Journal Issue

United States of America: The Depository Trust Company’s Observance of the CPSS-IOSCO Recommendations for Securities Settlement Systems

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

1. The assessment of the Depository Trust Company (DTC) against the CPSS-IOSCO Recommendations for Securities Settlement Systems (RSSSs)1 reveals that the system observes the recommendations, although some enhancements would allow DTC to increase its compliance level with all the recommendations. More precisely, actions need to be undertaken to improve its risk resilience by strengthening the stress testing, DTC’s financial and liquidity resources, in particular, to address the problem that could arise when money market does not work smoothly and equities repo cannot be used to raise equities or cash. Additional improvements would be to enhance governance arrangements, develop procedure for intraday finality for cash settlement.

2. The assessment of DTC was undertaken in the context of the IMF Financial Sector Assessment Program (FSAP).2 Prior to the mission, DTC conducted a self-assessment following the methodology of the RSSSs published in 2002 by the CPSS-IOSCO. The assessors3 also benefited from discussion with the Securities and exchange Commission (SEC), the Federal Reserve Board and Federal Reserve Bank of New York representatives (supervision and oversight), as well as with the operator of DTC and some major participants in the system. Relevant authorities and the operator of the system have been very co-operative in providing additional confidential information and organizing additional meetings, when required.

3. Given the organization of the Depository Trust & Clearing Corporation (DTCC), the assessment of the three entities belonging to the group (The Depository Trust Company – DTC, the National Securities Clearing Corporation – NSCC and the Fixed Income Clearing Corporation – FICC) resulted in almost identical recommendations concerning legal risk (RSSS1 and CCP1), operational risk (RSSS11 and RCCP8) governance (RSSS13 and RCCP 13) and efficiency (RSSS 15 and RCCP14).

II. Institutional AND Market Structure—Overview

4. DTC is a limited purpose trust company under the New York Banking Law, a clearing agency registered under the Securities Exchange Act, a clearing organization as defined by the Federal Deposit Insurance Corporation Improvement Act, a clearing corporation as defined in the Uniform Commercial Code, and a member bank of the Federal Reserve System. It is a depository and settlement system that effects issuance, transfer, and pledge by computerized book-entry system. DTC, the National Securities Clearing Corporation (NSCC), and the Government Securities Division of the Fixed Income Clearing Corporation (FICC-GSD), assessed in the context of the U.S. FSAP, are all wholly owned subsidiaries of the Depository Trust and Clearing Corporation (DTCC). The key statistics of DTC are provided in Table 1.

Table 1.Key Statistics of Depository Trust Company (DTC), 2007–09
1. Value of transactions processed (USD trillions)209.8181.9121.8
2. Instructions processed (millions)324.9316.6299.5
3. Average value of securities settled (USD billions)836.0724.8483.2
4. Peak value of assets settled (USD billions)1,3221,287791.0
5. Total Value of securities held (USD trillions), of which:40.027.633.9
5.1 Commercial paper26.720.915.7
5.2 Money market certificates of deposits10.712.110.4
5.3 Other money market Instruments securities20.323.320.2
6. Number of issues accepted54,26653,40240,067
7. Number of direct participants467413390
8. Overnight credit2 (USD billions)
9. Collateral provision outstanding (USD millions)907.00932.361,718.747
Source: DTCC.1 Value of end of day committed credit facility for USD settlements. The facility was not drawn on for any of the days noted. The current facility is 364 day facility that expires in May of the following year.

Value of the Participant Fund (all cash).

Source: DTCC.1 Value of end of day committed credit facility for USD settlements. The facility was not drawn on for any of the days noted. The current facility is 364 day facility that expires in May of the following year.

Value of the Participant Fund (all cash).

5. DTC provides its participants with various settlement services to facilitate the end-of-day settlement of obligations resulting from their trading activity in various markets. Besides the main settlement services, DTC provides a range of settlement, custody, and tax-related services for its members. DTC serves three different markets, namely (i) money market instruments, (ii) equities, and (iii) corporate and municipal bonds (Table 1).

6. The oversight, regulation, and supervision of DTC is conducted by different authorities owing to the organizational structure of DTC: (i) the Federal Reserve Board that derives its supervisory authority from DTC’s membership in the Federal Reserve System as a State member bank, (ii) the SEC whose authority stems from DTC’s operations as a clearing agency; (iii) the New York Banking State Department (NYSBD) whose supervisory authority derives from DTC’s charter as a limited purpose trust company under the New York banking law.

III. Main Findings

Legal Framework (Rec. 1)

7. DTC’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, which are publicly available and readily accessible to system participants.

Pre-settlement Risk (Rec. 2–5)

8. DTC does not fully offer trade confirmation services, as it is performed at the broker level provided to the NSCC on a “locked-in basis”. OTC equity product and fixed income transactions are not matched at the market place of execution. DTC does not match settlement instructions prior to settlement. DTC does not monitor settlement fails. For trades cleared by NSCC, the CCP monitors settlement fails, the figures of which are available on the SEC’s website, and has put in place incentives to settle in time. The settlement cycle for trades is generally T+3. Cost-benefit analysis for a shorter settlement fail have been conducted under the aegis of SEC. Not all transactions settled by DTC are cleared by NSCC or another CCP. For those transactions not cleared by a CCP, neither market participants nor U.S. regulators conducted a cost-benefit analysis.

Settlement Risk (Rec. 6–10)

9. The majority of securities settled in DTC are represented by physical certificates immobilized in the depository, although the trend is towards dematerialization. The vast majority of municipal and corporate debt issues distributed through DTC are in book-entry only form. Transfer of ownership occurs when securities are transferred between participants within the system. DTC relies on a DVP model 2 with securities settled on an intraday gross basis and associated funds on a net basis at the end of the day. All valued transactions in DTC are settled on a DVP basis. Finality of settlement occurs intraday for securities deliveries but at the end of the day for cash transfers outside DTC. To facilitate settlement through the day, DTC provides liquidity to participants, based on rigorous risk management procedures. DVP transactions are processed by debiting the securities from the account of the delivering participant and at the same time crediting the delivering participant the corresponding payment amount. DTC then reflects a payment debit and securities credit in the account of the receiving participant, treating the securities credit as an incomplete transaction. Should a participant default, DTC will be exposed to financial risks depending on its ability to timely liquidate the collateral of the defaulting participant. However, full collateralization of any intraday net debit money positions assures that, should several major participants fail to pay for their net debit money obligations at the end of the day, DTC would have sufficient collateral value (inclusive of haircuts) to cover the participants’ unpaid obligation. For cash settlement, DTC relies on settling banks—settling for their own and other participants—making the payments from and to DTC’s account at the FRBNY. There is a high concentration of payment flows at the top five settling banks in DTC. This concentration is currently not monitored by DTC.

Operational Risk (Rec. 11)

10. DTCC has developed business continuity arrangements at the level of the holding company, covering all sites; networks control centres and business sites as a unified complex. In doing so, DTCC has taken into account the requirements of the “Interagency paper on sound practices to strengthen the resiliency of the U.S. financial system”.4 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 DTC. A risk-based review of the IT system supporting DTCC functioning is performed by independent external auditors. Senior management regularly reviews operational reliability issues.

Custody Risk (Rec. 12)

11. DTC operates an indirect holding system where securities (or interest in securities) are registered in the name of the direct participants through nominee accounts rather than in the name of the end beneficiary. Physical and technical controls as well as periodic audits are performed by DTC’s regulators and Internal Audit Department.

Other Issues (Rec. 13–19)

12. There is a single governance structure for all the subsidiaries of DTCC. Currently, DTCC’s Board is composed of 18 members. Members of the Board are elected by the shareholders annually. Although DTCC’s governance arrangements are made public on its website, not all the relevant information is publicly available. DTC’s access and exit criteria are publicly disclosed and the same eligibility rules apply to all participants depending on the scope of the service used regardless of the type, identity and location of the participant. DTC reviews in the annual budget process its pricing levels which are cost-based. The cost allocation methodology is part of a regular review by both internal and external auditors. DTCC ensured that each service of the DTCC group does not cross-subsidise the cost and expenses of the others. DTC uses international standards for its cross-border linkages with foreign central securities depositories (CSDs). The laws, regulations, rules and procedures governing DTC are publicly available. Moreover, following the Federal Reserve Payment System Risk Policy, DTC has completed a self assessment following the RSSSs assessment methodology.

13. The responsibilities and objectives of relevant public authorities with regard to DTC activities are clearly defined and publicly disclosed. DTC is regulated and overseen by the SEC, the Federal Reserve and the NYSBD. The SEC has entered into memoranda of understanding with foreign regulators to facilitate the exchange of information with authorities of all the countries with which DTC has developed links, except for Peru.

14. DTC maintains links with 13 foreign CSDs, of which two are bilateral, i.e., both inbound link (foreign CSD opened accounts at DTC) and outbound link (DTC opened accounts with a foreign CSD). For inbound links, linked CSDs are treated as other participants in DTC, while for outbound links DTC conducts an assessment of the risks associated with the establishment of the link before allowing its participants to process transactions with a foreign CSD’s participants.

Table 2.Summary of Observance with the CPSS-IOSCO Recommendations
Legal risk
1. Securities settlement systems should have a well-founded, clear, and transparent legal basis in the relevant jurisdiction.DTC’s activities are governed by a consistent and transparent set of laws, regulations, and contractual arrangements that form a sound legal basis.
Pre-settlement risk
2. Confirmation of trades between market participants should occur as soon as possible after trade execution, but no later than the trade date (T+0). Where confirmation of trades by indirect market participants (such as institutional investors) is required, it should occur as soon as possible after trade execution, preferably on T+0, but no later than T+1.To enhance risk management procedures, DTC should explore the possibility to introduce an instructions matching mechanism prior to settlement.
3. Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. The benefits and costs of a settlement cycle shorter than T+3 should be assessed.DTC does not fully offer trade confirmation services, and does not match settlement instructions prior to settlement.
4. The benefits and costs of a central counterparty should be assessed. Where such a mechanism is introduced, the central counterparty should rigorously control the risks it assumes.No cost-benefit analysis of the introduction of a CCP for transactions settled through DTC but not cleared by NSCC has been conducted.
5. Securities lending and borrowing (or repurchase agreements and other economically equivalent transactions) should be encouraged as a method for expediting the settlement of securities transactions. Barriers that inhibit the practice of lending securities for this purpose should be removed.Securities lending and repurchase arrangements in the U.S. are largely over-the-counter bilateral transactions. It seems that there are no legal impediments to securities loan and repo transactions.
Settlement risk
6. Securities should be immobilized or dematerialized and transferred by book entry in CSD to the greatest extent possible.Many securities issued to the public in the U.S. are in the form of physical certificates. However, trend is to issue shares in electronic form.
7. Securities settlement systems should eliminate principal risk by linking securities transfers to funds transfers in a way that achieves delivery versus payment.DTC operates a DVP Model 2 settlement system, where securities settle on a gross basis intraday and associated funds settle on a net basis at the end of the day.
8. Final settlement on a DVP basis should occur no later than the end of the settlement day. Intra-day or real-time finality should be provided where necessary to reduce risks.The DVP 2 model is characterized by securities delivered during the day, while finality of cash takes place at the end of day.

DTC has in place measures to limit and control the liquidity and credit risks associated with this model. DTC does not provide intraday finality for cash transfer that would allow participants in a net credit position to have earlier access to their liquidity and move them out of DTC.
9. CSDs that extend intraday credit to participants, including CSDs that operate net settlement systems, should institute risk controls that, at a minimum, ensure timely settlement in the event that the participant with the largest payment obligation is unable to settle. The most reliable set of controls is a combination of collateral requirements and limits.Although DTC currently has sufficient liquidity resources to protect against the failure of the largest affiliated family of participants, more extreme cases of multiple failures could test DTC’s liquidity resources.
10. Assets used to settle the ultimate payment obligations arising from securities transactions should carry little or no credit or liquidity risk. If Central Bank money is not used, steps must be taken to protect CSD members from potential losses and liquidity pressures arising from the failure of the cash settlement agent whose assets are used for that purposeThere is a high concentration of payment flows at the top five settling banks, which increases credit risk exposures of the settlement banks. Moreover, DTC relies on a single bank for the cash settlement for Canadian dollar.

The self-assessment of the Federal Reserve’s NSS against the CPSIPS has not been reviewed by the relevant authorities and is not public.
Operational risk
11. Sources of operational risk arising in the clearing and settlement process should be identified and minimized through the development of appropriate systems, controls, and procedures. Systems should be reliable and secure, and have adequate, scalable capacity. Contingency plans and back-up facilities should be established to allow for timely recovery of operations and completion of the settlement process.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).
Custody risk
12. Entities holding securities in custody should employ accounting practices and safekeeping procedures that fully protect customers’ securities. It is essential that customers’ securities be protected against the claims of a custodian’s creditors.DTC has adequate procedures and measures in place to ensure the protection of customers’ securities.
Other issues
13. Governance arrangements for CSDs and central counterparties should be designed to fulfill public interest requirements and to promote the objectives of owners and users.The governance arrangements for DTC could be more transparent, including criteria for the composition and selection of Board members. Only limited information is available to the public.
14. CSDs and central counterparties should have objectives and publicly disclosed criteria for participation that permit fair and open access.DTC’s rules and by-laws, which are available on its website, provide objective access rules and criteria.
15. While maintaining safe and secure operations, securities settlement systems should be cost- effective in meeting the requirements of users.DTC’s fees are cost based and DTC returns to its users excess net revenues not needed to fund its operations via rebates or other refunds. DTCC performs periodic benchmarking studies to assess cost effectiveness in the market place.
16. Securities settlement systems should use or accommodate the relevant international communication procedures and standards in order to facilitate efficient settlement of cross-border transactions.DTC uses ISO 15022 for cross-border linkages with CSDs. The messages (ISO-based and Message Queuing) are sent and received over DTC’s proprietary system as well as SWIFT.
17. CSDs and central counterparties should provide market participants with sufficient information for them to accurately identify the risks and costs associated with using the CSD or central counterparty services.DTC’s rules and procedures, including its service guides, are publicly available on its website.
18. Securities settlement systems should be subject to regulation and oversight. The responsibilities and objectives of the securities regulator and the central bank with respect to SSSs should be clearly defined, and their roles and major policies should be publicly disclosed. They should have the ability and resources to perform their responsibilities, including assessing and promoting implementation of these recommendations. They should cooperate with each other and with other relevant authorities.The Fed’s oversight of DTC is not based on a general statutory payment systems oversight authority, but rather on DTC’s status as a State Member Bank of the Fed and the Fed’s consequent role as banking supervisor. The banking supervision and the oversight functions have two different objectives and use different tools.

The SEC has not yet required DTC to perform a self assessment with respect to RSSSs, but SEC staff would consider recommending to the Commission to require such a self-assessment.
19. CSDs that establish links to settle cross-border trades should design and operate such links to reduce effectively the risks associated with cross- border settlement.DTC has adequate measures and procedures to handle the risk associated with links.
Table 3.Actions to Improve Compliance
Reference RecommendationRecommended Action
Recommendation 2: Trade confirmationDTC should explore the possibility introducing an instructions matching mechanism prior to settlement.
Recommendation 4: CCPsA cost-benefit analysis of the introduction of a CCP for transactions not cleared by NSCC should be conducted.
DTC should consider conducting additional net funds settlement batches during the day in order to provide intraday finality for cash transfers.
Recommendation 9: Risk controls Recommendation 10: Cash settlementDTC should be given access to central bank liquidity facilities.

DTC should continue to monitor the financial conditions and should begin monitoring the exposures of the settlement banks.

DTC needs to reduce the concentration of settlement cash for Canadian dollar.

DTC may explore the possibility of becoming a direct participant of the Canadian RTGS system.

The self-assessment of the Federal Reserve’s NSS against the CPSIPS should be reviewed by the relevant authorities and made public.
Recommendation 11: operational riskDTCC should test its back-up sites to critical participants’ backup sites.
Recommendation 13: GovernanceDTC’s governance arrangements should be more clearly specified and transparent, including criteria for the composition and selection of Board members.
Recommendation 18: Oversight and regulationFormal co-operation with Authorities in Peru needs to be established.

It would be more effective and transparent to legally entrust the Fed the role of overseer of financial market infrastructure, and to separate between the banking supervision and the oversight functions.

SEC is encouraged to require clearing agencies to perform self-assessments against the CPSS-IOSCO recommendations by rules or in a policy statement.
Recommendation 19: Risks in linksDTC should update the information on links on DTCC’s website to reflect the current status.

IV. Authorities’ Response to the Assessment

15. The U.S. authorities welcome the IMF’s assessment of DTC against the RSSSs. 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 DTC with the RSSSs, and are largely in agreement with the assessment’s comments and recommendations, which the authorities will share with DTC.

16. Again, the authorities appreciate the significant undertaking associated with the assessment of DTC 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


For further discussion see the accompanying Financial System Stability Assessment (FSSA), (


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


“Interagency paper on sound practices to strengthen the resiliency of the U.S. financial system”, Federal Reserve Board, Securities and Exchange Commission, Office of the Comptroller of the Currency, 2003.

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