DTCC Connection

Jul 01, 2011 • DTCC Connection

NSCC Will Roll Out New Risk Management Service

by Craig Donner


Related Information

Learning About Trade Risk Pro

National Securities Clearing Corporation (NSCC) is developing a new industrywide, post-trade risk management service that will allow clearing firms to monitor and set credit limits on their correspondents’ and other business units’ equity trading activity.


Murray Pozmanter, DTCC managing director and general manager, Clearing Services

The near-real-time service, called DTCC Trade Risk Pro℠, will break new ground in risk management by helping clearing firms more effectively manage the exposure introduced by their correspondents and mitigate systemic risk. It will be the only service in the U.S. marketplace to provide a single, centralized view of a correspondent’s post-trade activity for virtually the entire U.S. equity marketplace, including the NYSE, Nasdaq and other equity trading venues and liquidity destinations.


“The growth of high-frequency trading, the industry’s increased focus on risk management and the regulatory focus on systemic risk are driving demand for a centralized post-trade risk solution to help clearing brokers monitor their exposure,” said Murray Pozmanter, DTCC managing director and general manager, Clearing Services. “Trade Risk Pro will address the needs of both the industry and regulators by providing a comprehensive approach to risk management that meets the standards recommended by global regulators.


“This service will serve as an early warning system by giving firms muchneeded transparency into the trading activity of their correspondents,” Pozmanter added.


Post- vs. pre-

NSCC received the approval of DTCC’s Board to develop the service in June and expects to submit a rule filing to the Securities and Exchange Commission (SEC) later this summer. NSCC plans to launch the service in 4Q2011, subject to regulatory approval.


Recent reports and rule filings from both The International Organization of Securities Commissions (IOSCO) and the SEC have said that having access to real-time pre- and post-trade information will allow financial firms to implement appropriate monitoring to protect against systemic risk.


Post-trade data is considered essential for effective risk management because it includes only executed trades, which represent actual market activity and exposure of individual firms.


In contrast, pre-trade data can create a distorted view of a firm’s true risk exposure, erroneously estimate potential positions or generate false positives because roughly 90% of all equity orders are not executed in today’s market. What’s more, pre-trade data provides an incomplete view of trading activity because it does not take into account those correspondents’ orders that are routed directly to the market, known as “trade aways.”


How it works

Trade Risk Pro will leverage NSCC’s new Universal Trade Capture (UTC) application to aggregate and present post-trade data in a centralized and standardized format. As a first step, users will decide which trading activity they want to track by selecting “risk entities.” These entities can include a firm, a correspondent, a single clearing member, a single trading desk or some unique combination of them.


Users will assign criteria to the risk entities using various data elements from the UTC trade records, such as clearing number, market, executing broker and account number. Combinations of these data elements, called trade arrays, will associate the trading activity and exposure with a particular risk entity.


As the final step, users will assign limits to each risk entity to monitor its exposure from various points of view. Users will be able to set share and dollar limits for each risk entity at a gross, adjusted and net level. To perform root-cause analyses, more granular data will be available for the clearing broker to scrutinize exposure at the CUSIP and individual trade levels.


In addition, Trade Risk Pro’s flexible functionality will allow clearing brokers to view a combination of risk entities to monitor their exposure based on their unique business needs, including tracking correspondent trading activity that was executed away from the clearing broker, monitoring Qualified Special Representatives (QSRs) and other proprietary risk management definitions.


“The service gives users a wide range of drill-down capabilities so they can analyze granular data to make decisions about managing their exposure,” Pozmanter said. “We see Trade Risk Pro as an extension of NSCC’s core mission to provide safety and soundness to the market and help minimize costs and for the industry.”


Alert to risk

Each trading day, NSCC will automatically populate Trade Risk Pro with new activity for each risk entity. Customers will have the option to provide start-of-day (SOD) positions, which will be incorporated into the tool to give users a complete picture of unsettled equity transactions. NSCC will update and display share quantities and values in seconds as new trading activity is received so firms can perform ongoing risk management.


In addition, the totals will be compared to the limits set by the users, who will be alerted when an entity approaches its limit and again if the limit is breached.


“The first alert will notify clearing brokers that they need to pay increased attention to a particular risk entity because it is building up an unacceptable level of risk,” said Pozmanter. “The second alert lets the user quickly take action if a breach has occurred to protect the firm against this risk.”


Industry collaboration

NSCC assembled a diverse client advisory board more than a year ago to solicit industry feedback and to gain insight into the unique needs of different market participants, including representatives of bulge-bracket firms and smaller high-speed trading companies.


This advisory board helped design the service and its functionalities. @


[If you have any questions about Trade Risk Pro, contact Bonnie Bowes at 212.855.8024 or bbowes@dtcc.com.]

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