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DTCC expands services for ETFs

The Depository Trust & Clearing Corporation (DTCC) has expanded its create and redeem service for Exchange Traded Funds (ETF) to include using cash as the sole underlying component.

The service enhancement now allows investors and agent banks to have virtually all domestically-traded ETF transactions be eligible for the creation and redemption process through DTCC subsidiary, National Securities Clearing Corporation (NSCC).

Previously, creates and redeems 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 (ETN), had to be processed ex-clearing, or outside NSCC.

"As investments in ETFs have 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," said Susan Cosgrove, DTCC managing director, 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 domestic equities, global/international equities, fixed income instruments, commodities and currencies. ETF assets reached $580 billion in September 2008, up from $551 billion (a 5% increase) in September 2007, according to the Investment Company Institute. The total number of ETFs grew from 560 to 701 during that same period, a 25% increase.

As part of the service enhancement, NSCC is also offering market participants an optional shortened settlement cycle of one day (T+1) instead of three (T+3) 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, like commodities," Cosgrove said. The enhanced service also allows NSCC to capture and process ETF creates and redeems for less frequently traded corporate and municipal bonds and Unit Investment Trusts (UIT).

ETFs are securities that combine the index tracking features of index mutual funds with the continuous, all-day trading flexibility of stocks. ETFs issue creation units (or creates) 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.

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