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The liquidity coverage ratio (LCR) refers to highly liquid assets held by financial institutions in order to meet short-term obligations. The LCR is designed to ensure that financial institutions have the necessary assets on hand to ride out short-term liquidity disruptions. Banks are required to hold an amount of highly-liquid assets, such as cash or Treasury bonds, equal to or greater than their net cash outflow over a 30 day period (having at least 100% coverage). LCR started to be regulated and measured in 2011, but the full 100% minimum wasn't enforced until 2015. Source: Investopedia

A heightened regulatory environment has brought increased complexity to collateral management, leading firms to seek new ways to manage their balance sheet more efficiently and to effectively comply with upcoming rules.

To help firms manage collateral requirements for their commercial paper obligations, The Depository Trust & Clearing Corporation (DTCC) launched the DTCC Liquidity Coverage Ratio Data Service (LCR Data Service), an offering of DTCC Data Products.

Typically, commercial paper is a short-term debt instrument issued by a corporation, usually for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range longer than 270 days.

With the DTCC LCR Data Service, firms provide DTCC with their commercial paper loan commitments and the LCR Data Service provides them with the aggregate maturities that are outstanding. By marrying the two numbers – commercial paper obligations and the aggregate maturities outstanding – the LCR Data Service provides a ratio the firm can use to determine how much collateral they need for their credit facility obligations. The LCR Data Service provides coverage obligation for the firm’s daily commercial paper portfolio delivered in a start-of-day CSV file.

“We heard from a number of firms that they needed a solution to help them manage collateral requirements for commercial paper,” said Robert Cavallo, Director, Settlement Product Management for The Depository Trust Company, a subsidiary of DTCC. “The DTCC LCR Data Service offers firms a holistic view of their collateral obligations as they relate to commercial paper.”

DTC statistics indicate the size of the commercial paper (CP) market in 2016:

  • The CP market has more than three dozen issuing/paying agents.
  • More than $1 trillion in CP is on deposit at DTC.
  • Approximately 3,200 entities are eligible to issue CP.
  • The volume of daily CP issuances averages approximately 2,400.

Overcollateralization an Issue

A firm can be the sole guarantor or part of a syndicate of guarantors behind a commercial paper program. The guarantor(s) must hold 100% of the amount for any commercial paper that is maturing within 30 days in high quality liquid assets (HQLA) as collateral under a portion of the Basel III regulations.

But what about instances where the entire amount of the commercial paper is not issued? Or the amounts of an issue that mature in more than 30 days? For example, if an issuing company has a program that can issue up to $1 billion in commercial paper but issues only $800 million, the guarantor(s) without knowledge of the actual outstanding being only $800 million, must set-aside $1 billion. The value proposition to the guarantor is that it provides a true short-term liquidity number.

DTCC’s LCR Data Service facilitates market participants’ collateral requirement by creating calculations about firms’ commercial paper portfolio exposure to subsequently provide maturity time horizons, thereby helping them allocate capital more efficiently. The commercial paper market activity settled through DTC allows the LCR Data Service to aggregate industry data with outstanding depth and breadth. Each business day CP issuers and paying agents send to DTC approximately $100 billion in new issuances.

Key benefits of the service include:

Balance Sheet Efficiency: Realize collateral-cost savings with coverage-ratio updates that can allow removal of excess collateral from the balance sheet and redeploy capital for other business needs.

Customized Intelligence: Sharpen collateral management using data from a current portfolio.

Greater Transparency: Simplify compliance with regulatory mandates, such as part of Basel III.

Rapid Turnaround: Receive overnight delivery of calculated liquidity requirements based on current CP portfolio positions.

“The service delivers transparency to firms and provides visibility to commercial paper outstanding and maturity dates,” said Matthew Bergerman, DTCC Director of Data Solutions. “It gives firms the ability to manage with heightened precision the cash coverage for their commercial paper obligations.”