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

Source: DTCC.

¹Includes the value of cash and securities.

Table 1.

Key Statistics of NSCC, 2007–09

		2007	2008	2009
1. Number of contracts and transactions cleared (millions)		13,537	21,877	23,254
2. Value of contracts and transaction cleared (USD billions)		283,200	315,100	209,690
3. Average daily value of transactions (USD billions)		1,137	1,255	835
4. Peak value of transactions (USD billions)		2,230	3,373	1,091
5. Total number of clearing members, of which:		226	221	206
	5.1 Foreign clearing members	3	4	3
6. Clearing fund (USD millions)1		4,866.6	6,620.4	2,941.0

Source: DTCC.

¹Includes the value of cash and securities.

View Table

Table 1.

Key Statistics of NSCC, 2007–09

		2007	2008	2009
1. Number of contracts and transactions cleared (millions)		13,537	21,877	23,254
2. Value of contracts and transaction cleared (USD billions)		283,200	315,100	209,690
3. Average daily value of transactions (USD billions)		1,137	1,255	835
4. Peak value of transactions (USD billions)		2,230	3,373	1,091
5. Total number of clearing members, of which:		226	221	206
	5.1 Foreign clearing members	3	4	3
6. Clearing fund (USD millions)1		4,866.6	6,620.4	2,941.0

Source: DTCC.

¹Includes the value of cash and securities.

III. Main Findings

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

Table 2.

Summary of Observance with the CPSS-IOSCO Recommendations

Responsibility	Assessment
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.
Efficiency
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.
Governance
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.

View Table

Table 2.

Summary of Observance with the CPSS-IOSCO Recommendations

Responsibility	Assessment
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.
Efficiency
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.
Governance
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

Table 3.

Actions to Improve Compliance

Reference Recommendation	Recommended Action
Recommendation 3: Credit exposures management	Align the definitions of margins and clearing funds with international standards.
Recommendation 5: Financial resources	Consider 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 risk	Continue 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 risk	Test and review NSCC’s backup sites to critical participants’ backup sites.
Recommendation 9: Money settlements	Give NSCC access to central bank accounts and Fedwire Securities Services.
Recommendation 13: Governance	NSCC’s governance arrangements should be more clearly specified and transparent, including criteria for the composition and selection of board members.
Recommendation 15: Regulation and oversight	SEC 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.

View Table

Table 3.

Actions to Improve Compliance

Reference Recommendation	Recommended Action
Recommendation 3: Credit exposures management	Align the definitions of margins and clearing funds with international standards.
Recommendation 5: Financial resources	Consider 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 risk	Continue 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 risk	Test and review NSCC’s backup sites to critical participants’ backup sites.
Recommendation 9: Money settlements	Give NSCC access to central bank accounts and Fedwire Securities Services.
Recommendation 13: Governance	NSCC’s governance arrangements should be more clearly specified and transparent, including criteria for the composition and selection of board members.
Recommendation 15: Regulation and oversight	SEC 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.