Settlement Overview



DTC's Settlement Department is responsible for overseeing the process of the settlement of Participant transactions. Specifically, the Settlement Department:

  • Ensures the collection/disbursement of Participant net settlement obligations and credits through the Fedwire system
  • Ensures that major components of DTC's Settlement Service are updating/processing in a timely manner
  • Helps resolve problems affecting the settlement process
  • Grants input extensions when processing problems arise
  • Provides backup to the extent possible when Participant systems go down
  • Answers questions regarding all aspects of settlement processing
  • Processes deposits and withdrawals of Federal book-entry eligible securities.



There are three main types of transactions processed through the Settlement system.

  1. Deliveries: DTC's delivery program allows a Participant to settle securities transactions by making book-entry deliveries to another Participant's account. The securities are immobilized in DTC's custody, eliminating the need for physical movement of certificates. DTC reduces the seller's position and increases the buyer's position without the need to move physical certificates. Deliveries can be made with or without the condition of money payment, depending on the applicable Participant’s delivery instructions.

  2. Payment Orders (POs): The payment order service provides Participants with a convenient method for settling amounts of money related to securities transactions that are effected separately through DTC earlier on the same day or on a previous day. Participants can use payment orders to collect option contract premiums and mark-to-market open contracts such as stock loans.

  3. Collateral Loans: The collateral loan service allows a Participant (the pledgor) to pledge securities as collateral for a loan or for other purposes and also request the release of pledged securities. This service allows such pledges and pledge releases to be made free, meaning that the money component of the transaction is settled outside of the depository, or valued, meaning that the money component of the transaction is settled through DTC as a debit/credit to the pledgor's and pledgee's DTC money settlement account. When pledging securities to a pledgee, the pledgor's position is moved from the pledgor's general free account to the pledgee’s account which prevents the pledged position from being used to complete other transactions. Likewise, the release of a pledged position would move the pledged position back to the pledgor's general free account where it would then be available to complete other transactions.



The following terms are important to understanding the Settlement Service:

 

This Term

 Refers To

Aggregate Affiliated Family Net Debit Cap A limit to the settlement debit an Affiliated Family can incur at any point during the processing day.
chill A systemic way DTC can prohibit a Participant from processing certain activities (for example, valued delivery chill will prevent the Participant from making valued deliveries from its account).
Collateral Monitor (CM) DTC's process for measuring the sufficiency of the collateral in a Participant’s account to cover its net settlement obligation.
collateral value The market value of a security less the applicable DTC haircut.
Computer-to-Computer Facility (CCF/CCF II) A batch transmission system for input/output based on various protocols between a Participant’s mainframe and DTC's mainframe.
Continuous Net Settlement (CNS) The system employed by NSCC to settle NYSE, AMEX, NASDAQ, and over-the-counter trades.
deliver order (DO) The term used to define a book-entry movement of shares of a particular security between two DTC Participants.
drop A transaction that does not complete because of insufficient position, Risk Management Controls, and so forth.
haircut The percentage decrease of a security's market value in determining the collateral value of the security.
initial distribution The delivery of shares of a new issue from the lead manager and syndicate members to their customers. Shares are considered initial distribution shares until they are sold on the secondary market.
long allocations Deliveries from NSCC's Omnibus Account 888 to a Participant’s DTC account as a result of Continuous Net Settlement processing.
market value The prior day's closing price of a security for security valuation purposes.
memo segregation An inventory control mechanism that allows a Participant to protect fully-paid-for securities in its general free or IPO control account.
Message Queuing (MQ) A system for messaging across multiple platforms. Developed as part of IBM’s WebSphere family, it is also referred to as "WebSphere MQ" or "MQ Series."
Minimum Amount (MA) DTC's classification for securities in a Participant’s account that are not considered collateral.
Money Market Instrument (MMI) Debt securities such as commercial paper or medium-term notes that are eligible for DTC's MMI Program.
Net Additions (NA) DTC's classification for securities in a Participant’s account that are considered collateral.
net debit cap A limit to the settlement net debit a Participant can incur at any point during the processing day.
night deliver order (NDO) A DO input on the day prior to settlement. A reduced rate is charged for NDO transactions.
payment order (PO) A transaction in which a Participant charges another Participant for changes in value for outstanding stock loans or option contract premiums.
Receiver Authorized Delivery (RAD) A control mechanism that allows a Participant to review transactions prior to completion of processing. It limits the Participant’s exposure from misdirected or erroneously entered DOs, POs, institutional delivery transactions, MMI transactions, reclaims, pledges and releases of pledged securities.
reclamation or reclaim The return of a DO, PO, institutional delivery transaction or MMI transaction received by a Participant. All reclaims are considered original transactions for purposes of DTC processing and are subject to Risk Management Controls and RAD.
Risk Management Controls The controls, primarily net debit cap and CM, that are used to provide protection to all DTC Participants against the inability of one or more Participants to settle net settlement obligations.
Settlement progress payments (SPP) An intraday funds transfer sent via Fedwire to a Participant’s DTC Participant account.
Settlement User Interface Any system or combination of systems that allows for input/inquiry into the DTC Settlement System.
short covers Deliveries to NSCC's Omnibus Account 888 as a result of CNS.
syndicate A group of broker-dealers that agree to purchase a new issue of securities from the issuer for resale to the investment public.
Unknown Rate For variable rate MMI Securities, the interest rate that the IPA will pay for the income portion of a presentment.
unvalued additions Unvalued additions to a Participant’s security account that do not carry a related payment obligation with the receipt of securities. They include:
  • Deposits
  • Free release of pledged securities
  • Receipt of a free DO
  • Releases of segregated securities

DTC's Activation/Account Coding product describes the various account options available to your participant account.

 

Requirements

To use DTC services, you must:

  • Become a DTC participant
  • Make your mandatory deposit to DTC's Participants Fund
  • Engage the services of a settling bank to settle daily on your behalf, and submit a formal settling bank agreement to DTC.

 

Account Options

When you open your account, and any time after, you can:

  1. Instruct DTC to group multiple accounts into different collateral families and allocate specific percentages of your start-of-day collateral and net debit cap to each family. If we do not receive this instruction, all your accounts will be grouped into one collateral family. See Grouping Accounts Into Collateral Families for more information.
  2. Instruct DTC to classify all of your start-of-day positions as collateral. At the opening of business each day, all security positions in the minimum amount (MA) account that are not memo-segregated will be moved into your net additions (NA) account, giving you collateral value credit for those securities. Absent your instructions, DTC will code the MA account for start-of-day positions.
  3. Instruct DTC to classify all unvalued additions as non-collateral (such as deposits, free deliver orders (DOs), release of segregated securities). Absent your instructions, DTC will code the NA account.

    Warning! You are advised to consider the implications of classifying your securities as collateral. Collateral can be used to support your net debit and therefore can be liquidated by DTC in the event you are unable to pay your settlement obligation.
  4. Elect to have the ability to make late, valued transactions to your settling bank's participant account, with the consent of the settling bank.
  5. Elect to have the ability to withdraw SPP Return /P&I Withdrawal allocations intraday. See Principal and Income Withdrawals and Settlement Progress Payments for more information.
  6. Elect to have the ability to chill (block) your account from transactions involving securities eligible for Federal book-entry.
  7. Choose between two recycle options. See Recycle Processing for more information.
  8. Choose from various memo-segregation options. See Memo Segregation.
  9. Elect to have Initial Public Offering (IPO) positions released automatically upon the input of a DO, if you act as a prime broker. See the IPO Broker Manual or call your Relationship Manager for more information.
  10. Elect to have all valued pledges subjected to Receiver Authorized Delivery (RAD) approval before they are processed by DTC, if you act as a pledgee. See Receiver Authorized Delivery (RAD) for more information.
  11. Elect to have all free DOs entered after 5:00 p.m. eastern time subjected to RAD approval before they are processed by DTC.