DTCC enhances ETF solution with automated collateral management process

New solution at DTCC includes fixed income ETF capabilities and a no-touch process which provides increased operational efficiency and balance sheet relief.

The Depository Trust & Clearing Corporation’s (DTCC) US clearing subsidiary has launched an automated ETF solution that simplifies the collateral management process and adds new fixed-income ETF capabilities.

The National Securities Clearing Corporation’s (NSCC) move is aimed at freeing up capital and increasing operational efficiency during market uncertainty and volatility.

NSCC’s new solution fully automates the exchange of ETF collateral, reducing risks from trade date to settlement date in the ETF fund process.

With this new enhancement, NSCC will process create/redeem instructions, generate payment orders, and ensure collateral is exchanged between authorised participants and servicing agents, all within a no-touch process.

NSCC said it will integrate the collateral process within its existing settlement process, freeing up capital for its members by reducing the amount of collateral needed on components that are eligible for NSCC’s netting process.

“DTCC worked closely with our clients to introduce an innovative solution that automates the exchange of ETF collateral, a previously manual process that was done outside of NSCC. With the ongoing volatility in the markets, this automated solution provides the industry much-welcome balance sheet relief and a faster and simplified workflow to support ETF orders,” said Michele Hillery, general manager of equity clearing and DTC settlement service at DTCC. 

NSCC has also expanded the ETF service to support the clearing of certain fixed-income ETFs, such as corporate and municipal bonds.

Corporate and municipal bond ETF orders can now be processed through NSCC and are included in the same trade guaranty given to securities cleared and settled at NSCC. This provides the assurance that the trade will be completed, even if a counterparty to the transaction defaults on its obligation.

DTCC said in a statement that firms which choose to process eligible fixed-income ETFs via NSCC also benefit from Continuous Net Settlement (CNS), an automatic process at NSCC that offsets trades down to one position per client, by reducing the value of payments that need to be exchanged and minimising security movements and costs.

“State Street is excited to offer the enhanced clearing and settlement service for fixed-income to its ETF clients. Offering CNS for fixed-income ETFs aligns with the continuing modernisation that bond market ETFs provide. This provides enhanced efficiency, balance sheet relief and ultimately tighter bid-ask spreads for investors,” said Frank Koudelka, global ETF product specialist at State Street.