© DTCC

“

DTC Settlement: Model, Benefits, Challenges

Susan Tysk-CosgroveManaging Director, Settlement and Asset Services

ACSDA 15th General AssemblyAntigua, Guatemala

April 18, 2013

© DTCC

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.”

© DTCC

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.”

© DTCC

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.”

© DTCC

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.”