The calculator enables participants to evaluate potential margin and clearing fund obligations associated with becoming a member of DTCC’s Fixed Income Clearing Corporation (FICC) Government Securities Division (GSD).

With the amount of US Treasury clearing activity processed through FICC expected to rise by $4 trillion daily following the SEC’s expanded clearing mandate which will be implemented in 2025 and 2026, DTCC’s calculator will be a key tool for firms to determine VaR and potential margin obligations for any simulated portfolio.

“VaR is a widely used risk management concept in the financial services industry and is the primary component of GSD’s clearing fund requirements,” said Tim Hulse, managing director, financial risk and governance, at DTCC.

“The calculator considers factors such as historical data, volatility and confidence levels to estimate VaR, increasing market transparency.”

Using FICC’s VaR methodology, the new calculator will offer the opportunity for participants to calculate potential margin obligations on a simulated portfolio, for given positions and market value.

“FICC understands the urgency and importance of evaluating firms’ risk exposure associated with the expansion of US Treasury Clearing. The VaR calculator provides market participants with increased transparency into these obligations,” added Hulse.

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With the size of transactions in the US Treasury market now exceeding $7 trillion daily, CCLF is will serve as a risk management tool used for managing FICC’s liquidity risk linked to settlement activity.

Participants will be able to input their current settlement activity into the calculator to estimate and understand the CCLF-related liquidity obligations that could arise from membership, DTCC said.

CCLF is a rules-based liquidity resource facility able to offer FICC additional liquid financial resources to meet its cash settlement requirements in the event of a default of the largest Government Securities Division (GSD) family of affiliated netting members.

Ahead of potential funding needs, GSD netting members can include their determined CCLF obligation amounts into their own liquidity plans.

Although the CCLF obligation is a committed obligation for the netting members, does not require pre-funding or deposits of the obligation amount are not required by FICC.

Netting members instead provide up-front attestations linked to their ability to provide such CCLF amounts as an ongoing FICC membership requirement.

“By providing the public CCLF calculator, we continue to increase transparency into our financial risk management program, empowering potential members to understand their role and obligations as a FICC GSD member,” said Tim Hulse, managing director, financial risk and governance at DTCC.

“CCLF provides a critical backstop to address the financial impact of volatility and stress across repo markets while safeguarding the industry and individual members.”

The CCLF calculator requires a range of data points to be provided by users. Once provided and entered on screen, the calculator processes the data points using the existing GSD CCLF engine logic, which then provides an estimated individual CCLF obligation.

“FICC recognizes that many firms are considering membership with GSD to comply with the final SEC rule on expanded clearing of US Treasury activity,” said Claire Lough, executive director, financial risk and governance at DTCC.

“This calculator will enable market participants to simulate their potential CCLF obligations to assist in understanding what is required of a GSD Netting Member.”

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The new service will bring OTC cash equities trades into Cboe Clear Europe’s cleared environment, which can then be netted against on-exchange transactions for settlement purposes.

Creating a link between DTCC’s Institutional Trade Processing (ITP) central matching service, CTM, makes up the first part of the joint initiative. Subject to regulatory approvals, this is projected to go live in Q2 of next year.

Cboe Clear Europe will be the first CCP to connect to CTM.

“This joint solution enables us to bring greater efficiencies to our clients, helping to optimise their current post-trade workflows and operational processes as the global financial markets look to accelerate settlement cycles,” said Vikesh Patel, president, Cboe Clear Europe.

As part of the initiative, DTCC and Cboe Clear Europe each intend to develop a proof of concept that links Cboe Clear Europe with the tri-party trade matching workflow of CTM.

Prime brokers will receive a golden copy of transaction details when a match is achieved between a hedge fund and executing broker via DTCC’s CTM service. CTM could then automatically send matched trades to the CCP, providing netting and clearing benefits to Cboe Clear Europe and DTCC’s mutual clients.

The pair claim the new workflow could help reduce settlement and operational risk and will help facilitate a reduction in capital requirements when moving from OTC to CCP settlement, as well as lower trade fails and defaults.

“We are pleased to be working with Cboe Clear Europe on this important initiative to bring greater post-trade efficiencies to the industry as the global markets look to accelerate to a T+1 settlement cycle,” said Val Wotton, managing director and general manager, DTCC Institutional Trade Processing.

“Cboe Clear Europe’s extensive venue coverage combined with CTM’s large client base will deliver increased operational efficiency and netting opportunities across European trading venues.”

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The lack of major issues and positive data signals on affirmation and fail rates will come as a huge sigh of relief to the industry, which is benefitting from an over-preparedness strategy and its highly alert, round-the-clock ‘war room’ and ‘command centres’.

“It was very smooth and someone in our office likened it to Y2K, which I took umbrage with because I think the reason it was smooth was because the industry got its act together and made sure that everybody knew what they had to do and when they had to do it. I think that really folded into a very smooth transition,” said one operations executive from an asset manager, speaking on the T+1 War Rooms initiative launched by The TRADE’s sister publication, Global Custodian. 

“We don’t often get the chance to pat ourselves on the back, so you might as well take this opportunity.” 

Another buy-side source said: “I think as much as we can make a joke that it was kind of a non-event, that shouldn’t take away from the planning, preparation, full scale project teams that went on for a year or so beforehand.”

For such a far-reaching market structure change however, the true measure of success will be measured in weeks and months – not just for affirmation and fail rates, but across geographies, client types and adjacent functions such as ETFs, FX and securities lending. Further tests will also arise through upcoming public holidays and market participants exiting this phase of ‘hyper focus’ on the matter.

“It’s more the longer-term items of extending settlement stress testing, your custodian’s ability to afford you an overdraft, seeing what the claims do in this quarter compared to last quarter,” said another asset manager on the discussion being held under Chatham House rules. “It’s not the day-to-day so much now, but more those rainy-day scenarios and seeing how the market reacts to that along with your custodian and your counterparts.” 

What the data says so far

The first three days saw incrementally increasing affirmation rates – 92.76%, 94.55% and 94.66%, respectively – while fail rates stayed consistent with those seen in a T+2 environment over day one and two. However, affirmations then dipped to 91.26% on day four, while fails saw an uptick over days three and four.

What is important to remember though, is that within the opening week there was both a double settlement day – whereby T+2 and T+1 transactions were settling together – along with the MSCI rebalancing, an event which many believed would be a stumbling block for the new operational setup for US equities.   

What the data for Monday 3 June has shown us is that the affirmation rates jumped back up to 93.65%, while fail rates were the lowest since the transition. Despite this, Reuters, Bloomberg and Financial News quickly jumped on the spike in fail rates through alarmist headlines on 31 May. One day of fail rates is not indicative however, especially when that day coincided with a major market event – in this case the MSCI rebalancing on 31 May. Many market experts look at monthly, or three-monthly averages, for an indication.

Outside of the quantitative data, the feedback both on the record and behind closed doors from the securities industry has been overwhelmingly positive. 

One source at a leading custodian said that the double settlement date didn’t cause issues despite an increase in trades requiring repair and a notional increase. Meanwhile, they noted the MSCI rebalance saw a 50% increase in volumes, but – again – no concerns and it “all went smoothly”. 

In addition, SEC chair Gary Gensler, along with the DTCC and SIFMA, were quick to herald the transition a success.  

What else we’re hearing 

The data right now is so positive that fail rates on certain days are eclipsing those seen in a T+2 environment, however it’s almost inevitable that this purple patch will have days – and weeks, even – where it comes crashing down. 

A survey by The ValueExchange in January saw market participants predict the fails rate would eventually rise to 4.1%, so could we be seeing a temporary quiet before the storm? 

“Most have put in place contingency support to deal with the switchover but that isn’t a long-term solution – and the more markets that move to T+1, the more pressure there will be to move away from manual and batch-based processing,” said Virginie O’Shea, founder and CEO of Firebrand Research. “The costs are higher than anticipated too due to the service providers charging for lending and overdraft facilities for funding support.”  

Two tests have been passed thus far, but what would a spate of market volatility mean for participants? We have already seen spikes in fails during turbulent markets, and with so many elections on the near horizon – along with upcoming public holidays – it’s not out of the question to foresee some tough market conditions – which could serve as a true measure of industry readiness around T+1. 

In addition, we should begin to hear reports of how parallel functions are faring. CLS has said it will monitor the impact of the shift to T+1 and make assessments in both June and September through “temperature checks”. 

“It’s difficult to ascertain exactly what might be related to T+1, because we don’t have that level of detail, but we can look around certain parameters. If we found that actually volumes and values stay exactly the same, then we can safely assume that the impact has been negligible. Obviously, if impacted volumes are much higher than expected we’ll reassess it sooner,” Lisa Danino-Lewis, chief growth officer at CLS told The TRADE and Global Custodian earlier this year. 

In addition, the impacts on securities lending will be one to watch – along with how the ETF markets have adjusted. There may also be some impacts on corporate actions which soon come to light. 

“The real test is the test of time,” said one custodian, speaking under the condition of anonymity. “We will continue to monitor affirmation rates, settlement rates, non-STP trades and funding changes to ensure the initial behavioural partners maintain into BAU processing.”

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According to the survey conducted by DTCC across 83 sell-side institutions, daily activity on its Fixed Income Clearing Corporation (FICC) will see an increase of $4 trillion as a result of the regulatory change – thanks in large part to new stipulations around mandatory central clearing.

The prediction is up from a previous estimate of $1.63 trillion, reached as part of a prior industry consultation.

“Given the SEC’s rules around mandatory central clearing are now final and the industry’s understanding of their impact is becoming clearer, it is not surprising to us to see the incremental volume estimates hardening around $4 trillion daily,” said Brian Steele, DTCC managing director, president, clearing and securities services.

“While expanding Treasury clearing will be an important structural change for all Treasury market participants, we view it as a logical expansion of the services we provide and consistent with FICC’s mission.”

Steele confirmed that DTCC currently processes roughly $7 trillion in Treasury activity each day, adding that DTCC’s buy-side ‘sponsored service’ had seen volumes increase by 70% year on year.

“We expect these growth trends to steadily continue as we move toward go-live for the expanded Treasury Clearing requirement,” he added.

DTCC highlighted “done-away activity” as a key area of discussion as a result of the new SEC rules. Done away activity relates to US Treasury activity that is executed by a client using one counterparty but then cleared by a different counterparty.

According to DTCC’s survey, around a third of sell-side institutions said they plan to offer US Treasury clearing activity out of their prime brokerage, agency clearing or futures commission merchant business (FCM) business lines.

First announced in December last year, the SEC’s new rules are designed to enhance risk management practices for central counterparties in the US Treasury market and facilitate additional clearing of securities transactions in this market segment.

Under the new rules covered clearing agencies in the US Treasury market are required to adopt policies that ensure their members submit for clearing certain specified secondary market transactions.

Subject to conditions, the amendments also permit broker-dealers to include customer margin required and on deposit at a clearing agency in the US Treasury market as a debit in the customer reserve formula. The amendments also require covered clearing agencies to separately collect and calculate margin for house and customer transactions.

The new rules also set out that policies and procedures must be designed to ensure that the covered clearing agency has appropriate means to facilitate access to clearing. The new rule includes an exemption for transactions where the counterparty is a central bank, sovereign entity, international financial institution, or natural person.

The amendments will go into effect in two phases. The changes regarding the separation of house and customer margin, the broker-dealer customer protection rule, and access to central clearing required to be completed the end of March 2025.

“The $26 trillion Treasury market — the deepest, most liquid market in the world — is the base upon which so much of our capital markets are built,” SEC Chair Gary Gensler said in a statement in December. “Having such a significant portion of the Treasury markets uncleared — 70 to 80 percent of the Treasury funding market and at least 80 percent of the cash markets — increases system-wide risk.”

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The rate increased from 92.76% on the first day of T+1. 

In addition, settlement fails appear not to have spiked yet, with the percentage still under 2% over the first two days of the new setup. 

According to the data from DTCC, CTM Allocations Rate by 7PM ET also rose above 99%.  

Overall, there appears to have been no major issues across the first two days of T+1 settlement for US equities, however Global Custodian reported yesterday that DTCC had experienced system issues within its DTC and NSCC night cycle processing on the first day of T+1. 

The issue was described by sources as having minor impact and is in line with ‘expected teething issues’ anticipated by the US market infrastructure.  

DTCC has issued a notice to market participants that a system issue had occurred, but according to sources at a number of custodians, transactions were still processed in accordance with the DTCC deadlines for settlement.

The processing delays were subsequently resolved.  

Elsewhere, Global Custodian also revealed that Canadian exchange TMX had some minor system issues on its first night of T+1, which was one day prior to its North American neighbour.  
 
“We experienced some isolated intra-day processing delays on Monday, 27 May, and undertook measures to address the issue,” a TMX spokesperson said. “All key and critical functions have been operating as normal. CDS continues to prioritise communication with participants during the transition.” 

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The issue was described by sources as having minor impact, and is in line with ‘expected teething issues’ anticipated by the US market infrastructure.

DTCC has issued a notice to market participants that a system issue had occurred, but according to sources at a number of custodians, transactions were still processed in accordance with the DTCC deadlines for settlement.

The processing delays were subsequently resolved.

Following the affirmation process under T+1, trades are sent from DTCC’s ITP service to DTC and NSCC for processing in DTC’s night cycle batch  process. The process starts on the evening of trade date at 11:30 PM ET and runs for two hours.

In addition, Global Custodian understands that affirmation rates were 92.76%, topping the DTCC’s target rate of 90%.

Last week, for the week ending 18 May 2024, 87.92% of transactions were affirmed by the DTC cut-off time of 9:00 ET on trade date.

In addition, Global Custodian understands that affirmation rates were 92.76%, topping the DTCC’s target rate of 90%.

Last week, for the week ending 18 May 2024, 87.92% of transactions were affirmed by the DTC cut-off time of 9:00 ET on trade date.

Global Custodian also understands Canadian exchange TMX had some minor system issues on its first night of T+1, which was one day prior to its North American neighbour.

“We experienced some isolated intra day processing delays on Monday, 27 May, and undertook measures to address the issue,” a TMX spokesperson told The TRADE. “All key and critical functions have been operating as normal. CDS continues to prioritise communication with participants during the transition.”

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Val Wotton

Specifically, Sumitomo is aiming to boost its trade processing through leveraging ITP’s central trade matching (CTM) platform which includes Match to Instruct (M2i) workflow. 

The asset manager is also set to fully automate the post-trade processing and develop its same day affirmation capabilities for cross-border transactions within APAC by leveraging TradeSuite ID, ALERT and Settlement Instruction Manager (SIM).

Yosuke Hosokawa, associate general manager at Sumitomo Mitsui Trust Asset Management, highlighted the relevance in the lead up to the settlement shift: “It is important that financial markets outside the US leverage automation to enable straight through processing and align with global standards. We are happy to collaborate with the wider industry to bring accelerated settlement to our clients.”

Sumitomo Mitsui Trust is the first Japanese asset manager to adopt the ITP services through Nomura Research Institute’s (NRI) SmartBridge Advance – the collaborative offering built in partnership by DTCC and NRI.

In addition, Japanese regulators require specifically appointed trust banks to oversee the trading activities of their underlying investment managers’, as well as being included in the pre-settlement, post-trade communications chain. With this in mind, DTCC’s SIM facilitate this and enables the “soto-soto” arrangement, helping to enable the T+1 settlement within the APAC region.

Val Wotton, managing director and general manager, DTCC ITP, said: “We are pleased to partner with Sumitomo Mitsui Trust Asset Management to bring best practice capabilities that enable accelerated settlement in the region. As we look toward the US move to T+1, achieving faster time to settlement for both cross-border and domestic transactions is more important than ever.

“ITP’s suite of services is uniquely positioned to enable counterparties to reach settlement finality faster while seamlessly connecting them to thousands of counterparties around the world.”

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Val Wotton

The introduction of CTM’s new workflow aims to streamline trade communications among hedge funds, prime brokers and executing brokers. By integrating CTM’s tri-party matching functionalities, the platform standardises and automates the delivery of hedge fund trade files, supporting real-time communication of trade details and fostering smooth trade processing flows.

“Right from the start we were excited to be part of the initiative. CTM’s tri-party matching workflow provides a much-needed solution in the prime brokerage space that improves post-trade processing workflows,” said Andrew Daponte at Societe Generale.

“The service integrates CTM into the prime broker environment, which increases efficiency, capacity and the client experience on the platform.”

The new workflow utilises CTM’s automated central matching functionality to furnish prime brokers with a definitive record of transaction details upon a trade match between a hedge fund and an executing broker, introducing real-time standardisation and automation to the trade allocation process.

Other key features include synchronising automation of the trade communication to all prime brokers, automating real-time trade notifications, identifying prime broker recipients via a golden source SSI database, and enhancing transactions in CTM with ALERT SSIs, promoting increased settlement instruction transparency. Additionally, the workflow provides a golden trade copy that has been pre-matched by the hedge fund and executing broker.

Val Wotton, managing director and general manager of DTCC institutional trade processing, said: “It is exciting to see Societe Generale’s adoption of CTM tri-party workflow capabilities, a critical enabler of accelerating settlement as it automates the communication of golden trade copy to prime brokers as soon as a match between the hedge fund and executing broker takes place within the CTM platform.”

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In today’s T+2 environment, approximately 90% of all trades are affirmed by 11:30am ET on T+1 – the current affirmation cut-off point, and DTCC feels a similar target rate for a T+1 environment would be appropriate to ensure settlement efficiency remains high in the market.   

The market infrastructure giant at the centre of the shift to T+1 has been tracking data of late and in December 2023 found only 69% of trades were affirmed by 9pm on trade date, while in January this rose to 73%. The 74.5% rate just a month later suggests slow progress, particularly when it comes to non-cleared flow, the bilateral settlement piece, where there are still challenges.

Subsequently, the DTCC has urged market participants to “ramp up their preparations and testing” and has encouraged continued collaboration between investment managers and their custodians. 

Regarding the latter pair, custodian or investment manager – or self-affirmation – rates were 53% as of 9:00pm ET on trade date in February, up from 51% in January. 

The prime broker affirmation rate was 83% – up from 81% in January – and investment manager auto affirmation – or central match – rate was 89%, down from 92% in January. 

In January, Val Wotton, head of ITP at DTCC told sister publication, Global Custodian, that prime brokers and hedge funds are highly incentivised to get their transactions into clearing – which has resulted in a 95% affirmation rate in a T+2 world for NSCC trades. Additionally, eight of the top 10 prime brokers had already achieved a 90% affirmation rate by 9pm ET on trade date.   

In a report issued in January, the DTCC noted: “Many custodians use omnibus accounts in which the custodian’s customers use the custodian’s TradeSuite ID number, mostly in the case of custodians for clients located outside the US.  

“The challenge is, when numerous market participants use a single TradeSuite ID number, it does not allow clear visibility into which investment managers have affirmed trades on time and which have not.  

“To bolster omnibus TradeSuite ID confirmation rates, DTCC has been partnering with custodians, particularly those with customers outside the US, to educate them on this issue, to highlight the nuances, and to suggest changes that can support higher affirmation rates.”

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