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by Steve Letzler

DTCC has increased its liquidity and credit levels to strengthen its ability to protect the industry and its subsidiaries against the risk of a customer insolvency.

Four DTCC subsidiaries effectively increased the level of collateral put up by their customer firms via a recent change in the haircut policy and two of those subsidiaries also increased their line of credit by more than $1 billion altogether.

Boosting available resources

The line of credit, provided by a consortium of banks, gives The Depository Trust Company (DTC) and National Securities Clearing Corporation (NSCC) a combined credit line now worth $8.075 billion. In the event of a participant insolvency, that credit will be available when the subsidiaries pledge a participant firm’s collateral to the consortium.

As part of the negotiations, DTCC and the consortium agreed to adjust the haircut, or discount, used by DTCC subsidiaries to value securities. Haircuts are used to protect banks, the industry and DTCC from price fluctuations if the collateral must be liquidated. Increasing the haircut effectively increases the level of liquidity available to DTCC to handle a participant failure.

“The banks in the consortium have seen an increase in the price volatility of securities and wanted to adjust the haircuts they assess to cover that increased risk, a position we agreed with,” said Gregory Kalina, DTCC vice president, Risk Management. “We decided to adjust our haircuts to meet or exceed their standards so that we have ample liquidity to meet our risk management needs.”

While the line of credit only applies to NSCC and DTC, DTCC’s subsidiaries have an agreement in place to harmonize the haircuts they assess against their customers’ collateral. So Fixed Income Clearing Corporation (FICC) and New York Portfolio Clearing (NYPC) also adopted the increased collateral haircuts that NSCC and DTC adopted, with all changes taking effect May 16.

Transaction volume

Before implementing the new haircut policy, DTCC wanted to be sure it would not have an unnecessary impact on transaction volume, according to Kalina. “We conducted a number of impact studies to ensure that the change in haircuts would provide increased protection without impacting transactions; to date, we have seen no impact on transaction volume since the haircuts went into effect.” @

[For more information, visit under Legal and Regulatory, Important Notices. NSCC’s notice on the topic is A7211 dated May 13, 2011; FICC GSD’s notice is GOV78.11 dated May 17, 2011; FICC MBS’s notice is MBS079.11 dated May 17, 2011, and DTC’s notice is 0485-11 dated April 27, 2011. NYPC’s information is available at and is notice O 008-11 dated May 6, 2011.]