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by Joseph King

A series of market shocks over the past several years focused industry attention on the need for more effective and efficient resources to help firms monitor and mitigate systemic risk. In response, and in connection with industry-wide discussions of these issues, DTCC developed the DTCC Limit Monitoring Tool, which, subject to regulatory approval of a proposed rule change, would be implemented at NSCC to help NSCC Member firms manage potential risk exposure for both their own accounts and their clients’ accounts for trading in equities, corporate and municipal bonds, and unit investment trust instruments.

Bill Kapogiannis, DTCC Vice President of Equity Clearing, recently spoke with @dtcc about DTCC Limit Monitoring on the heels of NSCC filing the proposed rule change with the Securities and Exchange Commission (SEC) to launch the tool.

Q. What market events led to the creation of the DTCC Limit Monitoring Tool?

A. There wasn’t one event in particular that I can point to as the catalyst for the creation of the tool. Rather, there were a number of industry events that transpired from 2010 to 2013 that destabilized the marketplace. That led to the formation of a series of working group committees which focused on what actions the industry could take to return stability to financial industry.

DTCC staff participated in those working group discussions. One of the takeaways by the participants was the need for supplemental controls that could further serve to mitigate risks associated with unintended market activity that could arise from technology issues.

Financial institutions rely heavily on technology to support their business and to handle ever-larger trade volumes. At the same time, the speed of trade execution has increased dramatically, to the point where it is now being measured in milliseconds or even microseconds. As critical business processes rely more and more on technology, at ever-increasing speeds, a software failure or other technology-related events can have a devastating impact.

In the end, the groups concluded that no single safeguard was comprehensive enough. A multi-layer approach with coordinated risk checks was extremely critical.

Q. Who Uses DTCC Limit Monitoring?

A. All NSCC Member clearing firms who need to monitor correspondent firms and activity submitted from established broker dealer 9A/9B relationships.

Q. How does the limit monitoring tool work?

A. Users must first establish the data points within the tool. Creating a risk entity for their own activity and for each of their correspondent clients is the first step in the setup process. Users will then define the trade array for each risk entity using trade identifiers (MPID’s & Mnemonic’s) which identify the executing broker of the transaction. The user then establishes a net notional limit for each risk entity. Early warning thresholds will be assigned by the tool at 50%, 75%, 90% of the user define net notional limit. At this point, the tool contains user defined information and is ready to receive data from its source. NSCC’s Universal Trade Capture (UTC) platform feeds DTCC Limit Monitoring all broker-to-broker trading cleared from exchanges, Electronic Trading Systems, and dark pools and other liquidity destinations in the U.S., including Real-Time Trade Matching (RTTM®) trades.

The transactions will be allocated and aggregated as defined by the user’s trade array and measured against the pre-defined limits. As early warning thresholds or breach levels are reached, the system will generate alert messages to report this activity to the user. The alert is critical for the user to understand its true exposure. The tool is providing information and the user would then further drill down to understand the exposure. The user can look at particular activity at the CUSIP level or at the individual trade level and contact the correspondent to understand what is going on and why an alert was triggered.

Q. What are the benefits to the financial industry?

A. When I think about it, I turn back to the role NSCC plays in the financial industry and our position in marketplace as a central utility/central counterparty (CCP). DTCC’s Limit Monitoring Tool provides a single, centralized and low-cost solution with standardized reporting out to users with little to no development costs.

Furthermore, a key point is that as the sole CCP we are providing users with a holistic view across all market centers not just one trading platform.

Q. How does the DTCC tool differ from what the self-regulatory organizations (SROs) and exchanges are working on?

A. There are a couple of key differences. First, the DTCC Limit Monitoring Tool contains post-trade information whereas SROs operate more in the pre-trade space. This is important because providing post-trade information creates multiple layers of controls. We are the backstop if all other pre-trade controls fail. The SRO’s are also developing “Kill Switch” functionality which our tool will not have. Second, the tool offers a holistic view of all broker to broker trading cleared from all 13 U.S. Exchanges and 40+ alternative trading platforms. I think that is a key difference where the SRO tools will be specific to their market venue.

Q. When Can NSCC Members Use the Tool?

A. Pending SEC approval, DTCC Limit Monitoring is expected to be available for NSCC members in the first quarter of 2014. The timeline for members to begin using the tool is as follows:

  • November, 2013: The front end of the tool was opened to NSCC members to establish risk entities and associated limits.
  • Q1, 2014: After regulatory approval of the rule filing, NSCC will begin providing its members with end-of-day reports to assist in verifying associated pre-set limits are aligned with current trading activity.
  • Q1, 2014: All functionality will be operating, including email notification for breaches of pre-set limits.