Money Market Instruments Blue Sky Task Force Report
SIFMA and the The Depository Trust & Clearing Corporation (DTCC) release a task force report that proposes several short- and long-term solutions to mitigate systemic and credit risks in the processing of money market instruments (MMI). The report’s short-term recommendations focus on addressing the credit risk exposure that Issuing and Paying Agent (IPA) banks face because of a lack of transparency around the amount an issuer must fund to cover its maturities.
Excerpt
Executive Summary
Money Market Instruments (MMIs) are a critical market for the financial industry and are one of the largest asset classes (in dollar value) among the outstanding instruments settled at The Depository Trust Company (DTC). In the aftermath of the financial crisis, the MMI market has undergone significant changes as a result of:
• Mounting concerns related to issuer solvency and credit worthiness,
• MMI issuers experiencing liquidity2 and credit pressures associated with investors’ reluctance to purchase asset-backed securities and commercial paper with longer dated maturities,
• A persistent low interest rate environment that is contributing to a market contraction of MMI outstandings,
• Heightened focus on risk reduction and the late day liquidity concentration of Fedwire funds. The Federal Reserve Bank of New York, through the Payments Risk Committee (PRC) Working Group, suggested that the money market industry identify specific best practices such as increased real-time finality in MMI settlements and investigate the need for potential structural market reform.
As a result, The Depository Trust and Clearing Corporation (DTCC) and The Securities Industry and Financial Markets Association (SIFMA) together formed the “MMI Blue Sky Taskforce” to identify possible ideas to mitigate systemic risks in the processing of MMIs and present them for industry-wide deliberation. Market participants on the taskforce assessed the effectiveness of changes that could reduce risk and vulnerabilities, provide processing flexibility and enable enhanced intraday settlement finality. Areas being reviewed include Issuing and Paying Agent (IPA) bank credit risk associated with the timing of issuer funding and the “conditionality” of MMI transactions vs. finality via intraday settlement and MMI matching as possible alternatives to the current process.
The approaches summarized in this report include:
• Short and medium term proposals that may require changes to deadlines, pricing, market rules changes that mitigate the unintended credit risk that IPAs face today in servicing this market. These changes are aimed at reinforcing consistent operational and market behavior.
• Longer term proposals that may require major structural and system changes but may offer the potential to address the systemic risk of settlement finality and release liquidity into the market earlier in the processing cycle. The taskforce outlined the implications of each approach and acknowledged the far-reaching impact of changing DTC procedures and the settlement structure.