GSD's DVP Netting and Settlement service facilitates efficient transaction settlement and risk management for the DVP Service.
Settlement
Settlement occurs after GSD has informed its Netting Members of their respective Securities Settlement Obligations. Securities Settlement Obligations are generated to settle Net Settlement Positions, Same-Day Settling Trades and Repo Collateral Substitutions. Settlement of these obligations would occur over the Fedwire or on the books of GSD’s designated clearing bank(s). A Netting Member with a Deliver Obligation would instruct their clearing bank to transfer securities to GSD’s clearing bank(s). GSD, acting as a CCP, would receive the securities and in turn deliver them to a Netting Member with a receive obligation.
Netting
Compared trades meeting netting eligibility requirements enter the GSD’s netting and settlement system on the day they compare. For each Netting Member, 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 Member. Several electronic output options for netting results are available to Netting Members, including Machine-Readable Output (MRO), print image reports , interactive messaging and online inquiry via the RTTM® Web application.
Members’ net positions in each security are converted into Securities Settlement Obligations with the GSD. All securities deliveries, whether to or from the GSD clearing bank(s), are made against full payment over the Fedwire or on the books of GSD’s Clearing Bank(s). Securities delivered to the GSD account(s) at its clearing bank(s) are immediately redelivered to Members that are due to receive securities.
The GSD assigns each security a system price to calculate the cash settlement amount of a given net position. The GSD’s system price is determined daily to calculate each security’s current market value (system value). The difference between the system value and the actual contract amounts of Members’ 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 and Repo trades.
In this example, a Member has four (4) netting eligible trades in the same CUSIP settling on the same day – two Buy/Sell trades and the end legs of a Repo and Reverse Repo trade. The Buy and Repo trades total a par value of 5 Million to be received in securities, while the Sell and Reverse Repo trades total a par value of 11 Million to be delivered. GSD’s netting process nets the respective receive and deliver positions for the CUSIP, establishing a Net Settlement Position for the Member to deliver 6 Million par of securities.