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by Edward C. Kelleher

Change is good. It can help reduce systemic risk, increase efficiency and enhance accountability in the allocation of several trillion dollars annually. And that’s exactly what happened after DTCC implemented its new methodology for processing principal and income (P&I) payments. In the four months since the changes went live on February 7:

  • The number of on-time and correctly identified payments by issuers and paying agents to The Depository Trust Company (DTC) rose to 98.7% compared to 96.7% for 2010. The 2% increase represents an additional $17 billion received on time and correctly identified.
  • The percentage of P&I entitlements allocated on the payable date – including those identified payments received just after the 3:00 p.m. cut-off time – increased to more than 99.3%, compared to 98.81% for 2010.
  • Of the less than 1% of entitlements not paid on the payable date, 94% were paid on payable date+1.
  • Late or misidentified P&I payments dropped substantially, to a little more than $1 billion per month, with expected P&I payments for the period totaling $767.2 billion, with $761.7 billion allocated on the payable date.

The outlook for further reducing late or unidentified payments in 2011 is bright. “We estimate, on an annualized basis for 2011, late or unidentified payments will drop by more than 40%, to less than $30 billion, compared to $50 billion in 2010,” said John Faith, DTCC vice president, Operations. “This represents a 75% decrease from $128 billion in 2009.”

Higher daily payments

“These numbers prove that the new methodology is working, and they are the result of the hard work and efforts of all our stakeholders,” said Kurt Holweger, DTCC managing director, Operations and Customer Service. He noted that the positive response by issuers and paying agents to the new methodology has enabled DTC to increase daily P&I payments while eliminating the inherent risk associated with the old P&I processing methodology.

DTC collects and allocates entitlements due on DTC-eligible securities on a daily basis. The P&I payments include dividend, interest, periodic principal, redemption and maturity payments. In 2010, DTC collected and allocated more than five million payments totaling $2.5 trillion to its participant firms and ultimately to investors.

Customer view

Four months into the new process, customers note the benefits in risk mitigation.

“Since BNY Mellon is a global leader in both the corporate trust and custody businesses, the DTC Principal and Income Refinement initiative has had a significant positive effect on us,” said Craig Bayer, managing director, BNY Mellon. “Our corporate trust group has worked with customers and refined internal processes to comply with new guidelines that went into effect in February 2011. The initiative has also had a beneficial effect on our custody business because there is a smoother payment process on payable dates, which reduces risk in the payment cycle.”

On-time payments

The new methodology allocates only those entitlements that are received on time and with the identifying CUSIP number. Under the previous long-standing industry practice, 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 payment 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. The paper stated that this “exposure to credit and liquidity risk in an increasingly complex financial and regulatory environment has grown to unacceptable levels.” @