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DTCC Addresses Volatility in ETF Collateral Management Process

Infrastructure giant Depository Trust & Clearing Corporation (DTCC) confirmed today that its subsidiary, National Securities Clearing Corporation (NSCC), has launched an automated solution that it says streamlines and simplifies the Exchange-Traded Fund (ETF) collateral management process and adds new fixed income ETF capabilities, a critical step to freeing up capital and increasing operational efficiency during market uncertainty and volatility. Today, NSCC processes an average of 260,000 ETF create/redeem transactions every day.

New collateral management capabilities

According to a company statement, the new NSCC solution fully automates the exchange of ETF collateral, reducing risks in the ETF fund process from trade date to settlement date. With this enhancement, it says, NSCC will process create/redeem instructions, generate payment orders, and ensure collateral is exchanged between authorized participants and servicing agents – all within a no-touch process.

Analysts say that, by closely integrating the collateral process within the existing NSCC settlement process, NSCC can free up capital for its members by reducing the amount of collateral required on components that are eligible for NSCC’s netting process.

“DTCC worked closely with our clients to introduce an innovative solution that automates the exchange of ETF collateral, a previously manual process that was done outside of NSCC,” said Michele Hillery, General Manager of Equity Clearing and DTC Settlement Service at DTCC. “With the ongoing volatility in the markets, this automated solution provides the industry much-welcome balance sheet relief and a faster and simplified workflow to support ETF orders.”

New fixed income ETF capabilities

Additionally, NSCC said it has further expanded the ETF service to support the clearing of certain fixed income ETFs, including corporate and municipal bonds. Orders for corporate and municipal bond ETFs can now be processed through NSCC and included in the same trade guaranty provided to securities cleared and settled at NSCC – the assurance that the trade will be completed, even if a counterparty to the transaction defaults on its obligation. Firms that choose to process eligible fixed income ETFs via NSCC also benefit from Continuous Net Settlement (CNS), an automatic process at NSCC that offsets trades down to one position per client, by reducing the value of payments that need to be exchanged and minimizing security movements and costs.

“Offering CNS for fixed income ETFs aligns with the continuing modernization that bond market ETFs provide. This provides enhanced efficiency, balance sheet relief and ultimately tighter bid-ask spreads for investors,” said Frank Koudelka, Global ETF Product Specialist at State Street.

DTCC said the new collateral management solution and the additional clearing capabilities are part of a series of ETF enhancements to provide industry-wide benefits, including increased transparency, cost savings and automated workflows. The company anticipates it will complete the final planned enhancement of its ETF service, which will support clearing related to other types of fixed income ETFs including mortgage-backed securities and government securities such as Treasuries, by the end of 2022.

About the NSCC ETF Service

According to Hillery, the ETF process automates the creation and redemption of ETFs when the underlying securities are eligible to be cleared through NSCC. NSCC reports, clears and settles ETFs and their underlying securities through its creation/redemption process.

This announcement is one part of a series of enhancements to NSCC’s ETF capabilities:

  • September 2020: DTCC announced enhancements to the consumption and distribution of the ETF Portfolio Composition File (PCF) process in support of regulatory changes calling for increased transparency into ETFs under SEC Rule 6c-11.
  • July 2021: DTCC announces new automated collateral management solution and the capability to clear certain fixed income ETFs, including corporate and municipal bonds.
  • By Q4 2022: DTCC anticipates that it will complete the final planned enhancement of its ETF service, which will support clearing related to other fixed-income ETFs, including mortgage-backed securities and government securities such as Treasuries.
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