Traditions

Before the invention of computers, financial practices were conducted with reliance upon tangible forms of security and personal insights into the character of those who were pledging collateral. Digitization of securities, currencies and recordkeeping has created new traditions, with new regulations. Examining the evolution of financial market traditions over time helps us understand how we should conduct business in the 21st Century realm of digital innovations like blockchain and distributed ledgers.


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Friday, September 3, 2021

Central Clearing for Securities Lending

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


Author: David Schwartz J.D. CPA

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. 

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