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by Edward C. Kelleher

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New Webcast On PI Payment Processing

The Depository Trust Company (DTC) will begin processing principal and income payments (P&I) on the more than 3.5 million securities it services using a new methodology to reduce systemic risk and enhance accountability in the allocation of several trillion dollars annually.

The new process will modernize the long-standing industry practice of having DTC collect and allocate virtually all payments on their scheduled payable dates, including those payments made 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. A white paper issued by DTC last year revealed that more than 4% of P&I payments, or approximately $10 billion per month, were late or misidentified.

Unacceptable risk

“We have conducted an extensive internal review and had in-depth discussions with regulators before deciding to move to this new methodology,” said Kurt Holweger, DTCC managing director, Operations and Customer Service. “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 it now entails is no longer appropriate given how sophisticated and efficient the process has become.”

DTC, a subsidiary of DTCC, collects and allocates cash entitlements due on DTC-eligible securities on a daily basis.

Five million payments

The P&I payments include dividend, interest, periodic principal, redemption and maturity payments. In 2009, DTC collected and allocated more than 5 million payments totaling more than $2.5 trillion. DTC receives P&I payments from about 7,000 different entities each year, with 16 of the largest agents responsible for 85% to 90% of the payments. The remaining percentage comes from smaller agents and issuers paying on their own behalf – most often, municipalities.

DTC first announced that it would enhance risk mitigation in the payment of P&I in a November 2009 white paper titled “P&I Payment Refinement: A Move to Further Reduce Payment Risk.” Since issuing the white paper, DTC has reported a substantial reduction in the number of late and misidentified payments from paying agents and issuers. As of September 2010, the value of payments made in a manner compliant with the 2011 allocation methodology increased to 98.53%, compared to 96% for all of 2009. The impact of this improvement is more than a 60% decrease in late or unidentified payments – from more than $10 billion per month in 2009 to less than $4 billion per month in third-quarter 2010.

“The goal is to ensure that all shareholders and bondholders receive the entitlements due them on the payable date in a manner that does not inject unnecessary risk into the system,” said John Faith, DTCC vice president, Operations. “By working collaboratively with the industry, we believe we have developed an improved system that will provide the same level of efficiency and certainty to market participants while mitigating the risk of late or misidentified payments.” @ [For more information on P&I payment processing, go to, Customer Center, Customer Tools, Principal & Income Payments (P&I) Refinement.]