This whitepaper describes The Depository Trust & Clearing Corporation’s (“DTCC”) plan to implement
structural changes to settlement processing at The Depository Trust Company (“DTC”) for money market .
instruments (“MMI”). These enhancements, which are subject to regulatory approval, are referenced in
DTCC’s recently released strategic paper entitled “A Roadmap for Promoting Intraday Settlement Finality in U.S.
Markets.” MMIs, particularly commercial paper (“CP”) in the U.S., have experienced a significant market contraction
in the last five years. The anxiety about “headline risk” associated with issuers has not completely
disappeared; thus, issuance activity has only slightly improved year over year. This market development is
consistent with the global economic downturn during the long running low-interest rate environment, resulting
in MMI inventory that is well below the boom years prior to 2008. In spite of these market dynamics,
MMIs are attractive instruments to issuers and investors alike because the terms can easily be tailored to meet
the specific financing and investment needs of the counterparties involved in the transaction.
The MMI settlement process at DTC has facilitated the growth of MMIs over the years by offering enormous
settlement transactional efficiency. The key impediment to intraday finality in the MMI settlement process is
the possibility that an Issuing and Paying Agent (“IPA”) bank may notify DTC by 3:00 PM ET of a refusal to pay
(“RTP”) with respect to an issuer program. Currently, the IPA’s RTP notice triggers a reversal of transactions .
associated with that issuer’s MMI program (which is referred to as an “acronym”) in the DTC settlement system.
These reversals are not subject to DTC’s risk management collateral and net debit cap controls and may be
for billions of dollars, heightening risk in the system.1 While DTC has controls in place to protect itself from a
single issuer failure, there is a greater risk exposure caused by the potential for multiple issuer failures given
the market stresses in the current global financial landscape. As the next phase of development, however, DTC
will seek to improve intraday finality and reduce credit and liquidity risk as further described in this proposal.
In 2012, DTCC, in partnership with industry participants including the MMI Blue Sky Taskforce2, developed
a model that will eliminate intraday reversals of transactions in DTC’s MMI system. The proposed structural
model supports the Committee on Payment and Settlement Systems and the Technical Committee of the
International Organization of Securities Commissions (collectively known as, “CPSS-IOSCO”) principle number
eight (8) related to the timing of settlement finality. The principle prescribes that “final settlement should
occur no later than the end of the settlement day. Intraday or real-time finality should be provided where
necessary to reduce risks.”
Download the White Paper: Reducing Risk and Enhancing Intraday Finality in the Settlement of Money Market Instruments