This chart offers a high-level overview of the settlement process for DTCC subsidiaries, The Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC). The graphic is interactive, enabling the user to obtain information on the various types of input that are settled through DTC, the processing involved and how the actual end-of-day settlement process works.
In the financial industry, settlement is generally the term applied to the exchange of payment to the seller and the transfer of securities to the buyer of a trade. It’s the final step in the lifecycle of a securities transaction.
DTC is the central securities depository for equity securities, such as common stock, as well as municipal and corporate debt securities, including money market instruments. It's the central hub where all securities positions are held in the U.S. DTC processes other types of securities movements such as institutional deliveries, stock loans and financing transactions, including the pledging of securities to the Federal Reserve, commercial banks or the Options Clearing Corporation. These transactions are settled at DTC. DTC and NSCC transactions are settled collectively at the end of the day, combining the settlement balances a client has at both DTC and NSCC in to a single obligation.
DTC, as the depository for all equity, municipal and corporate debt, including money market securities, in the U.S., receives instructions from a variety of organizations to process the movement of a security throughout a 23 hours per day, 5 days per week processing window. The key providers of these movements include NSCC, Omgeo, a DTCC subsidiary, client vendors, clients themselves and issuing agents.
Each transaction that DTC receives has its own processing characteristics. For example, certain movements require a deliverer to authorize the delivery. For Continuous Net Settlement (CNS), a delivery needs to only have a subset of the securities complete. And in special cases, some clients want certain transactions to occur before the others. These rules, as well as the basic DTC requirements to complete a transaction, such as ensuring the deliverer has enough shares in its account, are all managed through the Inventory Management System (IMS) and the Account Transaction Processor (ATP). (Please note: All deliveries versus money (valued deliveries) must also pass DTC’s risk controls prior to movement of securities. Please see “ATP” for a description of risk controls).
Settlement at DTC occurs business day at approximately 4:15 p.m. eastern standard time. This is when the cash is moved through the Federal Reserve Bank of New York on behalf of all of the transactions that were processed and completed that day. These cash movements are facilitated through settling banks who act on behalf of their account as well as brokers who choose to settle through them. The money associated with the movement of more than 1.3 million transactions a day is accomplished through approximately 70 transfers via the Federal Reserve’s National Settlement Service (NSS) each day.
As a DTCC subsidiary, the National Securities Clearing Corporation (NSCC) serves as the central counterparty for exchange transactions in the U.S., providing clearing services for virtually all broker-to-broker equity, listed corporate and municipal bond and unit investment trust transactions in the U.S. equities markets. DTC, serving as the Central Securities Depository, receives instructions from NSCC to move client securities positions in accordance with the clearing services provided by NSCC. DTC facilitates the book-entry movement of securities for various NSCC services including CNS, ACATs, Balance Orders and Obligation Warehouse transactions. For additional details on any of these services, or to see a complete list of NSCC service offerings, please refer to NSCC’s product page.
P&I Cash Processing interacts with over 7,000 paying agents and issuers annually to facilitate the allocation of P&I entitlements to DTC participants on the scheduled payment date. For cash distributions, DTC provides additional services related to tracking for stock loan, repo and fail transactions. DTC also provides the opportunity for its members to receive dividend reinvestment, payment in a foreign currency, and tax relief at-source for tax withheld on dividends paid on non-U.S. issues. Securities eligible for this service include foreign shares eligible at the depository but held in custody by DTC with local custodians and depositories.
DTC acts upon instructions received directly from its clients and/or their service providers. The main transaction types processed by DTC on behalf of its clients include Deliver Orders (including stock loans and returns, bank-to-broker customer transfers, etc.), Payment Orders and Collateral Loans.
The New Issue Eligibility program allows underwriters and other DTC Participants to submit eligibility requests for new and secondary security offerings. Once DTC makes an eligibility determination and accepts the securities for depository and book-entry services, the securities can be distributed quickly and efficiently. These securities are then available for the full range of DTC deposit and book-entry services. Lead managers, underwriters, placement agents and other market players that are DTC participants can use the service. In addition, firms that are not direct participants but maintain a clearing relationship with a DTC participant can use the service as a correspondent; however, the Participant through which the securities are introduced to DTC remains responsible for all activities within its account.
The eligibility process enhances capital market efficiencies and reduces costs to the industry by enabling eligible securities to be distributed, settled and serviced through DTC’s automated processes. DTC’s straight-through processing mitigates risk for the industry through automation and standardization.
There are 14 types of Money Market Instruments (MMIs) that are eligible to settle at DTC and they include Corporate Commercial Paper, Municipal Commercial Paper, Medium Term Notes, Institutional Certificates of Deposits and several others. Commercial Paper has the shortest maturity dates and is the most active from an issuance and maturing perspective since it allows corporate issuers to determine their cash flow needs on a daily basis if necessary. Key participants in the MMI space include:
Omgeo Institutional Deliveries (ID) transactions are deliveries that have a “trade match” between a broker and either an investment manager (IM) or the IM‘s custodian. These “institutional” deliveries represent the buys and sells for institutions, such as mutual and pension funds, etc.; however, since IMs aren’t participants of DTC, these transactions are processed between the IM’s custodian and broker.
IMS provides a warehouse and staging area for a client’s future-dated transactions, (e.g., Omgeo deliveries). In addition, for current and future-dated transactions, clients can use IMS to prioritize how they would like these transactions to be attempted for delivery and, for some transactions, the authorization of the delivery or receipt of a transaction.
The Account Transaction Processor (ATP) is one of the U.S. security industry’s most critical transaction processing systems and has been the core books and records of DTC for over 30 years. This mission-critical application maintains industry participant positions and risk management controls for the U.S. marketplace. The two main DTC risk management controls are the collateral monitor, which ensures that DTC participants maintain sufficient collateral in the form of cash or securities to cover their debit balances, and net debit caps, which ensure that DTC has sufficient liquidity to complete EOD settlement in the event that a DTC participant fails to pay its end-of-day obligation. ATP processes all settlement related security movements between counterparties, including NSCC’s Continuous Net Settlement Service. ATP annually handles over 350 million transactions valued at over $142 trillion and generates an activity audit trail for reconciliation and reporting.
Allows a participant to instruct DTC to automatically attempt to redeliver a transaction that did not process (i.e., dropped transaction) due to insufficient position or risk management controls.
Within the DTCC’s Continuous Net System, commonly referred to as “CNS,” NSCC acts as the central counterparty for clearance and settlement for virtually all broker-to-broker equity, corporate and municipal bonds and unit investment trust trading in the United States. CNS settles trades from the major exchanges, markets and other sources in the U.S. and nets these transactions in to one position per security, per client, per settlement date. Typically, NSCC’s trade guarantee will attach to CNS transactions that reach point of validation.” CNS processes include an automated book-entry accounting system that centralizes settlement and maintains an orderly flow of security and money balances.
Settlement Progress Payments (SPPs) are intraday money transfers sent by clients to fund their DTC accounts utilizing the Federal Reserve’s wire payment process.
Clients who are approaching or have reached their net debit caps can alleviate transaction blockage and continue to receive deliveries and subsequently avoid having transactions recycle by wiring funds to DTC’s account at the Federal Reserve if the wire is properly coded. Once received, DTC would automatically apply the funds to the client’s DTC account.
SPPs must be received by approximately 3:10 p.m. Eastern Standard Time to relieve any transactions that are pending because of net debit cap or insufficient collateral in their accounts. SPPs can be requested back by the client up until 3:00 p.m. as long as this transaction passes DTC’s risk controls.
DTC and NSCC post debits and credits for the various transactions they process throughout the day by clients into the settlement system. At approximately 3:45 p.m. Eastern Standard Time, DTC no longer permits these numbers to change and it posts the final figure of each client’s net DTC and NSCC legal entity debit or credit. DTC’s settlement system rolls up these balances to a client’s settling bank. Each settling bank will acknowledge the net-net balance presented or refuse to settle on behalf of a client. Once all settling bank balances have been acknowledged, DTC, through the Federal Reserve’s Net Settlement Service (NSS), will post the applicable net-net debit or credit to the settling banks. Firms for which a settling bank refuses to settle maintain primary responsibility for their settlement obligations, which they must satisfy via Fedwire. Once all payments are confirmed by the Federal Reserve, settlement is complete.
DTC and NSCC post debits and credits for the various transactions they process throughout the day by clients into the settlement system. At approximately 3:45 p.m. Eastern Standard Time, DTC no longer permits these numbers to change and it posts the final figure of each client’s net DTC and NSCC legal entity debit or credit. DTC’s settlement system rolls up these balances to a client’s settling bank. Each settling bank will acknowledge the net-net balance presented or refuse to settle on behalf of a client. Once all settling bank balances have been acknowledged, DTC, through the Federal Reserve’s Net Settlement Service (NSS), will post the applicable net-net debit or credit to the settling banks. Firms for which a settling bank refuses to settle maintain primary responsibility for their settlement obligations, which they must satisfy via Fedwire. Once all payments are confirmed by the Federal Reserve, settlement is complete.
DTC and NSCC post debits and credits for the various transactions they process throughout the day by clients into the settlement system. At approximately 3:45 p.m. Eastern Standard Time, DTC no longer permits these numbers to change and it posts the final figure of each client’s net DTC and NSCC legal entity debit or credit. DTC’s settlement system rolls up these balances to a client’s settling bank. Each settling bank will acknowledge the net-net balance presented or refuse to settle on behalf of a client. Once all settling bank balances have been acknowledged, DTC, through the Federal Reserve’s Net Settlement Service (NSS), will post the applicable net-net debit or credit to the settling banks. Firms for which a settling bank refuses to settle maintain primary responsibility for their settlement obligations, which they must satisfy via Fedwire. Once all payments are confirmed by the Federal Reserve, settlement is complete.