Thomas Ruggiero, TCS Financial Solutions

Several years ago, DTC formed a cross-industry working group to study the severity of P&I processing problems and to analyze possible solutions. The working group at that time focused mainly on the timeliness of rate information submitted to DTC by paying agents and recommended several changes to DTC’s Operational Arrangements. Those changes were approved by the Securities and Exchange Commission (SEC) and implemented in 2008. Implementation of the 2008 changes resulted in a 75% decrease in late rate information and a significant increase in the allocation of P&I on payment date. More recently, the working group has suggested that, among other things, DTC create a time limit for processing Post-Payable Adjustments (PPAs) received from Paying Agents.

Under today’s practice, DTC will process Post Payable Adjustments received from Paying Agents for up to one year or after the initial payment is made. DTC will process the debits and credits for the misapplied principal or income and participants of DTC must then process trade adjustments against any customer who traded the security since the error occurred. Participants must also process adjustments to their customers’ accounts for the misapplied principal and associated interest. DTC has been contracted a number of times by the Association of Global Custodians to focus more closely on the risks associated with income adjustments and to look for ways to reduce that risk.

In 2011 and 2012, the number of PPAs spiked dramatically. The annual number of PPAs rose from 3,957 in 2010 to 14,835 in 2011 and 19,368 in 2012. This change resulted in a significant risk and cost to the industry. DTC formed the PPA Working Group to work on identifying and implementing steps to reduce the number of PPAs. The Working Group includes representatives (e.g., SIFMS, AGC-Association of Global Custodians, among others) as well as firms representing paying and calculation agents.

In an effort to reduce the inherent risks associated with these types of PPAs and to compel all parties in the payment chain to confront and minimize the challenges associated with principal and interest adjustments, DTC will make the following changes in practice: Effective January 1, 2014, DTC no longer processes PPA requests through the settlement system beyond 180 calendar days after the initial payment date. That period reduced to 120 days from July 1, 2014, and will eventually come down to 90 days from January 1, 2015.

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