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1 Thomas Costa, Managing Director, Clearing and Settlement, DTCC ACSDA Leadership Forum October 8, 2007 Thomas Costa, Managing Director, Clearing and Settlement,

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Presentation on theme: "1 Thomas Costa, Managing Director, Clearing and Settlement, DTCC ACSDA Leadership Forum October 8, 2007 Thomas Costa, Managing Director, Clearing and Settlement,"— Presentation transcript:

1 1 Thomas Costa, Managing Director, Clearing and Settlement, DTCC ACSDA Leadership Forum October 8, 2007 Thomas Costa, Managing Director, Clearing and Settlement, DTCC ACSDA Leadership Forum October 8, 2007 National Securities Clearing Corporation and Fixed Income Clearing Corporation National Securities Clearing Corporation and Fixed Income Clearing Corporation

2 2 Organizational Structure

3 3 NSCC and FICC Common Features SEC-regulated clearing corporations and central counterparties (CCPs)SEC-regulated clearing corporations and central counterparties (CCPs) Organized under New York business codeOrganized under New York business code Wholly-owned subsidiaries of DTCCWholly-owned subsidiaries of DTCC Standard and Poor’s AAA ratedStandard and Poor’s AAA rated Comparable core services using similar business modelsComparable core services using similar business models Same Board of Directors (for all DTCC subsidiaries)Same Board of Directors (for all DTCC subsidiaries) Many of the same or related participating dealers, clearing banksMany of the same or related participating dealers, clearing banks Proven operating historyProven operating history SEC-regulated clearing corporations and central counterparties (CCPs)SEC-regulated clearing corporations and central counterparties (CCPs) Organized under New York business codeOrganized under New York business code Wholly-owned subsidiaries of DTCCWholly-owned subsidiaries of DTCC Standard and Poor’s AAA ratedStandard and Poor’s AAA rated Comparable core services using similar business modelsComparable core services using similar business models Same Board of Directors (for all DTCC subsidiaries)Same Board of Directors (for all DTCC subsidiaries) Many of the same or related participating dealers, clearing banksMany of the same or related participating dealers, clearing banks Proven operating historyProven operating history

4 4 What Our CCPs Do Record locked-in trades from our exchanges and match OTC trades with Real Time Trade Matching (RTTM) Establish a single net position for each member in each issue traded Multilateral, not bilateral netting NSCC and FICC interpose themselves between their members, “novate” trades between net settlement parties, and risk-manage the obligations until settled. All members settle “net” with NSCC or FICC as their “novated” settlement counterparty This greatly reduces number of securities movements required by offsetting between the firm’s own net debit and credit positions. Record locked-in trades from our exchanges and match OTC trades with Real Time Trade Matching (RTTM) Establish a single net position for each member in each issue traded Multilateral, not bilateral netting NSCC and FICC interpose themselves between their members, “novate” trades between net settlement parties, and risk-manage the obligations until settled. All members settle “net” with NSCC or FICC as their “novated” settlement counterparty This greatly reduces number of securities movements required by offsetting between the firm’s own net debit and credit positions.

5 5 Benefits of CCP’s Business Model Allows for efficient, high volume trading, especially anonymous trading in inter-dealer markets Guarantees ultimate settlement, using common risk management for counterparty and systemic risk Netting of securities and payments decreases the number of failed trades; manages fails for regulatory relief Adjusts for corporate action effects on trades pending settlement Net Settlement decreases financial resources needed to operate in the market and enhances settlement liquidity Allows for efficient, high volume trading, especially anonymous trading in inter-dealer markets Guarantees ultimate settlement, using common risk management for counterparty and systemic risk Netting of securities and payments decreases the number of failed trades; manages fails for regulatory relief Adjusts for corporate action effects on trades pending settlement Net Settlement decreases financial resources needed to operate in the market and enhances settlement liquidity

6 6 NSCC and FICC Participants NSCC and FICC Participants Broker / DealersBroker / Dealers Proprietary TradingProprietary Trading Prime BrokerPrime Broker Correspondent ClearingCorrespondent Clearing Inter-Dealer BrokersInter-Dealer Brokers Commercial BanksCommercial Banks GSEs (Fannie Mae and Freddie Mac)GSEs (Fannie Mae and Freddie Mac) Broker / DealersBroker / Dealers Proprietary TradingProprietary Trading Prime BrokerPrime Broker Correspondent ClearingCorrespondent Clearing Inter-Dealer BrokersInter-Dealer Brokers Commercial BanksCommercial Banks GSEs (Fannie Mae and Freddie Mac)GSEs (Fannie Mae and Freddie Mac) Insurance CompaniesInsurance Companies Investment Companies (Mutual Funds)Investment Companies (Mutual Funds) Investment Managers (EPN Only)Investment Managers (EPN Only) International Organizations, e.g. BISInternational Organizations, e.g. BIS Other Investment PortfoliosOther Investment Portfolios

7 7 A Wide Range of Markets NYSE EuronextNYSE Euronext NasdaqNasdaq Other OTC MarketsOther OTC Markets U.S. Treasury Securities MarketU.S. Treasury Securities Market Mortgage-Backed Securities MarketMortgage-Backed Securities Market Regional U.S. ExchangesRegional U.S. Exchanges Exchange Traded FundsExchange Traded Funds Electronic Trading SystemsElectronic Trading Systems ECNs (Electronic Communications Networks)ECNs (Electronic Communications Networks) ATSs (Alternative Trading Systems)ATSs (Alternative Trading Systems) NYSE EuronextNYSE Euronext NasdaqNasdaq Other OTC MarketsOther OTC Markets U.S. Treasury Securities MarketU.S. Treasury Securities Market Mortgage-Backed Securities MarketMortgage-Backed Securities Market Regional U.S. ExchangesRegional U.S. Exchanges Exchange Traded FundsExchange Traded Funds Electronic Trading SystemsElectronic Trading Systems ECNs (Electronic Communications Networks)ECNs (Electronic Communications Networks) ATSs (Alternative Trading Systems)ATSs (Alternative Trading Systems)

8 A Closer Look at NSCC for NYSE Trades Selling Broker Buying Broker Trade is executed on an exchange or marketplace; locked in and sent real-time to NSCC. NSCC records the trade, reports it to both sides, risk-manages the trade and calculates net margin on the overall portfolio of pending settlement and collects any required collateral. NSCC becomes the single counterparty to each net settling position for each issue that each broker trades. 97% of settlement obligations net away. NSCC instructs securities deliveries and receives at DTC. Buying and selling members buy/ sell a security – for their own account, or on a correspondent basis or customer’s order. Broker Dealer/ Market Trades NSCC DTC

9 9 Cleared Products Cleared Products NSCC OTC EquitiesOTC Equities Listed EquitiesListed Equities ETFsETFs Municipal BondMunicipal Bond Corporate BondsCorporate Bonds Unit Investment TrustsUnit Investment Trusts Canadian Depository LinkCanadian Depository Link________ InsuranceInsurance Mutual FundsMutual FundsNSCC OTC EquitiesOTC Equities Listed EquitiesListed Equities ETFsETFs Municipal BondMunicipal Bond Corporate BondsCorporate Bonds Unit Investment TrustsUnit Investment Trusts Canadian Depository LinkCanadian Depository Link________ InsuranceInsurance Mutual FundsMutual Funds FICC Govt Securities Division Treasury Bills, Bonds, NotesTreasury Bills, Bonds, Notes Treasury Zero Coupon SecuritiesTreasury Zero Coupon Securities Treasury Inflation Protection Securities (TIPS)Treasury Inflation Protection Securities (TIPS) Non-Mortgage-Backed Agency SecuritiesNon-Mortgage-Backed Agency Securities Fixed-Rate and Adjustable Rate Fannie Mae, Freddie Mac and Ginnie Mae Mortgage-Backed Securities (for GCF Repo)Fixed-Rate and Adjustable Rate Fannie Mae, Freddie Mac and Ginnie Mae Mortgage-Backed Securities (for GCF Repo) FICC Govt Securities Division Treasury Bills, Bonds, NotesTreasury Bills, Bonds, Notes Treasury Zero Coupon SecuritiesTreasury Zero Coupon Securities Treasury Inflation Protection Securities (TIPS)Treasury Inflation Protection Securities (TIPS) Non-Mortgage-Backed Agency SecuritiesNon-Mortgage-Backed Agency Securities Fixed-Rate and Adjustable Rate Fannie Mae, Freddie Mac and Ginnie Mae Mortgage-Backed Securities (for GCF Repo)Fixed-Rate and Adjustable Rate Fannie Mae, Freddie Mac and Ginnie Mae Mortgage-Backed Securities (for GCF Repo) FICC Mortgage- Backed Securities Division FICC Mortgage- Backed Securities Division Fixed Rate TBA Mortgaged-Backed Securities Issued By:Fixed Rate TBA Mortgaged-Backed Securities Issued By: Ginnie MaeGinnie Mae Fannie MaeFannie Mae Freddie MacFreddie Mac Actively Traded Adjustable Rate Agency MBS for ClearingActively Traded Adjustable Rate Agency MBS for Clearing All ARMs for EPNAll ARMs for EPN Full CCP Guaranty not offered (yet)

10 10 Trade Comparison – RTTM Off-exchange trades are submitted to FICC by buyers and sellers and instantaneously matched by RTTM Strive to achieve 100% match intraday Risk mitigation in capturing trades as they occur, not end of day Supports straight-through processing Uses a standardized international format to accept trades from members Approximate dollar value of trades received is $3 trillion daily Off-exchange trades are submitted to FICC by buyers and sellers and instantaneously matched by RTTM Strive to achieve 100% match intraday Risk mitigation in capturing trades as they occur, not end of day Supports straight-through processing Uses a standardized international format to accept trades from members Approximate dollar value of trades received is $3 trillion daily

11 11 NSCC – Average Daily and Peak Day Sides Average Daily Side in Millions Peak Day Sides in Millions * Data through 6/30/ *

12 12 Volumes Rising!

13 13 June 6, 2003 Buy 97% Sell May 10, 2004 Buy Sell 98% June 8, 2006 Buy Sell 98% Volume Peaks and Netting Buy Sell 99% August 16, 2007 $16.6B $14.7B$12.5B $1.02T $766B $495B $2.23T $31.1B 30.2 million sides39.6 million sides62.7 million sides125.1 million sides

14 14 Clearing and Settlement: The Role of N etting What it does: Netting significantly reduces settlement obligations and associated risks while freeing up a vast amount of capital for additional investment in the market. How? By reducing or netting down the total number of trade obligations requiring financial settlement by offsetting purchases against sales of the same security. Result: At day’s end, each dealer has a single net settlement obligation per issue. Netting eliminates the need for financial settlement of roughly: 98% of equity trades 94% of mortgage-backed securities trades 76% of government securities trades What it does: Netting significantly reduces settlement obligations and associated risks while freeing up a vast amount of capital for additional investment in the market. How? By reducing or netting down the total number of trade obligations requiring financial settlement by offsetting purchases against sales of the same security. Result: At day’s end, each dealer has a single net settlement obligation per issue. Netting eliminates the need for financial settlement of roughly: 98% of equity trades 94% of mortgage-backed securities trades 76% of government securities trades

15 15 Dealer B CCP Dealer A Dealer C 50,000,000 Dealer A Dealer C 50,000,000

16 16 NSCC – Netting 2007* * Data through 6/30/2007 Reduced by 98% 98% $122 trillion Net: $2.3 trillion Total YTD Obligations Requiring Financial Settlement

17 17 Looking Ahead to New Services Pool Netting and increasing CCPPool Netting and increasing CCP Services for Mortgage-Backed Securities Prime Brokering for GovernmentPrime Brokering for GovernmentSecurities Inter-bank GCF Repo for Government SecuritiesInter-bank GCF Repo for Government Securities Institutional ID Net for EquitiesInstitutional ID Net for Equities EuroCCP in EuropeEuroCCP in Europe Pool Netting and increasing CCPPool Netting and increasing CCP Services for Mortgage-Backed Securities Prime Brokering for GovernmentPrime Brokering for GovernmentSecurities Inter-bank GCF Repo for Government SecuritiesInter-bank GCF Repo for Government Securities Institutional ID Net for EquitiesInstitutional ID Net for Equities EuroCCP in EuropeEuroCCP in Europe

18 18 How CCPs Add Value CCPs create value for three distinct stakeholders: Market participants and the investors they represent, who benefit from the guarantee, liquidity and efficient capital preservation. Marketplaces and issuers benefit from confidence that the neutral, risk-managed CCP provides structure, network effects and reduces volume constraints. Regulators gain in progressing their public policy objectives, and safety and soundness. CCPs create value for three distinct stakeholders: Market participants and the investors they represent, who benefit from the guarantee, liquidity and efficient capital preservation. Marketplaces and issuers benefit from confidence that the neutral, risk-managed CCP provides structure, network effects and reduces volume constraints. Regulators gain in progressing their public policy objectives, and safety and soundness.

19 19 NSCC and FICC’s Shared Mission Ensure the safety and soundness of the U.S. equity and fixed income marketplacesEnsure the safety and soundness of the U.S. equity and fixed income marketplaces Centralize, standardize, and automate post- trade processingCentralize, standardize, and automate post- trade processing Minimize riskMinimize risk Increase operational efficienciesIncrease operational efficiencies Reduce costsReduce costs Create innovative, flexible technological solutionsCreate innovative, flexible technological solutions Meet the industry’s growing need for seamless global trading solutionsMeet the industry’s growing need for seamless global trading solutions Ensure the safety and soundness of the U.S. equity and fixed income marketplacesEnsure the safety and soundness of the U.S. equity and fixed income marketplaces Centralize, standardize, and automate post- trade processingCentralize, standardize, and automate post- trade processing Minimize riskMinimize risk Increase operational efficienciesIncrease operational efficiencies Reduce costsReduce costs Create innovative, flexible technological solutionsCreate innovative, flexible technological solutions Meet the industry’s growing need for seamless global trading solutionsMeet the industry’s growing need for seamless global trading solutions

20 20 NSCC Services Trade Capture and ReportingTrade Capture and Reporting Continuous Net SettlementContinuous Net Settlement Depository Settlement (DTC)Depository Settlement (DTC) Risk ManagementRisk Management Automated Customer Account Transfer Service (ACATS)Automated Customer Account Transfer Service (ACATS) Cost Basis Reporting Service (CBRS)Cost Basis Reporting Service (CBRS) Correspondent Clearing ServiceCorrespondent Clearing Service Index Share ProcessingIndex Share Processing Trade Capture and ReportingTrade Capture and Reporting Continuous Net SettlementContinuous Net Settlement Depository Settlement (DTC)Depository Settlement (DTC) Risk ManagementRisk Management Automated Customer Account Transfer Service (ACATS)Automated Customer Account Transfer Service (ACATS) Cost Basis Reporting Service (CBRS)Cost Basis Reporting Service (CBRS) Correspondent Clearing ServiceCorrespondent Clearing Service Index Share ProcessingIndex Share Processing Product Annex and Selected Statistics

21 21 NSCC Services (continued) Reconfirmation and Pricing Service (RECAPS)Reconfirmation and Pricing Service (RECAPS) Stock Borrow ProgramStock Borrow Program Prime Broker ServicesPrime Broker Services Dividend Settlement ServiceDividend Settlement Service Envelope Settlement ServiceEnvelope Settlement Service Funds Only Settlement ServiceFunds Only Settlement Service Reconfirmation and Pricing Service (RECAPS)Reconfirmation and Pricing Service (RECAPS) Stock Borrow ProgramStock Borrow Program Prime Broker ServicesPrime Broker Services Dividend Settlement ServiceDividend Settlement Service Envelope Settlement ServiceEnvelope Settlement Service Funds Only Settlement ServiceFunds Only Settlement Service

22 22 Real-time Trade Matching (RTTM)Real-time Trade Matching (RTTM) NettingNetting SettlementSettlement Delivery Versus Payment (DVP)Delivery Versus Payment (DVP) Fed Funds over FedWireFed Funds over FedWire Risk ManagementRisk Management Repurchase (Repo) AgreementsRepurchase (Repo) Agreements OvernightOvernight TermTerm Forward StartingForward Starting Real-time Trade Matching (RTTM)Real-time Trade Matching (RTTM) NettingNetting SettlementSettlement Delivery Versus Payment (DVP)Delivery Versus Payment (DVP) Fed Funds over FedWireFed Funds over FedWire Risk ManagementRisk Management Repurchase (Repo) AgreementsRepurchase (Repo) Agreements OvernightOvernight TermTerm Forward StartingForward Starting GSD Services

23 23 General Collateral Finance (GCF) ReposGeneral Collateral Finance (GCF) Repos Collateral Substitutions for ReposCollateral Substitutions for Repos Auction Takedown (Treasury and Freddie Mac)Auction Takedown (Treasury and Freddie Mac) Sponsored MembershipSponsored Membership Cross-MarginingCross-Margining General Collateral Finance (GCF) ReposGeneral Collateral Finance (GCF) Repos Collateral Substitutions for ReposCollateral Substitutions for Repos Auction Takedown (Treasury and Freddie Mac)Auction Takedown (Treasury and Freddie Mac) Sponsored MembershipSponsored Membership Cross-MarginingCross-Margining GSD Services (continued)

24 24 Real-time Trade Matching (RTTM)Real-time Trade Matching (RTTM) Settlement Balance Order Netting and Trade-for- Trade ProcessingSettlement Balance Order Netting and Trade-for- Trade Processing Electronic Pool Notification (EPN)Electronic Pool Notification (EPN) Specified Pool Trade Matching ServiceSpecified Pool Trade Matching Service Testing new EPN Pool Substitution ServiceTesting new EPN Pool Substitution Service Pool Netting and CCP Services planned for 2008Pool Netting and CCP Services planned for 2008 Real-time Trade Matching (RTTM)Real-time Trade Matching (RTTM) Settlement Balance Order Netting and Trade-for- Trade ProcessingSettlement Balance Order Netting and Trade-for- Trade Processing Electronic Pool Notification (EPN)Electronic Pool Notification (EPN) Specified Pool Trade Matching ServiceSpecified Pool Trade Matching Service Testing new EPN Pool Substitution ServiceTesting new EPN Pool Substitution Service Pool Netting and CCP Services planned for 2008Pool Netting and CCP Services planned for 2008 MBSD Services

25 25 NSCC – Average Daily and Peak Day Sides Average Daily Side in Millions Peak Day Sides in Millions * Data through 6/30/2007

26 26 NSCC – Netting 97% 98% * Data through 6/30/2007

27 27

28 28 GSD – Average Daily and Peak Day Dollars $2.16 $2.12 $5.06 Total Average Day Dollar Value In-Net in Trillions Peak Day Dollars in Trillions $2.83 $4.85 $5.13 $3.50 $6.19 $3.50 $6.20 $3.92 $5.92 * Data through 6/30/2007

29 29 GSD Average Daily Dollar Value of Trades and Obligations (Dollars in Trillions) * Data through 6/30/2007

30 30 GCF Repo – Average Trade Size $629,825,382 DVP Repo – Average Trade Size $ 41,789,942 Buy/Sell – Average Trade Size $ 11,966,770

31 31 MBSD – Average Daily and Peak Day Dollars in Clearing (Par) $202 $271 $270 $303 $440 $533 $614 $767 Average 48 Hour Day Dollars in Billions Peak Day Dollars in Billions $305 $906 $363 $926 * Data through 6/30/2007

32 32 MBSD Average Monthly Clearing Values Par in Trillions * Data through 6/30/2007

33 33

34 34 MBSD: EPN - Average Daily 48 Hour Day Dollars and Peak Day Dollars (Current Face in Billions) $155 $215 $179 $195 $437 $614 $541 $608 Average 48 Hour Day Dollars in Billions Peak Day Dollars in Billions $180 $535 $191 $609 * Data through 6/30/2007

35 35


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