The Depository Trust & Clearing Corporation (“DTCC”) plans to implement structural changes to settlement processing at The Depository Trust Company (“DTC”) for money market instruments (“MMI”). These enhancements, subject to regulatory approval, are referenced in two DTCC white papers published in December 2012: “A Roadmap for Promoting Intraday Settlement Finality in U.S. Markets” and “Reducing Risk and Enhancing Intraday Finality in the Settlement of Money Market Instruments.” This service description provides additional detail and an updated timeline regarding the proposed MMI settlement processing enhancements.
MMIs in the U.S. represent more than 50% of DTC’s total settlement value (and less than 5% of the total transactions processed). Although MMIs in the U.S. have experienced some market contraction in the last five years, they remain attractive financial instruments to issuers and investors. DTC continues to reduce credit and liquidity risk in this market. DTC also seeks to adhere to the Principles for Financial Market Infrastructures (the “PFMI Principles”) of the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions (“CPSS-IOSCO”). In particular, PFMI Principle 8, Settlement Finality, recommends that a Financial Market Infrastructure should promote final settlement intraday or in real time. To better satisfy this principle, DTC seeks to modify the current MMI process that allows an Issuing & Paying Agent (“IPA”) to issue “refusal to pay” and trigger a reversal of MMI deliveries prior to settlement.
The MMI settlement process at DTC has facilitated the growth of the MMI market over the years by providing substantial settlement efficiency. However, an IPA may notify DTC by 3:00 p.m. EST of a refusal to pay (“RTP”) with respect to an issuer acronym1. The RTP notice triggers a reversal of transactions associated with that issuer’s MMI acronym in the DTC settlement system. These reversals may create additional risk exposure to DTC and its Participants but that exposure is currently offset by DTC controls to protect settlement from two issuer failures. In the next phase of development, DTC will seek to eliminate reversals and, at the same time, to eliminate the offsetting Largest Provisional Net Credit Control, to improve intraday settlement finality and reduce credit and liquidity risk as further described in this service description.
In 2012, the MMI Blue Sky Taskforce, a joint project of DTCC and The Securities Industry and Financial Markets Association (SIFMA), developed a model that would eliminate intraday reversals of MMI transactions in the DTC system.
The proposed MMI Settlement model will effect changes to DTC’s RTP procedures and to the current market practices for in- vestors, issuers, custodians, placement agent dealers and IPAs. These changes will allow transactions to be processed intraday for end-of-day net funds settlement, without the risk of reversal prior to settlement.
The model will depend on achieving certainty of funding by the issuer to the IPA and by the IPA to DTC and/or the IPA prior to DTC processing presentments and issuances of an acronym of the issuer. IPAs will be asked to forego the option for a re- fusal to pay if they are satisfied that funding will be sufficient based on receipt of issuer funds and/or any decision they may make to extend credit on behalf of the issuer, subject to satisfaction of their DTC risk management controls, if and when
DTC is able to confirm that all counterparties to the IPA on that day and with respect to the acronym, have satisfied risk management controls for the further processing of deliveries of the acronym. When these conditions are confirmed, DTC
will process delivery versus payment (“DVP”) maturity presentments and issuances of the acronym as further set out in procedures specified. New and/or revised Rules and Procedures of DTC, to be approved by its regulators, will set forth the terms and conditions for this new process.
This change will optimize the netting and offset of maturity presentments, income presentments and reorganization payments for MMI’. IPAs will retain the ability to instruct DTC of an RTP in the event of an issuer insolvency. The proposed MMI approach will:
- Mitigate the credit and liquidity risks to DTC, IPAs, Custodians and Dealers associated with MMI pre-settlement reversals.
- Maintain the current levels of intraday settlement throughput and participant funding requirements.
- Reduce risk control blockage within the system by no longer withholding the two Largest Provisional Net Credits (“LPNC2”). Currently, DTC holds an average of $150 billion of LPNC daily in the system across all participants.
- Leverage existing infrastructure and technology to minimize the changes necessary to participant’s procedures or systems.
- Increase transparency in the system for all stakeholders with regards to issuer funding, including IPAs, Investors and their Custodians.
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