The Depository Trust & Clearing Corporation (DTCC) is proposing changes to its settlement processing for money market instruments (MMIs) to boost efficiencies, improve intraday settlement finality and further reduce credit and liquidity risk in the MMI market.
In a white paper to the industry – “Reducing Risk and Enhancing Intraday Finality in the Settlement of Money Market Instruments” – DTCC, through its depository, The Depository Trust Company (DTC), plans to enhance the settlement model to eliminate the risks that come with intraday reversals of transactions in DTC’s MMI system.
These enhancements are subject to regulatory approval.
“The MMI process at DTC has facilitated the growth of MMIs over the years by offering enormous settlement transaction efficiencies,” says Susan Cosgrove, DTCC managing director and general manager, settlement and asset services. “As the next phase of development, DTC will continue to promote risk mitigation and improve intraday finality, but will also introduce a new optimisation engine to retain settlement efficiency for DTC and its members.”
In 2012, DTCC, in partnership with the industry and the Securities Industry and Financial Markets Association (SIFMA), developed the new settlement model to conform to guidelines recommended by CPSS-IOSCO that “final settlement should occur no later than the end of the settlement day. Intraday or real-time finality should be provided where necessary to reduce risks.” (CPSS-IOSCO stands for the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organisation of Securities Commissions (IOSCO).)
Under the current MMI model, issuing and paying agent (IPA) banks, who act on behalf of issuers, can instruct DTC to “refuse to pay” when the IPA has not received adequate funding from the issuer. In the event of a “refuse to pay,” DTC will reverse all valued transactions processed for the designated issuer on the current day.
“MMI reversals undermine intraday finality by allowing IPAs to unilaterally instruct DTC to reverse processed transactions,” according to the paper. “This interferes with the timely updating of customer accounts by participants and extends the window of risk associated with processed transactions until very late in the settlement day when there is generally little opportunity to react.”
The new MMI settlement model will require changes to DTC’s “refusal to pay” procedures and to current market practices by investors, issuers, custodians, placement agents dealers and IPAs. The proposed change will require confirmation that issuer funding has occurred before MMI transactions are submitted for processing. This, in effect, will eliminate the reversal of MMI transactions currently associated with a “refusal to pay”.