Buy Side to Join DTCC Fixed Income Service

Terry Flanagan

Fixed Income Clearing Corporation (FICC), a subsidiary of The Depository Trust & Clearing Corporation (DTCC), has filed a proposed rule change with the Securities and Exchange Commission (SEC) to establish minimum financial requirements for registered investment companies (RICs) – buy-side market participants – to become members of its Government Securities Division (GSD).

Enabling RICs to become guaranteed service members of GSD will reduce risk, enhance efficiency and increase transparency of the market by capturing a larger portion of activity from both current and new members. RICs are key participants in the market served by GSD.

“We are pleased to offer buy-side firms the benefits of GSD’s netting services and the advantages of a central counterparty, which help firms reduce risk, enhance transparency and lower costs in the trading of U.S. Government securities,” said Murray Pozmanter, managing director and general manager of DTCC’s Clearing Services. “With both existing and new members submitting trades to GSD, a broader, more centralized view of the market will also help regulators monitor a firm’s exposure to these financial instruments.”

GSD is a provider of trade comparison, netting and settlement for the Government securities marketplace. GSD’s clients include the nation’s major brokers and dealers, as well as a wide range of entities that trade U.S. Government securities.

As GSD members, RICs will benefit from GSD netting services and the related operational efficiencies of a central counterparty (CCP), which provides a guarantee of completion on eligible trades, even in the event of a member default.

Other membership benefits include guaranteed settlement with FICC as the central counterparty, automation and centralization of collateralization of counterparty exposures, daily risk management services, and centralized liquidation of a failed counterparty, reducing the potential for market disruption.

In addition to the benefits that RIC firms would receive as members of GSD, broadening the GSD membership pool will help better protect the safety and soundness of the overall U.S. financial system by offering decreased settlement and operational risk as transactions for a greater number of members will be netted subject to guaranteed settlement, novation and independent risk management, as well as more efficient use of collateral as the CCP will have a more holistic view of actual risk the netting members have in the asset class.

As well, buy side participation will lower risk of market disruption in a liquidation as a result of having a more complete view of the failing counterparty’s actual positions, therefore eliminating unnecessary market activity between the CCP clearing organization and non-members, provide increased transparency to regulators, as well as provide fully collateralized market risk, with uniform margin methodologies applied to the marketplace.

Currently, RICs are included as a membership category in the GSD rules; however, the proposed rule change establishes their minimum financial requirement of $100 million in net asset value, enabling them to begin utilizing GSD’s Tier Two Netting membership type. Because RICs are legally prohibited from participating in loss mutualization, such members are only subject to loss allocation based upon their trading activity with the defaulting member that resulted in a loss.

Pending regulatory approval, RICs will have the ability to become members of GSD. RICs will not be permitted to utilize the GCF Repo service, which falls within the scope of GSD services. As DTCC continues to work collaboratively with tri-party banks and supervisors on tri-party reform, it will revisit opening this service to the RICs.

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