New Term DBV Functionality - Available to test 22nd February 2012

Enhancing Term DBV functionality - OVERVIEW

Euroclear are introducing new functionality relating to Term DBVs in April and June of this year.

The main changes are as follows:

• Enhancements to the existing giver recall substitutions functionality to allow partial recalls to be generated where full stock is not available. (June)
  
  
• Enhancements to automatic splitting functionality. (June)
  
  
• Introduction of intraday mark to market in addition to the overnight process. (April)

 

Automatic splitting service

The automatic splitting functionality assesses transactions which are failing to settle due to insufficient stock. Where the debit party has some stock available Crest will split the trade and settle for the quantity available.

Two siblings will be created, one of which will settle. The parent transaction will go to ‘Will not be actioned’ status. Crest may attempt to split the remaining sibling again, transactions can be auto split more than once.

The auto splitting process has the same effect at manual splitting:

• The siblings are created in the same way.
• The consideration is pro rated across the siblings.
• The siblings have the same priority as the parent.
• Status changes are also generated in the same way.

Currently only DEL and CLA transactions can be auto split, this is being updated to allow:

• Auto splitting of TDRs, DBRs, OATs, SLOs, SLRs
• All instrument types apart from UTFs

Please note that OATs are not available for manual splitting but can be auto split.

Both participants to the trade must be set up to allow auto splitting. This is done at Member Account level.

The sibling transactions will contain a link to the parent.

In the case of SLRs, TDRs and DBRs being split then a link is also maintained to the original SLO, TDO or DBV.

 

Partial Giver Recall Substitutions

Partial Giver Recalls are used to aid settlement of failing transactions. These are known as TDGs.

TDGs are used where a transaction is failing to settle due to insufficient stock but that stock is out on a Term DBV, a TDG is created to ‘recall’ the required stock and replace it with a different line of security.

Currently the TDG processing works on an all or nothing basis. The amount out on the TDR must be sufficient to settle the failing transaction.

For example:

Full Recall substitution

The Delivery above is failing to settle due to PTY1 having insufficient stock in their Member Account.

 

 

PTY1 has an open Term DBV where there is stock GB001 out on an open TDR. The quantity loaned out is 1,000 (enough to cover the failing DEL)

 

 

A TDG is created to recall 500 of stock GB001 and replace with a different line of security for the same value.

 

Partial Recall Substitution

The changes being introduced are to allow for a partial substitution. For example:

The Delivery above is failing to settle for 1500 shares of GB006.

PTY1 has an open Term DBV where there is stock GB006 out on an open TDR. The quantity loaned out is 800. This is NOT enough to fully settle the DEL.

 

A TDG is created to recall 800 of stock GB006 and replace with the same value of stock GB009. The Delivery will then be split to allow 800 to settle and leave 700 open awaiting settlement.

 

Intraday Mark-to-Market

Currently mark to market is performed overnight. A new intra day mark to market is being introduced to try deal with any imbalances which could not be fully resolved in the overnight process.

During the mark-to-market process Crest determines whether the Term DBV is:

• Over or under collateralised (stock value gone up or down)
• In breach of the concentration limit (more than 10% of each stock)
• The Term DBV Consideration needs to be reapportioned across the TDRs

If the Term DBV is over/under collateralised or in breach of the concentration limit a TDM will be created. If the consideration needs to be reapportioned then the TDRs will be updated (No need for TDM).

 

Partialling

In the current overnight processing

• a TDM is generated (for over collateralised or over concentrated Term DBV) for the full amount required regardless of whether the taker has sufficient stock in their account to settle the transactions.

• In relation to under collateralised Term DBV, a TDM will only be generated if the Giver has the full amount of securities in their account.

However, in the intra-day processing the system

• will not be restricted to only generating TDMs where the full amount of stock is available. It will use as much stock as is available from the giver/taker.

• A TDM will only be generated if there is at least some available stock in account.