WASHINGTON — The Depository Trust Co. has changed the way it processes principal and interest payments for municipal and other securities, triggering revised procedures or challenges for some rating agencies, trustees and issuers.
DTC made the changes on Monday, after more than a year of deliberation and discussion with market participants and regulators, saying the new procedures are necessary “to reduce systemic risk and enhance accountability in the allocation of several trillion dollars annually.”
Under the changes, DTC will process P&I payments and send them on to securities firms, money market funds and other members the same day only if it receives them along with the appropriate information before 3:00 p.m. Eastern Time. The deadline is necessary so DTC has enough time to send the payments to its members.
In the past, DTC processed the payments regardless of when it received them. But in a white paper issued in November 2009, the company concluded that more than 4% of P&I payments, totaling about $10 billion per month, were either late or misidentified.
“The goal is to ensure that all shareholders and bondholders receive the entitlements due them on the payable date in a manner that does not impose unnecessary risk on the system,” John Faith, vice president of operations for the Depository Trust and Clearing Corp., the parent company of DTC, said in a recent release.
“By working collaboratively with the industry, we believe that we have developed an improved process that will provide the same level of efficiency and certainty to market participants while mitigating the risk of late or misidentified payments,” he said.
Principal and interest payments include dividend, interest, period principal, redemption and maturity payments, according to DTC.
The company’s action prompted Moody’s Investors Service on Monday to revise its ratings guidelines.
Under the changes, if a P&I payment is delayed only one or two days due to operational or administrative issues, is quickly remedied, and is not expected to recur, it probably will not be treated as a default or result in rating changes for the securities, Moody’s said in a release.
“Our approach is to differentiate between short-term technical issues and real underlying credit stress or management problems,” said Jack Dorer, Moody’s managing director for public finance.
Doer stressed that rating committees will still look at each situation.
“In the event of a one-time late payment of interest or principal that is cured in very short order ... if there is reason to anticipate that late payment may recur, rating committees would consider whether a revision is appropriate,” Moody’s said in the release. “This is most likely to be a negative outlook.”
A spokesperson for Standard & Poor’s said it has not revised its rating procedures as a result of the DTC changes.
One trustee bank official said that while trustees have been aware of the changes, “my sense is that this is going to put a lot of pressure on West Coast issuers and the trustees who serve them.”
These issuers and trustees have to send DTC principal and interest payments and the appropriate information by noon, Pacific Time, given the three-hour time difference, the official said.
But Cristeena Naser, senior counsel at the American Bankers Association, said: “The trustees have been involved with this for over a year. ... To my knowledge, they’re all on board with it.”
Naser said DTC consulted with the trustees as well as other market participants.
