GSD's DVP Netting and Settlement service facilitates efficient transaction settlement and risk management for the DVP Service. Select a tab to read more about Netting & Settlement for the DVP Service.
Compared trades meeting eligibility requirements enter the GSD’s netting and settlement system on the day they compare. For each netting participant, the system calculates the difference between the long and short positions in each security. The result is a single net long or short position for the security composed of all the buy/sell, repo, and Treasury auction purchases transacted by the participant. Several electronic output options for netting results are available to Netting Members, including Machine-Readable Output (MRO), print image reports and on-line inquiry via the RTTM® Web application.
Participants’ net positions in each security are converted into settlement obligations with the GSD. All securities deliveries, whether to or from the GSD’s clearing banks, are made against full payment over the Fedwire. Securities delivered to the GSD accounts at the respective clearing banks are instantaneously redelivered to participants that are due to receive securities.
The GSD assigns each security a system value to calculate the cash settlement amount of a given net position. The GSD’s system value is determined daily to calculate each security’s current market value. The difference between the system value and the actual contract amounts of participants’ trades in a given security is accounted for in the Transaction Adjustment Payment component of Funds-Only Settlement.
Let’s take a look at an example of DVP Netting for Buy/Sell trades.
In this example, a Dealer Member has seven (7) netting eligible trades in the same CUSIP settling on the same day. Four (4) are buy trades totaling 10 Million in par value and three (3) are sell trades totaling 12 Million in par value. The buy and sell trades are netted down to create a single net obligation of 2 million where the Dealer Member is obligated to deliver.
Settlement occurs after GSD has informed its Netting Members of their respective obligations (principally on the night of Trade Date in a T+1 market). Settlement occurs on the Fedwire system or on the books of FICC’s designated settlement banks. Netting Members in turn instruct their clearing bank to transfer securities to one of GSD’s two clearing banks, BNY Mellon and JP Morgan*. FICC, acting as a CCP, receives the securities and turns the securities to the ultimate net buyers.
*JP Morgan announced its plans to exit the government bond clearance business.