1. DTC Settlement Strategy and Roadmap Update Bank Depository User Group
September 23, 2013
Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

2. Introduction
Settlement Roadmap Paper originally published in December 2012
Strategic objectives are Systemic Risk mitigation and further adherence with CPSS IOSCO recommendations
Promotion of Settlement Finality
White Paper published to provide customers with information on how multiple initiatives come together over the next 5 years – a “Roadmap”
Four Key settlement related initiatives:
Settlement Matching
CNS Settlement as Delivery Versus Payment (CNS for Value)
Money Market Settlement - Structural Changes
Shortening the Settlement Cycle
Catalyst for major structural modifications to the U.S. Settlement process is the reduction of systemic risk and further adherence to the CPSS IOSCO recommendations for Securities Settlement Systems (SSS)
Implementation will occur over the next five years
Plans are further detailed in three industry white papers on the DTCC website under “Thought Leadership”:
Reducing Risk and Enhancing Intraday Finality in the Settlement of Money Market Instruments
A Roadmap for Promoting Intraday Settlement Finality in U.S. Markets
CNS Settlement As Delivery Versus Payment in DTC (CNS for Value)
Proposal to Launch a New Cost Benefit Analysis on Shortening the Settlement Cycle
Objective to provide customers with information on the strategic future of the U.S. Settlement process to allow them to project development resource requirements
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.”

3. Settlement Matching - Background
DTC permits receiving participants to “reclaim” processed transactions
Certain reclaims are permitted to bypass DTC’s risk controls
Reclaims compromise intraday settlement finality
Reclaims present credit and liquidity risk to DTC, participants and the system as a whole
The value of transactions currently reclaimed is approximately $4 Billion per day but could increase in times of stress
Reclaim rates of unaffirmed institutional transactions are MUCH higher than those of affirmed transactions - 5% vs. 0.2%
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

4. Settlement Matching - Proposal
Proposal: Require receiving participants to match transactions prior to settlement
Non – Institutional Trades
The matching requirement will leverage DTC’s Receiver Authorized Delivery (RAD) system
All non-ID transactions require RAD approval prior to processing
Institutional Trades
Will be supported by the trade match – promoting affirmation and STP
Custodians will be given the option to pull out obligations for which they have funding or credit issues
Supports bank participant demands for the “exception”
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

5. Settlement Matching – Benefits
Mitigate systemic risk associated with overriding DTC risk management controls
Improve intraday settlement finality for US settling transactions
Promote best practice for trade affirmation
Leverage trade match to drive settlement – gives teeth to affirmation
Position DTC and industry for shortened settlement cycle
Effective trade affirmation and settlement matching cited as key enablers
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

6. Settlement Matching - Next Steps
Published detailed service description in 1Q/13
Published updated implementation schedule 2Q/13
Publish an important notice in Q4 with additional detail
Settlement Matching will be implemented in four phases:
Introduce reduced RAD limits in 2Q/13 (Completed in July)
Introduce stock loan specific RAD profiles scheduled for October 25
Reduce RAD limits to zero originally targeted for 4Q/13 but moved to 2Q/14
Require receiver matching for institutional transactions originally targeted for 1Q/14 but moved to 3Q/14
Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

7. CNS for Value - Model
Continuous Net Settlement (CNS) is a service provided by NSCC to net and novate “street-side” trades
CNS obligations will be processed as delivery versus payment (DVP) in DTC instead of free of payment
CNS obligations will be subject to DTC’s risk management controls
Members with pending receives will be required to fund their DTC accounts to support CNS receive obligations in DTC
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.”

8. CNS for Value - Benefits
Enabler for multiple intraday settlement slices
Provides participants with intraday liquidity benefits, i.e., ability to use NSCC credits to offset DTC debits
Alerts DTCC to potential default situations earlier in the day
Reduces affiliate risk
Eliminates cross-guaranty
Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.”

9. CNS for Value – Milestones
Published Industry White Paper
Solicited member feedback on the proposal
Modeled potential collateral monitor and debit cap blockage
Model intraday impact to NSCC Clearing Fund
Target dates as follows:
Detailed Business Case Q3 2013
Detailed Service Description                       Q4 2013
Impact Studies and Build Q
Testing Available                                Q3 2015
Implementation                              Q (Deferred)
Project is being deferred due to resource contention
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.”

10. MMI Processing - Background
DTC processes approximately $250 billion worth of transactions in Money Market Instruments (MMIs) per day
A large portion of maturing MMI securities are funded through the issuance of new MMI securities
Net maturing MMI positions require issuer funding
MMI issuer Paying Agents can instruct DTC to reverse processed transactions if unfunded by the issuer
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

11. MMI Processing Risk
If an MMI Paying Agent isn’t paid by the issuer by 3:00 PM ET, the Paying Agent can Refusal to Pay (RTP) the issuer’s obligation
When notified of a RTP by an MMI Paying Agent, DTC will:
Reverse all completed transactions for the respective MMI issue
Permit the MMI reversal transactions to bypass DTC’s risk management controls
MMI reversals compromise intraday settlement finality
MMI reversals present credit and liquidity risk to DTC, participants and the system as a whole
Today, DTC withholds the two largest credits a participant has in MMI securities (LPNC) in case they are reversed
The objective of MMI optimization is to eliminate the credit and liquidity risk associated with reversals of completed transactions related to an issuer failure and to eliminate the need to withhold credits via LPNC
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

12. MMI Optimization
All MMI issuances and deliver orders (DOs) will continue to be presented to DTC’s Receiver Authorized Delivery (RAD) system for approval
All approved MMI transactions, along with that day’s maturity presentments, will be “held” in a pending status until the issuer has “funded” its maturities in one of two ways:
When the settlement value of approved issuances exceeds the value of the applicable maturing obligations and/or,
When the IPA has indicated via a screen or automated message that it has received issuer funding
Once funded, DTC will simultaneously check all transactions for an issuer, i.e., issuances, DOs and maturities, against each participant’s DTC position and risk controls
If able to complete, these transactions will be processed and final, i.e., no reclaims or reversals
If unable to complete no transactions for the relevant issuer will be processed
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

13. MMI Optimization
Periodically throughout the day the transactions associated with acronyms that have been funded and not completed will be attempted for processing with other pending MMI “units” and staged to the “new MMI Optimization” process
MMI Optimization will attempt to maximize the settlement of transactions by looking at the net effects of transactions across multiple issuers on the receiving and delivering participants’ position and risk controls
Once the optimal combination of transactions is amassed, the transactions will be processed and then settled.
Participants will continue to be required to fund their accounts intraday when they have debits that will exceed their net debit caps or if there is a collateral shortfall
“”Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.”

14. MMI Processing Benefits
Eliminates DTC credit and liquidity risk associated with issuer failure reversals that override controls
Increases intraday settlement finality
Enhances intraday liquidity recycling at DTC through the elimination of the 2 Largest Provisional Net Credits (2LPNC) control since MMI transactions will no longer be eligible for reversal
Preserves the IPA’s ability to notify DTC of an issuer default
Minimizes participant technology changes
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

15. MMI Optimization – Key Dates
DTCC published an industry whitepaper in December, 2012 “Reducing Risk and Enhancing Intraday Finality in the Settlement of Money Market Instruments”
- Thought Leadership, White Papers
The Detailed Service Description will provide a timeline for targeted dates as follows:
Publish a Detailed Service Description  Q4 2013
Solicit Industry Feedback Q1 2014
Begin Simulations of the Model Q2 2014
Submit Rule Filing (tentative) Q4 2014
Participant Testing Available   Q2 2015
Implementation  Q4 2015
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

16. Shortening the Settlement Cycle (SSC)
Originally proposed in 2000
Industry analysis performed
Decision made to focus on improving industry processing efficiently
10 building blocks identified
Significant progress in many of these areas
In 2011, DTCC and Industry agreed the time was right for another industry study
In spring of 2012, DTCC issues Request for Proposal for new cost benefit analysis
Boston Consulting Group (BCG) selected to conduct analysis
Conducted approximately 100 stakeholder interviews
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

17. SSC - Enablers Enablers For T+2 and T+1 Additional Enablers for T+1
Migration to institutional trade date matching
Mandated Settlement Matching at the depository
Cross-industry Settlement Instructions solution
Continue to dematerialize physicals
Extend "access equals delivery" for all products
Compress timeframes / rule changes
Increase penalties for fails
Additional Enablers for T+1
Build infrastructure for near-real time processing
Transform securities lending processes
Transform foreign buyer processes
Accelerated retail funding
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.

18. SSC – Cost / Benefits
Reduce risk for both the individual investor and the industry at large including
Enable firms to optimize capital by reducing collateral required and liquidity need for NSCC
NSCC estimates its line of credit could be reduced by 20-25% in T+2 and 40-50% in T+1, thus reducing line costs by $5MM- $7MM and $10MM to $15MM, for T+2 and T+1, respectively.
Reduce operational risk and expenses through implementation of building blocks
Align settlement cycle across geographies
BCG Estimated
T+2 total investment at $550M with $170M in annual cost savings
T+1 total investment at $1,770M with $175M to $370M in annual cost savings
Next Steps
DTCC currently consulting with Industry representatives and Regulators and expects to publish a position paper in the next few weeks
“Confidential Treatment Requested by DTCC, [DTC, NSCC, FICC, WTC] Pursuant to the Freedom of Information Act.