U.S.A.: Prospective changes : New matching scheme

Further to our Announcement A12144, dated 30 July 2012, describing a number of initiatives taken to strengthen the functioning of the U.S. securities markets and to reduce risks in the area of settlement and custody, we hereby provide an update to one of these initiatives concerning settlement efficiency.

Background

On 26 November 2012, DTC released an Important Notice outlining a proposed matching scheme, subject to regulatory approval, whose objectives are to promote intraday settlement finality and reduce the credit and liquidity risk associated with reclaims (that is, the return of unacceptable deliver or payment orders).

Implementation of the scheme would mean that all valued Deliver Order (DO) and Payment Order (PO) transactions would require matching; free DO transactions would not require matching.

To achieve the above-mentioned objectives, DTC proposes to employ two existing models:

• For affirmed institutional deliveries, DTC would use the institutional trade matching/affirmation functionality, including the Authorisation and Exception functionality within DTC’s Inventory Management System (IMS).
  
• For non-institutional transactions, DTC would use the Receiver Authorised Delivery (RAD) functionality.

Note: Currently, DTC’s default RAD limits are set to USD 15 mn for deliver orders and USD 1 mn for payment orders. These limits would be progressively lowered in accordance with DTC’s implementation schedule, bringing additional transaction volumes within the scope of the RAD functionality.

The new matching scheme would enable receiving participants to authorise or approve incoming DO and PO transactions, which, once authorised or approved, would be processed with no possibility to be reclaimed, thus eliminating the intraday uncertainty engendered by such reclaims.

Our comments

Participants in the U.S. securities markets are confronted, at settlement level, with a number of issues that could be avoided with the introduction of an appropriate matching scheme.

In practice, a delivery instruction is all that is required to initiate a transfer of securities in DTC or FedWire, entailing, in particular, the DK (Don’t Know) process whereby the receiving party can return the securities to the delivering party, creating uncertainties as to settlement finality and, in the case of transactions against payment, triggering cash management issues.

This initiative launched by DTC would help to resolve such inefficiencies, at least as far as DTC-eligible securities are concerned, and the phased approach should mitigate any possible disruption of the market. We are very supportive of this initiative and look forward to its implementation.

We continue to monitor developments under this initiative very closely and are contributing actively to the debate, thanks to the continuing dialogue established with local market players.