by Michael Scholl
DTCC has announced plans to enhance the settlement processing of money market instruments (MMI) in ways that will help mitigate credit and systemic risks in this $363 billion-a-day market.
DTCC is developing the initial round of enhancements, scheduled to take effect in May 2012 subject to Securities and Exchange Commission approval, as part of an industry-wide effort to reduce risks associated with the settlement of these instruments.
“After robust and thorough consultation with market participants, we are now poised to implement the first round of changes to The Depository Trust Company (DTC) MMI processing system,” said Susan Cosgrove, DTCC managing director and general manager, Settlement and Asset Services. “The goal is to strengthen and reduce risk associated with issuance and maturity settlement processing in the MMI market, a market that plays such a vital funding role in the U.S. economy.”
In addition, discussions with the industry on longer-term and more structural enhancements to the MMI settlement process are under way and will continue in 2012.
The daily MMI market accounts for approximately 55% of the gross value of settlement activity at DTCC’s depository and includes a daily average of $122 billion in issuances, $125 billion in maturities and $116 billion in deliveries.
The MMI initiative is being spearheaded by an MMI Blue Sky task force organized by DTCC and the Securities Industry and Financial Markets Association (SIFMA). The task force released a report in March 2011 proposing a series of short-term changes to the MMI processing system, along with ideas for long-term structural change. In response to feedback from a broad spectrum of MMI market participants, the task force revised the short-term recommendations, and DTCC now expects to implement them in May 2012.
The task force will further discuss and prioritize the report’s ideas for longerterm enhancements with the goal of finalizing recommended proposals and implementation timelines by the end of 2012.
New cutoff times
The short-term changes include the implementation of new cutoff times (see box) intended to give MMI Issuing and Paying Agents (IPAs) sufficient time to calculate their exposure to issuer credit risks and, if a funding shortfall exists, time to resolve the shortfall by 3 p.m., the time by which an IPA must determine whether it will issue a Refusal to Pay (RTP). An RTP reverses all transactions for that day in a given issuer’s MMI and can trigger market concerns about the issuer’s financial health.
Under the existing MMI processing schedule, IPAs face a degree of credit exposure because issuers are allowed to continue submitting new valued issuances to DTC until 3:20 p.m., 20 minutes after an IPA must decide whether to issue an RTP. IPAs therefore often come up against the RTP deadline with an uncertain picture as to what an issuer’s final balance will be, obliging them to make a decision about whether to “push the RTP button” based on incomplete information.
The existing cutoff times often create credit event decisions for the IPAs when in fact they are simply dealing with timing issues around funding, according to Cosgrove. “Right now, if an IPA doesn’t have all relevant facts and funding by 3 p.m. it can either execute an RTP, which would generate turmoil in the market, or extend credit to the issuer,” she said. “Today, if an IPA does issue an RTP and the issuer ultimately comes up with sufficient funding by 3:20 p.m., the IPA then has to go through the cumbersome process of reversing the RTP.”
The proposed earlier cutoff times are intended to increase transparency and reduce this risk by giving IPAs a complete and timely view of issuers funding requirements before making their RTP decisions at 3 p.m. “The planned changes in cutoff times will synchronize the cutoffs with the RTP process,” Cosgrove said.
Using RAD to eliminate reclaims
Christopher Buechner, executive
director for commercial paper
IPA services at JPMorgan Chase
The other short-term MMI change DTCC plans to implement in May will require all MMI transactions to receive approval through the Receiver Authorized Delivery (RAD) function. Currently, only MMI transactions with a minimum value of $15 million are routed to RAD.
RAD enables DTCC customers to avoid reclaims by allowing them to review incoming deliveries and to either accept or reject them before they are processed against their settlement accounts. Currently, transactions that are not approved by their receivers in RAD can be reclaimed on the day they are received, effectively overriding the receiver’s risk management controls. Having all MMI transactions go through RAD will eliminate these reclaims in the MMI market, thereby reducing credit and liquidity risk. The number of such transactions is expected to double to about 14,000 per day as a result of RAD becoming mandatory for MMI.
The planned short-term changes have garnered broad industry support, thanks to the task force’s collaborative efforts and its active pursuit of industry input.
“This is part of what we see as a necessary evolution of the money market process in the U.S.,” said Christopher Buechner, executive director for commercial paper IPA services at JPMorgan Chase, one of the nation’s leading IPAs.
Buechner, a task force member who played a key role in the drafting of its report, said the overall proposed changes to the MMI process would help increase transparency and create more settlement finality in the MMI marketplace.
“We see the revised cutoff times as a necessary first step,” he added. @
[For more information on the MMI Blue Sky Task force, write to firstname.lastname@example.org.]