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by Edward C. Kelleher

As part of DTCC's efforts to mitigate systemic risk, The Depository Trust Company (DTC) has enhanced its practice of managing customers' net debit caps during weekends and holidays. This change will mitigate risk by temporarily reducing customers' maximum net debit cap during weekend or holiday processing.

DTC routinely processes transactions for settlement on S-1 (settlement day less one day) in its night cycle. For obligations settling on Monday, processing begins Friday night, resulting in participants having access to a potential large net debit for an extended period over a weekend or holiday. Under the new process, DTC temporarily reduces the largest net debit caps on Friday and restores them to their previous levels in the ordinary course of business prior to the open of day-cycle processing Monday morning or post-holiday processing.

This change, approved by the Securities and Exchange Commission, is designed to enhance the safety and soundness of the U.S. settlement system by minimizing liquidity pressures on DTC, and therefore the system as a whole, if a firm fails over a weekend. The change took effect for settlement activity commencing Monday, February 27, 2012.

New caps

The net debit cap reflects the highest obligation amount a family of related companies or an individual company potentially has to DTC during a business day. Additionally, the firm must have sufficient collateral on hand to cover any net debit that arises from processing a transaction.

DTC, a DTCC subsidiary, reduced net debit caps as follows:

  • For a family of companies: from aggregate maximum net debit caps of US$3 billion to US$1.5 billion.
  • For individual firms: from maximum net debit caps of US$1.8 billion to US$1.5 billion.

Individual firms that have a DTC net debit cap below US$1.5 billion were not impacted.

Liquidity and market risk

Member failures, such as Lehman Brothers, led to uncertain conditions on the days prior to and typically through the weekend, creating exposure for DTC.

"Under the previous policy, if a firm experienced a sudden failure over the weekend, DTC carried liquidity and market risk for at least two days,” said Gregory Kalina, DTCC vice president, Enterprise Risk Management. "Lowering the debit cap reduces systemic risk by ensuring DTC not only has enough liquidity to cover the potential failure of a large participant should it occur over the weekend or holiday, but has enough liquidity on the Monday following the default to still provide remaining participants with debit caps, averting a ‘cash-and-carry' settlement scenario.”

Impact of reduction

Prior to implementing these changes, DTC conducted an impact study to assess the potential effects of lowering the net debit cap during weekend night-cycle processing. The study found that, overall, the reduction in the net debit cap caused slightly over 1% more transactions to be blocked during the night cycle. "The highest net debit caps are primarily to support the processing of money market instruments during the day cycle,” said John Kiechle, DTCC vice president of Settlement Product Management, "so the level of blockage during the night cycle is relatively minimal.” In addition, these pending transactions would be processed once the net debit caps were restored on Monday morning.

In order to help participants better monitor their accounts in light of this practice, DTC will make available a new report of night-cycle blockage to participants via SMART/Search. Entitled Night Cycle Blockage Report, it is available each night at approximately 11:30 p.m. ET. @