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by Craig Donner

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Clearance & Settlement

DTCC is taking the lead in developing solutions to help firms meet new regulatory and reporting requirements in the most cost-effective manner possible, according to Susan Cosgrove, DTCC managing director, Clearance and Settlement/Equities, who spoke on a panel at SunGard’s June 21 New York City Day conference.

Cosgrove also outlined steps DTCC is taking to help its customers manage risk, credit and collateral during this period of industry transformation as well as how the company is responding to changes in the equity market structure.

“The industry faces significant challenges in the coming years – and DTCC is staying ahead of the curve and adapting so that we remain a strong partner to our customers,” Cosgrove said. “New laws being passed in Washington, D.C., and Brussels present opportunities for us to leverage our capabilities to facilitate more cost-effective compliance with regulations that will impact our customers.”

Meeting industry needs

Cosgrove cited DTCC’s resilient infrastructure, the connectivity it supports across the marketplace and its ability to promote standardization as key assets that will position the company to meet emerging industry needs.

As an example, Cosgrove pointed to DTCC’s enhanced Cost-Basis Reporting Service (CBRS), which will help firms comply with a January 1, 2011, federal mandate requiring them to report cost-basis information for equities between financial intermediaries. National Securities Clearing Corporation (NSCC) is leveraging the existing CBRS technology to automate and standardize the movement of this information in a secure electronic environment.

“Firms will be able to meet the federal law without having to make a significant capital investment,” Cosgrove said. “In addition, by enhancing a proven and reliable service, we’ll have it operational in a fraction of the time it would normally take to develop such a capability. Our goal is to minimize the cost of compliance and improve processing efficiencies so our customers can focus on growing their business.”
Leveraging the infrastructure

During the panel, Nicholas Rubino, executive vice president, Daiwa Capital Markets America Inc., discussed the importance of a central counterparty (CCP) in providing stability and certainty to the market, especially during times of crisis or unexpected volatility.

– Susan Cosgrove, DTCC managing director, Clearance and Settlement/Equities

“The CCP infrastructure is a powerful resource that the industry can leverage to mitigate systemic risk and provide safety and soundness to the marketplace,” Rubino said. “But the infrastructure can also make our markets safer and more transparent while driving down post-trade costs and enhancing efficiencies and liquidity. As the markets continue to evolve, the industry will look to DTCC to help support this transformation so that financial firms can seize new opportunities.”

Reviewing margin requirements

With liquidity remaining a serious issue facing the industry, Cosgrove explained the challenges DTCC faces in balancing the need to be fully collateralized to protect the industry in the event of a firm default while also ensuring margin requirements do not deplete capital from the system unnecessarily. One way DTCC strikes the right balance, according to Cosgrove, is by viewing each member’s exposure to the system as a portfolio, which provides a complete picture of its risk profile and also avoids possible double-charging that could result from the firm having offsetting positions with different clearing agencies.

One innovative solution to this challenge, according to Cosgrove, is the agreement between NSCC and the Options Clearing Corporation that prevents the collection of duplicative risk margin for options exercises and assignments. “This accord allows billions of dollars of margin each month to be returned to customers sooner, freeing up much-needed capital and reducing overall costs to the industry – with no adverse impact on our risk management. We will continue exploring portfolio-based margining to bring greater efficiency to this process.”

Higher volume; lower costs

The explosive growth of high-frequency trading and its impact on the equity markets was another hot topic of conversation during the panel.

Cosgrove explained that NSCC processing volumes have surged over the past five years to an average of roughly 100 million transactions per day, up from about 20 million transactions in 2005. To accommodate this growth, NSCC continuously upgrades its systems to ensure sufficient capacity to handle market volume as well as spikes to the market – while still charging the lowest price in the world for equity clearance.

“We’ve reduced clearance costs by 80% since 2005 while keeping our cost base relatively flat at about $70 million annually to clear the entire U.S. equity market,” Cosgrove said. “That means our customers today pay one-third of a penny per transaction compared to 1.5 cents in 2005. The more volume we process, the lower the per-unit cost of clearing becomes – and the more money the industry saves on its post-trade costs.”

As an illustration of DTCC’s commitment to keep ahead of market changes, Cosgrove described NSCC’s new Universal Trade Capture (UTC) application. This system will replace the multiple trade-capture applications currently used by NSCC with a single, real-time validation and reporting engine.

UTC dovetails with NSCC’s plans to accelerate its trade guarantee, Cosgrove explained, by creating a near real-time system to capture and novate trades before sending output to firms for reconciliation. @