The Auction Takedown Service reduces settlement risk and costs for Fixed Income Clearing Corporation’s (FICC) Government Securities Division (GSD) Members that purchase securities through the U.S. Treasury Department’s auction programs.
The service nets Treasury auction purchases along with secondary market trades and repo transactions, thereby reducing securities movements and associated costs. Efficient delivery of auction awards by GSD streamlines the settlement process, enhances risk management and decreases Members’ exposure to daylight overdrafts. Primary dealers and other institutions that are Netting Members of GSD can use this service.
The Auction Takedown Service eliminates the need for Members to submit auction purchase details to GSD. Instead, Members can submit bids to the Treasury Department’s Bureau of Public Debt until 1:00 PM ET on the day of the auction. Securities available for auction and processing through FICC include U.S. Treasury Bills, Notes, Bonds, Treasury Inflation Protection Securities (TIPs) and Treasury Floating Rate Notes (FRNs). The securities can be new issues or re-issued securities.
On auction date, all eligible auction awards are then submitted directly to GSD by the Federal Reserve Bank of New York (or a regional Federal Reserve Bank) on a locked-in basis, and GSD automatically generates trade confirmations for the contra-side of each award based on the information supplied by the Federal Reserve Bank(s).
Treasury auction awards are reported to participating GSD Members through GSD’s comparison output, indicating that the trade was submitted on a locked-in basis by the Federal Reserve Bank that submitted the information. Resulting net positions are treated as forward settling transactions and forward mark is assessed accordingly.
These locked-in compared Treasury auction awards are netted and guaranteed with the rest of a Member’s trading activity in secondary markets on the night prior to the issue date of the auctioned security. Several electronic output options for netting results are available including Machine-Readable Output (MRO), print image reports, on-line inquiry via the RTTM® Web application and interactive messaging. As the auction award trades and secondary market trades are included in the net , the net positions are replaced by settlement obligations versus GSD. On issue date, the GSD delivers securities to Members with long positions immediately after receiving the securities from the Federal Reserve. As GSD’s settlement obligations are generated from its Member’s net trade activity the night prior, the obligations to deliver securities to Members with net long positions will be settled at GSD’s system price. The Federal Reserve Bank of New York, however, will deliver the issued securities to GSD at the Fed Average Price. This potential price difference can cause Delivery Differential Adjustment Payment, a component of Funds-Only Settlement in which the settlement proceeds of the price difference is distributed to Netting Members with net long positions in the auctioned security.