The Depository Trust & Clearing Corporation (DTCC) announced today two measures that will further mitigate risk for the industry and ensure greater certainty for market participants: 1) the plan to implement a real-time trade date guarantee for all Continuous Net Settlement (CNS) eligible trades, including equity, corporate bond and municipal bond transactions and 2) its equity clearing processing capacity has been increased to an unprecedented 500 million transactions per day.
DTCC’s equity clearing subsidiary, National Securities ClearingCorporation (NSCC), will apply its guarantee on trade date uponcomparison for non-locked-in trades or validation for locked-in tradesinstead of T+1, which will reduce credit exposure for trading firms and systemic risk across the industry. Currently, the trade guaranteeis applied at midnight of T+1, which represents a delay before NSCCsteps in between the two sides of a trade and assumes the buyer’scredit risk and the seller’s delivery risk in the event either sidedefaults. NSCC is expected to file a rule change with the Securitiesand Exchange Commission (SEC) in 1Q 2009 seeking approval for itsreal-time trade guarantee. The decision to move to a real-time tradeguarantee was recently approved by DTCC’s Board of Directors.
“Maintaining confidence and stability in the marketplace andprotecting our members under both ordinary and extraordinarycircumstances is our highest priority. A real-time trade guaranteesignificantly enhances DTCC’s already robust risk management processand gives financial firms greater certainty that their trades willsettle,” said Michael C. Bodson, DTCC Executive Managing Director,Business Management & Strategy.
“Recent market events, including firm failures like Lehman Brothersand Madoff Securities, underscore the importance of a real-time tradeguarantee and the value of a central infrastructure provider likeDTCC that can manage risk from a central vantage point across assetclasses,” Bodson said.
The benefits of DTCC’s risk management experience was evident inOctober 2008 when the organization, through all of its subsidiaries,successfully closed out $500 billion in open, unsettled tradesresulting from the Lehman bankruptcy with no adverse impact to marketparticipants’ clearing fund deposits. In December, NSCC chose toguarantee (although it was not obligated to) all trading activity withBernard Madoff Investment Securities received as of December 12, 2008and closed out the account with no loss to member firms.
“We have been working to enact a real-time guarantee for some timebecause we understand that by speeding up this process, we can reducecounterparty risk for trading firms and protect them from potentiallyunstable trading partners,” said Marie Rey, DTCC Managing Director,Enterprise Risk Management. “The firm failures of Lehman Brothers andMadoff Securities demonstrate the value of DTCC’s ability to providecertainty and stability during unforeseen shocks to the markets.”
With the move to a real-time trade guarantee, DTCC expects some changeto clearing fund requirements. However, in light of the currenteconomic environment, DTCC is currently reviewing its collateralmanagement methodologies and calculations to ensure adequate coverageto protect the industry while minimizing expenses for member firms.
Capacity Increased to 500 Million Transactions Per DayIn the fourth quarter of 2008, NSCC experienced a 33% jump in equityvolume, handling a daily average of nearly 170 million totaltransactions compared to the average daily volume of 128 million for2008. On October 10, 2008, NSCC processed a peak record 315.6 milliontotal transactions. The number of transactions is different thanshares; a single NSCC transaction (also called a side) can be for anynumber of shares of stock ie. 100 shares, 500 shares or 1,000shares.
The increase in capacity to 500 million transactions per day ensuresthat DTCC has the ability to handle unexpected spikes in tradingvolume. DTCC provides clearance and settlement services for virtuallyall broker-to-broker trades on the nine major and regional exchangesand 50+ electronic communications networks (ECNs) in the UnitedStates.
“DTCC’s members pay the lowest equities clearance fees in the world,and baked into that price is our enormous processing capacity,comprehensive risk management process and the netting down of tradeobligations requiring financial settlement,” said Susan Cosgrove, DTCCManaging Director, Equities Clearance and Settlement Group.
“The total cost to provide equity clearing is less than $100 millionannually,” Cosgrove said. “If we do the simple math, based on about300 firms, the average cost per firm is roughly $300,000. DTCC hasinvested over the years in its technology infrastructure so that weare always prepared to handle trading volumes, including spikes involume, at no additional cost to financial firms.”
In its 30+ year history, DTCC’s family of companies has neverexperienced a system outage or service interruption that prevented usfrom completing clearance and settlement.