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by Edward C. Kelleher

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Principal and Income Payment (P&I) Refinement

The Depository Trust Company’s (DTC) new methodology for processing principal and income (P&I) payments, which went live in February, has succeeded in reducing systemic risk, increasing efficiency and enhancing accountability in the allocation of several trillion dollars annually.

The number of on-time and correctly identified payments made by issuers and paying agents to DTC has risen significantly. In the first eight weeks, DTC made 99.3% of allocated payments, or $349 billion, on the payable date. This is up from an average of 98.8% in 2010.

“The new methodology is having its intended effect,” said Kurt Holweger, DTCC managing director, Operations and Customer Service. “The performance of issuers and paying agents has exceeded our initial expectations, and we have been able to allocate more daily payments than we did last year, without the inherent risk associated with the old process.”

DTC currently estimates that, in 2011, late or unidentified payments will drop by 40% to $30 billion compared with $50 billion in 2010. This represents a 75% decrease from $128 billion in 2009.

Then and now

DTC initiated the new process for P&I payments, which allocates only those entitlements that are received on time and with the identifying CUSIP number, on February 7.

The new process differs from the previous long-standing industry practice in which DTC collected and allocated virtually all payments on the payable date, regardless of whether the payments were received on time or correctly identified. DTC withheld payments only if it determined that the entitlement would not be funded by the agent or issuer.

DTC first announced plans to change the process in a November 2009 white paper, which revealed that more than 4% of P&I payments, or approximately $10 billion per month, were late or misidentified.

Millions of payments

P&I payments include dividend, interest, periodic principal, redemption and maturity payments. In 2010, DTC collected and allocated more than 5 million payments totaling more than $2.5 trillion. DTC receives P&I payments from about 7,000 different entities each year, with 16 of the largest agents responsible for 85% to 90% of the payments. The remaining percentage comes from smaller agents and issuers that are mostly municipalities paying on their own behalf.

“As DTC can’t control the timely receipt of P&I payments from agents and issuers, the success to date is directly attributable to process improvements by all stakeholders,” said John Faith, DTCC vice president, Operations. “We can remind everyone about the need for timely payments and identifying CUSIP numbers, but the ability to ensure that holders receive their entitlements on the payable date rests with the issuer and agent.”

Over the past year, DTC has worked with the industry to ensure a smooth transition to the new processing method. Now, the goal is to further strengthen P&I processing in 2011. “We’ll continue to work with agents and issuers to make the process even more efficient, strengthen overall payment procedures and further improve allocation performance rates to our customers,” Faith said. @