DTCC Could Help Control Market Glitches
Traders Magazine Online News, October 9, 2012
The utility that provides clearing services for the equities trading industry could be asked to produce the “control mechanism” that keeps brokerages, market makers and other trading participants from imploding due to flawed technology.
An industry working group that includes all four major national stock exchange operators, broker-dealers, buyside firms and the Financial Industry Regulatory Authority suggested in its September 28 letter to the Securities and Exchange Commission that the Depository Trust and Clearing Corporation (DTCC) and its clearing agencies might provide a “consolidated control mechanism” that could help keep trading from running wild, as occurred in the August 1 flood of erroneous orders that nearly swamped market maker Knight Capital.
That’s because its clearing operations are in “a unique position” to limit risks, able to act “as the ultimate receiver of the potential risks resulting from technology-related and similar events,” according to the group.
In particular, the group pointed to two proposals by the DTCC’s National Securities Clearing Corporation (NSCC) agency that are already under review at the SEC.
The first is a rule filing that would require that amounts, prices and other details on trades be “locked-in” when buy and sell orders are matched and that the “locked-in-trade data” be submitted by market participants to the clearer on a real-time basis.
This proposal was designed to prevent the hazards of not having up-to-the-moment trade data. Late day trade data now limits NSCC’s ability to “effectively monitor counterparty credit risk and to risk manage those trades on an intra-day basis,” according to the letter.
The DTCC is also calling for accelerated trade guarantees. Currently, the NSCC guarantees trades at midnight the day after a trade takes place.
If the trade guarantee were moved up, the clearer could become the central counterparty earlier in the trading cycle. This also would reduce intra-day counterparty exposure.
These proposals, still to be fleshed out by the industry group and worked out with regulators, is designed to prevent the hazards of not having up-to-minute trade data.
Late-day trade data now limits NSCC’s ability to “effectively monitor counterparty credit risk and to risk manage those trades on an intra-day basis,” according to the letter.
DTCC confirmed that the utility is discussing faster, more effective trade guarantees.
“The group is discussing what actions the industry can take to improve the stability of the markets without inhibiting the ability for firms to conduct their normal business,” said Bari Trontz, a DTCC spokeswoman. “As these discussions are in their early stages, it is premature to determine the direction of the group’s views,” she added.
Trontz said it was too early to go beyond general comments, saying discussions with the working group are ongoing.
“The DTCC suggestions are meant to get the DTCC to a more real-time environment so they could perhaps function longer in some sort of centralized risk management capacity in real time,” one industry professional familiar with the talks said. He said the first step is to “get the DTCC systems more real time.”
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