by Edward C. Kelleher
DTCC has proposed changing the way its clearing agency subsidiaries, The Depository Trust Company (DTC) and National Securities Clearing Corporation (NSCC), process Continuous Net Settlement (CNS) transactions. The enhanced process would align CNS processing with the risk management control structure used by DTC to reduce risk and boost liquidity efficiencies in the settlement of almost $870 billion in equities that trade in the U.S. markets each day.
The proposal is presented in a white paper titled "CNS Settlement as Delivery Versus Payment in DTC (CNS for Value)," which DTCC issued to the industry in September. In the paper, DTCC asks for feedback on the initiative.
NSCC and DTC together clear and settle virtually all broker-to-broker equity, corporate and municipal debt securities transactions in the U.S. In addition, NSCC serves as the equity markets’ central counterparty and guarantees trades by becoming the buyer for every seller and the seller for every buyer for CNS-eligible securities.
Under the methodology currently used for CNS obligations, the securities are moved via a book-entry transfer that is free of payment at DTC, with the related money settlement occurring at NSCC. With the initiative, called CNS for Value, DTC will process both aspects of the CNS settlement obligation, moving security positions and credits/debits simultaneously through DTC’s settlement system, and leveraging DTC’s existing risk management controls (net debit cap and collateral monitor).
CNS for Value offers several important benefits to members. It will:
- Provide a single, transparent intraday settlement process that allows them to better monitor settlement activity and manage liquidity needs;
- Continuously net members’ CNS credits and debits with DTC credits and debits, which may reduce a member’s intraday funding requirements;
- Position DTCC to support more robust intraday settlement finality and liquidity management by supporting a multi-cycle settlement process.
"With the implementation of CNS for Value, we will be able to mitigate systemic risk and promote harmonization of the U.S. settlement system with evolving international standards for financial market infrastructures," said Susan Cosgrove, DTCC managing director and general manager, Settlement and Asset Services. "This change will give DTC, NSCC and their members more robust and transparent methodologies for managing intraday settlement liquidity risk."
CNS transactions processed as delivery versus payment (DVP) at DTC will be subject to DTC’s collateral monitor and net debit cap risk management controls. The net debit cap control limits the net debit balances of DTC participants so that DTC will have sufficient liquidity to fund end-of-day net settlement with sufficient collateral support based on the collateral monitor. The use of DTC’s collateral monitor and net debit cap controls on CNS transactions will protect DTC from potential spillover risks from NSCC.
"The concept of moving DTC from a single end-of-day settlement model to a more robust intraday multi-cycle settlement model is also being explored," said Julie Krill, DTCC vice president, Settlement and Asset Services. "This multi-cycle model would further mitigate certain risks by providing members and the market with intraday settlement finality."
DTCC anticipates implementation of CNS for Value in early 2014.@
[To access the white paper "CNS Settlement as Delivery Versus Payment in DTC (CNS for Value)," go to www.dtcc.com and click Thought Leadership, White Papers.]