DTC's Settlement Operations group controls and coordinates the settling of Participant accounts and Settling Bank accounts on DTC's systems. A Settling Bank is a bank Participant that settles for itself and may settle for other Participants for which it is the designated Settling Bank, including other bank Participants. A Settling Bank can be located in any Federal Reserve district, but it must have access to the Settlement User Interface and online access to the National Settlement Service (“NSS”) provided by the Federal Reserve Banks (individually and collectively, the “Fed” unless indicated otherwise) and Fedwire®.
Note– A Participant must make formal arrangements with DTC and a Settling Bank for that Settling Bank to be designated as the Settling Bank to settle with DTC on the Participant’s behalf. Each Settling Bank must sign an agreement with DTC prior to the bank performing as a Settling Bank. The actual settlement process occurs through NSS and is initiated when DTC posts final figures for Participants and Settling Banks.
Although the actual settlement process begins with the posting of final settlement figures at approximately 3:45 p.m. eastern time each day, DTC operates a settlement system that provides Participants and Settling Banks with online reports throughout the processing day. These reports reflect intraday gross debits, gross credits, and the net debit or credit for each Participant, as well as a net-net figure for each Settling Bank.
The end-of-day net-net settlement balance for each Settling Bank that settles on behalf of more than one Participant is the net of the net debit and net credit balances of all Participants for which that Settling Bank settles, after cross-endorsement with the National Securities Clearing Corporation (NSCC), including the Settling Bank’s own settlement obligations as a Participant if it settles for itself.
A Settling Bank may refuse to settle on behalf of another Participant for which it is the designated Settling Bank, in accordance with the processing schedule and other provisions set forth below. It is the primary obligation of each Participant to ensure that its net settlement balance, if any, is settled timely. If a Settling Bank does not settle on behalf of a Participant, as a result of a refusal to settle or otherwise, the Participant must make alternative arrangements to make payment to DTC via Fedwire® as set forth below. A Participant that acts as its own Settling Bank, whether or not it settles for others, may not refuse to settle for itself; if it does not fund its settlement obligation, it will be in default under the DTC Rules and Procedures.
Note- Any Settling Bank that settles for both Participants of DTC and members of NSCC will have its net-net credit or debit balances at DTC and NSCC aggregated and netted to one consolidated debit amount or credit amount, as applicable.
Example of the Calculation of a DTC Settling Bank’s Net-Net Settlement Balance:
The following details illustrate and example of how the settlement process works for DTC:
- Settling Bank ABC settles for Participants 1, 2, and 3.
- Participant 1 has a gross debit of $2 million and a gross credit of $1 million, giving it a net debit of $1 million.
- Participant 2 has a gross debit of $3 million and a gross credit of $2 million, giving it a net debit of $1 million.
- Participant 3 has a gross debit of $2 million and a gross credit of $3 million, giving it a net credit of $1 million.
- Settling Bank ABC's net-net settlement balance would be a debit for $1 million, which is the sum of the net debits and credits of Participants 1, 2, and 3.
As illustrated in the example, net-net settlement reduces the number and the dollar amount of payments due to DTC. In the example, DTC would instruct the Fed to charge the Settling Bank's American Banking Association (ABA) routing number for $1 million via NSS.
Note– Although each Settling Bank settles with DTC on one net-net amount, the Settling Bank is responsible for collecting final net debits from, and paying final net credits to, the Participants it represents.