The Depository Trust Company (DTC), a subsidiary of The Depository Trust & Clearing Corporation (DTCC), completed the first phase of its initiative to implement Settlement Matching. The four-phased project is designed to facilitate intraday certainty and reduce systemic risk associated with same-day reclaim transactions that may override risk management controls.
DTC settles approximately 1.4 million transactions per day with a value of roughly $550 billion after netting. Historically DTC has offered a deliverer based system processing transactions initiated on the instructions of the deliverer for delivery to the receiver’s account without prior notification to or consent of the receiver. Receiver approval was only available for DOs over $15 million and POs over $1 million and, conversely, receivers have been permitted to reclaim (that is return, in a separate transaction) DOs of $15 million or less and POs of $1 million or less, without being subject to risk management controls on the original deliverer.
On average, 5,000 same-day reclaims with a combined settlement value exceeding $5 billion are processed through DTC’s settlement system each day. Many of these reclaims occur late in the afternoon on settlement date when there is generally little opportunity to resolve differences. This introduces operational friction and leads to increased fail rates. In addition to improving intraday certainty at DTC, and eliminating the risks inherent with same day reclaim processing, Settlement Matching will provide improved straight-through processing capabilities, promote “best practices” for institutional trade matching, and better position DTC and the industry for a shortened settlement cycle.
Settlement Matching will be implemented in stages by extending receiver approval capabilities to all valued receives via DTC’s Receiver Authorized Delivery (RAD) system. “By providing the receiver with an opportunity to view and approve a transaction prior to settlement, DTC eliminates the need for processing same day reclaims which override risk management controls, which mitigates risk and greatly improves intraday finality,” said Jack Manuel, Director, Settlement Product Management at DTCC.
Transactions that do not have receiver approval will remain in RAD until they are approved, cancelled, or “dropped” at the end of the day and will not be settled. “We understand the need to balance our efforts to mitigate risk with the most effective way to make these changes seamless for our customers,” said John Kiechle, DTCC Vice President, Equity Clearance and Settlement. “We made sure to partner with the industry every step of the way, which is why we chose a multi-phased implementation over making all the changes at one time.”
Phase 1 Completed
In July, DTC reduced the minimum RAD threshold for DOs to $7.5 million and POs to $500,000 from the previous limits. By lowering the RAD limits, DTC effectively increased the number of receives for receiver approval which directly decreased the number of transactions available for reclaim. Ultimately, this reduces the number of transactions that pose risk to DTC, its participants, and financial markets more generally.
“The benefits were immediate,” said Dan Thieke, DTCC GM of Settlement and Asset Services. “Since implementing the change, the value of reclaims processed through DTC has decreased by approximately 40 percent.”
The remaining phases will involve:
- An optional stock lending profile allowing customers to set RAD authorization limits specifically for stock loan and stock loan return activity.
- Subjecting additional valued DOs and POs to RAD by lowering the RAD default limits to zero, in further stages.
- Subjecting institutional transactions to receiver approval.
“Settlement Matching represents the most significant changes to the way securities transactions in equities, corporate debt and municipal debt securities are settled in the U.S.,” said Thieke. “The Settlement Matching initiative represents a major milestone in DTCC’s ongoing goal of safeguarding the industry against systemic risk.”
DTC has set the benchmark for the safe and secure settlement of financial transactions in the U.S. for more than 40 years and has delivered certainty, reliability and risk mitigation to facilitate the growth of these markets into the deepest, most liquid and efficient in the world.@
Read more about Settlement Matching at DTCC here: http://dtcc.uat.webstagesite.com/news/2013/september/12/settlement-matching.aspx