DTCC, the U.S. umbrella organization for clearance and settlement, clears and settles virtually all equity trades in the U.S. but it does require that some transactions be settled on a trade-for-trade basis outside its systems. That means they must be settled by firms manually on their own and bilaterally with each counterparty. And that spells additional administrative costs and operational risk.
DTCC’s clearing agency subsidiary, National Securities Clearing Corporation (NSCC) has begun aggregating these “trade-for-trade” transactions. As these transactions flow from the exchanges and other trading venues into NSCC’s trade capture system each day, NSCC aggregates buy and sell orders between counterparties in a given security that it designates to settle on a trade for trade-basis into a single receive order for the receipt of securities and a single deliver order for the delivery of cash. However, as is currently the case for transactions settled bilaterally on a trade-for-trade basis, the aggregated obligations are not netted against each other and they are not guaranteed to settle by NSCC.
DTCC offered the following example for how the new service works: if Broker A had fifteen buys against Broker B in Security X, these items would be aggregated into one receive obligation for A and one deliver obligation for B for the total amount of shares for the 15 transactions in Security X. If Broker A also had 20 sells with Broker B on that same day for the same security, those items would also be aggregated into one deliver obligation for A and one receive obligation for B. In this example, A and B would each have two settlement obligations with the other for Security X rather than the 35 obligations they would each have without aggregation.
“While trade-for-trade transactions represent a small percentage of overall equity trading volume, they inject unnecessary inefficiencies into the system because each trade has to be manually settled,” said Susan Cosgrove, DTCC’s managing director for clearance and settlement for equities in a statement. “By aggregating these trades, we are able to reduce the total number of transactions that need to be settled each day, which helps our members reduce their own internal costs.”
DTCC said that for the week of May 17, NSCC successfully aggregated 67 percent of the 64,650 trade-for-trade transactions in its systems. Doing so reduced the number of trades requiring financial settlement to 20,834.
Later this year, NSCC will send the aggregated transactions to its new Obligation Warehouse (OW) to be stored until they settle. The OW will also automate the management for those trades which fail to settle and check them each day to see if they are eligible for processing through the NSCC’s CNS (Continuous Net Settlement) system. The goal of the OW, expected to go live in the first quarter of 2011, is to allow brokers to have real-time access to the status of their open failed transactions, which will help minimize the expense and risk of managing those open obligations on their own.
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