New York, March 1, 2011 – The Depository Trust & Clearing Corporation (DTCC) announced today that the Securities and Exchange Commission (SEC) has approved the transformational “one-pot” cross-margining arrangement between fixed income positions cleared by DTCC’s Fixed Income Clearing Corporation (FICC) subsidiary, including U.S. Treasury securities, agencies, and repurchase agreements, and interest rate futures positions cleared by New York Portfolio Clearing (NYPC)—a critical step designed to deliver an unprecedented level of capital and operational efficiency, transparency and risk reduction.
The SEC approval permits FICC, for the first time ever, to participate in a cross-margining arrangement that brings together fixed income cash and derivatives positions in a single margin calculation. This innovative “one-pot” model will produce significant capital efficiencies by margining the actual economic risk of combined portfolios of cash and derivatives positions. By offering a single combined view of risk across asset classes, “one-pot” margining also enhances market and regulatory transparency with respect to the clearing of fixed income portfolios, which can be used to identify and moderate systemic market risks, facilitating more orderly risk mitigation and reduction in settlement risks.
“Since the financial crisis, we’ve been intensely focused at DTCC on mitigating risk and increasing market transparency for regulatory authorities while introducing new efficiencies into the clearing system,” said Murray Pozmanter, DTCC managing director, Fixed Income Clearing and Settlement. “In fixed income markets, where firms routinely use futures to provide a natural offset or hedge to cash market trades, we’re confident that ‘one-pot’ margining will help achieve these goals, and we’re grateful that the SEC has approved this expeditiously.” In 2010, FICC cleared and settled transactions valued at average of about $4.6 trillion daily.
The SEC rule filing also enhances risk mitigation procedures for FICC member firms that trade government securities by implementing twice-a-day margin calls instead of the single margin call currently in place.
New York Portfolio Clearing (NYPC)
“One-pot” margining is a key element behind the launch of New York Portfolio Clearing (NYPC), a joint venture of DTCC and NYSE Euronext (NYX). NYPC will take advantage of the correlation between cash market trades cleared and settled at FICC and hedges made with offsetting futures markets trades cleared at NYPC.
NYPC will also provide important operational efficiencies to its members, including the “locked-in” trade delivery process that allows expiring futures to be seamlessly submitted to FICC for physical delivery.
NYPC will initially clear Eurodollar and U.S. Treasury Futures for NYSE Liffe U.S. Its “open access” architecture will enable other derivatives exchanges and clearinghouses to link into the “one-pot” margining system.
At launch, “one-pot” margining of cash and futures positions will only be available for the proprietary accounts of common members of NYPC and FICC.
Below is a schematic drawing that helps explain the single-pot margining concept.