DTCC, through its depository, The Depository Trust Company (DTC), will enhance its settlement model to eliminate risks associated with intraday reversals of transactions in DTC's MMI system that are the result of issuer failure. Subject to regulatory approval, the proposed changes are detailed in a service description paper entitled "Increasing Certainty and Promoting Intraday Settlement Finality."

"DTCC continually examines how to further reduce risk in the financial system and the proposed changes to MMI transaction processing aim to help eliminate the credit risk that IPAs still face today," said Andrew Gray, DTCC managing director, Core Business Management.

Current and Proposed Models

Under the current MMI model, Issuing and Paying Agents (IPA) banks, who act on behalf of issuers, can instruct DTC to issue a "refusal to pay" for its maturity obligations up to 3 p.m. EST when the IPA has not received adequate funding from the issuer. In the event of a "refusal to pay," DTC will reverse all valued transactions processed for the designated issuer on the current day. MMI reversals compromise intraday settlement finality and create uncertainty for clients.

The proposed MMI settlement model will require changes to DTC's "refusal to pay" procedures and to current market practices by investors, issuers, custodians, placement agents dealers and IPAs. These changes will allow MMI transactions to be processed intraday for end-of-day net funds settlement and without the risk of reversal prior to settlement, currently associated with a "refusal to pay."

"DTCC has played a key role in the growth and expansion of the MMI market by providing significant settlement efficiencies in the processing of these instruments," said Daniel Thieke, DTCC managing director and general manager, Settlement and Asset Services. "DTCC is committed to strengthening intraday settlement finality and reducing risk exposure to help better protect and preserve the MMI market and the intee integrity of the financial system."

Benefits of the Enhanced Model for DTC and the Industry

The paper outlines some of the key benefits gained from the enhanced model, including:

Mitigating credit and liquidity risks associated with intraday MMI transaction reversals;
Increasing transparency of issuer funding for investors, their custodians and IPAs; and
Maintaining the current level of intraday and end of day liquidity requirements for DTC clients.

History and Impetus for Driving Down Risks in MMI Processing

In the wake of the financial crisis, DTCC and the Securities Industry and Financial Markets Association (SIFMA) formed the MMI Blue Sky Task Force ("the Task Force") to evaluate the strengths and weaknesses of the current MMI settlement system and work collaboratively to develop ways to further reduce risk in the processing of these transactions. In 2012, the Task Force created a model to eliminate intraday reversals of MMI transactions in the DTC system and has since further defined the concept, outlined in the DTCC service description paper.

In addition, DTCC supports the CPSS-IOSCO Principles for Financial Market Infrastructures, which state that Financial Market Infrastructures should promote final settlement intraday or in real time. To comply with these guidelines, DTC seeks to modify the current MMI process that allows an IPA to issue a "refusal to pay," which triggers a reversal of MMI deliveries prior to settlement. CPSS-IOSCO stands for the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO).

The MMI enhancements are also referenced in two DTCC white papers published in December 2012: "A Roadmap for Promoting Intraday Settlement Finality in U.S. Markets" and "Reducing Risk and Enhancing Intraday Finality in the Settlement of Money Market Instruments."