Now on Screen: How DTCC Manages Liquidity Pressure

by Helen Cunningham

DTCC's risk management infrastructure includes regular outreach to customers to keep them informed about the organization's procedures and controls for handling potential market disruptions such as the 2003 blackout and 9/11, as well as insolvencies by member firms.

As part of this ongoing effort, DTCC recently produced a new Webcast that provides an overview of how The Depository Trust Company (DTC) and National Securities Clearing Corporation (NSCC) subsidiaries manage liquidity pressure. The presentation, which is being sent to customers via an email link, includes recommended best practices for firms to monitor their own liquidity.

Building knowledge
Over the past several years, DTCC has made presentations to various customers and regulators about the risk management procedures that protect the organization and the industry in emergency situations, including the possible inability of one or more firms to meet their settlement obligations.

"Post-9/11, we realized that many of our customers were not familiar with DTC's mechanisms and controls for handling the liquidity problems that could arise in emergencies," said Cheryl Lambert, DTCC managing director. "To address this knowledge gap, we created a presentation that described the depository's multi-layered plan for ensuring the markets have sufficient liquidity to complete settlement each business day, and we took it on the road."

In 2006, the Federal Reserve Bank of New York asked DTCC to formalize and expand the presentation to include NSCC, making it available to all DTC and NSCC member firms. The result is a new high-level Webcast, whose target audience consists of chief financial officers and executives who head the risk and operations areas of their firms.

"Both DTCC and regulators want to create wider understanding within the industry of how we manage potential liquidity pressure and the repercussions these events could have on both the financial system and member firms," said Douglas George, who recently joined DTCC from Citi in the newly created position of chief risk officer and managing director. "In addition to educating customers about DTCC's risk management procedures, we hope the Webcast will serve as a catalyst for firms to assess their own planning for possible liquidity crunches."  

Sneak preview
To provide easy access to this educational piece, DTCC will be sending an email to firms this month, outlining the Webcast's purpose and providing a link for opening it.

The Webcast takes about 15 to 20 minutes to view. It begins by defining liquidity pressure, and is organized into separate sections on DTC and NSCC that outline the various risk management controls for the respective subsidiaries. (Future versions are expected to include DTCC's other subsidiaries.)

For instance, the DTC section gives a concise definition of the Participants Fund and its role in risk mitigation. ("If a participant fails to settle for any reason, the all-cash Participants Fund provides immediate liquidity to complete settlement without the need to draw down DTC lines of credit in most cases.")

The NSCC section includes a similar description of the Clearing Fund. ("NSCC functions as a central counterparty and calculates a Clearing Fund amount for each member every business day. If a member firm has a Clearing Fund deficit, these funds are due in to NSCC in the early morning.")

The presentation also includes several scenarios, ranging from a small insolvency to a possible catastrophic event, and describes how DTCC would manage these events from a liquidity point of view. For example, one scenario examines a failing DTC participant that has an end-of-day settlement obligation of $600 million.

The Webcast concludes with recommended best practices for firms to monitor potential liquidity problems.
"In all business continuity planning, preparedness is critical to the successful management of unforeseen events," said Lambert. "As the Webcast illustrates, DTCC has a rigorous program in place for handling potential liquidity pressures. Familiarizing the marketplace with our procedures strengthens our ability to respond quickly and effectively in an emergency; it also strengthens confidence in the resiliency of the U.S. financial system." @

[To receive a link to DTCC's Webcast on managing liquidity pressure, contact training_administrator@dtcc.com.]