DTCC Connection

Jul 01, 2010 • DTCC Connection

DTC Accelerates Payments And Reduces Risk in P&I Allocations

by Edward C. Kelleher


The Depository Trust Company (DTC) has reported a substantial reduction in the number of late and misidentified payments it receives from paying agents, issuers and other customers as part of the principal and income payments (P&I) DTC handles on the more than 3.5 million securities it holds in custody. This tightening of the processing chain will further reduce risk in the allocation of several trillion dollars annually.


DTC collects and allocates cash entitlements due on DTC-eligible securities on a daily basis. The P&I payments include dividend, interest, periodic principal, redemption and maturity payments. In 2009, DTCC collected and allocated almost five million payments totaling just under $3 trillion.


DTC announced in November 2009 it would change the way it handles P&I payments beginning January 2011, to reduce risk in their allocation. The announcement came in a white paper titled P&I Payment Refinement: A Move to Further Reduce Payment Risk, which pointed out that more than 4% of these payments, or approximately $10 billion per month, were late or misidentified.


Risk exposure

Under current practices, DTC allocates virtually all payments on their scheduled payment dates, whether or not it has received payment from an agent or if it has received the payment without the information needed to pair it with a specific CUSIP number.


“There are inherent risks associated with allocating late and unidentified payments, and the exposure to credit and liquidity risk in an increasingly complex financial and regulatory environment has grown to unacceptable levels,” said Kurt Holweger, DTCC managing director, Operations and Customer Service.


Starting January 2011, DTC will only allocate those payments that have been made on time and identified with the correct CUSIP.


Industry collaboration

“After issuing the white paper, we immediately formed an industry task force with participants, paying agents and relevant industry groups to alert them to the changes we proposed and to investigate ways to reduce the number of late and misidentified payments,” said John Faith, DTCC vice president, Operations.


DTC and the industry have made steady gains since announcing the changes with both on-time payments and correct CUSIPs. As of May 2010, the value of on-time and properly identified payments – compliant with the 2011 allocation methodology – increased to 98.35%, from 97.23% in January. The percentage of CUSIPs allocated in a compliant manner in May jumped to 94.87%, from 89.3% in January.


The value of “noncompliant” payments in May declined to $3.34 billion versus $5.75 billion in January, a 42% improvement, and the number of CUSIPs allocated in a noncompliant manner fell to 17,300 in May versus 39,630 in January. Faith also pointed out that 90% of late or incorrect P&I payments in May were resolved by pay date + 1, meaning that $9 of every $10 dollars that would not have been credited to customers on the payable date would have been allocated by the following business day.


To what does Faith attribute the improvements?


“It’s more a question of awareness,” he said. “The white paper and the task force helped alert the industry to the problem, and both the major agents as well as the smaller ones, started working to improve their processes – taking the steps necessary to ensure share and bondholders continue to receive entitlements on the payable date.”

To keep awareness on the front burner, DTC also began issuing weekly reports of noncompliant payments in January so participants could monitor and track the impact of this change on their organizations. Reports detailing this information have been shared with the largest paying agents since March and will be expanded to include late payment detail and daily and monthly summaries for all paying agents later in the third quarter.


New online resource

DTC continues its industry outreach to alert firms to the upcoming changes in P&I payments. It has been in contact with more than 3,000 agents and issuers so far this year. In the third quarter, DTC will launch a new P&I page on the DTCC website that will provide P&I news and updates, a user guide, best practices and metrics. “This new online resource will serve as a complete repository of resources for paying agents, issuers and DTC customers,” said Faith.


DTC receives P&I payments from about 7,000 different entities each year, with 16 of the largest agents responsible for 90% of the payments. The remaining 10% come from the smaller agents and municipalities. @

dtccdotcom