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Risk Management Controls protect DTC and its clients from the inability of one or more clients to pay their settlement obligations. Risk Management Controls are based on guidelines established by the Federal Reserve Bank (FRB). DTC currently employs three primary Risk Management Controls for processing securities:
- Collateralization (Collateral Monitor)
- Net Debit CapIssuer/Participant Number (IPN)
- Collateral Control.
Collateralization
Collateralization ensures that your account has sufficient collateral for DTC to liquidate if you fail to pay your settlement obligation and become insolvent. DTC's collateralization procedures prevent the completion of transactions that would cause your net debit to exceed the total available collateral in your account.
DTC operates on a fully collateralized basis. You are required to have sufficient collateral in your account to support net settlement debits you incur. Transactions that would cause your net debit to exceed the total value of collateral in your account are held in a recycle (pend) queue until sufficient collateral is available.
Your primary sources of collateral are:
- Cash deposited to the Participants Fund
- Proprietary or firm positions (such as dealer, investment, or margin positions) that you designate as collateral
- Securities received (and not paid for) versus payment
- Securities added to your account and not received versus payment (such as deposits, free deliveries, free pledge releases, release of segregated securities) that you designate as collateral.
Net Debit Caps
Net Debit Caps help ensure that DTC can complete settlement, even if a client fails to settle. They are based on your net debit history at DTC and automatically rise or fall relative to the average of your highest intraday net debit peaks in accordance with a calculation. A Net Debit Cap, recalculated daily, is applied to your account to limit the settlement net debit you could incur at any point during a processing day.
Your Net Debit Cap is limited by DTC's established maximum Net Debit Cap, the value of which is always set lower than DTC's total available liquidity. Currently, the maximum Net Debit Cap you can have is $1.8 billion.
Issuer/Participant Number (IPN) Collateral Control
Collateral in a client's account associated with the client (such as the client's own commercial paper) increases risk to DTC if that client failed to pay DTC and its obligation is supported partly or fully by the failing client's associated securities. To eliminate this risk, DTC's system monitors collateral received in a client's account related to that client.
Example:
A client makes a Settlement Progress Payments (SPP) by 2:00 p.m. eastern time in order to prevent valued transactions from dropping at the 3:10 p.m. valued recycle cutoff.
For more information:
- Settlement Web Help. Refer to the Introduction to Risk Management Controls Inquiry section.