DTCC Sets Up Post-Trade Early Warning System

Red Alert! No more going over your trading limits.

The Depository Trust & Clearing Corporation is readying a new real-time post-trade warning system for that will alert member firms when they go over their pre-defined trading limits.

The proposed system, DTCC Limit Monitoring, comes in response to recent trading glitches, such as Knight Capital and others, that cost the firms millions of dollars or in some cases, forced them to re-capitalize. In response to these events and subsequent industry discussions, the clearing entity designed DTCC Limit Monitoring to monitor all broker-to-broker trading cleared from exchanges and SROs.

While other market participants may be developing additional risk management tools in connection with these recent industry-wide efforts, the proposed DTCC Limit Monitoring would be separate from and would operate completely independently from any such tools, say DTCC officials.

Bill Kapogiannis, vice president of DTCC Equities Services, told Traders Magazine that the DTCC’s system would differentiate itself from other monitoring solutions in that it covered all trading venues and not just one or a few.

“I think this system is more effective in that it provides a more holistic view of the markets – across all SROs and ATS’,” Kapogiannis said, “rather than looking at a single specific trading platform or SRO.”

Through its National Securities Clearing Corporation division (NSCC), DTCC has filed a proposed rule change with the Securities and Exchange Commission to compel its members to use DTCC Limit Monitoring early warning system. According to Kapogiannis, the tool will enable firms to manage potential risk exposure for both their own accounts and their clients’ accounts for the trading in equities, corporate and municipal bonds, and unit investment trust instruments.

The DTCC proposal is subject to regulatory approval.

Real Time Monitoring

Here’s how DTCC Limit Monitoring would work:

NSCC’s Universal Trade Capture (UTC) platform — a service that collates U .S. equity trade data through the clearing process — will feed the DTCC Limit Monitoring service. Real-time trade data from all broker-to-broker trades cleared from exchanges, alternative trading systems, ECNs, dark pools and other liquidity destinations in the U.S. will go through the system.

NSCC members that are either required to use the service under NSCC’s rules or who elect to use the service will input trading alert criteria, specifically identifying trading limits based on the net-notional value for trading activity of their clients and for their own trading desks. If trading activity exceeds the pre-set early warning levels or established trading limits, DTCC Limit Monitoring will generate and deliver several warning messages before limits are reached. In the case where a limit is exceeded, a breach message is sent.

The system providesusers with alerting functionality via: a systemic message, an email, or on the front-end web-based user tool’s screen. The tool would send early warning alerts at 50, 75 and 90 percent of a users’ predefined limit, Kapogiannis said.

NSCC members will be responsible for ensuring that the trading limits are appropriate. However, NSCC at its discretion may review those limits and discuss concerns with its members if the limits set are not aligned with recent trading activity.

Pending SEC approval, DTCC Limit Monitoring is expected to go online for NSCC members that subscribe by mid-January, 2014.

There are 170 NSCC members.