Overview

Fixed Income Clearing Corporation’s (FICC) Automated Funds-Only Settlement Service provides a standardized, automated method for settling non-trade, funds-only obligations each day between FICC and its customers’ settling banks. FICC’s service eliminates manual processing and reduces costs by aggregating payments due to or from a customer and then automatically transferring the funds into or out of the customer’s settling bank.

Non-trade obligations that the service handles for U.S. Government securities can include cash payments to reflect changes in the value of securities when they’re marked to market, cash adjustments related to securities trades, and the pass-through of bond coupon payments for term repos or trade obligations that cross a coupon date. For mortgage-backed securities, non-trade cash obligations can include the net settlement balance order market differential (SBOMD) on the days of the month when mortgage-backed securities trades settle, cash payments to reflect changes in the value of mortgage pools underlying TBA trades when the pools are marked to market, cash adjustments related to net pool obligation settlements, principal and interest payments for failing net pool settlement obligations (to the extent that they are not handled by the Fedwire Securities Service Automated Claims Adjustment Process (“ACAP”), charges assessed by The Sponsored by the Federal Reserve Bank of New York, the Treasury Market Practices Group (“TMPG”) for delivery fails, as well as “housekeeping” matters, such as funds to cover cash adjustments, interest income rebates and routine billing matters.

Who Can Use the Service

The service is automatic and mandatory for FICC members that have funds-only settlement obligations. This includes both Government Securities Division (GSD) netting members and Mortgage-Backed Securities Division (MBSD) members.

Benefits

• Builds an automated process for settlement of funds owed to and from FICC’s Government Securities and Mortgage-Backed Securities Divisions
• Provides a tool for market participants to ensure that obligations due to FICC are made on a timely basis
• Increases operational efficiencies by eliminating a manually intense process of tracking waivers for late payments and of collecting late payment penalties
• Mitigates risk by automating the funds-only settlement process while streamlining and standardizing the collection of funds across clearing corporations

How the Service Works

To provide this service, FICC employs the Federal Reserve Bank’s National Settlement Service (NSS) to debit and/or credit net settlement obligations at the settling bank level of GSD netting participants and MBSD clearing members. The individual debits and credits of all participants using the same settling bank are totaled, and the net result established at the settling bank level will be settled using NSS. FICC has further leveraged systems and procedures already in place at The Depository Trust Company to perform this function by using it as the agent to interface with the Federal Reserve Bank for settlement. The Depository Trust Company is also a subsidiary of DTCC.

The service creates a funds-only settlement file containing all of the participants’ debits and credits for the current business day. This file is sent to DTCC’s Fed Funds Settlement (FFS) system. The DTCC Participant Browser Service (PBS) is then used to send broadcast messages containing net settlement figures to settling banks. Settling banks are required to acknowledge final settlement figures by 9:30 a.m. EST, which is also the deadline for settling banks to refuse to settle on behalf of one or more of the participants for whom they settle.

What the Service Covers

For MBSD, cash settlement is the accumulation and projection of aggregated payable/receivables resulting from the following cash obligation items: Settlement Balance Order Market Differential (SBOMD)

• Pool Transaction Adjustment Payments
• Clearance Adjustments
• Principal Payments
• Interest Payments
• Broker Commissions
• MBSD Clearing Billing Fee
• EPN Billing Fee
• Clearing Fund Interest
• Settlement Balance Order Market Differentials (SBOMD)
• TMPG charges
• CPR Claims
• TMPG Financing Amounts
• Miscellaneous from TBA Clearing
• Miscellaneous from Pool Netting

For GSD, the major components of the funds-only settlement process are:

• Transaction Adjustment Payment (TAP)
• Forward Margin
• Forward Margin Return
• Forward Margin Return Interest
• Coupon Payments
• Fail Mark
• Clearance Difference Adjustment
• Delivery Differential Adjustment
• Maturity Payments
• Invoice and Miscellaneous Adjustments or fees

For More Information

If you would like further information regarding Automated Funds-Only Settlement processing, please contact your DTCC relationship manager via the Relationship Services Group Hotline at (800) 422 0582, or by email at rmsupport@dtcc.com.