The Netting and Settlement service of FICC’s Government Securities Division (GSD) provides centralized, automated clearance and guaranteed settlement of eligible U.S. Treasury bills, notes, bonds, strips and book-entry non-mortgage-backed agency securities. As part of its GCF Repo® service, GSD also processes transactions involving certain mortgage-backed securities.
Through netting, the GSD establishes a single net long or short position for each participant’s daily trading activity in a given security, including all cash buy/sell, repo/reverse and U.S. Treasury auction purchases. The participant’s net position is the difference between all long and all short positions in a given security.
The GSD minimizes risk by guaranteeing the settlement of all trades entering its net. The GSD’s guarantee is effective upon comparison of netting-eligible trades. Trades are formally compared when the GSD communicates to members that their trades have compared. The GSD communicates with its participant-members by providing machine-readable output (MRO), print image reports or online inquiry via the RTTM® Web Front End. The GSD then acts as the settlement counterparty by interposing itself between the original trading parties and becoming the legal counterparty for settlement purposes.
How the Service Works
The GSD replaces each net position with a settlement obligation for the scheduled settlement date. Obligations are settled using the Fedwire, which ensures all deliveries are made against full payment. The GSD’s netting system typically lowers costs associated with securities transfers by reducing the number of securities movements required to settle obligations. Fewer securities movements may also reduce daylight overdraft charges.
In addition, the GSD has developed risk management policies and procedures to mitigate the risk associated with clearing securities transactions.
The Netting and Settlement service facilitates efficient transaction settlement and risk management.
Compared trades meeting eligibility requirements enter the GSD’s netting and settlement system on the day they compare. For each netting participant, the system calculates the difference between the long and short positions in each security. The result is a single net long or short position for the security composed of all the buy/sell, repo, and Treasury auction purchases transacted by the participant.
THE SETTLEMENT PROCESS CONSISTS OF TWO DAILY SETTLEMENTS:
Securities Settlement—Participants’ net positions in each security are converted into settlement obligations with the GSD. All securities deliveries, whether to or from the GSD’s clearing banks, are made against full payment over the Fedwire. Securities delivered to the GSD accounts at the respective clearing banks are instantaneously redelivered to participants that are due to receive securities.
The GSD assigns each security a system value to calculate the cash settlement amount of a given net position. The GSD’s system value is determined daily to approximate each security’s current market value. The difference between the system value and the actual contract amounts of participants’ trades in a given security is accounted for in the Transaction Adjustment Payment component of Funds-Only Settlement.
Funds-Only (cash-only) Settlement—Funds-Only Settlement is an aggregate cash amount that is paid to, or collected from, participants each day. It is composed of calculated values that are associated with each participant’s overall trading activity calculated at End of Day and Intraday. For Intraday Funds Settlement FICC collects forward margin on all open positions in the system as of noon eastern time using the market price as of noon eastern time. Positions that are marked include all compared trades settling on the next business day and beyond and all unsettled obligations. Intraday Forward margin is returned to participants on the next business day and accrue interest for that time period based on the overnight fed investment rate.
- Centralized Clearance and Guaranteed Settlement Gone: IBKR will lose access to the centralized and automated clearance system for eligible U.S. Treasury bills, notes, bonds, strips, and certain non-mortgage-backed agency securities.
- Loss of Netting Benefits: The service provides a single net long or short position for each participant's daily trading activity in a given security. Without this, IBKR will have to manage individual trades rather than a consolidated net position.
- Loss of Risk Minimization: The GSD guarantees the settlement of all trades that enter its net, which minimizes the risk associated with unsettled trades. Without the guarantee, IBKR be exposed to the risk of counterparties not fulfilling their obligations.
- Loss of Trade Comparison: The GSD provides trade comparison services to confirm trades have been matched correctly. Without this service, IBKR will have to manage and verify trade comparisons independently.
- Loss of Settlement Counterparty: The GSD acts as the settlement counterparty by legally placing itself between the original trading parties for settlement purposes. This means without the service, IBKR will have to deal directly with multiple trading parties for settlement.
- Loss of Cost Efficiency: The netting system typically reduces costs associated with securities transfers by decreasing the number of securities movements required to settle obligations.
- Loss of Risk Management: The GSD has developed risk management policies and procedures to mitigate the risk associated with clearing securities transactions. By withdrawing, IBKR will lose the benefit of these specialized risk management measures.
- Loss of Efficient Transaction Settlement: The service ensures that trades that meet eligibility requirements are efficiently settled by calculating the net long or short position for each security. IBKR will no longer be able to make use of this.
- Securities Settlement Process: The GSD manages two daily settlements - Securities Settlement and Funds-Only Settlement. IBKR will lose the streamlined process provided by these settlements, including the benefit of securities deliveries made against full payment over the Fedwire.
- Effective Tuesday, October 31, 2023 INTERACTIVE BROKERS LLC/IBKR SECURITIES SERVICES LLC will withdraw from membership in the Netting and Repo Netting of the Government Securities Division.
- By withdrawing from the netting and settlement services IBKR will lose out on a range of benefits from risk minimization, cost savings, efficient transaction processing to specialized risk management procedures.
- IBKR will lose access to the centralized and automated clearance system for eligible U.S. Treasury bills, notes, bonds, strips, and certain non-mortgage-backed agency securities.