The Depository Trust Company Will Launch New Processing Method to Mitigate Risk in P&I Payments

NEW YORK--(BUSINESS WIRE)-- The Depository Trust Company (DTC) will begin processing principal and income (P&I) payments on the more than 3.5 million securities it services using a new methodology to reduce systemic risk and enhance accountability in the allocation of several trillion dollars annually.

The new process will modernize the long-standing industry practice of having DTC collect and allocate virtually all payments on their scheduled payable dates, including those payments made to DTC after established intraday cut-off times or received without the detail needed to allow a payment to be paired with its specific CUSIP number. A white paper issued by DTC last year revealed that more than 4% of P&I payments, or approximately $10 billion per month, were late or misidentified.

Beginning February 7, 2011, DTC will allocate only those P&I payments that have been made on time and identified with the correct CUSIP.

“We have conducted an extensive internal review and had in-depth discussions with regulators before deciding to move to this new methodology,” said Kurt Holweger, DTCC managing director, Operations and Customer Service. “While the practice of allocating all entitlements on the payable dates has provided a great deal of certainty for DTC participants and their customers, the exposure to credit and liquidity risk it now entails is no longer appropriate given how sophisticated and efficient the process has become.”

DTC, a subsidiary of The Depository Trust & Clearing Corporation (DTCC), collects and allocates cash entitlements due on DTC-eligible securities on a daily basis. As the central depository for the United States, DTC holds an estimated 85% to 90% of all U.S. securities, including equities, corporate bonds, municipal bonds and money market instruments, valued at $33.9 trillion.

The P&I payments include dividend, interest, periodic principal, redemption and maturity payments. In 2009, DTC collected and allocated more than five million payments totaling more than $2.5 trillion. DTC receives P&I payments from about 7,000 different entities each year, with 16 of the largest agents responsible for 85 to 90% of the payments. The remaining percentage comes from smaller agents and issuers paying on their own behalf – most often, municipalities.

DTC first announced that it would enhance risk mitigation in the payment of P&I in a November 2009 white paper titled “P&I Payment Refinement: A Move to Further Reduce Payment Risk.” Since issuing the white paper, DTC has reported there has been a substantial reduction in the number of late and misidentified payments from paying agents and issuers. As of September 2010, the value of payments made in a manner compliant with the 2011 allocation methodology increased to 98.53% from 96% for all of 2009. The impact of this improvement is more than a 60% decrease in late or unidentified payments – from more than $10 billion per month in 2009 to less than $4 billion per month in third quarter 2010.

“The goal is to ensure that all shareholders and bondholders receive the entitlements due them on the payable date in a manner that does not impose unnecessary risk on the system,” said John Faith, DTCC vice president, Operations. “By working collaboratively with the industry, we believe we have developed an improved process that will provide the same level of efficiency and certainty to market participants while mitigating the risk of late or misidentified payments.”

For more information on the changes to P&I payment processing, go to www.dtcc.com, Customer Center, Customer Tools, Principal & Income Payments (P&I) Refinement.

About DTCC

DTCC, through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC's depository provides custody and asset servicing for more than 3.6 million securities issues from the United States and 121 other countries and territories, valued at US$33.9 trillion. In 2009, DTCC settled nearly US$1.48 quadrillion in securities transactions. DTCC has operating facilities and data centers in multiple locations in the United States and overseas. For more information, visit www.dtcc.com.

The Depository Trust CompanyEdward C. Kelleher, 212-855-5301
[email protected]

Source: The Depository Trust Company