated more than 99.95% of all cash due on the payable date.
But “there are inherent risks associated with allocating late and unidentified payments,” the paper states, and “while the practice of allocating all entitlements on the payable dates has provided a great deal of certainty for DTC participants and their customers, the exposure to credit and liquidity risk in an increasingly complex financial and regulatory environment has grown to unacceptable levels.”
After conducting an extensive internal review and in-depth discussions with regulators, DTC “has determined that, given today’s market conditions, these risks must be substantially eliminated.” This involves moving from an “allocate all” methodology to one that allocates only those payments that have been made on time and identified with the correct CUSIP. This would mean that even if 96% of the payments were made to DTC on time and identified correctly on a payable date – 96% is the current performance level – there would still be a sizeable amount of unallocated payments. “For example, on a peak day where expected allocations totaled $50 billion, 96% compliance would result in approximately $2 billion not being allocated,” according to the white paper.
“We believe this paper will raise awareness of the risks involved in P&I processing and that the changes it recommends will help refine the process and reduce payment risk for all parties,” said Aimetti.
As part of its action plan, DTC will:
- Form an industry task force to ensure collaboration as this effort moves forward.
- Expand communication among all agents on payment timeliness so that each can see how they are faring compared to other agents.
- Provide agents with more and current information on what payments are due DTC.
- Publish milestones as DTC moves toward implementation.
P&I Payment Refinement: A Move to Further Reduce Payment Risk can be accessed at www.dtcc.com under Thought Leadership, White Papers.
About DTCC
The Depository Trust & Clearing Corporation (DTCC), through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with financial firms and third parties who market these products. DTCC's depository provides custody and asset servicing for more than 3.5 million securities issues from the United States and 110 other countries and territories, valued at $27.6 trillion. In 2008, DTCC settled more than $1.88 quadrillion in securities transactions. DTCC has operating facilities in multiple locations in the United States and overseas.