After the financial crisis and system-wide shocks of 2008, The Depository Trust & Clearing Corporation (DTCC) and the financial services industry increased its focus and scrutiny on the potential systemic impacts of certain financial and operational exposures.
In response to the financial crisis of 2008, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). DTCC’s clearing agencies — The Depository Trust Company (DTC), National Securities Clearing Corporation (NSCC), and Fixed Income Clearing Corporation (FICC) — were designated as systemically important financial market utilities (or “SIFMUs”) under Title VIII of Dodd Frank.
Shortly after receiving the SIFMU designation, DTCC’s clearing agencies began working on a framework to establish clear and transparent recovery and wind-down strategies and plans.
The planning process involved input from many parts of the organization, as well the clearing agencies’ members and their relevant regulators. This comprehensive planning process included a detailed examination of the clearing agencies’ obligations and exposures to both member defaults and non-default events, which meant planning not just for the “what if” scenario of the default of a single, large member and subsequent impact to the clearing agencies’ financial resources, but also planning for the stress arising from the default of multiple members, and the aftershocks of “tail” events sequenced over several days.
This work occurred over several years and recently culminated in finalized recovery and wind-down plans for each of DTC, FICC and NSCC that were filed with and approved by the U.S. Securities and Exchange Commission (SEC), along with supporting rules adopted to the clearing agencies’ rulebooks.
In recognition of the finalization of these plans, Moody’s Investors Services also gave DTC, NSCC and FICC a “credit positive rating.” The rating agency stated the implementation of these plans “will provide clearing core transparency over how the clearing agencies’ would plan to recover or wind down following an extremely stressful event.”
“Across DTCC’s core businesses of trade execution, clearing, payments, and settlement, we have worked diligently to manage risk for our members and the broader financial services industry,” said Stephen Pecchia, DTCC Managing Director, Head of Recovery and Resolution Planning and Business Risk Management. “We believe the global, interconnected financial ecosystem is now much more robust, with strengthened market stability, capital structure and resilience. Our efforts together with those of our peer financial market utilities and member firms will help increase market resiliency and reduce the likelihood and impact of systemic shocks to the market.”
“Our recovery and wind-down plans, and the corresponding rules adopted in our SIFMUs’ rulebooks, provide our members transparency into the various tools that DTCC’s clearing agencies can use to effect a recovery or wind-down as a result of extreme market stress,” he added.