Settlement Roadmap

Report
DTC Settlement Strategy and Roadmap
Update
Bank Depository User Group
September 23, 2013
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Introduction
 Settlement Roadmap Paper originally published in December 2012
 Strategic objectives are Systemic Risk mitigation and further adherence
with CPSS IOSCO recommendations
 Promotion of Settlement Finality
 White Paper published to provide customers with information on how
multiple initiatives come together over the next 5 years – a “Roadmap”
 Four Key settlement related initiatives:
 Settlement Matching
 CNS Settlement as Delivery Versus Payment (CNS for Value)
 Money Market Settlement - Structural Changes
 Shortening the Settlement Cycle
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Treatment
Requested
by DTCC,
[DTC,
NSCC,
FICC,
WTC]
Pursuant
to thetoFreedom
of Information
Act. Act.”
“Confidential
Treatment
Requested
by DTCC,
[DTC,
NSCC,
FICC,
WTC]
Pursuant
the Freedom
of Information
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Settlement Matching - Background
 DTC permits receiving participants to “reclaim” processed transactions
 Certain reclaims are permitted to bypass DTC’s risk controls
 Reclaims compromise intraday settlement finality
 Reclaims present credit and liquidity risk to DTC, participants and the
system as a whole
 The value of transactions currently reclaimed is approximately $4 Billion per
day but could increase in times of stress
 Reclaim rates of unaffirmed institutional transactions are MUCH higher than
those of affirmed transactions - 5% vs. 0.2%
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Settlement Matching - Proposal
 Proposal: Require receiving participants to match transactions prior to
settlement
 Non – Institutional Trades
 The matching requirement will leverage DTC’s Receiver Authorized
Delivery (RAD) system
All non-ID transactions require RAD approval prior to processing
 Institutional Trades
 Will be supported by the trade match – promoting affirmation and
STP
 Custodians will be given the option to pull out obligations for which
they have funding or credit issues
Supports bank participant demands for the “exception”
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Settlement Matching – Benefits
 Mitigate systemic risk associated with overriding DTC risk
management controls
 Improve intraday settlement finality for US settling transactions
 Promote best practice for trade affirmation
 Leverage trade match to drive settlement – gives teeth to
affirmation
 Position DTC and industry for shortened settlement cycle
 Effective trade affirmation and settlement matching cited as key
enablers
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Settlement Matching - Next Steps
 Published detailed service description in 1Q/13
 Published updated implementation schedule 2Q/13
 Publish an important notice in Q4 with additional detail
 Settlement Matching will be implemented in four phases:
 Introduce reduced RAD limits in 2Q/13 (Completed in July)
 Introduce stock loan specific RAD profiles scheduled for October
25
 Reduce RAD limits to zero originally targeted for 4Q/13 but
moved to 2Q/14
 Require receiver matching for institutional transactions originally
targeted for 1Q/14 but moved to 3Q/14
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CNS for Value - Model

Continuous Net Settlement (CNS) is a service provided by NSCC to net
and novate “street-side” trades

CNS obligations will be processed as delivery versus payment (DVP) in
DTC instead of free of payment

CNS obligations will be subject to DTC’s risk management controls

Members with pending receives will be required to fund their DTC
accounts to support CNS receive obligations in DTC
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“Confidential
Treatment
Treatment
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Requested
by DTCC,
by DTCC,
[DTC,
[DTC,
NSCC,
NSCC,
FICC,
FICC,
WTC]WTC]
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Pursuant
to thetoFreedom
the Freedom
of Information
of Information
Act. Act.”
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CNS for Value - Benefits
 Enabler for multiple intraday settlement slices
 Provides participants with intraday liquidity benefits, i.e., ability to
use NSCC credits to offset DTC debits
 Alerts DTCC to potential default situations earlier in the day
 Reduces affiliate risk
 Eliminates cross-guaranty
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CNS for Value – Milestones
Published Industry White Paper - 2011
 Solicited member feedback on the proposal - 2012
 Modeled potential collateral monitor and debit cap blockage - 2012
 Model intraday impact to NSCC Clearing Fund - 2013
 Target dates as follows:
 Detailed Business Case
Q3 2013
 Detailed Service Description
Q4 2013
 Impact Studies and Build
Q1 2013 - 2015
 Testing Available
Q3 2015

 Implementation
Q3 2016 (Deferred)
 Project is being deferred due to resource contention
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MMI Processing - Background
 DTC processes approximately $250 billion worth of transactions in
Money Market Instruments (MMIs) per day
 A large portion of maturing MMI securities are funded through the
issuance of new MMI securities
 Net maturing MMI positions require issuer funding
 MMI issuer Paying Agents can instruct DTC to reverse processed
transactions if unfunded by the issuer
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MMI Processing Risk
 If an MMI Paying Agent isn’t paid by the issuer by 3:00 PM ET, the Paying
Agent can Refusal to Pay (RTP) the issuer’s obligation
 When notified of a RTP by an MMI Paying Agent, DTC will:
 Reverse all completed transactions for the respective MMI issue
 Permit the MMI reversal transactions to bypass DTC’s risk management
controls
 MMI reversals compromise intraday settlement finality
 MMI reversals present credit and liquidity risk to DTC, participants and the
system as a whole
 Today, DTC withholds the two largest credits a participant has in MMI
securities (LPNC) in case they are reversed
 The objective of MMI optimization is to eliminate the credit and liquidity risk
associated with reversals of completed transactions related to an issuer
failure and to eliminate the need to withhold credits via LPNC
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MMI Optimization
 All MMI issuances and deliver orders (DOs) will continue to be presented to DTC’s
Receiver Authorized Delivery (RAD) system for approval
 All approved MMI transactions, along with that day’s maturity presentments, will be
“held” in a pending status until the issuer has “funded” its maturities in one of two
ways:
– When the settlement value of approved issuances exceeds the value of the
applicable maturing obligations and/or,
– When the IPA has indicated via a screen or automated message that it has
received issuer funding
 Once funded, DTC will simultaneously check all transactions for an issuer, i.e.,
issuances, DOs and maturities, against each participant’s DTC position and risk
controls
– If able to complete, these transactions will be processed and final, i.e., no
reclaims or reversals
– If unable to complete no transactions for the relevant issuer will be processed
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MMI Optimization
 Periodically throughout the day the transactions associated with acronyms
that have been funded and not completed will be attempted for processing
with other pending MMI “units” and staged to the “new MMI Optimization”
process
 MMI Optimization will attempt to maximize the settlement of transactions by
looking at the net effects of transactions across multiple issuers on the
receiving and delivering participants’ position and risk controls
 Once the optimal combination of transactions is amassed, the transactions
will be processed and then settled.
– Participants will continue to be required to fund their accounts intraday
when they have debits that will exceed their net debit caps or if there is
a collateral shortfall
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MMI Processing Benefits
 Eliminates DTC credit and liquidity risk associated with issuer failure
reversals that override controls
 Increases intraday settlement finality
 Enhances intraday liquidity recycling at DTC through the elimination
of the 2 Largest Provisional Net Credits (2LPNC) control since MMI
transactions will no longer be eligible for reversal
 Preserves the IPA’s ability to notify DTC of an issuer default
 Minimizes participant technology changes
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MMI Optimization – Key Dates
 DTCC published an industry whitepaper in December, 2012
“Reducing Risk and Enhancing Intraday Finality in the Settlement of
Money Market Instruments”
 www.DTCC.com - Thought Leadership, White Papers
 The Detailed Service Description will provide a timeline for targeted
dates as follows:






Publish a Detailed Service Description
Solicit Industry Feedback
Begin Simulations of the Model
Submit Rule Filing (tentative)
Participant Testing Available
Implementation
Q4 2013
Q1 2014
Q2 2014
Q4 2014
Q2 2015
Q4 2015
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Shortening the Settlement Cycle (SSC)
 Originally proposed in 2000




Industry analysis performed
Decision made to focus on improving industry processing efficiently
10 building blocks identified
Significant progress in many of these areas
 In 2011, DTCC and Industry agreed the time was right for another
industry study
 In spring of 2012, DTCC issues Request for Proposal for new cost
benefit analysis
 Boston Consulting Group (BCG) selected to conduct analysis
 Conducted approximately 100 stakeholder interviews
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SSC - Enablers
 Enablers For T+2 and T+1







Migration to institutional trade date matching
Mandated Settlement Matching at the depository
Cross-industry Settlement Instructions solution
Continue to dematerialize physicals
Extend "access equals delivery" for all products
Compress timeframes / rule changes
Increase penalties for fails
 Additional Enablers for T+1




Build infrastructure for near-real time processing
Transform securities lending processes
Transform foreign buyer processes
Accelerated retail funding
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SSC – Cost / Benefits
 Reduce risk for both the individual investor and the industry at large including
 Enable firms to optimize capital by reducing collateral required and liquidity need for
NSCC
 NSCC estimates its line of credit could be reduced by 20-25% in T+2 and 40-50%
in T+1, thus reducing line costs by $5MM- $7MM and $10MM to $15MM, for T+2
and T+1, respectively.
 Reduce operational risk and expenses through implementation of building blocks
 Align settlement cycle across geographies
 BCG Estimated
 T+2 total investment at $550M with $170M in annual cost savings
 T+1 total investment at $1,770M with $175M to $370M in annual cost savings
Next Steps
 DTCC currently consulting with Industry representatives and Regulators and expects to
publish a position paper in the next few weeks
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