The Depository Trust & Clearing Corp. is seeking industry comment on a new service designed to cap its own liquidity risk when it covers the default of a clearing member.
The new service, called Continuous Net Settlement for Value, would allow DTCC to place "debit caps" on obligations of its National Securities Clearing Corp., in the event of a default that it has to cover. A debit cap would establish the maximum dollar amount that could be charged against the NSCC, in a default. NSCC would remain the central counterparty to a transaction but would not suffer a liquidity shortfall.
Currently, the NSCC funds obligations of a defaulting member in the short term and may not always have immediate access to that firm's positions to complete its obligations. Therefore, NSCC must always have the correct amount of liquidity it needs on hand.
As part of the new system, NSCC would move from allowing CNS obligations and allocations to be processed as free of payment delivery of securities at the Depository Trust Company -- another DTCC subsidiary -- to a delivery versus payment system. NSCC clears transactions in U.S. equities. The DTC settles those transactions.
Although NSCC has never experienced a liquidity shortfall, DTCC is interested in the CNS for Value initiative as part of an overall program to strengthen its risk management practices.
CNS for Value, say DTCC officials also offers a key benefit to members. It would allow them to offset their net credits at NSCC with their net debits which might reduce their intraday funding requirements.
When a broker executes a sell order for a receive versus payment (RVP) client it will have a debit at DTC for the RVP and a credit at NSCC, Currently, the credit at NSCC cannot offset the debit at DTC intraday. It will be able to do so under the new CNS for Value model, because both transactions will settle at DTC.
"With the implementation of CNS for Value, we will be able to mitigate systemic risk and promote harmonization of the U.S. settlement system with evolving international standards for financial market infrastructures," said Susan Cosgrove, DTCC managing director and general manager for Settlement and Asset Services. "This change will give DTC, NSCC and their members more robust and transparent methodologies for managing intraday settlement liquidity risk."
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