Journal Issue

United States of America: The National Securities Clearing Corporation 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 National Securities Clearing Corporation (NSCC) observes or broadly observes most of the CPSS-IOSCO Recommendations for CCP (RCCPs).1 The system properly addresses legal, credit, custody, and operational risks. Some measures to improve resilience against financial risks have been identified, including measures to enhance governance arrangements. It is however important that NSCC effectively addresses issues concerning financial resources, money settlement (including DVP arrangements), and links between CCPs. It would also be beneficial that the Securities and Exchange Commission (SEC) require NSCC’s compliance with RCCPs and that the Federal Reserve is provided with a legal mandate to oversee the NSCC, which is a systemically important system, as a complementary function to the existing SEC regulation and supervision.

2. The assessment of the NSCC was undertaken in the context of the IMF Financial Sector Assessment Program (FSAP).2 Prior to the mission, NSCC conducted a self-assessment following the methodology of the RCCPs 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 the NSCC and some major participants in the system.3 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 NSCC, and the Fixed Income Clearing Corporation (FICC) is almost identical for the 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

4. The NSCC is registered as a clearing agency with the Securities and Exchange Commission (SEC) and subject to the SEC’s oversight. It was established in 1976 as a New York business corporation, and since 1999 it became a wholly-owned subsidiary of the Depository Trust & Clearing Corporation (DTCC).

5. NSCC provides central counterparty services for certain transactions for the vast majority of broker-to-broker trades involving equities, corporate and municipal bonds. In addition, NSCC provides a range of other services to its members, namely wealth management and insurance services, automated customer account transfer services and risk management. As of December 2009, NSCC had 206 clearing members, including 3 foreign institutions Table 1.

Table 1.Key Statistics of NSCC, 2007–09
1. Number of contracts and transactions cleared (millions)13,53721,87723,254
2. Value of contracts and transaction cleared (USD billions)283,200315,100209,690
3. Average daily value of transactions (USD billions)1,1371,255835
4. Peak value of transactions (USD billions)2,2303,3731,091
5. Total number of clearing members, of which:226221206
5.1 Foreign clearing members343
6. Clearing fund (USD millions)14,866.66,620.42,941.0
Source: DTCC.

Includes the value of cash and securities.

Source: DTCC.

Includes the value of cash and securities.

III. Main Findings

Legal Framework (Rec. 1)

6. NSCC’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 publically available and readily accessible to system participants.

Participation requirements (Rec. 2)

7. The NSCC’s access and exit criteria are publicly disclosed. NSCC requirements for participants’ financial resources and credit worthiness are based on the legal nature of the participating entities as well as the services that these entities will use. The NSCC also assesses the participants’ financial strength and operational reliability.

Financial risk management (Rec.3–6)

8. The NSCC measures its exposures to participants daily and requires payment of contributions to the clearing fund. It can, when deemed appropriate, conduct intraday calls for additional clearing funds. The NSCC mitigates its credit exposures on the basis of the clearing fund requirements as well as cross-guarantee and cross-margining arrangements. The NSCC conducts stress testing monthly, on the basis of scenarios selected from the past ten years together with specific historic events. NSCC’s liquidity resources are composed of cash and securities and committed credit facility by some banks. In case of insufficient cash resources, the NSCC seeks to liquidate the available collateral via repo arrangements. NSCC’s default procedures are clearly stated in the system’s rules and procedures.

Custody and investment risks (Rec. 7)

9. NSCC’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 outlines principles for mitigating the risk of losses stemming from unsecured investments. The NSCC assets are held under tri-party custodial arrangements. When repos are not available, the assets are invested in overnight commercial paper in bank sweep accounts.

Operational risk (Rec. 8)

10. NSCC business continuity arrangements are developed at the level of DTCC holding company, including all sites, networks control centres, 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 mitigate the sources of operational risk. Contingency plans and back-up facilities are regularly tested and maintained to ensure the resilience of NSCC.

Money settlements (Rec. 9)

11. The NSCC settles its money obligations in commercial bank money.

Physical deliveries (Rec. 10)

12. The NSCC rules clearly set forth its obligations with respect to securities deliveries. In order to protect itself from principal risk linked to market movements, NSCC continuously monitors participants’ exposures and collect margins when required. The NSCC uses a “modified” DVP mechanism, under which securities are delivered with finality to the participants only if the NSCC has received the cash or is in a credit position vis-à-vis the relevant clearing member.

Risks in links between CCPs (Rec. 11)

13. The NSCC has established three links to the Option Clearing Corporation (OCC) and the Canadian Clearing and Depository Services Inc (CDS). According to the NSCC, an assessment of the associated risks with these links has been conducted.

Efficiency (Rec. 12)

14. The NSCC regularly reviews its pricing levels, which are based on cost recovery. The cost allocation methodology is part of a regular review by both internal and external auditors. NSCC also conducts benchmark studies to assess cost effectiveness in the market. According to DTCC, internal auditors ensure that each service provided by 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)

15. There is a single governance structure for all DTCC subsidiaries, including the NSCC. 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)

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

Regulation and oversight (Rec. 15)

17. 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 the NSCC given its status of a registered clearing agency. In conducting its responsibilities, the SEC applies other standards than the RCCPs, although some of the issues covered by the RCCPs are also addressed by the standards under the securities laws that are applied by the SEC. The Federal Reserve has the authority to examine the NSCC as an affiliate of DTC. The SEC and the Federal Reserve have signed exam-specific information sharing arrangements regarding the oversight of NSCC. A cooperation framework (MoU) between the SEC and the Canadian authorities has been set for the supervision of the links, while there is no such arrangement with the Monetary Authority in Singapore (MAS).

Table 2.Summary of Observance with the CPSS-IOSCO Recommendations
Legal risk
1. Central counterparties should have a well-founded, clear and transparent legal basis in the relevant jurisdiction.NSCC’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 in an on-going basis. A CCP’s participation requirements should be objectives, publicly disclosed, and permit fair and open access.The NSCC has adequate financial requirements for participants, which are based on the type of the entity and the provided services. NSCC defines a net capital requirement, which is above the minimum capital requirement imposed by the SEC. Moreover, all members contribute to the Clearing Fund, with the amount defined by the NSCC.

The NSCC assesses participants’ financial and operational capability, including: (a) sufficient financial ability to make anticipated contributions to the Clearing Fund and to meet obligations to the NSCC; (b) an established business history of a minimum of six months or personnel with sufficient operational background and experience; (c) appropriate settling bank arrangements; and (d) appropriate communication procedures.
Measurement and management of credit exposures
3. A CCP should measure its credit exposure 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 operation 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 is not consistent with international usage/practice and the definitions provided in the glossary of the RCCPs.
Margin requirements
4. If a CCP relies on margin requirements to limit its credit exposures to participants, these 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.The NSCC relies on margin requirements to collect contributions to the clearing fund to cover its exposure vis-à-vis its members. The NSCC tests regularly participants’ exposures as a basis to determine the contributions to the clearing fund.
Financial resources
5. A CCP should maintain sufficient financial resources to withstand, at a minimum, the default of a participant to which it has the largest exposure in extreme but plausible market conditions.NSCC’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 default procedures should be clearly stated, and should ensure that the CCP can take timely action to contain losses and liquidity pressure and to continue meeting its obligations. Key aspects of the default procedures should be publicly available.NSCC’s default procedures are clearly stated in the system’s rules and procedures, which would allow the NSCC to suspend or terminate a member for 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.NSCC’s assets are highly concentrated in two major commercial banks, and not all NSCC’s 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 and procedures. Systems should be reliable and secure, and have adequate, scalable capacity. Business continuity plans should allow for timely recovery of operations and fulfilment 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 should eliminate or strictly limit its settlement bank risks, that is, its credit and liquidity risk from the use of banks to effect money settlements with its participants. Funds transfers to a CCP should be final when effected.The NSCC relies on a settlement agent to settle end-of-day funds in central bank money since it does not have access to Federal Reserve accounts. Access to central bank would require either the NSCC being chartered as a bank or statutory changes to grant the Federal Reserve legal authority to provide accounts to the NSCC.
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.Securities delivered to the NSCC are promptly redelivered to parties that are entitled to receive them through an allocation algorithm.
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 among the relevant regulators and overseers.The NSCC has appropriate risk management procedures in place to identify and evaluate the risks from the links. A framework for cooperation (MoU) between the SEC and the Canadian authorities has been set for the link to the Canadian system.
12. While maintaining safe and secure operations, CCPs should be cost-effective in meeting the requirements of participants.The NSCC 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 fulfil 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.The NSCC 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 costs and risks associated with using its services.The regulations, rules, and procedures governing NSCC are publicly available, as are annual audited financial statements, and participants receive unaudited 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 co-operate with each other and with other relevant authorities.The SEC has not formally required NSCC to perform self-assessment based on the RCCPs.

The Federal Reserve does not have a legal mandate to oversee the NSCC, other than its authority to examine NSCC as an affiliate of DTC.
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 additional liquidity buffer to deal with extreme situations where repo arrangements cannot be used.

Consider conducting more frequently 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 to the largest extent possible unsecured investments.
Recommendation 8: Operational riskTest and review NSCC’s backup sites to critical participants’ backup sites.
Recommendation 9: Money settlementsGive NSCC access to central bank accounts and Fedwire Securities Services.
Recommendation 13: GovernanceNSCC’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 required NSCC to perform a self-assessment based on RCCPs.

Ensure the compliance of the SEC rules with the RCCPs.

Provide legal mandate to the Federal Reserve to oversee NSCC, as a complement to the SEC regulation and supervision.

IV. Authorities’ Response to the Assessment

18. The U.S. authorities welcome the IMF’s assessment of the NSCC against the RCCP. 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 the NSCC with the RCCPs, and will work with the NSCC in considering the assessment’s specific comments and recommendations. Again, the authorities appreciate the significant undertaking associated with the assessment of the NSCC 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 Stability Assessment (FSSA), (


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

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