In April, the National Securities Clearing Corporation (NSCC), a clearing agency subsidiary of DTCC, successfully completed its inaugural term debt issuance in the amount of $2 billion as part of its strategy to diversify its default liquidity resources. While NSCC issues commercial paper to raise default liquidity, this marks the first time in the firm’s history that NSCC has raised funds through a term debt issuance via an offering under Rule 144A. Lukas Morell, DTCC Managing Director and Treasurer, sat down with DTCC Connection to explain the reasons for taking this new approach, and how it will help mitigate risk and maintain stability in the financial marketplace.
DC: What prompted NSCC to issue term notes?
LM: Our goal was to access another market to raise default liquidity, which are the funds we need to have available to complete settlement when a clearing member defaults on its obligations to NSCC. As a central counterparty, we are in the middle of all guaranteed transactions we clear, and it is NSCC’s responsibility to take on a defaulted member’s obligations and complete settlement.
While NSCC has other sources of liquidity, including a clearing fund, a committed line of credit, and a commercial paper program, we started this new program to further diversify and augment our portfolio of default liquidity resources.
DC: How much liquidity is NSCC raising through this initiative?
LM: We issued a total of $2 billion in “medium-term” notes in two tranches of $1 billion each; $1 billion has a maturity of three years and the other is five years. NSCC is the only central counterparty in the U.S. that clears broker-to-broker trades involving equity securities, corporate and municipal bonds, exchange-traded funds (ETFs) and unit investment trust (UIT) transactions. Regulatory requirements mandate that we have enough liquidity resources on hand to close out the guaranteed obligations of our largest member family.
DC: How will this debt issuance benefit NSCC member firms?
LM: Most importantly, raising funds through a debt issue will increase our prefunded liquidity resources, and cash on hand is always preferable. Also, it supports the resiliency of the central counterparty, which mitigates systemic risk, providing stability to the financial markets in which we operate, including our members. As our members continue to face liquidity and capital constraints, we’re able to use our balance sheet to raise default liquidity so they can more efficiently use their resources to maximize returns.
DC: This sounds like a win-win for NSCC and our clients. Have we ever raised money through a debt issue like this before?
LM: No, this is quite groundbreaking for us. While the closest thing we’ve done akin to this is the commercial paper program, which is also for default liquidity purposes, issuing medium-term notes involved accessing a different market, which has unique trading strategies and investors. Since this is the first time we’ve accessed the investment-grade debt market, this deal is essentially our “senior debt IPO”, which is exciting!
DC: What was the thinking behind this? What was involved in bringing it to market?
LM: The key driver was our strategy to diversify default liquidity resources and strengthen our financial resiliency. As you can imagine, quite a bit of work was involved throughout the process, from the conceptual idea through issuing and closing the deal. We needed to introduce ourselves to this market, gauge investor interest and articulate our business case to various constituents. Of course, receiving high credit ratings from the rating agencies was critical to the success.
DC: Were investors concerned that NSCC was accessing the market in these volatile times?
LM: We were asked this and similar questions in the period leading up to the issuance. It was a good question given the timing of this deal, but we were able to provide detailed information to potential investors to have confidence that we are doing this out of a position of strength and executing on a well thought out strategy to grow and diversify our liquidity resources. Once potential investors understood the full picture, we were pleased to see the level of interest in the issuance.
DC: How did you determine the timing of the term note issuance, especially as the world was in the grips of a global crisis?
LM: We initially planned to issue the notes in mid-March but decided to postpone it because of extreme market volatility associated with the COVID-19 pandemic. As the markets began to stabilize, we saw a window of opportunity and decided to go to market on April 16. A high-quality order book quickly built up and became significantly oversubscribed, which was critical for its successful execution. We’re very pleased with the results and, depending on NSCC’s liquidity needs, market conditions and investor appetite in the future, we’ve set the foundation for raising additional capital in this market.