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Executive Summary

The Depository Trust & Clearing Corporation (DTCC) is seeking feedback on its initiative to change the way Continuous Net Settlement (CNS) transactions are processed. CNS is a service of the National Securities Clearing Corporation (NSCC). Currently, CNS obligations of NSCC Members (short covers) and allocations to such NSCC Members (long allocations) are processed as free of payment deliveries at The Depository Trust Company (DTC) with the related funds settlement occurring at NSCC via an end-of-day net settlement process. With this initiative, DTCC will process CNS transactions as deliveries versus payment (DVP) at DTC subject to DTC’s risk management controls (CNS for Value), with one consolidated settlement process for all these transactions.

With the implementation of CNS for Value, DTCC seeks to further mitigate systemic risk and promote adherence to international standards for financial market infrastructures. Specifically, CNS for Value will provide DTC and NSCC with more robust and transparent methodologies for managing liquidity, operational and credit risks by processing CNS obligations DVP, subjecting them to DTC’s risk management controls and by moving securities and credits/debits simultaneously through the same settlement system. Additionally, processing CNS obligations DVP at DTC will obviate the need for the existing cross-guaranty between DTC and NSCC. The use of DTC’s collateral monitor and net debit cap controls will ensure that NSCC, as a Central Counterparty (CCP), will not pose additional material risks to DTC as the Central Securities Depository (CSD), protecting against any potential spillover of risks between the infrastructures. CNS for Value will provide a number of direct benefits to NSCC Members. First, CNS for Value will provide NSCC Members with a single, transparent, intraday settlement process to allow such Members to better monitor settlement activity and manage liquidity needs. CNS for Value will also continuously net NSCC Members’ CNS credits and debits with DTC debits and credits (intraday cross-endorsement) which may reduce Members’ intraday funding requirements. Lastly, CNS for Value will position DTCC to support more robust intraday settlement finality and liquidity management by supporting a multi-cycle settlement process1.

Although referenced here in the context of CNS for Value, the concept of moving DTC from a single end-of-day net settlement system model to a more robust intraday multi-cycle settlement model is also being explored for other DTC activity, e.g., Institutional Delivery (ID) transactions. The multi-cycle model will require Members to settle with DTC in several defined settlement “slices” scheduled at various times during the day rather than solely in the existing end-of-day settlement process. This further mitigates risk by providing Members and the system with improved settlement finality. Processing CNS transactions DVP at DTC means NSCC itself, like other DTC Participants2, will be required to have sufficient collateral and net debit cap available to process each transaction. NSCC will need to meet liquidity and collateral requirements and will use a portion of its existing Clearing Fund to fund DVP activity processed through NSCC’s CNS account at DTC. These NSCC funds will be deposited with and/or pledged to DTC to support DVP processing.

This paper will present more details of the CNS for Value initiative. Members are strongly encouraged to comment where applicable. DTCC requests all comments be submitted by October 15, 2011. DTCC recognizes the magnitude of the changes outlined in this paper, but believes the processing efficiencies and risk mitigation benefits justify them. DTCC also recognizes that the implementation of the CNS for Value initiative will require all Members to migrate to the new process on the same day which will require extensive industry-wide coordination and testing prior to implementation some time in 2013-14.

DTCC plans to work closely with industry representatives and will establish industry working groups in late October to refine the initiative and coordinate implementation. Details for providing feedback and participating in the working groups are provided at the end of this paper.

Download the White Paper: CNS Settlement as Delivery versus Payment in DTC (CNS for Value)