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Rebuilding DTCC’s Risk Engine

DTCC's ability to identify, measure, monitor and report risk is critical to preserving the secure operations and resiliency of the capital markets. The firm’s multi-year Risk Transformation program, launched in 2013, greatly strengthened DTCC’s risk management systems with new, state-of-the-art, and world-class risk processes and technology.

“The move to near real-time trade input means all of the market data and business records we receive now feed directly into the Risk Data Warehouse for risk identification, analysis and reporting,” said Robert Leffler, DTCC Systems Director, Applications Development. “By using a 1TB data cache, these systems can net position and calculate risk metrics for all member portfolios with up-to-the-minute trade submissions.”

ATG’s robust, intraday mark-to-market monitoring system, which required all new hardware and a build out of all new technology, is designed to run continuously — in 15-minute increments — calculating and collecting margin as soon as a change in risk is detected and assessed.

The new Accelerated Trade Guaranty (ATG), an important industry risk-mitigation initiative rolled out to clients of DTCC’s subsidiary, National Securities Clearing Corporation (NSCC), in April, speeds up the NSCCC’s trade guaranty to apply to trades either upon the point of validation for locked-in submissions or at the point of comparison and validation for bilateral submissions.

Prior to ATG, NSCC’s trade guaranty — the guaranty that members’ trades would be completed and settled once entered into the NSCC system as a compared trade — automatically attached at midnight of one day after trade date (T+1). However, with several large-scale firm failures, such as Lehman Brothers and Bernard L. Madoff Investments in 2008 and MF Global in 2011, also came the recognition that midnight of T+1 potentially represented a timing delay before the central counterparty (CCP) could step in between counterparties to assume the buyer’s credit risk and the seller’s delivery risk in the event of either side defaulting.

“The importance of a near real-time trade guaranty became very apparent when the volatility of unpredictable market events — combined with the uncertainty of trade completion if an unstable trading partner were to default — resulted in risk and stress for other member firms,” said Tim Hulse, DTCC Executive Director, Risk. “ATG reduces that window of risk for everyone, and brings greater certainty, clarity and transparency to an otherwise potentially uncertain situation.”

“ATG benefits the industry by mitigating counterparty risk — and the parties’ inability to assess that risk — by having NSCC step in as the CCP to transactions at an earlier point in the settlement cycle,” said Michele Hillery, DTCC Executive Director, Equity Clearing. “With the mandate to submit activity in real-time, ATG will also provide members with a dramatic reduction in intra-day counterparty risk exposure.”

In development and review for several years, bringing ATG to clients has involved significant effort from a cross-functional team at DTCC, including Equity Risk, Legal, Product Management and Application Development, especially with respect to adding new margin components to the clearing fund formula and enhancing the mark-to-market margin process. [See sidebar: Rebuilding DTCC’s Risk Engine]

Approved by the U.S Securities and Exchange Commission in December 2016, ATG went live on Monday, April 24th, following a controlled three-month parallel period running in a test environment. The purpose of the parallel period was for clients to review and understand the impact of ATG on their firms’ clearing fund requirement on a daily basis.

ATG and the industry’s larger initiative to shorten the settlement cycle to T+2 are separate, albeit parallel, efforts with no dependencies on each other. Nevertheless, DTCC projects that the overall impact of ATG, which will increase typical clearing fund requirements for clients, could potentially be mitigated by the industry’s T+2 conversion in September, as well as other programs and initiatives.