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How Margin Calls Help Protect the Industry

By Bill Chronister, Associate Director, Market & Liquidity Risk Management | 3 Minute read | January 12, 2021

Working at DTCC provides a unique and exciting vantage point into the global financial ecosystem. We stand at the center of the majority of U.S. trading activity, processing trillions of dollars of securities transactions. Providing stability and efficiency to the capital markets is of the utmost importance, which makes risk management one of the primary functions at DTCC.

Being proactive and vigilant in assessing real-time risks is one of the most powerful tools we have to ensure the financial markets remain safe and stable. And one of the ways we help mitigate risk is by preparing for the possibility that our exposure to risk increases.

Usually one of two things lead to increased risk exposure – significant changes in the size or composition of a client’s trading activity, or overall market volatility.

We’ve seen unprecedented market volatility in recent years stemming from various global events including Brexit, U.S politics and others, but nothing we’ve seen can compare to the volatility and record-setting number of transactions we processed in March 2020, at the height of the uncertainty of the COVID-19 pandemic. The pandemic, with the accompanying volatility and rapidly changing market prices, resulted in significantly increased margin calls for our participants. A margin call is a requirement that additional funds be deposited into a participant’s account to limit the clearing agencies’ exposure in a potential default scenario.

Every day NSCC and FICC participants are required to post margin, which is made up of a number of risk-based components, including an amount determined in part by a Value-at-Risk (“VaR”) Calculator, based on submitted trading activity. Margin amounts, which make up each clearing agency’s Clearing Fund, is collected at the start of each day for NSCC and FICC (at both MBSD and GSD), our SIFMU clearing agencies, and in some cases can be collected intraday as well.

All in a Day’s Work: Providing Stability in Times of Market Stress

Last April, Murray Pozmanter helped explain DTCC’s importance of providing stability during times of unprecedented volatility.

When the global pandemic caused much of the world to shut down, DTCC’s clearing agencies experienced dramatic increases in transactions through our systems. Despite setting a new single day record, processing over 363 million transactions on March 12, 2020, we maintained full operational processing capability.

This new peak was more than 15% higher than our last peak of 315 million transactions in October 2008, at the height of the financial crisis and 40% higher than our daily average volume in March 2020.

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Throughout each day, NSCC and FICC net down trades in each participant’s portfolio to calculate and assess margin requirements. When we see increased exposure between margin cycles, we may make a margin call to collect additional margin from those participants. Additional margin calls are designed to cover possible losses to the clearing agency and protect the industry in the event of a participant default. While a participant default does occur from time to time, neither NSCC nor FICC have experienced a financial loss following a default that was not covered by its financial resources.

To operate in a highly dynamic and evolving marketplace, we are continuously working to develop and maintain risk requirements to help reinforce our risk management practices and standards. DTCC adheres to international regulatory standards to maintain back-testing coverage at 99%. This means we are required by our regulators to maintain the clearing funds at a level that covers potential liquidation losses 99% of the time, for each of our clearing corporations. Every day, we run calculations and simulate default scenarios to see if we have any gap or exposure between the margin we collected and what could have occurred in a loss.

Our mission is to protect the industry and our participants. The risk management actions we sometimes must take, including the intraday margin calls, are designed to protect everyone in the industry.