Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Thursday, May 9, 2013

DTC Reduces Settlement Processing Risks

Posted by Brenda Hamilton
Securites Attorney Boca Raton Florida
In order to mitigate systemic risk the SEC approved Depository Trust Company’s (“DTC’s”) modified processing of customers’ net debit caps during weekends and holidays. Effective February 27, 2012, DTC commenced temporarily reducing customers’ maximum net debit cap during weekend or holiday processing periods.
DTC routinely processes transactions for settlement on S-1 (settlement day less one day) in its night cycle which results in Friday processing of obligations settling on Monday. This causes participants to have potential for large net debit obligations for an extended period over a weekend or holiday.

Under the modified process, DTC temporarily reduces the largest net debit caps on Friday and restores them to their previous levels in the ordinary course of business prior to the opening of day-cycle processing on Monday morning or post-holiday processing.
Member failures, such as Lehman Brothers, led to uncertain conditions on the days prior to, and typically through the weekend and holidays, which created substantial exposure for DTC.
“Under the previous policy, if a firm experienced a sudden failure over the weekend, DTC carried liquidity and market risk for at least two days,” said Gregory Kalina, DTCC Vice President, Enterprise Risk Management. “Lowering the debit cap reduces systemic risk by ensuring DTC not only has enough liquidity to cover the potential failure of a large participant should it occur over the weekend or holiday, but has enough liquidity on the Monday following the default to still provide remaining participants with debit caps, averting a ‘cash-and-carry’ settlement scenario.”

New Net Debit Caps
The net debit cap reflects the highest obligation amount a family of related companies or an individual company potentially has to DTC during a business day. Additionally, the firm must have sufficient collateral on hand to cover any net debit that arises from processing a transaction.
DTC, a DTCC subsidiary, reduced net debit caps as follows:
♦ For a family of companies: from aggregate maximum net debit caps of US$3 billion to US$1.5 billion.
♦ For individual firms: from maximum net debit caps of US$1.8 billion to US$1.5 billion.
Individual firms that have a DTC net debit cap below US$1.5 billion were not affected by the changes.

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