The Depository Trust & Clearing Corporation (DTCC) recently wrapped up its multi-year effort to significantly reduce the risks associated with the Money Market Instrument (MMI) settlement process offered by The Depository Trust Company (DTC), a wholly-owned subsidiary of DTCC, as part of its Settlement Service. These enhancements, which were aimed at eliminating intraday reversals of processed transactions due to issuer failure, have improved settlement finality and increased transparency in the settlement of MMI transactions.
Eliminating Intraday Reversals
One of the key features of the initiative was to require IPAs to acknowledge the funding of their maturing obligations at an acronym level. The task force felt that this would reduce the risk associated with an issuer failure.
Prior to MMI Optimization, an Issuing & Paying Agent (IPA) could refuse to pay for an issuer’s MMI maturing obligations up until 3:00 p.m. EST, which would result in DTC reversing transactions that were already processed versus clients’ accounts. This process created a lack of settlement finality.
DTC mitigated this risk by withholding a client’s two Largest Provisional Net Credits (LPNC2) for risk control purposes. The new optimization process eliminated the potential of reversing MMI transactions by requiring issuer funding assurances from IPAs for the Issuers that they support prior to DTC processing transactions for that issuer. Without the need to reverse transactions due to the new requirement, DTC was able to retire the LPNC2 control.
The initiative, which was fully implemented in May of this year, had its origins in 2011 when DTCC and the Securities Industry and Financial Markets Association (SIFMA) together formed the MMI Blue Sky Task Force to identify opportunities to mitigate systemic risks in MMI processing, and presented them for industry-wide deliberation.
“The Task Force determined that Refusal to Pay (RTP) notices from Issuing and Paying Agents to DTC, led to same day reversals of transactions through DTC, and thus created additional risk for the industry and their clients,” said Robert Cavallo, DTCC Director, Settlement. “Ultimately, our goal was to figure out how to remove those intraday reversals and create additional transparency in the settlement of MMI transactions for the industry.”
MMIs, which are typically short-term securities (e.g., commercial paper, banker’s acceptance, short-term bank notes), represent roughly $3.2 trillion in outstanding securities at DTC, and account for more than 50% of the total U.S. settlement value processed by DTCC’s subsidiary, DTC.
In 2012, DTCC published a white paper that provided a high-level overview of MMI finality, among other key DTC settlement initiatives.
A detailed service description, Increasing Certainty and Promoting Intraday Settlement Finality, was published in 2013 to outline the necessary changes to mitigate the credit and liquidity risks associated with this process. DTCC made it a priority to communicate this plan to its clients and stakeholders by holding industry calls, presenting at various industry events and meeting with clients and regulators.
With the industry onboard and ready to move forward, client testing began in August of 2016. In January 2017, the U.S. Securities and Exchange Commission (SEC) approved a DTC rule filing, which allowed DTC to continue toward a phased-in implementation of the MMI finality through optimization initiative. The implementation began in March 2017 and culminated in May 2017.
“We are always looking for innovative ways to reduce risk and create transparency in the settlement process for our clients,” said Dan Thieke, DTCC Managing Director and General Manager of Settlement & Asset Services. “Being able to eliminate intraday reversals for MMI transactions is a monumental achievement for DTCC and the industry.”
To learn more about the MMI finality through optimization initiative, please click here.