DTCC plans real-time trade guarantee for municipal and corporate bonds, equities

By Jennifer Chiou

New York, Jan. 29 - Depository Trust & Clearing Corp. announced a plan to implement a real-time trade date guarantee for all continuous net settlement eligible trades, including equity, corporate bond and municipal bond transactions.

This move is among the measures that will further mitigate risk for the industry and ensure greater certainty for market participants, DTCC said in a news release.

In addition, its equity clearing processing capacity has been increased to 500 million transactions per day.

DTCC noted that its equity clearing subsidiary, National Securities Clearing Corp., will apply its guarantee on the trade date upon comparison for non-locked-in trades or validation for locked-in trades instead of T+1, which will reduce credit exposure for trading firms as well as systemic risk across the industry.

With the move to a real-time trade guarantee, DTCC said it expects some change to clearing fund requirements. However, in light of the current economic environment, DTCC added that it is reviewing its collateral management methodologies and calculations to ensure adequate coverage to protect the industry.

Currently, the trade guarantee is applied at midnight of T+1, which represents a delay before NSCC steps in between the two sides of a trade and assumes the buyer's credit risk and the seller's delivery risk in the event either side defaults.

NSCC is expected to file a rule change with the Securities and Exchange Commission in the first quarter seeking approval for its real-time trade guarantee. The decision was recently approved by DTCC's board.

"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," Michael C. Bodson, DTCC executive managing director, business management and strategy, said in the release.

"Recent market events, including firm failures like Lehman Brothers and Madoff Securities, underscore the importance of a real-time trade guarantee - and the value of a central infrastructure provider like DTCC that can manage risk from a central vantage point across asset classes," Bodson added.

In the fourth quarter of 2008, NSCC experienced a 33% jump in equity volume, handling a daily average of nearly 170 million total transactions, compared to the average daily volume of 128 million for 2008, the release said.

The increase in capacity to 500 million transactions per day ensures that DTCC has the ability to handle unexpected spikes in trading volume.

DTCC is based in New York and provides clearance, settlement and information services through its subsidiaries.

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