The three core clearing agency subsidiaries of The Depository Trust & Clearing Corporation (DTCC) – The Depository Trust Company (DTC), National Securities Clearing Corporation (NSCC) and Fixed Income Clearing Corporation (FICC) – were recently assigned issuer ratings of Aaa long-term and Prime-1 (P-1) short-term with stable outlooks by Moody’s Investors Service.
Obligations rated Aaa are “judged to be of the highest quality, subject to the lowest level of credit risk” and “Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.” (Moody’s Rating Scale)
“We are pleased that Moody’s has recognized DTC, NSCC and FICC as financially sound, stable and trusted clearing agencies,” said Michael Bodson, President and CEO of DTCC. “DTCC has long been committed to protecting the stability and integrity of global financial markets, and these ratings are an acknowledgement of the robust risk management and financial controls that we have implemented across the organization.”
Designated as Systemically Important Financial Market Utilities (SIFMUs) under the Dodd-Frank Wall Street Reform Act, NSCC, FICC and DTC utilize multiple risk mitigation mechanisms to protect against their principal risk – a default by a member.
One of those mechanisms - the waterfall structure - absorbs losses first through clearing funds (margin) provided by the defaulting member. In its rating action, Moody’s noted that DTCC’s three subsidiaries performed well during the collapse of Lehman Brothers in 2008. "As a proxy for their operational and risk management resilience, with the collapse of Lehman Brothers in 2008, each clearinghouse and depository had enough margin from Lehman Brothers that they did not break through even the first layer of the waterfall," said Moody's Senior Analyst Katie Kolchin.
In addition, to the waterfall structure, DTCC’s subsidiaries employ a number of techniques to ensure the adequacy of funds, including marking-to-market at least daily, back testing margin positions to test collateral coverage levels, and utilizing margin add-ons should a member accumulate a position representing a significant concentration in a particular security.