The Depository Trust & Clearing Corporation (DTCC) today released details on how its depository subsidiary, The Depository Trust Company (DTC), will introduce Settlement Matching, bringing significant enhancements to the settlement process and further reducing settlement risk.
In a paper titled "Increasing Certainty and Promoting Intraday Settlement Finality: A Service Description for Settlement Matching," DTCC outlined the processing changes it will make in 2013 and 2014 to implement Settlement Matching for all clients. These processing changes at DTC will be subject to appropriate regulatory rule filings and approvals.
DTC will leverage existing infrastructure to provide participants with the ability to "authorize or match" transactions before it attempts to process these transactions for settlement. This will eliminate reclamation transactions or "reclaims," which occur when a participant attempts to return a transaction made earlier in the day. Settlement Matching also will eliminate any credit and liquidity risk associated with same-day reclaims.
"Settlement Matching will bring many benefits to the U.S. market," said Susan Cosgrove, DTCC Managing Director and General Manager, Settlement and Asset Services. "With the elimination of reclaims, we'll have enhanced intraday settlement finality. By leveraging the matching process to drive settlement, DTCC will promote 'best practices' for trade affirmation and straight-through processing. Lastly, with the implementation of Settlement Matching, DTCC and the industry will be better positioned for a shortened settlement cycle, if and when it's recommended.
"The Settlement Matching initiative follows on DTCC's recent efforts to further reduce systemic risk and the heightened focus on risk management," said Cosgrove, "and it also more closely aligns DTCC with global standards."
Settlement Matching will be introduced in two ways:
Affirmed institutional transactions processed by Omgeo or any other qualified vendor will be sent to DTCC in a straight-through manner where the trade match will automatically trigger the settlement match, otherwise known as passive matching. To address the need for clients to ensure funding is in place from their customers prior to taking in securities, DTCC will introduce exemption functionality to allow receivers to pause or withhold the transaction from settlement until appropriate credit decisions are reached.
Unaffirmed institutional, non-institutional trades and other transactions submitted by DTCC clients including banks, brokers and their service providers will be matched leveraging the current Receiver Authorization Delivery (RAD) process.
The RAD system enables DTCC clients to review and either approve or cancel the transaction, avoiding reclamations and thereby promoting intraday settlement finality. Currently, RAD has value thresholds limiting the transactions it processes. These limits will be lowered to zero in two stages in 2013 and 2014 so that all non-institutional and unaffirmed transactions will be processed through RAD.
Trades cleared through National Securities Clearing Corporation, the U.S. central counterparty and a DTCC subsidiary, are currently pre-matched, locked in and not available for reclaim. These transactions will not require Settlement Matching.
The service description follows the release of an industry white paper in December 2012 announcing proposed changes to DTCC's settlement process titled "A Roadmap for Promoting Intraday Settlement Finality in U.S. Markets." Settlement Matching was one of four areas discussed in the paper.
The service description provides detailed information on how DTCC and clients will prepare to implement Settlement Matching as well as development and operational changes clients will need to make for each implementation stage.