The Depository Trust & Clearing Corporation (DTCC) has outlined plans to implement a real-time trade date guarantee for equity and corporate and municipal bond transactions, as it looks to ease concerns among market participants over security of settlement.
The DTCC's equity clearing subsidiary, National Securities Clearing Corporation (NSCC), will apply its guarantee for all Continuous Net Settlement (CNS) eligible trades on trade date upon comparison for non-locked-in trades or validation for locked-in trades.
Currently, the trade guarantee is applied at midnight of T+1, leaving a gap before NSCC steps in between the two sides and assumes the buyer's credit risk and the seller's delivery risk in the event of default.
The clearing house says that, in the wake of failures at firms like Lehman Brothers and Madoff Securities, the guarantee will reduce credit exposure for firms, protecting them from potentially unstable trading partners, as well as systemic risk across the industry.
The DTCC admits the move will probably involve some change to clearing fund requirements but says that "in light of the current economic environment" it will look to minimise the expenses to member firms by reviewing collateral management methodologies and calculations.
Michael Bodson, executive managing director, business management and strategy, DTCC, says: "A real-time trade guarantee significantly enhances DTCC's already robust risk management process and gives financial firms greater certainty that their trades will settle."
Having received approval from the DTCC board, NSCC plans to file a rule change with the Securities and Exchange Commission (SEC) in the first quarter seeking approval for the real-time trade guarantee.
The clearer says it has also increased its equity clearing processing capacity to 500 million transactions per day to ensure it can handle unexpected spikes in trading volume.
The move comes after NSCC experienced a 33% jump in equity volume, handling a daily average of nearly 170 million total transactions, in Q4 2008.