Sep 13, 2011
• White Papers
CNS Settlement as Delivery versus Payment in DTC (CNS for Value)
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
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
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)