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Bill Kapogiannis, DTCC

DTCC comments on firm’s enhanced offering

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Bill Kapogiannis, Executive Director at The Depository Trust and Clearing Corporation (DTCC), comments on his firm’s enhanced offering and the impact of the ETF rule.

How big a change has the SEC Rule 6c-11 rule brought to the industry when it was introduced? 
 
The SEC Rule 6c-11 became effective a year after its adoption, giving the industry sufficient time to plan and prepare ahead of the compliance date.  

By eliminating the need to apply for individual exemptive relief, the adoption of the SEC Rule 6c-11 has also enabled faster entry of ETFs into the market, significantly benefiting sponsors, especially smaller sponsors.  
 
What new efficiencies/capabilities will DTCC’s enhancements to the ETF PCF process help firms achieve?  
 
The new capabilities have been designed to enhance the consumption and distribution of the ETF Portfolio Composition File (PCF) process in support of regulatory changes calling for ETF increased transparency under SEC Rule 6c-11. As part of these improvements, we have introduced multiple basket types to provide flexibility for Create/Redeem order customisation, pricing baskets and additional data elements to support the clearance of additional asset classes, such as fixed income ETFs, in the near future. The features and automated controls introduced by DTCC expand the firm’s existing ETF primary market clearing process to include processing of multiple basket types and flexibility for order customisation. It will allow DTCC’s clearing members to benefit from the customisation the Rule 6c-11 has allowed for.  

These enhancements are a result of close industry collaboration over the past few years, during which DTCC facilitated a very active large industry working group, including authorised participants, agent banks, and sponsors, working collectively to address key industry challenges and identifying opportunities to improve the functionalities of central clearing processing, not only from an operational standpoint, but also from a risk perspective.  Together, we have devised best practices as it relates to ETF clearing in order for authorised participants to clearly differentiate all basket types, thereby reducing risk for the industry. We plan to continue to closely work with the industry and aim to introduce common practices that will further increase efficiency and transparency in the market. 

What prediction does DTCC/NSCC have for the growth in the ETF industry going forward? 
 
Looking at the market data it is very clear that the largest inflows in ETFs have been, and will continue to be, in the fixed income space. Against this backdrop, future enhancements allowing for centralised clearing and settlement of fixed income ETFs will help facilitate this growth. Additionally, exemptive relief, which allows for faster and cheaper methods to launch new funds, could further boost ETF growth. Finally, the unprecedented market challenges and volatility earlier this year has unsurprisingly increased ETF trading volumes, leading to a 60 per cent increase in ETF clearing. The approaching November US Presidential election will likely further drive volatility and ETF growth. As a result, we can expect to see more market participants rally behind a centrally cleared ETF model, which significantly decreases operational risks and introduces multiple efficiencies.  
 

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