The Depository Trust Company (DTC) will change the way it handles principal and income payments (P&I) on more than 3.5 million securities it services beginning in 2011, according to a DTC white paper published today. The paper, titled P&I Payment Refinement: A Move to Further Reduce Payment Risk says the move will help reduce risk in the allocation of more than several trillion dollars annually.
DTC, a subsidiary of The Depository Trust & Clearing Corporation (DTCC), collects and allocates cash entitlements due on DTC-eligible securities on a daily basis. The P&I payments include dividend, interest, periodic principal, redemption and maturity payments. In 2008, DTC collected and allocated more than five million payments totaling more than $3 trillion.
There will be a major change in how we process P&I payments as we sunset our current practice and transition to a methodology that reduces risk for the industry, says William B. Aimetti, president and chief operating officer of DTCC. We are reaching out to our customers and other stakeholders to help them prepare for 2011 and to solicit industry input and collaboration as we move forward on this change.
Under the current practice, DTC collects and allocates virtually all payments on their scheduled payable dates including those that may be paid to DTC after established intraday cut-off times or received without the detail needed to allow a payment to be paired with its specific CUSIP number, the paper states. (A unique CUSIP number is assigned to all securities issued in the United States.) In 2009, DTC has allocated more than 99.95% of all cash due on the payable date.
But there are inherent risks associated with allocating late and unidentified payments, the paper states, and while the practice of allocating all entitlements on the payable dates has provided a great deal of certainty for DTC participants and their customers, the exposure to credit and liquidity risk in an increasingly complex financial and regulatory environment has grown to unacceptable levels.
After conducting an extensive internal review and in-depth discussions with regulators, DTC has determined that, given todays market conditions, these risks must be substantially eliminated. This involves moving from an allocate all methodology to one that allocates only those payments that have been made on time and identified with the correct CUSIP. This would mean that even if 96% of the payments were made to DTC on time and identified correctly on apayable date 96% is the current performance level there would still be a sizeable amount of unallocated payments. For example, on a peak day where expected allocations totaled $50 billion, 96% compliance would result in approximately $2 billion not being allocated, according to the white paper.
As part of its action plan, DTC will:
Form an industry task force to ensure collaboration as this effort moves forward.
Expand communication among all agents on payment timeliness so that each can see how they are faring compared to other agents.
Provide agents with more and current information on what payments are due DTC.
Publish milestones as DTC moves toward implementation. P&I Payment Refinement: A Move to Further Reduce Payment Risk can be accessed at www.dtcc.com under Thought Leadership, White Papers.
D.C.