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DTC Settlement: Model, Benefits, Challenges Susan Tysk -Cosgrove

DTC Settlement: Model, Benefits, Challenges Susan Tysk -Cosgrove Managing Director, Settlement and Asset Services ACSDA 15 th General Assembly Antigua, Guatemala April 18, 2013. “. DTC Processing - Model.

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DTC Settlement: Model, Benefits, Challenges Susan Tysk -Cosgrove

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  1. DTC Settlement: Model, Benefits, Challenges Susan Tysk-Cosgrove Managing Director, Settlement and Asset Services ACSDA 15th General Assembly Antigua, Guatemala April 18, 2013 “

  2. DTC Processing - Model • DTC provides intraday liquidity to its members by allowing them to accept receives and incur debits to a specified amount based on their activity history. • The specified amount is called a “Net Debit Cap (NDC)”. The maximum NDC any member can have is $1.8B regardless of their activity. • When a net debit equals the NDC, the member is required to fund, i.e., prepay additional receives for amounts greater than their NDC. • Members can incur debits without pre-funding, but DTC also ensures that members’ debits are fully collateralized. • Therefore, receivers must have sufficient collateral to cover the difference between the settlement value debit and the collateral value of the securities they are receiving. “Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.”

  3. DTC Processing – Model • DTC’s net debit caps are there to ensure that DTC itself has sufficient liquidity to complete settlement, i.e., net debits cannot exceed DTC’s line of credit from a consortium of banks. • DTC sources of liquidity: • $1.9 Billion in Line-of-Credit (LOC) • $1.3 Billion Participants Fund (P-Fund) contributions • Although securities received in a member’s account are not considered final until the end-of-day payment, collateral controls allow re-deliveries leveraging a member’s other collateral. • In short, the NDC and collateral controls permit efficient intraday liquidity recycling. “Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.”

  4. DTC Processing - Benefits • The main benefit of NDCs is that members can accept receives and redeliver those receives without liquidity burdens. • In contrast, real-time gross settlement (RTGS) systems require members to pre-fund every receive, even if they are simply redelivering. • NDCs provide liquidity efficiencies for high transaction volume systems. “Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.”

  5. DTC Processing – Challenges • There is a cost and risk to the liquidity efficiencies realized from the NDCs and collateral controls. Cost: • The cost of NDCs comes in the form of line of credit fees. Risks: • Loss - DTC faces liquidation risk, i.e., the value of its collateral may drop below the debit amount to be covered by the liquidation. • Liquidity - A major systemic event could result in failure of LOC banks to meet their LOC obligations, or multiple participant failures could exceed the $1.9 B LOC. “Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.”

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