Currently only overseas firms with U.S. branches or agencies are eligible for membership in DTCC’s Fixed Income Clearing Corporation (FICC). According to a press release, in a filing with the Securities and Exchange Commission (SEC) on December 3, the corporation proposed that non-U.S. financial companies be allowed to join FICC directly so they can take advantage of the risk management, balance-sheet netting, and cost savings that membership provides.
When firms settle their U.S. government securities trades outside FICC, the transactions have to be completed on a trade-for-trade basis without the benefit of a trade guarantee or the optimum use of capital that netting provides, the announcement explained. This raises cost and risk not only for non-U.S. firms, but also for U.S. firms that are the counterparties to the trades.
Legal uncertainties about FICC’s rights in the event of a foreign member’s insolvency have historically limited membership in the company only to non-U.S. banks with U.S. branches or agencies, but FICC says amendments to U.S. bankruptcy statutes have eased these uncertainties.
Because FICC becomes the counterparty to all netted trades, trading firms are able to record the net rather than the gross value of the trades on their balance sheet. This difference, noted Murray Pozmanter, managing director, DTCC Fixed Income Clearance and Settlement Group, in the announcement, reduces the amount of capital they must set aside for the trades and frees up additional capital for other investments.
“With more netting members FICC will be able to free up more capital by netting out the offsetting financial obligations across a larger pool of trades,” Pozmanter said. “If we expand the number of firms that are direct netting members, each individual firm will have, on average, less risk, lower clearing costs, more balance sheet relief and more capital released for additional investment. That’s a worthy goal, especially during this period of acute capital shortages for many institutions.”