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by Edward C. Kelleher

As part of the ongoing drive to reduce risk in the processing of money market instruments (MMIs), DTCC, through The Depository Trust Company (DTC), a DTCC subsidiary, has implemented changes that double its protection from MMI issuer failures but preserve the level of transaction throughput in the system. “These changes provide a win-win scenario for DTCC, our participants and the industry as a whole,” said Susan Cosgrove, DTCC Managing Director and General Manager, Settlement and Asset Services.

DTCC’s current settlement process for MMIs allows issuing and paying agent (IPA) banks to submit a “refusal to pay” (RTP) when the issuer has not provided funding to the IPA when the settlement value of the issuer’s maturities exceeds the settlement value of its new issuances on the current day. When an RTP occurs, DTCC reverses all valued transactions processed for the issuer that day.

RiskRisk controls

Risk management controls play a major role in the settlement system, and DTCC requires that participants have sufficient collateral to cover their net debits and that their net debit balances do not exceed their respective net debit caps.

“These reversals create risk for DTCC because they are processed without regard to our risk management controls, and a participant can wind up with a net debit that exceeds its net debt cap or have insufficient collateral to cover its net debit,” said John Kiechle, Vice President, Settlement and Asset Services. “At the same time, they undermine intraday finality by allowing IPAs to unilaterally instruct DTC to reverse processed transactions.”


One of the risk-reducing measures DTCC put into place in March 2013 was to change its current Largest Provisional Net Credit (LPNC) control.

The LPNC control “withholds” from participants the use of their largest net settlement credit they would otherwise receive in an MMI program that day. DTCC withholds these credits since they can be reversed later on as a result of an issuer failure. DTCC changed its LPNC control to withhold the two largest provisional net credits a participant has instead of just one. This protects the system from not just one issuer failure, but two, and provides increased risk protection in the event of transaction reversals of multiple issuer defaults or a single issuer default with two more MMI programs.@