The new model, outlined in an FICC white paper 'Straight-Through Processing (STP) for Institutional Settlement', would include only the dealer side of the trade in its net settlement process.

The institutional side of the trade would not be netted, but rather settled with the institutional customers on a trade-for-trade basis by FICC on behalf of the dealer.

In addition, FICC says it will encourage direct institutional membership by removing some of the current admission and regulatory barriers. The agency also proposes to extend its existing Correspondent Clearing Service, in which full netting members can submit trades on behalf of institutions for netting and settlement.

FICC’s white paper was developed as part of an industry-wide initiative to address key issues surrounding STP for institutional settlement, with collaboration from the STP Committee of The Bond Market Association (TBMA).

Tom Costa, FICC president says the idea is to build a process that would facilitate the dealer managing only the block side of the trade in the post-trade processing environment.

"FICC would step in between both sides of the trade and assume the dealer’s role in settling the institutional side of the trade," he says. "This new model will maximise netting, fill in the gaps in the institutional settlement process that exist now and provide a significant step in the right direction for achieving long-term goals."

The plan is to use the the US Government and Agency securities clearing and settlement process model as the basis for a comprehensive settlement model that will encompass trades in all fixed income and other securities, says Costa. In determining how to evolve the Government model to include other security types, a joint working group of TBMA and DTCC/FICC will be formed.

The infrastructure for such a scheme would leverage the use of a common message hub to provide a single point of connectivity for all market participants, the expanded use of common message standards and the use of FICC's established processing mechanisms for centralised netting and settlement.

In the proposed model, FICC would conduct trade-for-trade settlement based on instructions provided by the institution’s matching engine, for example a Centralised Matching Utility (CMU) or an Electronic Trading System (ETS) which offers already compared trade data and settlement instructions.

"The proliferation of ETSs and the emergence of CMUs are a new opportunity for us to redesign our netting and settlement systems to capture all the institutional activity of our dealer members," Costa says.

Susan Tysk, FICC vice president of Planning, says that an established framework for the full integration of functions across CMUs, ETSs, clearing corporations and depositories will ultimately allow for a seamless settlement process extending from block execution through to settlement with custodian banks, thus easing the administrative burden presently incurred by dealers in managing multiple sub-accounts at the allocated trade level.

In addition to soliciting comments on the paper, Tysk says FICC is planning to establish an Operations Working Group and a Risk Management Working Group, to assist in development of more detailed business requirements for the Government securities phase of the project.