by Michael Scholl
In conjunction with the release of the Blue Sky Task Force’s report on mitigating systemic and credit risks in the processing of money market instruments (MMI), @dtcc sat down with Susan Cosgrove, DTCC managing director and general manager, Settlement and Asset Services, and Robert Toomey, managing director and associate general counsel, Securities Industry and Financial Markets Association (SIFMA). They discussed the impact of the 2008 financial crisis on the MMI market and the task force’s short- and long-term efforts to reduce risk in this segment of the industry.
Toomey, managing director and associate general counsel, Securities Industry and Financial Markets Association (SIFMA)
What prompted the creation of the Blue Sky Task Force in 2009 and what are its goals?
Toomey: In the aftermath of the financial crisis, there was heightened concern about various risks affecting the industry. Regarding MMI in particular, there was consensus among market participants that it would be best to bring a cross-section of those participants together to examine the risks in this market segment and to make suggestions for mitigating them.
Cosgrove: The name Blue Sky was bestowed on the task force because its objective was to take a step back to determine what we would want a settlement system for the U.S. money markets to look like if we could build it from scratch. The task force’s goal was to determine the key features of that ideal settlement process and to identify potential impediments to achieving that ideal.
Why did the 2008 financial crisis lead to increased liquidity and credit pressures in the MMI market?
Cosgrove: A significant strain was placed on MMI, specifically commercial paper, by the Lehman Brothers bankruptcy, which triggered a major money market fund to “break the buck,” or go below $1 a share in value. Investors responded by shifting their money from commercial paper and other MMIs into U.S. Treasuries. That had a profound impact on the ability of issuers to raise capital in the short-term market. The disruption was so severe that the Federal Reserve had to create a commercial paper funding facility to support the orderly functioning of the money markets. Those events dramatically heightened the industry’s awareness of the investment risk associated with MMIs.
Toomey: As credit pressures increased post-Lehman and MMI market participants became highly sensitive to the system’s risks, there was a definite push to examine and mitigate those risks.
Do you think all market participants will be able to meet the new daily deadlines called for in the task force’s short-term proposals?
Cosgrove: We’ve had conversations with market participants and believe the proposed deadlines are feasible. In fact, 91% of all new valued issuance trans-actions are already submitted by 1:30 p.m. to DTC [The Depository Trust Company]. If we move the deadline up to 1:30 p.m., we believe the remaining firms will be able to adapt to that change and we are committed to working with them to do so.
Right now an MMI issuer can continue to process new valued issuance transactions until 3:20 p.m., 20 minutes beyond the 3:00 p.m. Refusal To Pay (RTP) deadline. What impact does this 20-minute gap have on credit risk transparency?
Cosgrove: Those 20 minutes are critical. Issuing and paying agents [IPAs] already face a difficult challenge in determining whether they should hit the RTP button at 3:00 p.m. It seems counterintuitive to allow activity that could impact that decision to occur once the decision has been made – and it introduces added risk to the market.
Toomey: Currently an IPA can decide to RTP an issuer at 3:00 p.m., only to see that issuer succeed in lining up the required additional investors within the following 20 minutes. This has lead to situations in which an RTP is issued, only to be reversed later, which is a cumbersome process.
Susan Cosgrove, DTCC managing director and general manager, Settlement and Asset Services
Do you have a time frame in mind for implementing the task force’s short-term proposals?
Cosgrove: Our goal is to make the rule changes needed to implement the short-term proposals within the next 12 months. As a first step, we will accept feedback about those proposals until the end of May, and we will use that feedback to fine-tune the proposals before we implement them. There is also a technology development effort associated with these changes, which needs to go through the normal DTCC development cycle.
Toomey: Although DTCC has the ultimate say over what the valued issuance cutoff times are, SIFMA and the other members of the task force have worked hard to develop broad industry consensus for enacting the short-term proposals.
What will be the process for determining which long-term options to implement, if any?
Cosgrove: The long-term proposals are options for consideration and some of them present opposing ideas, so the task force clearly does not intend for the industry to implement all of them. Now that we have released the report, the task force will work with the industry to refine its thinking about which options have the most feasibility. Critical to this process will be continued collaboration with the industry.
Toomey: We also want to better gauge the impact of each option, because all of them would require system changes for DTCC and others in the industry. The task force will continue to work through the details of the longer-term proposals as we receive feedback. Going forward, we may look to issue a follow-up report to provide an update on where we are in that process. @