Liquidity Risk Management

Overview

The DTCC Liquidity Risk Management (LRM) program is responsible for measuring, monitoring and managing the liquidity risks that arise in or are born by each of the DTCC Clearing Agencies: The Depository Trust Company (DTC), National Securities Clearing Corporation (NSCC) and Fixed Income Clearing Corporation (FICC). LRM monitors the sufficiency of each of the Clearing Agencies’ liquid resources in all relevant currencies to ensure they are able to effect same-day, intraday and multi-day settlement of payment obligations, as applicable, with a high degree of confidence under a wide range of foreseeable stress scenarios that includes the default of all members of the Affiliated Family with the settlement obligation that would generate the largest aggregate payment obligation in extreme but plausible market conditions (Cover One standard). One of our flagship products - the Liquidity Optimizer - assists firms in monitoring changes in liquidity needs in near real-time, estimating the sufficiency of available liquidity resources, and anticipating potential Supplemental Liquidity Deposits (SLD) at NSCC so that treasury desks and traders are aligned with expected funding, thus providing increased transparency into their liquidity obligations. LRM is also responsible for advising each Clearing Agency in deploying its liquidity tools to meet their settlement obligations. These activities are described further in the DTCC Clearing Agency Disclosure Frameworks for Covered Clearing Agencies and Financial Market Infrastructures – Principle 7: Liquidity risk; CCAS 17Ad-22(e)(7).

Objectives

The objective of Liquidity Risk Management at DTCC is to prepare for the potential insolvency of a member or affiliated family with the largest aggregate liquidity exposure (i.e., complying with the Cover One standard). LRM monitors liquidity risk by performing daily simulations that measure liquidity needs over the settlement cycle and seeks to assess and maintain qualifying liquid resources in an amount sufficient to cover and manage this risk under a wide range of foreseeable stress scenarios. The liquidity risk team actively monitors future settlement dates and conducts outreach as needed. These simulations utilize regulatory and informational stress scenarios which represent a wide range of historic and hypothetical events with various levels of stress applied. These scenarios are developed either by LRM or in collaboration with the Stress Testing and Systemic Risk Office, following a defined governance process to create, modify, and retire scenarios.

Liquidity Risk is presented differently in each Clearing Agency; therefore, the risk management practices are unique for NSCC, FICC, DTC:

• DTC Liquidity Risk

  DTC provides depository and book-entry services, including custody of securities certificates and other instruments, and settlement and asset services for types of eligible securities including, among others, equities, warrants, rights, corporate debt and notes, municipal bonds, government securities, asset-backed securities, depositary receipts and MMIs. LRM’s activities assume that DTC operates on a fully collateralized basis and limits its members’ settlement obligations to the amount of available liquidity resources such that potential secured borrowing needs are supported by sufficient collateral. DTC’s liquidity resources are an all-cash Participants’ Fund as well as a committed 364-day credit facility with a consortium of lenders.

• NSCC Liquidity Risk

  NSCC provides centralized clearing and settlement services for equities, corporate bonds, municipal bonds, and Unit Investment Trusts. NSCC maintains a liquidity risk management framework for the measurement, monitoring and management of its potential liquidity needs, which is designed to ensure that NSCC maintains sufficient liquid resources to timely meet its payment (principally settlement) obligations in the event of a Participant default. On a daily basis, LRM measures the amount of liquidity that would be required by NSCC in the event that the Participant or Participant family with the largest aggregate liquidity exposure fails to settle (Cover One standard). NSCC then seeks to maintain qualifying liquid resources in an amount sufficient to cover this risk. NSCC’s liquidity resources include (i) cash in its Clearing Fund; (ii) cash that would be obtained from NSCC’s committed 364-day credit facility with a consortium of lenders; (iii) supplemental liquidity deposits, which are designed to cover the heightened liquidity exposure, required from those Participants whose activity would pose the largest liquidity exposure to NSCC; and (iv) a default liquidity facility comprised of cash from the sale of commercial paper, extendible notes and term debt to institutional investors.

  NSCC provides daily reports to its members to view their current liquidity obligations and available resources via PBS.

• FICC Liquidity Risk

  LRM manages FICC Government Securities Division (GSD) and Mortgage Back Securities Division (MBSD) liquidity risks with the objective to maintain sufficient liquidity resources to be able to fulfill obligations that have been guaranteed by FICC to non-defaulting members in the event of the default of the largest individual member or affiliated family of a GSD and/or MBSD member. LRM calculates member-level liquidity needs for GSD and MBSD and aggregates the amounts to the affiliated family level assuming all affiliates fail simultaneously.

  MBSD provides clearing services for Agency to-be-announced (TBA) securities, Agency TBA options, and Agency specified pools. A Funds only Settlement (FOS) charge is also included in the liquidity need calculation when applicable.

  • TBAs generally settle on four TBA SIFMA class settlement days per month (A, B, C, D). Mortgage-backed securities in the U.S. are generally traded on TBA basis, meaning the identity of the securities to be delivered to the buyer is not specified exactly at the time of the trade.

  GSD provides clearing services for eligible U.S. Treasury bills, notes, Treasury STRIPS, government Agency securities, General Collateral Facility (GCF) and repurchase agreement transactions (repo). A Funds only Settlement (FOS) charge is also included in the liquidity need calculation when applicable.

  • GSD’s peak liquidity needs are generally observed around quarter-end and year-end as well as in line with treasury auction dates.

  FICC’s qualifying liquid resources include (i) cash in its Clearing Fund and (ii) the Capped Contingent Liquidity Facility (CCLF), which allows FICC to obtain short term financing (subject to a cap per member) collateralized by the incoming securities being delivered to the defaulter and securities deposited to the FICC Clearing Fund (see GSD Rule 22A, Section 2a and MBSD Rule 17, Section 2a).

  FICC provides daily reports for GSD and MBSD via RTTM to allow members to view their current and rolling CCLF obligations and to manage and track their projected obligation for the upcoming reset.