Journal Issue

United States of America: The Fixed Income Clearing Corporation–Government Securities Division Observance of the CPSS/IOSCO Recommendations for Central Counterparties

International Monetary Fund
Published Date:
July 2010
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I. Summary, Introduction, and Methodology

1. The Fixed Income Clearing Corporation–Government Securities Division (FICC-GSD) observes the majority of the recommendations and broadly observes the others of the CPSS-IOSCO Recommendations for central counterparties (RCCPs).1 The system properly addresses risks related to clearing, custody, financial resources, operations, and links. Some measures to improve resilience against financial risks, governance arrangements, and transparency have been identified. It is, however, important that FICC-GSD effectively takes additional steps to properly address financial risks. It would also be beneficial that the Securities and Exchange Commission (SEC) requires FICC-GSD compliance with RCCPs, and the Federal Reserve is provided with a legal mandate to oversee FICC, as a complementary function to the existing SEC regulation and supervision.

2. The assessment of FICC-GSD was undertaken in the context of the IMF Financial Sector Assessment Program (FSAP). This assessment only covers FICC-GSD, i.e. the CCP providing services for transactions in U.S. Government Treasury and Agency securities. The FICC Mortgage Backed Securities Division (MBSD), which is not yet providing CCP services, is not covered by this FSAP mission.

3. Prior to the mission, FICC-GSD conducted a self-assessment following the RCCPs methodology published by the CPSS-IOSCO in 2004. The assessment also benefited from discussions with the SEC, the Federal Reserve Board and Federal Reserve Bank of New York representatives, as well as the operator of FICC and some major participants in the system.2 Relevant authorities and the operator of the system have been very co-operative in providing additional confidential information and organizing additional meetings, when required.

4. Given the organization of the Depository Trust & Clearing Corporation (DTCC), the assessment of the three entities belonging to the group i.e. the Depository Trust Company (DTC), the National Securities Clearing Corporation (NSCC) and the Fixed Income Clearing Corporation (FICC) resulted in almost identical recommendations on legal risk (RSSS1 and CCP1), operational risk (RSSS11 and RCCP8) governance (RSSS13 and RCCP13), efficiency (RSSS15 and RCCP14) and links (RSSS19 and RCCP11).

II. Institutional and Market Structure—overview

5. The FICC-GSD, wholly-owned subsidiary of DTCC, is a systemically important CCP for transactions in U.S. Government Treasury and Agency Securities. It was established in 2003 from the merger between the Government Securities Clearing Corporation and the Mortgage Backed Securities Clearing Corporation. Its predecessors were established in 1986 to provide automated trade comparison and settlement services, risk management and operational efficiency to the U.S. Government securities market. Key figures of FICC’s activities are provided in Table 1.

Table 1.Key Statistics of FICC-GSD, 2007–09
1. Number of contracts and transactions cleared (millions)30.434.428.7
2. Value of contracts and transaction cleared (USD billions)1,006,1001,014,500905,100
3. Average daily value of transactions (USD billions)443,6
4. Peak value of transactions (USD trillions)
5. Total number of clearing members, of which:1039798
5.1. Foreign clearing members111113
6. Clearing fund (USD millions) 1/13,701.718,896.814,141.4
Source: DTCC.

Includes the value of cash and securities.

Source: DTCC.

Includes the value of cash and securities.

6. FICC-GSD is a registered as a clearing agency and regulated and supervised by the SEC (section 17A of the Securities and Exchange Act). Although the SEC has not formally required FICC-GSD to perform a self-assessment with respect to the RCCPs, compliance with SEC rules assures compliance with most of the recommendations. FICC-GSD, as an affiliate of DTCC, is also subject to the oversight of the Federal Reserve.

III. Main Findings

Legal Framework (Rec. 1)

7. FICC’s activities are governed by a consistent set of laws, regulations, and contractual arrangements that form a sound legal foundation for clearing, settlement, and custody activities. This information is publically available and readily accessible to system participants.

Participation requirements (Rec. 2)

8. The FICC-GSD’s access and exit criteria are publicly disclosed. FICC-GSD requirements for participants’ financial resources and credit worthiness are based on the legal nature of the participating entities as well as the services used. FICC-GSD also assesses the participants’ operational reliability.

Financial risk management (Rec.3-6)

9. FICC-GSD daily measures its exposures to participants and requires payment of contributions to the clearing fund. It can, when deemed appropriate, conduct intraday calls for additional clearing funds. FICC-GSD members’ positions are monitored by DTCC risk management system. FICC mitigates its credit exposures on the basis of the clearing fund requirements, as well as cross-guarantee and cross-margining arrangements. The clearing fund is composed of cash and securities. In case of insufficient cash resources, FICC-GSD seeks to liquidate the available collateral via repo arrangements, although they are not committed facilities, and there is no certainty that they would be available in extreme but plausible scenario. The U.S. legal framework ensures the legal enforceability of FICC-GSD’s collateral arrangements.

Custody and investment risks (Rec. 7)

10. FICC-GSD’s securities and cash of the clearing fund are held in dedicated accounts with the two major clearing banks. Cash investments are authorized under a policy, approved by DTC’s Audit Committee, which establishes principles for minimizing the risk of losses stemming from unsecured investments. The Audit Committee policy also establishes credit limits by counterparties to ensure that investments do not exceed a certain level of concentration.

Operational risk (Rec. 8)

11. FICC-GSD business continuity arrangements are developed at the level of DTCC holding company, including all sites, networks control centers and back-up sites as a unified complex. These arrangements are based on the authorities’ requirements. DTCC has in place adequate procedures to identify and minimize the sources of operational risk that may arise in the clearing and settlement process. Contingency plans and back-up facilities are regularly tested and maintained to ensure the resilience of FICC-GSD.

Money settlements (Rec. 9)

12. For its end-of-day funds settlement, FICC-GSD uses central bank money with a tiered settlement arrangement relying on DTC as settlement agent. The end of day money settlement occurs via the settlement banks at the Federal Reserve’s National Settlement Service (NSS).

Physical deliveries (Rec. 10)

13. The FICC-GSD’s rules clearly set forth its obligations with respect to securities deliveries. In order to protect itself from principal risk, FICC–GSD continuously monitors participants’ exposures and collects margin against failed items.

Risks in links between CCPs (Rec. 11)

14. FICC-GSD has set up a cross-margining arrangement with the Chicago Mercantile Exchange (CME) so that eligible positions at the CME are offset against eligible positions at FICCGSD. For the purpose of this arrangement, a cooperative framework between the Commodity Futures and Exchange Commission (CFTC), overseeing the CME, and the SEC, overseeing the FICC-GSD is in place.

Efficiency (Rec. 12)

15. FICC-GSD regularly reviews its pricing levels, which are cost-based. The cost allocation methodology is part of a regular review by both internal and external auditors. FICC-GSD also conducts benchmark studies to assess cost effectiveness in the market. DTCC ensured that each service of the DTCC group does not cross-subsidise the cost and expenses of the others and that the risk management financial resources are not commingled.

Governance (Rec. 13)

16. There is a single governance structure for all DTCC subsidiaries, including FICC-GSD. Although DTCC’s governance arrangements are made public, not all the relevant information is publicly available. DTCC is currently in the process of reviewing its governance arrangements. Public interest is taken into account in a number of ways, including the requirement that all proposed rule changes of NSCC be filed with the SEC and noticed for public comment, and by discussion with industry participants.

Transparency (Rec. 14)

17. Market participants are provided with sufficient information regarding FICC-GSD risk management. The regulations, rules, and procedures governing FICC-GSD are publicly available, as are annual audited financial statements, and participants receive non audited quarterly financial statements. The FICC-GSD has completed and published on its website a self-assessment following the RCCPs assessment methodology.

Regulation and oversight (Rec. 15)

18. The responsibilities and objectives of relevant public authorities with regard to securities clearing and settlement systems are clearly defined and publicly disclosed. The SEC supervises FICC-GSD given its status of registered clearing agency. In conducting its oversight responsibilities, the SEC applies other standards than the RCCPs, although some of the issues covered in the RCCPs are also addressed by the standards under the securities laws that are applied by the SEC. As an affiliate of DTC, the Federal Reserve has the legal power to examine FICC. The SEC and the Federal Reserve have signed exam-specific information sharing arrangements regarding the oversight of FICC-GSD.

Table 2.Summary of Observance with the CPSS-IOSCO Recommendations
Legal risk
1. A CCP should have a well founded, transparent, and enforceable legal framework for each aspect of its activities in all relevant jurisdictions.FICC-GSD’s activities are governed by a consistent and transparent set of laws, regulations, and contractual arrangements that form a sound legal basis.
Participation requirement
2. A CCP should require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the CCP. A CCP should have procedures in place to monitor that participation requirements are met on an ongoing basis. A CCP’s participation requirements should be objective, publicly disclosed, and permit fair and open access.FICC submitted a rule filing to SEC for expanding its membership to include some buy-side unregistered investment pools (UIP), such as hedge funds, as a new membership category. In its filing to the SEC, FICC stated it will impose additional risk management measures with respect to UIP members, including calculating their Clearing Fund requirements at a higher value at risk confidence level and instituting an additional qualitative assessment requirement.
Measurement and management of credit exposures
3. A CCP should measure its credit exposures to its participants at least once a day. Through margin requirements, other risk control mechanisms or a combination of both, a CCP should limit its exposure to potential losses from defaults of its participants in normal market conditions so that the operations of the CCP would not be disrupted and non-defaulting participants would not be exposed to losses that they cannot anticipate or control.The definition of margins and clearing funds in the published assessment should be made more consistent in line with international usage/practice and the definitions provided in the glossary of the RCCP.
Margin requirements
4. If a CCP relies on margin requirements to limit its credit exposures to participants, those requirements should be sufficient to cover potential exposures in normal market conditions. The models and parameters used in setting margin requirements should be risk-based and reviewed regularly.FICC-GSD relies on margin requirements to collect contributions to the clearing fund to cover its exposure vis-à-vis its members. The clearing fund is composed of deposits from the members either in cash or in certain securities. FICC-GSD tests regularly the risk-based margin requirements.
Financial resources
5. A CCP should maintain sufficient financial resources to withstand, at a minimum, a default by the participant to which it has the largest exposure in extreme but plausible market conditions.FICC-GSD’s liquidity need is highly concentrated to the two major clearing banks.

FICC-GSD’s liquidity can be increased by repoing the securities in the clearing fund. However, this arrangement cannot be considered as a committed line, since there is no complete assurance that the repo markets would be effective in extreme market situations.
Default procedures
6. A CCP’s default procedures should be clearly stated, and they should ensure that the CCP can take timely action to contain losses and liquidity pressures and to continue meeting its obligations. Key aspects of the default procedures should be publicly available.FICC-GSD’s default procedures are clearly stated in the system’s rules and procedures, which would allow FICC-GSD to suspend or terminate a member from any service, should it become subject to insolvency proceedings or fail to perform its obligations to the system. The U.S. legal framework provides a high degree of assurance with regard to the enforceability of default procedures.
Custody and investment risk
7. A CCP should hold assets in a manner whereby risk of loss or of delay in its access to them is minimized. Assets invested by a CCP should be held in instruments with minimal credit, market, and liquidity risks.FICC-GSD’s assets are highly concentrated to the two major clearing banks, and not all FICC-GSD investments are secured.
Operational risk
8. A CCP should identify sources of operational risk and minimize them through the development of appropriate systems, controls, and procedures. Systems should be reliable and secure, and have adequate, scalable capacity. Business continuity plans should allow for timely recovery of operations and fulfillment of a CCP’s obligations.Contingency plans and backup facilities for the failure of key systems are not tested and reviewed with participants (only connectivity is tested with the critical participants).
Money settlements
9. A CCP should employ money settlement arrangements that eliminate or strictly limit its settlement bank risks, that is, its credit and liquidity risks from the use of banks to effect money settlements with its participants. Funds transfers to a CCP should be final when effected.FICC-GSD uses the central bank model with a tiered settlement arrangement relying on DTC as settlement agent, for its end-of-day funds settlement.
Physical deliveries
10. A CCP should clearly state its obligations with respect to physical deliveries. The risks from these obligations should be identified and managed.FICC-GSD does not have direct access to Fedwire Securities and Fedwire Funds services. Such access would allow FICC-GSD to settle DVP in central bank money and reduce the settlement concentration to the two clearing banks.
Risks in links between CCPs
11. CCPs that establish links either cross-border or domestically to clear trades should evaluate the potential sources of risks that can arise, and ensure that the risks are managed prudently on an ongoing basis. There should be a framework for cooperation and coordination between the relevant regulators and overseers.FICC-GSD has appropriate risk management procedures in place to identify and evaluate the risks from the links, and there is a supervisory coordination between CFTC and SEC for the links to CME.
12. While maintaining safe and secure operations, CCPs should be cost-effective in meeting the requirements of participants.FICC-GSD regularly reviews its pricing levels, which are cost-based. It also conducts benchmark studies to assess cost effectiveness in the market.
13. Governance arrangements for a CCP should be clear and transparent to fulfill public interest requirements and to support the objectives of owners and participants. In particular, they should promote the effectiveness of a CCP’s risk management procedures.FICC-GSD’s governance arrangements are not sufficiently specified and transparent, including criteria for the composition and selection of Board members.
14. A CCP should provide market participants with sufficient information for them to identify and evaluate accurately the risks and costs associated with using its services.The regulations, rules, and procedures governing FICC-GSD are publicly available, as are audited annual financial statements, and participants receive non audited quarterly financial statements.
Regulation and oversight
15. A CCP should be subject to transparent and effective regulation and oversight. In both a domestic and an international context, central banks and securities regulators should cooperate with each other and with other relevant authorities.The SEC has not formally required FICC-GSD to perform a self-assessment based on the RCCPs, but compliance with SEC rules ensures compliance with most of the recommendations.
Table 3.Actions to Improve Compliance
Reference RecommendationRecommended Action
Recommendation 3: Credit exposures managementAlign the definitions of margins and clearing funds with international standards.
Recommendation 5: Financial resourcesConsider an additional liquidity buffer to deal with extreme situations where repo arrangements cannot be used.

Minimize FICC-GSD’s exposure and concentration risk vis-à-vis the two clearing banks.

Consider conducting more frequent stress testing than once a month, in particular, in times of unusual market volatility.

Disclose stress testing assumptions to participants.
Recommendation 7: Custody and investment riskContinue to monitor and mitigate the potential risks, which result from holding assets at only two commercial banks.

Avoid unsecured investments to the largest extent possible.
Recommendation 8: Operational riskTest and review FICC-GSD backup sites to critical participants’ backup sites.
Recommendations 10: Physical deliveriesProvide FICC-GSD direct access to Fedwire Securities and Fedwire Funds services to settle DVP transactions in central bank money.
Recommendation 13: GovernanceFICC-GSD’s governance arrangements should be more clearly specified and transparent, including criteria for the composition and selection of Board members.
Recommendation 15: Regulation and oversightSEC should formally require FICC-GSD to perform a self-assessment based on the RCCPs.

Ensure the compliance of the SEC rules with the RCCPs.

Provide legal mandate to the Federal Reserve to oversee FICC-GSD, which is systemically important system, as a complementary function to the SEC regulation and supervision.

IV. Authorities’ Response to the Assessment

19. The U.S. authorities welcome the IMF’s assessment of the FICC-GSD against the RCCPs. We appreciate the significant undertaking associated with an FSAP review of the biggest financial sector in the world, as well as the challenges that accompany the first assessment of a large advanced country in the wake of the crisis. The authorities are pleased to note that the IMF’s assessment reflects the high degree of compliance of FICC-GSD with the RCCPs, and will work with FICC-GSD in considering the assessment’s specific comments and recommendations. Again, the authorities appreciate the significant undertaking associated with the assessment of FICC-GSD and the contribution that the assessment process makes to the stability and effective regulation and oversight of systemically-important payment, clearing and settlement systems.


The underlying Detailed Assessment Report was published in May 2010 and is available at


This assessment was carried out by Daniela Russo (external expert) and overseen by Elias Kazarian (IMF).

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