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DTCC to allow exchange-traded funds to use cash for creation and redemption

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The Depository Trust & Clearing Corporation has announced it has expanded its create and redeem service for exchange-traded funds to include using cash as the sole underlying component

The Depository Trust & Clearing Corporation has announced it has expanded its create and redeem service for exchange-traded funds to include using cash as the sole underlying component, to reduce risk and costs for participants.

The change makes virtually all US-traded ETF transactions from investors and agent banks eligible for the creation and redemption process through DTCC subsidiary National Securities Clearing Corporation.

ETFs issue creation units in large blocks of usually 50,000 shares to institutional investors in exchange for a basket of securities that mirrors the ETF’s portfolio instead of cash. ETFs are redeemed when investors exchange a total number of ETF shares equivalent to a creation unit for the underlying basket of securities.

Previously, for creation and redemption for ETFs whose underlying components were not eligible for processing at NSCC, including those containing commodities, foreign equities, credit default swaps and exchange-traded notes, had to be processed ‘ex-clearing’, or outside NSCC.

‘As investment in ETFs has surged and the marketplace has evolved with the introduction of new products, it is critical for the post-trade infrastructure to adapt to support this continued growth,’ says Susan Cosgrove, managing director of the DTCC’s clearance and settlement group.

‘This enhancement allows NSCC to process creates and redeems for an expanded product base and also offer investors and agent banks the benefits of our central counterparty guarantee and netting.’

The variety of asset classes comprising US-listed ETFs has grown rapidly in recent years to include US equities, international equities, fixed-income instruments, commodities and currencies.

ETF assets reached USD580bn in September, up 5 per cent from USD551bn a year earlier, according to the Investment Company Institute, while the total number of ETFs grew from 560 to 701 during that same period.

As part of the service enhancement, NSCC is also offering market participants an optional shortened settlement cycle of one day instead of three for ETF transactions. ‘A shorter settlement cycle enhances liquidity and allows the ETF settlement to coincide with the settlement cycle for certain components of ETFs that may be shorter than T+3, such as commodities,’ Cosgrove says.

The enhanced service also allows NSCC to capture and process ETF creation and redemption for less frequently traded corporate and municipal bonds and unit investment trusts.

The DTCC provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. It is also a processor of mutual funds and insurance transactions, linking funds and carriers with financial firms and third parties who market these products.

DTCC’s depository provides custody and asset servicing for more than 3.5 million securities issues from the US and 110 other countries and territories, valued at USD40trn. Last year, DTCC settled more than USD1.8qdrn in securities transactions.

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