The critical nature of DTCC’s role in the financial markets becomes most apparent in times of market stress or crises, when DTCC has proven its ability to withstand turmoil and provide stability and resilience for the markets.
In the final part of a three-part series, DTCC: Providing a Public Good, we look back at several well-known crises through the lens of DTCC’s role and performance.
Part I: From Paper Certificates to Quadrillions of Dollars in Securities Each Year
Part II: Key Advances in Clearance and Settlement
9/11 Terrorist Attack
The epicenter of the 9/11 terrorist attack on the World Trade Center took place only blocks away from DTCC’s NYC headquarters at that time, 55 Water Street. While most of Wall Street was forced to shut down, DTCC opened the next day and employees spent four days and three nights at 55 Water Street, helping the industry recover thousands of lost trades. DTCC successfully cleared and settled $1.8 trillion of securities transactions during the volatile week, enabling the markets to re-open the following Monday. Jill M. Considine, DTCC’s chairwoman at the time, said it was “a case of ordinary people doing extraordinary things.”
Tremendous business changes resulted from the terrorist attack, completely transforming the industry’s understanding of business continuity and DTCC helped lead that change. Three weeks after the attack, DTCC presented its Board with the next generation of our business continuity plan, incorporating the initial lessons learned from the experience of 9/11. The Board approved the plan, demonstrating its understanding of the importance of business continuity planning for market infrastructure.
Amid the unprecedented turmoil that engulfed DTCC’s clients and the financial services sector in 2008, DTCC continued to deliver the highest levels of risk management and reliability despite the chaos.
2008 Financial Crisis
Amid the unprecedented turmoil that engulfed DTCC’s clients and the financial services sector in 2008, DTCC continued to deliver the highest levels of risk management and reliability despite the chaos. It was one of the most challenging years, and one of the most successful, in DTCC’s history.
As financial markets reeled, DTCC successfully protected participants and the nation’s securities clearance and settlement system throughout the crisis, especially in the days following the Lehman Brothers’ bankruptcy. DTCC resolved $500 billion in equities exposure, the largest liquidation of a financial services firm in U.S. history, without having to draw upon our other participants’ clearing fund deposits. DTCC also leveraged its central role to help counteract misinformation and calm market unease. The liquidation of Lehman was complex, involved multiple asset classes and required a methodical approach to mitigate potential losses from outstanding trading obligations.
At the time of the Lehman bankruptcy, DTCC’s rapid public correction of rumors that Lehman’s exposure in the credit default swaps (CDS) market could reach $400 billion—in fact, our Trade Information Warehouse (TIW) records suggested Lehman’s net exposure was closer to $6 billion—significantly helped to calm the financial markets.
The TIW also successfully managed 11 credit events in the over-the-counter derivatives markets in 2008, including Lehman Brothers Holding Inc., Fannie Mae, Freddie Mac and Washington Mutual. Approximately $285 billion (in aggregate gross notional value) of CDS contracts were netted down to $12 billion in actual payments.
DTCC also helped steady the industry during the March bailout of Bear Stearns. DTCC supported the transfer of Bear Stearns’ deal book of about 150,000 open CDS contracts to multiple JPMorgan Chase subsidiaries, most of which were handled in 48 hours over a weekend, eliminating uncertainty in the market and operational risk for our participants.
In another example of DTCC’s capabilities, NSCC took responsibility for all trades that participants had open with Bernard Madoff Investment Securities through December 12, 2008—the firm’s last trading day—and closed all those trades with no loss to participants firms.
Throughout all these extraordinary events, DTCC processed more than $1.88 quadrillion in securities transactions in 2008 without interruption.
Throughout all these extraordinary events, DTCC processed more than $1.88 quadrillion in securities transactions in 2008 without interruption.
Knight Capital (2012)
During the first 45 minutes after the market opened on Aug. 1, 2012, Knight Capital lost $460 million when a technology glitch resulted in the transmission of a large number of erroneous trades to the NYSE and then to DTCC. The error, which sent a shudder through the industry, had the potential to create chaos in the equity markets and negatively impact clients as Knight Capital lost about $10 million a minute.
Across four days, DTCC worked closely with Knight Capital, our Board Risk Committee and our regulators to protect our clients and DTCC from any potential losses, while also mitigating systemic risk. In addition, we worked together with Knight Capital to manage settlement of the erroneous trades. The result of these efforts was a speedy resolution that averted a full-blown, cascading crisis and helped keep Knight Capital solvent in the days immediately following the crisis.
Superstorm Sandy (2012)
Superstorm Sandy devastated New York and the tri-state area and created unprecedented challenges for DTCC.
On the night of Oct. 28, 2012, millions of gallons of contaminated water overflowed the seawalls in lower Manhattan and filled the basement and sub-basements at DTCC’s headquarters at 55 Water Street, flooding DTCC’s main securities vault. The water wreaked havoc, strewing more than 1.7 million water-logged certificates and millions of other documents throughout the vault. The flood forced DTCC from the building, displacing some 2,300 employees and the company’s operations.
DTCC’s clearing and settlement activities, however, continued to operate without interruption during and after Sandy’s landfall. Relying on the firm’s well-tested business continuity plans and procedures, DTCC shifted key processing and operations to its Tampa, Dallas and Brooklyn sites before the storm landed.
Two weeks later, teams of recovery experts trekked down five flights of stairs into the DTCC vault to begin the largest and most expensive vault recovery ever undertaken. The securities were flash-frozen and shipped across the country in container trucks. As part of the recovery process the water was vaporized and the securities were exposed to radiation to sterilize them. The securities were then shipped back to DTCC to be cleaned and reconciled. After six months of 10-hour shifts, six days a week, 99.9% of certificates were recovered and restored—an unprecedented $1 trillion vault recovery effort.
COVID-19 (2020)
DTCC’s responsibilities have been magnified during the market volatility associated with the spread of the COVID-19 pandemic across the world. Trading activity flowing through DTCC systems set record levels four times since mid-March. On March 12, DTCC set a new single day record, processing more than 363 million equity transactions, 15 percent more than at the height of the 2008 crisis. On the last day of February, 19.3 billion U.S. shares were traded, more than twice the average daily volume of 7.0 billion shares over 2019. The 10 highest volume days for U.S. shares by notional volume or trade count of all time occurred in 2020.
During each of these crises, amid extraordinary circumstances, financial markets continued to function. Thanks to the heightened risk management standards required of Systemically Important Financial Market Utility (SIFMUs), including risk-based margin requirements, clearinghouses are well capitalized and able to measure risk exposure, including making adjustments in real-time, to protect market stability in the event of a firm failure.