FICC To Expand Settlement to Certain Buy Side Institutions; New Model Will Allow Qualifying Banks to Sponsor Mutual Fund Clients into FICC Membership.

NEW YORK -- Fixed Income Clearing Corporation (FICC) has received SEC approval for two new membership categories that will expand settlement of U.S. Government securities transactions to the buy side community, including mutual funds and other registered investment institutions. This is a significant step in FICC's efforts to bring straight-through processing (STP) and greater risk management to the fixed income institutional marketplace.

The proposal, which will be implemented July 7, 2005, creates two new categories ("sponsoring member" and "sponsored member"). Initially, only member banks that meet stringent financial requirements will be allowed to sponsor mutual fund clients into FICC membership. FICC is a subsidiary of The Depository Trust & Clearing Corporation (DTCC).

"Both the sponsoring and sponsored members have a great deal to gain from this new model," said Jeff Ingber, DTCC's General Manager, Fixed Income Clearance and Settlement. "As sponsoring members, among other things, banks gain the benefits of balance sheet relief for financing transactions.

"As sponsored members, mutual funds will receive the benefits of guaranteed settlement enjoyed by the sell side (broker/dealers, banks), as well as expanded access to financing opportunities through reverse repos executed with the sponsoring bank." (Reverse repos are used by institutions to earn income on their excess cash reserves.)

Ingber said that while FICC's new membership categories will be available initially only to qualifying banks and mutual funds, FICC intends to gradually expand the types of entities that will be eligible for sponsoring or sponsored membership, such as broker/dealers and pension funds.

The sponsoring/sponsored membership model was developed in close consultation with State Street Bank, which is the first bank to enroll as a sponsoring member.

"State Street is pleased to have assisted FICC in developing a superior process for our institutional customers to transact repurchase agreements," said Kerry Pope, State Street's Senior Vice President. "The new model for transacting repos will enhance operational efficiency, increase access to liquidity, and improve counterparty and operational risks. We are pleased to provide customers with leading edge product solutions that leverage our focus and resources.

"I expect that the new model will be widely adopted by our repo customers over the coming months as they learn of the model's superior features and synergies associated with sponsored membership with FICC."

For almost 18 years, the Government Securities Division (GSD) of FICC and its predecessor company, Government Securities Clearing Corporation (GSCC), have focused on managing and reducing industry risk for sell side members, by bringing more trades into its net settlement system for U.S. Government securities. FICC has dramatically reduced members' operational costs by millions of dollars, provided risk protection through guaranteed settlement and real-time trade matching, and introduced additional trading opportunities to the street. Government securities valued at more than $2.8 trillion, including some $1.9 trillion in repos, are processed by FICC on an average day.

"With this sponsoring/sponsored membership approach," said Adrien Vanderlinden, FICC Director of Planning, "we've opened a new door for the buy side that offers many of the same benefits of FICC netting and settlement arrangements that are available to the sell side."

In order to qualify as a sponsor for its mutual fund clients into FICC membership, an FICC netting member bank must have at least $5 billion in equity. The bank would interface with FICC and act as the processing agent for the government securities transactions of its sponsored mutual fund clients. Each fund would be responsible for its own settlement obligations to FICC.

However, the sponsoring bank will provide a guarantee to FICC for its sponsored mutual funds, which FICC could exercise if those settlement obligations were not satisfied by the fund directly. In addition, the sponsoring bank would be responsible for any mutualization of liquidation loss attributable to activity by a sponsored fund.

Ingber noted that FICC would continue to work with industry participants and The Bond Market Association to accommodate the unique requirements of the buy side.

"With the support of our existing members," Ingber added, "we think it's an attainable goal to bring numerous institutions into FICC settlement - and provide a new era of reduced risk, increased financing opportunities inherent in repo transactions, and greater efficiencies."

About DTCC

The Depository Trust & Clearing Corporation (DTCC), through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities and over-the-counter credit and equity derivatives. DTCC's depository also provides custody and asset servicing for almost two and a half million securities issues from the United States and 100 other countries and territories. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with their distribution networks. DTCC has operating facilities in multiple locations in the United States and overseas. DTCC's derivatives services are offered through DTCC Deriv/SERV LLC, a wholly owned subsidiary of DTCC. For more information on DTCC, visit www.dtcc.com.