Friday, September 3, 2021

Central Clearing for Securities Lending

DTCC Gambles that If They Build it, they Will Come.

DTCC has applied to the US Securities and Exchange Commission for permission to launch a securities finance clearing service. DTCC's fixed income arm, the National Securities Clearing Corporation (NSCC), spearheads the central clearing initiative, touting the numerous efficiency benefits to clearing customers, including increased capital efficiency for both borrowers and agent lenders and a reduction in counterparty risk by novating to NSCC the completion of settlement obligations.


Despite the reduction of counterparty risk offered by central clearing, the service is not without its costs. Central clearing is paid for by both borrowers and lenders, potentially cutting into already marginal income from securities lending. Switching from bilateral to central clearing is dependent on a complex cost-benefit analysis. Securities lending market participants must consider margin requirements, trading liquidity, and comparative ease of trade in central clearing versus bilateral clearing. Meaning central clearing may be cost-effective for some but not for others. 


The SEC typically has 45 days to approve or deny requests like these from DTCC. In this case, however, the Commission has given itself more time, until November 9, 2021. Having received no comment letters on the proposal, the Commission says it needs more time "to consider and take action on the Proposed Rule Change." It could be that they need to fit this into their greater post-Robin Hood regulatory plans.