DTCC Creates Trade Limit Monitoring Tool

The Depository Trust & Clearing Corporation (DTCC) has established a new risk tool, DTCC Limit Monitoring, which alerts users when trading activity nears pre-defined trading limits.

The tool works by pulling in trade data from DTCC subsidiary National Securities Clearing Corporation (NSCC), which covers broker-to-broker trading cleared from exchanges, Electronic Trading Systems, and dark pools and other liquidity destinations in the U.S., including Real-Time Trade Matching (RTTM) trades.

NSCC member firms are the ones who set up the tool, meaning “they establish what’s called the risk entity, and that’s someone they want to manage the exposure for,” says Bill Kapogiannis, vice president, DTCC Equities Clearing. It could be for their own proprietary trading or for someone they clear for. Within the risk entity they define what’s called the trade array, which defines which transactions across market platforms belong to a specific risk entity”.

Once these member firms set the limits, DTCC will send alerts as trading activity gets closer to these amounts. “The tool will take the overall net notional limit that they’ve established and use predefine early warning limits against that threshold of 50, 75, and 90 percent,” says Kapogiannis.

NSCC has filed a proposed rule change with the Securities and Exchange Commission (SEC) that would allow NSCC members to use the tool, and pending regulatory approval, DTCC plans to have Limit Monitoring fully operational by mid-January 2014. Approximately 85% of NSCC members will be required to use the tool, and there are three categories of those who fall into this group—full-service members that clear for others, members that submit transactions directly to a CCP as a Qualified Special Representative (QSR—“a full-service member who has been granted status for the purpose of locking-in trades for other NSCC members and/or their correspondent,” the DTCC explains) or those that are locked into a transaction by a QSR.

The tool came as a result of a working group formed in September 2012, comprised of exchanges, self-regulatory organizations (SROs), broker-dealers, buy-side firms and clearing organizations, of which the DTCC took part in. The group discussed ways to improve market stability and mitigate risk, so in response, DTCC created this solution. This post-trade tool is also designed to be used alongside other risk management tools, but it will operate independently.

“I think the industry as a whole has agreed that, collectively, all of those tools should be utilized to reduce risk,” says Kapogiannis.