Same-day funds settlement on municipal bonds: new principal and income cash transfer deadlines.

• Author: Anders, Alan L.

Funds transfers on municipal bond payment dates are commonly viewed by public debt managers as a back-office function that comes to the attention of senior finance officers only on rare instances when "something goes wrong." Even at such times - for example, when the wire transfer system fails - paying agents have been willing to remit funds on behalf of issuers, comforted by the ultimate remedy of a "clawback" of monies from the Depository Trust Company (DTC) and ultimately from securities firms and dealers, if necessary. However, the full implementation of the technologies of paperless municipal bonds and same-day funds settlement is bringing funds transfer mechanics more into the spotlight and necessitating that issuers develop more fail-safe procedures in cooperation with their paying agents.

"Clawback" refers to the DTC policy which makes it possible for paying agents to be made whole for payments made on behalf of issuers in instances when the issuer ultimately fails to make payment itself. Uncertainty as to whether this remedy will be denied to paying agents at some point in the future is the crux of a dialog which has developed between DTC, its participants (as defined below), The Bond Market Association, the paying agent community, and issuers. If the right to "clawback" is repealed in the future, paying agents will have no alternative but to be much more reluctant to make payments on behalf of issuers during the inevitable intra-day periods when funds may be in transit from the issuer but where there is no way for the paying agent to know this for certain.

The transition to same-day settlement dates back to a Group of Thirty (G-30) set of recommendations to the U.S. financial industry in 1988. The G-30 is an independent, nonpartisan, nonprofit organization established in 1978 to deepen understanding of international economic and financial issues, to explore the international repercussions of decisions taken in public and private sectors, and to examine choices then available to policy makers. The 1988 G-30 recommendations were aimed at a) reducing risk and funding requirements, b) promoting payment finality and payment consistency across instruments, and c) improving trade processing efficiencies in the U.S. securities industry. In support of the visions set forth by those recommendations, and as part of the U.S. Working Committee's G-30 Clearance and Settlement Project, industry guidelines were published in 1993 requiring, as of...