## _cr10129 — Detailed Assessment of Observance of the National Securities Clearing Corporation (NSCC) of the CPSS‑IOSCO Recommendations for Central Counterparties

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### Legal basis, accessibility, and membership access (Recommendation 1; Section 17A)
- Findings:
  - NSCC is a registered clearing agency with the Securities and Exchange Commission pursuant to Section17A of the Exchange Act and is a “clearing corporation” within Article 8 of the New York UCC.
  - Laws, regulations and NSCC Rules & Procedures have been publicly available since 1976 via DTCC’s website.
  - All participants execute membership agreements agreeing to be bound by NSCC’s Rules; rule changes are filed with and reviewed by the SEC and subject to public comment.
  - NSCC becomes legal counterparty at the latest at midnight of T+1; NSCC is seeking regulatory approval to move the trade guaranty earlier (trade validation for locked-in trades; comparison for trades compared through NSCC).
  - U.S. law (UCC, FDICIA, 2005 Amendments) supports netting, enforceability of netting contracts, protection of CCP lien/collateral, and close-out validity in insolvency.
  - Cross-border: all full Members U.S.-regulated except CDS Clearing and Depository Services Inc. (Canada); foreign legal opinions historically required; 2005 Amendments reduce relevance of foreign legal regimes in U.S. proceedings.
- Assessment: Observed.
- Section 17A specifics:
  - Section 17A requires fair procedures for disciplining participants, denial of participation, and limitation of access; participants may include registered brokers/dealers, clearing agencies, investment companies, banks, insurance companies, or other Commission‑designated persons.
  - NSCC’s participation requirements are objective, publicly disclosed, and limit access on grounds of risk (credit, operational, compliance, legal).
- Assessment: Observed.

### Participant financial resources, operational capacity, and access (Recommendation 2)
- Membership financial standards:
  - Full-service Members must have excess net capital over SEC (or designated examining authority) minimum of:
    - (i) US$500,000, or
    - (ii) US$100,000, if Municipal Securities Brokers’ Broker, or
    - (iii) US$1,000,000 if the applicant clears for other broker/dealers.
  - NSCC Rule 4 requires deposits to the Clearing Fund; amounts fixed by formula(s).
- Operational requirements and monitoring:
  - Applicants must demonstrate minimum six months business history or equivalent personnel experience, appropriate settling bank arrangements, appropriate communication procedures, DTC Participant status for CNS settlement, and complete connectivity/testing prior to activation.
  - Ongoing monitoring: annual audited financial statements and monthly/quarterly regulatory reports; internal quantitative credit risk rating (1–7 scale) produced systemically from regulatory data and reviewed by analyst; fines for late reporting reported to SEC.
  - NSCC staff continuously monitors Clearing Fund requirements and intra‑day market/news.
- Suspension/termination tools:
  - NSCC can restrict access, cease to act for a Member, declare wind-down Members, or accept voluntary retirements (Member remains liable for prior obligations); NSCC issues Important Notices and notifies SEC as required.
- Assessment: Observed.

### Measurement of exposures and risk mitigation (Recommendation 3)
- Measurement practices:
  - Exposures measured at least once daily using a risk‑based margin methodology; daily calculation uses prior day’s closing market price.
  - Clearing Fund deficiencies due by 10:00 a.m. each business day; NSCC can call intraday additional Clearing Fund deposits.
  - Security pricing updated intraday; DTCC Risk Management systems monitor trading activity throughout the day.
- Risk mitigation tools:
  - Clearing Fund (margin) calculated daily on unsettled/pending transactions; cross‑guarantee arrangements with DTC, FICC and OCC for sharing excess net collateral of a common defaulting participant.
  - Intraday closeout scenarios: Risk Management runs closeout scenarios each morning for highest‑risk families; twice‑daily intraday scenarios for members rated 6 and 7 using intraday prices/positions.
- Assessment: Observed.
- Comment: Definitions of margins and clearing funds in public assessment should be aligned with international usage/RCCP glossary; NSCC management will clarify in next self‑assessment.

### Margin models, intraday calls, and collateral (Recommendation 4)
- Model parameters and validation:
  - Clearing Fund calculated assuming a three-day liquidation period and a 99 percent confidence level; internal monthly back‑testing over past two years showed overall coverage exceeding 99 percent.
  - Historical data windows: most recent 153 days for equities and 250 days for bonds.
  - Model back-tested monthly; submitted to and approved by the SEC; periodically validated by outside experts.
- Intraday margin calls and collateral:
  - Legal authority and operational capability to call intraday margin; Risk Management has discretion based on market events and predetermined thresholds.
  - Eligible collateral: cash (not less than 40 percent) and eligible securities (U.S. Government Treasury securities, U.S. Agency securities guaranteed by U.S. Government, certain U.S. Agency/GSE pass‑through securities); cash typically majority of Clearing Fund.
  - Securities re‑priced nightly; haircuts set in Procedure XV based on ten‑year volatility analysis using a 5 sigma confidence level plus concentration factors; haircut rates reviewed quarterly.
- Assessment: Observed.

### Financial resources, stress testing, and liquidity (Recommendation 5)
- Stress testing framework:
  - Stress tests performed monthly covering 50 stress scenarios selected from past 10 years and special events (e.g., 1987 market break); 82 scenarios include hypothetical components.
  - Results reported to executive management and DTCC Board Credit and Market Risk Management Committee; stress testing criteria/assumptions not disclosed to participants.
  - External expert review of models/parameters/scenarios completed end‑2009; annual re‑evaluation planned going forward.
- Liquidity and committed resources:
  - Committed liquidity resources:
    - i. cash in the Clearing Fund amounting to US$6.2 billion;
    - ii. funds available for NSCC’s committed liquidity facility in the current amount of US$3.1 billion. If drawn, the line would be collateralized with Clearing Fund securities (US$403 million in U.S. Treasury and Agency securities, end‑2008) and the securities that would have been delivered to the defaulting member.
  - Non‑committed additional liquidity options include pledging/repurchase of remaining Clearing Fund securities and repo of securities that would have been delivered to the defaulting member.
  - NSCC evaluates adequacy daily and monthly using back test of actual settlement obligations with historical CNS prices.
  - Beginning 2009, NSCC evaluated sufficiency to cover failure of largest affiliated family; back test for January–April 2009 showed sufficient liquidity (using current committed facility amount) to cover failure of the largest affiliated family 99.98 percent of the time.
- Loss‑absorption waterfall on a Member failure (order of use):
  1. resources available under applicable cross‑guaranty agreements (multilateral netting contracts and limited cross‑guaranty agreement with DTC, FICC and OCC; NSCC–OCC agreement for certain options settlements);
  2. use of NSCC retained earnings;
  3. use of non‑defaulting members’ Clearing Fund deposits.
- Availability and enforceability:
  - Collateral arrangements supported by UCC and New York contract law; FDICIA, the Code, FDIA and SIPA provide specific protections for clearing agency close‑outs and collateral access/retention.
  - Clearing Fund cash held in tri‑party repo overnight and returned to NSCC bank account during day for immediate access; securities held at DTC with immediate access; US$3.1 billion committed end‑of‑day credit line tested with liquidity providers.
  - Cross‑guarantee arrangements with other clearing agencies to share excess net collateral.
- Assessment: Broadly observed.
- Required actions for full compliance (from source):
  1. consider additional liquid financial resources to use in case of extreme situations where repo market would not be available;
  2. consider conducting more frequent stress testing than once a month, in particular, in times of unusual market volatility; and
  3. disclose stress testing assumptions to participants.
- Comment: Repoing Clearing Fund securities or unpaid allocations can increase liquidity but cannot be considered a committed line in extreme market situations.

### Default procedures, enforceability, and transparency (Recommendation 6)
- Findings:
  - NSCC Rules define default; Board or delegated Committee may suspend/prohibit participants for enumerated circumstances (regulatory expulsion/suspension, failure to deliver funds/securities, extreme financial/operational difficulties).
  - NSCC Rule 22A requires prompt close‑out and permits application of liquidation proceeds and other funds/assets of defaulting Member to meet obligations.
  - SIPC provides customer protection up to US$500,000 of customer net equity balance in distribution of customer cash/securities.
  - NSCC maintains comprehensive closeout management framework, conducts periodic tests for closing out accounts and borrowing under liquidity arrangements, and reviews closeout procedures at least annually.
  - Key closeout procedures are publicly available on DTCC’s website.
- Assessment: Observed.

### Custody and investment of CCP resources (Recommendation 7)
- Findings:
  - Clearing Fund cash held at two private commercial banks; securities collateral held at DTC and pledged to NSCC; some Clearing Fund cash may be held in a DTC sub‑account at Federal Reserve Bank of New York.
  - Investment Policy (approved by Audit Committee) emphasizes liquidity and permits use as pledged securities under committed liquidity facilities.
  - Typical investments: U.S. Government and U.S. Government Agency debt via repos and direct purchase; repo risk‑minimizing features include principal counterparties, overnight maturity, tri‑party custody, repo counterparties rated A or better, and collateral market value ≥ 102 percent of cash invested.
  - When repos unavailable, funds may be placed in overnight commercial paper sweep accounts (unsecured) with approved custodian banks.
  - Credit limits by counterparty established and monitored daily across DTCC subsidiaries.
- Assessment: Observed.
- Comments / Recommended improvements:
  - Continue to monitor and mitigate risks from holding assets at only two commercial banks.
  - Avoid unsecured investments to the largest extent possible.

### Operational risk management and business continuity (Recommendation 8)
- Findings:
  - BCP organized at DTCC holding company level; DTC, NSCC and FICC are separate applications on same mainframe with clear separation.
  - Permanent groups include Operational Risk Group, Internal Risk Management Committee, Security Committee, Internal Audit, and independent accountants.
  - Data centers and staff in multiple locations; out‑of‑region data centre is a warm site with 2 hour recovery capability; out‑of‑region business operations sites are hot sites.
  - Data centre failover tests 3–4 times per year; business operations tests conducted throughout year; annual BCP white paper and Out‑of‑Region guide published.
  - Contingency tests are not conducted with participants (except connectivity testing on joining and annual testing for participants deemed critical); DTCC does not test back‑up sites to participant backup sites for critical participants.
  - NSCC reported no key system failures or data loss in the last year; system availability 100percent year to date; processing capacity exceeds 2 times historical peaks.
- Assessment: Observed.
- Comments / Recommended action:
  - Contingency plans and backup facilities are not tested with participants; DTCC should test its back‑up sites to critical participants’ backup sites.

### Money settlement arrangements and settlement bank access (Recommendation 9)
- Findings:
  - NSCC uses central bank model with tiered settlement; DTC acts as settlement agent for end‑of‑day funds settlement on Federal Reserve’s NSS; CCP is always in a flat position.
  - DTC submits debit/credit files by settlement bank to FRBNY; Federal Reserve processes and makes debits/credits final when made on NSS.
  - Settling Bank Only Members must be a bank or trust company with direct Federal Reserve account/Fedwire/NSS access and meet NSCC standards including Tier 1 risk‑based capital ratio of at least 6 percent.
  - NSCC does not monitor distribution of exposures among settlement banks.
- Assessment: Observed.
- Comment / Recommended action:
  - As a systemically important CCP, NSCC should have direct access to Federal Reserve accounts and services; current legal constraints mean this requires NSCC to be chartered as a bank or statutory changes granting the Federal Reserve legal authority to provide accounts and services to NSCC.

### Physical delivery obligations and DVP (Recommendation 10)
- Findings:
  - NSCC becomes counterparty when trade guaranty applies; securities delivered to NSCC are promptly re‑delivered via allocation algorithm; Members must take and pay for securities allocated in CNS.
  - NSCC uses a “modified” DVP: securities deliveries not final until the “effective time” (generally when NSCC has been paid or is in credit position with respect to Member or its settling bank); end‑of‑day net funds payments via NSS.
  - Book‑entry CNS movements avoid physical certificate storage/delivery risks.
- Assessment: Observed.

### Links, legal support, monitoring, and cooperation (Recommendation 11)
- OCC link:
  - OCC is a DTC Participant (not NSCC Member); Accord provides two‑way guaranty between OCC and NSCC for mutual participant failures with payment formulas (lesser of net member debit or calculated margin requirement/credit); Accord governed by New York law and approved by SEC.
- CDS (Canada) link:
  - CDS is NSCC Member and DTC Participant; New York Link Service enables CDS Participants to clear/settle OTC trades via sponsored accounts; CDS provides collateral and funds its NSCC deficit daily; NSCC holds risk‑based Clearing Fund collateral from CDS sponsored participants.
  - New York Participants may face expanded collateral requirements up to twice normal requirement to participate in NSCC/CDS link.
  - CDS monitored via membership review and annual financial review; legal opinion including conflict-of‑laws required.
- Ongoing monitoring and oversight cooperation:
  - Risk Management engages with OCC and CDS, subscribes to third‑party ratings, and reviews financial condition annually.
  - MoU between U.S. and Canada supports cooperation regarding CDS; OCC and NSCC are registered clearing agencies and SROs under SEC oversight.
- Assessment: Observed.

### Cost‑effectiveness (Recommendation 12)
- Findings:
  - NSCC fees are cost‑based; excess net revenues returned via rebates/refunds.
  - DTCC conducts periodic benchmarking; pricing reviewed during annual budget; participant service surveys annually; operational reliability monitored monthly; annual Capacity Planning Report to Board and regulators.
- Assessment: Observed.

### Governance and public interest (Recommendation 13)
- Findings:
  - DTCC is holding company for DTC, FICC, NSCC with single governance structure; governance arrangements publicly updated annually (last update October 2009).
  - DTCC common shareholders ≈ 362 banks, broker‑dealers, mutual funds and other firms.
  - DTCC Board: 18 members — 14 designated by shareholders, 2 DTCC executives (CEO and COO), 2 designated by preferred shareholders (NYSE and FINRA); directors elected for one‑year terms.
  - Chief Risk Officer reports directly to Chairman and CEO; standing Board committees include credit and market risk, compliance and operational risk, and core services operations and planning.
  - Compensation Committee links compensation to performance; auditors ensure no cross‑subsidization and separate maintenance of risk management resources.
  - Public interest protections derive from Section 17A and SEC rule filing/public comment processes (minimum 21 days).
- Assessment: Broadly observed.
- Comment / Recommended improvement:
  - Governance arrangements for NSCC should be more clearly specified and transparent, including criteria for composition and selection of Board members.

### Disclosure, transparency, and self‑assessment (Recommendation 14)
- Findings:
  - NSCC rules, Important Notices, service bulletins and risk management guidelines are publicly available on DTCC website.
  - Participants receive annual audited financial statements and unaudited statements for first three calendar quarters.
  - NSCC completed and disclosed RCCP key questions answers; self‑assessment reviewed by senior management and approved by Board prior to publication; review at least every two years or upon material change.
  - Information provided in English; management engages with participants on inquiries and meetings.
- Assessment: Observed.

### Regulation, oversight, cooperation, and resources (Recommendation 15)
- Findings:
  - NSCC registered with SEC under Section 17A and subject to Exchange Act regulation; Federal Reserve has authority to examine NSCC because NSCC is affiliate of state member bank (DTC).
  - SEC: estimated 51 staff involved in clearing oversight (≈ 23 full‑time equivalent positions).
  - FRBNY/Board: about 20 budgeted officers/staff full time on policy/oversight for payment, clearing and settlement; about 15 supervisory staff dedicated to specific private sector systems; 9 examiners broadly dedicated; 10 focused on systemically important clearing activities by banks/affiliates.
  - SEC objectives/policies public; Federal Reserve publishes Payments System Risk policy and operating circulars; NSCC must file/make public proposed rule changes.
  - Recordkeeping under Exchange Act Section 17 and SEC rules: records preserved for not less than five years (first two years in an “easily accessible place”).
  - SEC conducts onsite examinations; Automation Review Policy requests real‑time notifications of significant system outages.
  - Domestic coordination: SEC and Federal Reserve have information‑sharing arrangements; cross‑border cooperation via SEC MoUs.
- Assessment: Observed.
- Comments / Recommended enhancements:
  - SEC has not formally required NSCC to perform RCCP self‑assessment; SEC staff would consider recommending such a requirement to promote consistency.
  - Federal Reserve should be provided a legal mandate to oversee NSCC as a systemically important system as a complement to SEC regulation and supervision.

### Selected actions to improve compliance (extracted)
- Recommendation 3:
  - Align definitions of margins and clearing funds with international usage and RCCP glossary.
- Recommendation 5:
  - consider additional liquid financial resources in extreme situations where repo market unavailable;
  - minimize exposure and concentration risk vis‑à‑vis the two banks;
  - consider conducting more frequent stress testing than once a month in periods of unusual market volatility;
  - disclose stress testing assumptions to participants.
- Recommendation 7:
  - continue to monitor and mitigate risks from holding assets at only two commercial banks;
  - avoid unsecured investments to the largest extent possible.
- Recommendation 8:
  - test and review NSCC backup sites to critical participants’ backup sites.
- Recommendation 9:
  - provide NSCC direct access to Fedwire Securities to settle DVP transactions in central bank money.
- Recommendation 13:
  - clarify and increase transparency of governance arrangements, including criteria for composition and selection of Board members.
- Recommendation 15:
  - SEC should formally require NSCC to perform RCCP self‑assessments; ensure SEC rules are aligned with CPSS/IOSCO Recommendations; provide legal mandate to Federal Reserve to oversee NSCC as a systemically important system.

*Source: _cr10129 — Detailed Assessment of Observance of the National Securities Clearing Corporation (NSCC) of the CPSS‑IOSCO Recommendations for Central Counterparties (excerpt).*

### 1. Detailed Assessment of Observance of the National Securities Clearing Corporation

### 1. Detailed Assessment of Observance of the National Securities Clearing Corporation (NSCC) of the CPSS-IOSCO Recommendations for Central Counterparties

### Recommendation 1 — Legal basis and accessibility of the regulatory framework
- Accessibility of the regulatory framework (Q1)
  - NSCC is a registered clearing agency with the Securities and Exchange Commission (SEC) pursuant to the provisions of Section17A of the Exchange Act.
  - NSCC is also a “clearing corporation” within the meaning of Article 8 of the New York Uniform Commercial Code.
  - Laws, regulations and rules are readily accessible to participants and the general public via the Internet and through other public sources.
  - NSCC Rules & Procedures (collectively the “Rules”) have been available to its participants since 1976 and can be found on the website at NSCC’s parent company, The Depository Trust & Clearing Corporation (“DTCC”) at www.dtcc.com.
  - All NSCC participants are required to execute membership agreements under which they agree to be bound by NSCC’s Rules.
  - All changes to NSCC’s Rules are filed with and reviewed by the SEC, and proposed rule changes are subject to public comment.
  - NSCC’s rule filings and SEC approvals thereof are posted on the DTCC website as well as the SEC’s website, www.sec.gov.

- Legal basis (Q2)
  - The legal framework demonstrates a high degree of assurance that there is a clear and effective legal basis for:
    - (a) The CCP acting as counterparty
      - The legal framework includes statutory provisions and clearing agency rules.
      - The New York law of contracts and provisions of the Uniform Commercial Code (UCC) (see e.g., NYUCC §8–111) support NSCC’s activities as a CCP.
      - Each membership applicant is required to provide a legal opinion confirming that the membership agreement and the Rules (including those relating to NSCC’s role as a CCP) are enforceable against it.
    - (b) The timing of assumption of liability as CCP
      - Following NSCC’s Rules, NSCC becomes legal counterparty in a trade (or provide trade guaranty) at the latest at midnight of T+1.
      - New York law of contracts and provisions of the UCC support the enforceability of the timing of assumption of liability as CCP by NSCC.
      - NSCC is currently in the process of seeking regulatory approval to move the trade guaranty forward to the point of trade validation (for locked-in trades) and comparison (for trades compared through NSCC).
    - (c) Netting arrangements
      - U.S. law supports netting arrangements relating to securities transactions.
      - The U.S. Federal Deposit Insurance Corporation Improvement Act of 1991, as amended (FDICIA) supports “netting contracts” providing for the netting of payment obligations and payment entitlements between and among members of clearing organizations.
      - Under FDICIA, netting under a netting contract is not prevented or subject to being unwound by the receiver or trustee in a subsequent insolvency proceeding.
      - New York law recognizes the validity of contractual netting arrangements generally (including transaction novation, payment and closeout netting).
      - The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “2005 Amendments”) include provisions that validate master netting agreements in respect of securities, commodities, forward, swap and repurchase transactions, and provide that the closeout and netting of transactions arising under such agreements may not be stayed or avoided in any bankruptcy proceeding brought under the Code, the Federal Deposit Insurance Act (FDIA), or the Securities Investor Protection Act (SIPA).
    - (d) The protection of the CCP’s interest in collateral (including margin)
      - The UCC (Articles 8 and 9) and general New York contract law support the validity of NSCC’s membership agreements and its rules, including the validity of NSCC’s lien and collateral protections and the cross guaranty arrangements, that are structured as “netting contracts” under FDICIA.
      - Relevant insolvency laws can limit a secured party’s rights to access and liquidate its collateral, but FDICIA, the Code, FDIA, and SIPA contain specific provisions to protect clearing agency close-outs (including access to and retention of collateral).
    - (e) Default procedures
      - NSCC’s Rules provide that if a Member fails to meet its settlement obligations to NSCC, and NSCC ceases to act on behalf of the Member, that Member’s positions would be closed out.
      - Clearing agency close-out provisions are specifically permitted under both FDICIA and the Bankruptcy Code.
    - (f) Finality of transfers of funds and financial instruments
      - NSCC Rule 12 (Settlement) provides that securities deliveries/movements to participants are final at the "effective time."
      - Generally, the “effective time” occurs when it is clear that NSCC has either been paid, or is in a credit position with respect to a participant or its settling bank.
      - Funds transfers become final at the time of the funds’ movements, according to the Federal Reserve requirements regarding National Settlement Service (NSS) and Fedwire.

- Enforceability of NSCC rules/procedures/contracts (Q3)
  - The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (amending both the FDICIA and the U.S. Bankruptcy Code) contain provisions validating the rules/procedures/contracts of NSCC.
  - The 2005 Act also provides that the close-out and netting of transactions under such agreements may not be stayed or avoided in any bankruptcy proceeding brought under the Code, FDIA, or SIPA (subject in the case of SIPA, to certain exceptions not relevant for clearing organizations).

- Cross-border activities (Q4)
  - All full Members of NSCC are U.S.-regulated entities, except for CDS Clearing and Depository Services Inc., the Canadian central securities depository.
  - Historically, NSCC has required its non-domestic applicants to obtain legal opinions from applicants’ counsel, in which conflict of laws issues are addressed.
  - The 2005 Amendments render consideration of foreign legal regimes less relevant by making clear that should a foreign receiver on behalf of a defaulting foreign member seek recognition in the U.S. Bankruptcy Courts, the same protections available to NSCC under the Code with respect to a domestic participant should also be available to it in any domestic proceeding brought on behalf of a foreign participant.

- Assessment
  - Observed.

### Recommendation 2 — Participant financial resources, operational capacity, and access
- Sufficient financial resources and robust operational reliability (Q1)
  - NSCC establishes requirements for participants' financial resources and creditworthiness (set in NSCC’s rules).
  - Financial requirements are based upon entity type, the types of services that the entity will use, and whether the entity intends to clear transactions for others.
  - Full-service Members must have excess net capital over the minimum net capital requirement imposed by the SEC or such higher minimum capital requirement imposed by the broker/dealer’s designated examining authority in the amount of:
    - (i) US$500,000, or
    - (ii) US$100,000, if such applicant is a Municipal Securities Brokers’ Broker (as defined in Rule 15c3–1(a) (8) of the Exchange Act) or
    - (iii) US$1,000,000 if such applicant clears for other broker/dealers.
  - NSCC Rule 4 provides that all members shall make a deposit to the Clearing Fund, with the amount required fixed by the Corporation in accordance with one or more formulas.
  - NSCC assesses participants' operational capability. In particular, each participant should have:
    - (a) sufficient financial ability to make anticipated contributions to the Clearing Fund and to meet obligations to NSCC;
    - (b) an established business history of a minimum of six months or personnel with sufficient operational background and experience to ensure the ability of the firm to conduct such a business;
    - (c) appropriate settling bank arrangements; and
    - (d) appropriate communication procedures.
  - NSCC Members must also be Participants of Deposit Trust Company (DTC) to effect settlement of CNS securities movements.
  - Prior to activating membership, NSCC applicants are required to conduct testing with NSCC (e.g., connectivity testing).

- Monitor compliance with participation requirements (Q2)
  - NSCC monitors that participation requirements are met on an ongoing basis.
  - Members must submit annual audited financial statements and monthly or quarterly regulatory reports.
  - Members are required to provide these reports and other required financial information on a timely basis.
  - NSCC may fine Members that fail to timely provide such information and such fines are reported to the SEC.
  - An internal credit risk rating matrix is utilized to risk rate bank and broker/dealer Members.
    - The matrix is quantitatively driven and is produced systemically from data contained in the Members’ regulatory reports.
    - The SEC has evaluated this matrix when NSCC added it to its risk management and the matrix is subject to periodic regulatory review.
    - The key financial elements focus on a Member’s capital, leverage, liquidity and profitability.
    - Once the rating is generated it is reviewed by an analyst for possible downgrade due to qualitative factors and then a final rating is assigned.
    - The rating determines the level of financial review and may impact the Member’s Clearing Fund requirement.
  - The Risk Management Department monitors the markets and news intra-day.
  - Participants with a lower internal credit rating may be monitored more closely than those with a higher rating.
  - NSCC staff continuously monitors the Clearing Fund requirements and operations monitors the operational proficiency of participants, as applicable.

- Suspension and termination of participants’ membership
  - NSCC’s Rules contain provisions that facilitate the suspension and orderly exit of firms that no longer meet the participation requirements:
    - NSCC has the right to restrict a Member’s access to services, by limiting or excluding the Member’s participation in one or more classes of transactions or services, or by ceasing to act for the Member generally.
    - If NSCC ceases to act for a Member, the rules provide that NSCC must notify the affected Member, other Members (via important notice) and the SEC of NSCC’s action.
    - NSCC can facilitate the orderly wind-down of a Member’s business when NSCC is notified by the Member that it intends to wind-down its business. If NSCC declares a Member to be a wind-down Member, NSCC will notify the Member, all other Members (via important notice) and the SEC of such a determination.
    - A Member may voluntarily retire from membership by notifying NSCC in writing. Notwithstanding any such notification, a Member remains obligated to satisfy any open obligations and liabilities arising out of its membership existing at the time of such notification.
    - NSCC issues an important notice to Members when a Member voluntarily retires from membership.

*Detailed Assessment of Observance of the National Securities Clearing Corporation (NSCC) of the CPSS-IOSCO Recommendations for Central Counterparties*

### Section 17A of the Exchange Act requires that the rules of the clearing agency provide that

### _cr10129 - Section 17A of the Exchange Act requires that the rules of the clearing agency provide that

### Legal framework and open and fair access (Section 17A)
- Section 17A requires that the rules of the clearing agency provide that (subject to any rule or order of the Commission pursuant to section 17(d) or 19(g)(2)) its participants shall be appropriately disciplined for violation of any provision of the rules of the clearing agency by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, or any other fitting sanction.
- Section 17A requires a fair procedure with respect to:
  - disciplining of participants;
  - denial of participation to any person seeking participation; and
  - prohibition or limitation by the clearing agency of any person with respect to access to services offered by the clearing agency.
- Section 17A(b)(3) particulars:
  - Any (i) registered broker or dealer, (ii) other registered clearing agency, (iii) registered investment company, (iv) bank, (v) insurance company, or (vi) other person or class of persons as the Commission may designate may become a participant, subject to statutory disqualification or failure to meet prescribed standards of financial responsibility, operational capability, experience, and competence.
  - Rules may not be designed to permit unfair discrimination in admission or use of the clearing agency, nor impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.
- NSCC-specific access practices:
  - Participation requirements are objective, clearly stated, and limit access only on grounds of risk (credit risk, operational capability, compliance risk, legal risk).
  - Membership types differ in access to services, reporting requirements, admission and continuance standards, and Clearing Fund requirements; participants in the same category are generally subject to the same requirements.
  - Before denying membership NSCC must provide a concise written statement of specific grounds for denial and notify the applicant of the right to request a hearing to determine whether the application should be denied.
- Assessment: Observed.

### Recommendation 3 — Measurement of exposures and risk mitigation
- Requirement summary: A CCP should measure its credit exposure to its participants at least once a day and, through margin requirements and other risk control mechanisms, limit exposure so CCP operation is not disrupted and non-defaulting participants are not exposed to unanticipated losses.
- Measurement practices (Q1):
  - NSCC measures exposures to Members using a risk-based margin methodology daily.
  - Requires payment of any Clearing Fund deficiencies by 10:00 a.m., each business day.
  - Daily calculation uses the prior day’s closing market price.
  - Margin methodology is part of NSCC’s rules and reviewed and approved by the SEC.
  - NSCC can call for additional Clearing Fund deposits on an intraday basis as needed.
  - Security pricing is updated on an intraday basis and additional charges may be collected to cover significant price movements for Members with significant exposure.
  - DTCC Risk Management systems permit monitoring of Members’ overall trading activities throughout the trading day to detect building exposures.
- Risk mitigation tools (Q2):
  - Clearing Fund requirement (margin) is calculated daily based on unsettled and pending transactions; aggregate deposits constitute the Clearing Fund (NSCC’s default fund).
  - NSCC limits exposure by:
    - establishing and monitoring membership standards;
    - requiring contributions to the Clearing Fund (margin);
    - monitoring Members’ daily trading activity;
    - cross-guarantee arrangements with DTC, FICC and OCC for sharing excess net collateral resources of a common defaulting participant.
  - Under NSCC Rule 15, NSCC may seek assurances of financial responsibility and operational capability from a participant as deemed necessary.
  - Daily closeout (profit/loss) scenarios:
    - Risk Management runs various closeout scenarios each morning for families of members posing highest risk, simulating profit or loss upon liquidation.
    - Intraday monitoring includes running closeout scenarios twice daily for all Members rated 6 and 7 using intraday prices and intraday positions; members are rated on a 1 to 7 scale (1 strongest, 7 weakest).
    - A Member’s intraday exposure is compared to its clearing fund deposit to assess sufficiency.
- Assessment: Observed.
- Comment: Definitions of margins and clearing funds in the public assessment should be made more consistent with international usage/practice and the RCCP glossary; NSCC management stated they would clarify this terminology in the next self-assessment revision.

### Recommendation 4 — Margin models, parameters, intraday calls, and collateral
- Requirement summary: If a CCP relies on margin requirements, these must be sufficient to cover potential exposures in normal market conditions; models and parameters should be risk-based and regularly reviewed.
- Models and parameters (Q1):
  - NSCC calculates Clearing Fund requirements assuming a three-day liquidation period in normal market conditions.
  - Clearing Fund requirement is calculated to achieve a confidence level of 99 percent; regular back-testing studies (assuming no positions liquidated until the third day) over the past two years have shown actual overall coverage exceeding 99 percent.
  - NSCC can conduct a closeout over a longer liquidation period if deemed appropriate.
  - Model is back-tested internally monthly and was submitted to and approved by the SEC.
  - Clearing Fund requirements use most recently observed market conditions using historical data of the most recent 153 days for equities and 250 days for bonds.
- Validation:
  - Models and parameters and NSCC’s risk management procedures are periodically examined by regulators and internal and external auditors; the model is periodically validated by outside experts.
- Intraday margin calls (Q2):
  - NSCC has legal authority to call for intraday margin and can operationally effect intra-day margin calls as necessary; Risk Management has discretion based on market events and internally maintained predetermined thresholds.
- Assets accepted as margin and haircuts (Q3):
  - NSCC accepts cash (not less than 40 percent) and eligible securities: U.S. Government Treasury securities, U.S. Agency securities guaranteed by the U.S. Government, and certain U.S. Agency/Government Sponsored Enterprise pass-through securities.
  - Under normal circumstances cash represents the overwhelming majority of the Clearing Fund.
  - Assets (securities) are re-priced every night.
  - Haircuts for pledged securities are set forth in Procedure XV of NSCC’s Rules.
  - Initial haircut rates were determined based on a ten-year historical return volatility analysis using a 5 sigma confidence level, plus additional concentration factors if deposits exceed a certain percent of total collateral.
  - Haircut rates are reviewed quarterly.
- Assessment: Observed.

### Recommendation 5 — Financial resources, stress testing, and liquidity
- Requirement summary: A CCP should maintain sufficient financial resources to withstand, at minimum, the default of the participant to which it has the largest exposure in extreme but plausible market conditions.
- Stress testing (Q1):
  - NSCC performs stress testing on a monthly basis.
  - Stress tests cover 50 stress scenarios selected from the past 10 years of historical data and special events such as the 1987 market break.
  - There are 82 scenarios included that have at least some hypothetical component and are not solely based on historical performance.
  - Results are brought to executive management and the DTCC Board's Credit and Market Risk Management Committee; they may not be made known to participants.
  - NSCC engaged an external expert to review models, parameters, scenarios, and frequency; review completed at the end of 2009.
  - Going forward, NSCC will re-evaluate the model, parameters and scenarios annually.
  - Stress testing criteria and assumptions are not disclosed to participants.
- Sufficiency of liquidity resources:
  - Committed liquidity resources:
    - i. cash in the Clearing Fund amounting to US$6.2 billion;
    - ii. funds available for NSCC’s committed liquidity facility in the current amount of US$3.1 billion. If drawn, the line would be collateralized with Clearing Fund securities (US$403 million in U.S. Treasury and Agency securities, end-2008) and the securities that would have been delivered to the defaulting member.
  - Non-committed additional liquidity could be obtained by:
    - i. pledging to end-of-day line banks or repoing remaining securities in the Clearing Fund; and
    - ii. repoing remaining securities that would have been delivered to the defaulting member.
  - NSCC evaluates and reports adequacy of liquidity resources daily and monthly using a back test of actual settlement obligations with historical CNS prices.
  - Beginning in 2009, NSCC began evaluating sufficiency to cover the failure of the largest affiliated family.
    - A back test study for January through April 2009 showed sufficient liquidity (using the current committed facility amount) to cover failure of the largest affiliated family 99.98 percent of the time.
- Sufficiency of resources to cover losses:
  - In the event of a Member failure, after closing out a defaulting Member’s positions, any loss not satisfied from the defaulting Member’s Clearing Fund deposit would be satisfied from, in order:
    1. resources available under applicable cross-guaranty agreements:
       - multilateral netting contract and limited cross-guaranty agreement with DTC, FICC and OCC to make payments for remaining unsatisfied obligations to the extent excess resources of the defaulting participant exist;
       - NSCC and OCC agreement providing for payments to each other relating to settlement of certain option exercises and assignments in the event of a mutual participant’s failure.
    2. use of NSCC retained earnings;
    3. use of non-defaulting members’ clearing fund deposits.
  - NSCC back and stress tests its Clearing Fund monthly to measure sufficiency to cover losses in the event of the failure of its largest Member under extreme but plausible circumstances.
  - 2009 back test results showed the sum of all back test losses of NSCC Members was less than the sum of the required Clearing Fund deposits of Members.
- Ability to draw on financial resources (Q2):
  - Legal enforceability of collateral arrangements is supported by the UCC and generally New York contract law.
  - Insolvency laws can limit a secured party’s rights, but FDICIA provisions, the Code, FDIA and SIPA contain specific provisions to protect clearing agency close-outs (including access to and retention of collateral).
- Immediate availability of financial resources (Q3):
  - NSCC reports all resources relied upon to cover default losses are liquid and readily available.
  - Clearing Fund cash is held in a tri-party repurchase agreement overnight and returned to an NSCC bank account during the day for immediate access.
  - Securities in the Clearing Fund and collateral supporting long allocations of the defaulting Member are held at DTC with immediate access available if a line needs to be drawn.
  - NSCC has a US$3.1 billion committed end-of-day line of credit with a consortium of banks.
  - NSCC conducts tests with liquidity provider banks to ensure timely drawings.
  - Cross-guarantee arrangements exist with other clearing agencies to share excess net collateral of a common defaulting Member.
- Assessment: Broadly observed.
- Comments / Recommended improvements for full compliance:
  1. consider additional liquid financial resources to use in case of extreme situations where repo market would not be available;
  2. consider conducting more frequent stress testing than once a month, in particular, in times of unusual market volatility.

*Source: _cr10129 - Section 17A of the Exchange Act requires that the rules of the clearing agency provide that*

### 3. disclose stress testing assumptions to participants.

### 3. disclose stress testing assumptions to participants.

### Recommendation 6 — Default procedures: definition, enforceability, internal plans, transparency
- Findings:
  - NSCC’s rules define default and empower the Board (or delegated Committee) to suspend/prohibit participants for enumerated circumstances including regulatory expulsion/suspension, default in delivering funds or securities, and extreme financial or operational difficulties.
  - NSCC Rule 22A (“Procedures for When the Corporation Ceases to Act”) requires close-out to be completed as promptly as possible and permits application of liquidation proceeds and all other funds/assets of the defaulting Member to meet obligations.
  - External mechanisms: SIPC organizes distribution of customer cash and securities and provides insurance coverage of up to US$500,000 of the customer’s net equity balance.
  - Legal enforceability rests on 2005 Amendments, the Code, FDIA, SIPA, and Uniform Commercial Code (Articles 8 and 9), offering high degree of assurance for close-out and netting and for liens/collateral protections.
  - NSCC maintains a comprehensive closeout management framework, conducts periodic tests for closing out accounts and borrowing under liquidity arrangements, and reviews closeout procedures at least once per year.
  - Key aspects of close-out procedures are in NSCC’s Rules and Important Notices, publicly available on DTCC’s website.
- Assessment: Observed.
- Comments: (none beyond findings in source)

### Recommendation 7 — Asset custody and investment of CCP resources
- Findings:
  - Clearing Fund cash held at two private commercial banks; securities deposited as Clearing Fund collateral held at DTC and pledged to NSCC; portion of Clearing Fund cash may be held in a DTC sub-account at the Federal Reserve Bank of New York.
  - Risk Management monitors custodian banks and notifies Treasury Operations on significant changes.
  - Investment Policy (approved by Audit Committee) permits direct investments readily accessible for liquidity as pledged securities under committed liquidity facilities.
  - Typical investments: debt obligations of the U.S. Government or U.S. Government Agencies subject to reverse repurchase agreements (“repos”); direct purchase of debt obligations of the U.S. Government.
  - Risk-minimizing features for repos:
    - principal counterparties (not agents);
    - maturity limited to the next business day;
    - tri-party custodial agreements;
    - repo counterparties must have long-term debt rating of A or better;
    - collateral market value must be ≥ 102 percent of cash invested.
  - When repos unavailable, funds may be placed in overnight commercial paper sweep accounts (unsecured) with custodian banks approved by Risk Management following thorough financial reviews.
  - Credit limits by counterparty are established and monitored daily across DTCC subsidiaries.
- Assessment: Observed.
- Comments:
  - NSCC should continue to monitor and mitigate risks from holding assets at only two commercial banks.
  - NSCC should avoid to the largest extent possible unsecured investments.

### Recommendation 8 — Operational risk management and business continuity
- Findings:
  - Business continuity organized at holding company (DTCC) level; DTC, NSCC, FICC are separate applications on same mainframe with clear separation of applications.
  - Permanent groups: Operational Risk Group, Internal Risk Management Committee, high-level Security Committee, Internal Audit, independent accountants.
  - DTCC has formal BCP; operates data centers and staff in multiple locations; out-of-region data centre is a warm site with 2 hour recovery capability; out-of-region business operations sites are hot sites.
  - Data centre failover tests conducted 3–4 times per year. Business Operations tests conducted throughout the year.
  - DTCC updates an annual white paper describing BCP and an “Out-of-Region” guide for clients.
  - Contingency tests are not conducted with participants except connectivity testing on joining and annually for participants deemed critical; DTCC does not test back-up sites to participant backup sites for critical participants.
  - Operational reliability: NSCC reported no key system failures nor data loss in the last year; system availability for NSCC systems is 100percent year to date.
  - Processing capacity: NSCC can process in excess of 2 times their respective historical peaks in a processing day.
  - Capacity/utilization reports and an annual Capacity Planning Report are produced and presented to the Board and the SEC.
- Assessment: Observed.
- Comments:
  - Contingency plans and backup facilities for failure of key systems are not tested and reviewed with participants (only connectivity is tested with critical participants).
  - DTCC should test its back-up sites to critical participants’ backup sites.

### Recommendation 9 — Money settlement arrangements, central bank usage, and settlement banks
- Findings:
  - NSCC uses the central bank model with a tiered settlement arrangement, relying on DTC as settlement agent for end-of-day funds settlement on the Federal Reserve’s NSS (CCP is always in a flat position).
  - NSCC and DTC separately calculate net money positions; DTC (as Settlement Agent under OC 12) submits debit/credit files by settlement bank to FRBNY; Federal Reserve processes and makes all debits and credits final at the time they are made on NSS.
  - Settling Bank Only Members must: be a bank or trust company member, have direct access to a Federal Reserve account and Fedwire Funds and National Settlement Services, and meet NSCC standards including a Tier 1 risk-based capital ratio for regulatory purpose of a least 6 percent.
  - NSCC does not monitor the distribution of exposures among settlement banks.
- Assessment: Observed.
- Comments:
  - As systemically important CCP, NSCC should have direct access to Federal Reserve accounts and services; current legal constraints mean this can only be met by NSCC being chartered as a bank or by statutory changes granting the Federal Reserve legal authority to provide accounts and services to NSCC.

### Recommendation 10 — Physical delivery obligations and DVP
- Findings:
  - NSCC becomes counterparty when trade guaranty applies; obligation to deliver securities arises after receiving assets from original counterparty unless default rules activated.
  - Securities delivered to NSCC are promptly redelivered via allocation algorithm; Members must take and pay for securities allocated in the CNS process.
  - NSCC utilizes a “modified” delivery versus payment mechanism: securities deliveries/movements are not final until the “effective time” (generally when NSCC has been paid or is in a credit position with respect to a Member or its settling bank); end-of-day net funds payments made over NSS.
  - Book-entry CNS movements avoid storage/delivery risks for physical certificates.
- Assessment: Observed.

### Recommendation 11 — Links (domestic and cross-border): arrangements, legal support, monitoring, cooperation
- Findings — OCC (Accord):
  - OCC is not a Member of NSCC but is a DTC Participant; the Accord provides a two-way guaranty between OCC and NSCC for mutual participant failures with formulas determining payments (lesser of net member debit or calculated margin requirement/credit as defined in the Accord).
  - OCC margins E&A activity through settlement date; NSCC collects risk-based margin on entire portfolio. Amendments allow using stock deposited as margin with OCC to meet NSCC settlement obligations.
  - The Accord is governed by New York law and approved by the SEC.
- Findings — CDS (Canada):
  - CDS is both Member of NSCC and DTC Participant; operates New York Link Service enabling CDS Participants to clear and settle OTC trades through sponsored accounts; NSCC looks only to CDS for satisfaction of clearance and settlement obligations of its participants.
  - CDS provides collateral and funds its NSCC deficit daily; NSCC holds all risk-based Clearing Fund collateral from CDS’s sponsored participants.
  - New York Participants may face expanded collateral requirements, which may be up to twice the normal requirement, to participate in the NSCC/CDS link.
  - CDS is monitored via membership review and annual financial condition review; legal opinion (including conflict of laws) required from CDS.
- Ongoing monitoring:
  - Risk Management engages with OCC and CDS counterparts, subscribes to third party ratings (OCC currently rated AAA; CDS rated low risk by securities’ depositories raters), and reviews financial condition annually.
- Cooperative oversight:
  - Memorandum of Understanding between U.S. and Canada supports cooperation regarding CDS; OCC and NSCC are registered clearing agencies and SROs under SEC oversight.
- Assessment: Observed.

### Recommendation 12 — Cost-effectiveness
- Findings:
  - NSCC fees are cost based; excess net revenues returned to users via rebates or refunds.
  - DTCC carries out periodic benchmarking studies and pricing reviewed during annual budget process.
  - Participant service-level surveys conducted annually; operational reliability monitored monthly with results reported to IT, product and senior management; annual Capacity Planning Report submitted to Board and regulators.
- Assessment: Observed.

### Recommendation 13 — Governance: transparency, structure, board composition, public interest
- Findings:
  - DTCC is the holding company for DTC, FICC, NSCC with a single governance structure; governance arrangements publicly available and updated yearly (last update October 2009).
  - DTCC common shareholders include approximately 362 banks, broker-dealers, mutual funds and other financial services firms.
  - Board composition: Board of DTCC has 18 members: 14 designated by shareholders (employees of shareholding firms), 2 DTCC executives (CEO and COO), 2 designated by preferred shareholders (NYSE and FINRA). FINRA is not a participant of DTCC or its subsidiaries.
  - Directors elected for a one-year term, typically at April shareholders meeting; Governance Committee recommends nominees to satisfy fair representation under Section 17A and governance best practices.
  - Separation: Chief Risk Officer reports directly to Chairman and CEO; standing Board committees include credit and market risk management, compliance and operational risk management, and core services operations and planning.
  - Management goals set yearly; Compensation Committee (non-management directors) links compensation to performance.
  - Auditors ensure services do not cross-subsidize and risk management financial resources are separately maintained and not co-mingled.
  - Public interest: NSCC’s objectives are based on Section 17A of the Securities Exchange Act; SEC review includes public comment period of at least 21 days for proposed rule changes.
- Assessment: Broadly observed.
- Comments:
  - Governance arrangements for NSCC should be more clearly specified and transparent, including criteria for composition and selection of Board members.

### Recommendation 14 — Disclosure of risk, financials, and RCCP self-assessment
- Findings:
  - NSCC’s rules and procedures are publicly available on DTCC’s website; rules specify when NSCC assumes counterparty exposure and describe default procedures.
  - Important Notices, explanatory service bulletins, and guidelines on risk management measures are posted on DTCC’s website.
  - NSCC provides participants with annual audited financial statements and unaudited financial statements for the first three calendar quarters each year.
  - NSCC completed and disclosed the RCCP key questions answers; self-assessment reviewed by senior management and approved by Board prior to publication; review conducted at least every two years or upon material change.
  - Information provided in English; management responds to participant inquiries and meetings to explain rules and risks.
- Assessment: Observed.

### Recommendation 15 — Regulation and oversight, cooperation, resources, and transparency
- Findings:
  - NSCC is a clearing agency required to register with the SEC under Section 17A and is subject to full regulation under the Exchange Act; Federal Reserve has authority to examine NSCC because it is an affiliate of a state member bank (DTC).
  - At the SEC, an estimated 51 staff are involved in whole or in part in clearing oversight (approximately 23 full-time equivalent staff positions).
  - Between FRBNY and the Board, about 20 budgeted officers and staff work full time on policy and oversight for payment, clearing and settlement; about 15 supervisory staff dedicated full time to specific private sector systems; 9 examiners broadly dedicated to payment and settlement infrastructure; 10 more focused on systemically important clearing activities by banks and affiliates.
  - SEC’s objectives, responsibilities and policies are public; Federal Reserve publishes policy on Payments System Risk and operating circulars; NSCC must file and make public proposed rule changes.
  - NSCC subject to recordkeeping requirements under Exchange Act Section 17 and SEC rules, with records preserved for not less than five years (first two years in an “easily accessible place”).
  - SEC conducts onsite examinations; SEC Automation Review Policy (ARP) requests real-time notifications of significant system outages and IT-specific onsite examinations.
  - Domestic coordination: SEC and Federal Reserve have exam-specific information-sharing arrangements; cross-border cooperation via SEC MoUs with non-domestic regulators.
- Assessment: Observed.
- Comments:
  - The SEC has not formally required NSCC to perform a self-assessment against the CPSS-IOSCO recommendations, though SEC staff would consider recommending such a requirement to promote consistency.
  - The Federal Reserve should be provided a legal mandate to oversee NSCC as a systemically important system as a complementary function to existing SEC regulation and supervision.

*Source: _cr10129 - 3. disclose stress testing assumptions to participants. https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10129.pdf*

### 1. Central counterparties should have a well-

### 1. Central counterparties should have a well-founded, clear and transparent legal basis in the relevant jurisdiction.

### Participation requirement
- A CCP should require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in the CCP.
- A CCP should have procedures in place to monitor that participation requirements are met in an on-going basis.
- A CCP’s participation requirements should be objectives, publicly disclosed, and permit fair and open access.
- Grading: O

### Measurement and management of credit exposures
- A CCP should measure its credit exposure to its participants at least once a day.
- Through margin requirements, other risk control mechanisms or a combination of both, a CCP should limit its exposure to potential losses from defaults of its participants in normal market conditions so that the operation of the CCP would not be disrupted and non-defaulting participants would not be exposed to losses that they cannot anticipate or control.
- Grading: O
- Comment: "The definition of margins and clearing funds in the public assessment should be made more consistent in line with international usage/practice and the definitions provided in the glossary of the RCCP. It will be beneficial (especially for non-U.S. CCPs that intend to establish links with NSCC and FICC-GSD) to clarify the terminology. NSCC management stated that they would clarify this terminology in the next revision of the self-assessment."

### Margin requirements
- If a CCP relies on margin requirements to limit its credit exposures to participants, these requirements should be sufficient to cover potential exposures in normal market conditions.
- The models and parameters used in setting margin requirements should be risk-based and reviewed regularly.
- Grading: O

### Financial resources
- A CCP should maintain sufficient financial resources to withstand, at a minimum, the default of a participant to which it has the largest exposure in extreme but plausible market conditions.
- Grading: BO
- Required actions for NSCC to be fully compliant:
  1. consider additional liquid financial resources to use in case of extreme situations where repo market would not be available;
  2. consider conducting more frequent stress testing than once a month, in particular, in times of unusual market volatility; and
  3. disclose stress testing assumptions to participants.
- Comment: "NSCC’s liquidity can be increased by repoing the securities in the Clearing Fund or the unpaid allocations of the defaulting members. However, this arrangement cannot be considered as a committed line, since there is no complete assurance that the repo markets would be effective in extreme market situations."

### Default procedures
- A CCP default procedures should be clearly stated, and should ensure that the CCP can take timely action to contain losses and liquidity pressure and to continue meeting its obligations.
- Key aspects of the default procedures should be publicly available.
- Grading: O

### Custody and investment risk
- A CCP should hold assets in a manner whereby risks of loss or of delay in its access to them is minimized.
- Assets invested by a CCP should be held in instruments with minimal credit, market and liquidity risks.
- Grading: O
- Comment: "NSCC should continue to monitor and mitigate the potential risks which result from holding assets at only two commercial banks. Furthermore, NSCC should avoid to the largest extent possible unsecured investments."

### Operational risk
- A CCP should identify sources of operational risk and minimize them through the development of appropriate systems, controls and procedures and procedures.
- Systems should be reliable and secure, and have adequate, scalable capacity.
- Business continuity plans should allow for timely recovery of operations and fulfillment of a CCP’s obligations.
- Grading: O
- Comment: "Contingency plans and backup facilities for the failure of key systems are not tested and reviewed with participants (only connectivity is tested with the critical participants)."
- Comment on NSCC arrangements: "The data centers in the New York region act as a single data centre and provide secondary back-up to both systems and the entire facility. In the event that New York region data centers are not available, the out of region recovery site is available to cover all critical systems. Failover and recovery of any data centre does not require changes by participants. The network automatically reroutes the client traffic from their primary or backup sites to the recovered data centre. Therefore, it is not reliant to test the failure of one key system with the participants."
- Recommended action: "DTCC should test its back-up sites to critical participants’ backup sites."

### Money settlements
- A CCP should employ money settlement arrangements that should eliminate or strictly limit its settlement bank risks, that is, its credit and liquidity risk from the use of banks to effect money settlements with its participants.
- Funds transfers to a CCP should be final when effected.
- Grading: O
- Comment: "As a systemically important CCP, NSCC should have direct access to Federal Reserve accounts and services. However, due to current legal constraint, this recommendation can only be met by either NSCC being chartered as a bank or statutory changes to grant the Federal Reserve legal authority to provide accounts and services to NSCC."

### Physical deliveries
- A CCP should clearly state its obligations with respect to physical deliveries. The risks from these obligations should be identified and managed.
- Grading: O

### Risks in links between CCPs
- CCPs that establish links either cross-border or domestically to clear trades should evaluate the potential sources of risks that can arise, and ensure that the risks are managed prudently on an ongoing basis.
- There should be a framework for cooperation and coordination among the relevant regulators and overseers.
- Grading: O

### Efficiency
- While maintaining safe and secure operations, CCPs should be cost-effective in meeting the requirements of participants.
- Grading: O

### Governance
- Governance arrangements for a CCP should be clear and transparent to fulfill public interest requirements and to support the objectives of owners and participants.
- In particular, they should promote the effectiveness of a CCP’s risk management procedures.
- Grading: BO
- Comment: "For the observance of this recommendation, the governance arrangements for NSCC should be more clearly specified and transparent, including criteria for the composition and selection of Board members."

### Transparency
- A CCP should provide market participants with sufficient information for them to identify and evaluate accurately the costs and risks associated with using its services.
- Grading: O

### Regulation and oversight
- A CCP should be subject to transparent and effective regulation and oversight.
- In both a domestic and an international context, central banks and securities regulators should co-operate with each other and with other relevant authorities.
- Grading: O
- Comment: "The SEC has not formally required NSCC to perform a self-assessment with respect to the CPSS-IOSCO recommendations. However, the SEC reviews the self-assessments currently prepared by the clearing agencies. Furthermore, compliance with SEC rules ensures compliance with most of the RCCPs. SEC staff stated that it would consider recommending to the Commission that clearing agencies be required to perform self-assessments against the CPSS-IOSCO recommendations by rule or by policy statement. SEC is encouraged to do so, also with a view to encouraging consistency in the assessment of globally relevant systems and to facilitate co-operation with other authorities."
- Recommended additional oversight: "The Federal Reserve should be provided a legal mandate to oversee NSCC which is systemically important system as a complementary function to the existing SEC regulation and supervision."

### Actions to Improve Compliance (selected items from Table 3)
- Recommendation 3: Credit exposures management
  - Align the definitions of margins and clearing funds with international ones.
- Recommendation 5: Financial resources
  - Consider additional liquid financial resources to use in case of extreme situations where repo agreements cannot be used.
  - Minimize its exposure and concentration risk vis-à-vis the two banks.
  - Consider conducting more frequent stress testing than one a month, in particular, in times of unusual market volatility.
  - Disclose stress testing assumptions to participants.
- Recommendation 7: Custody and investment risk
  - Continue to monitor and mitigate the potential risks, which result from holding assets at only two commercial banks.
  - Avoid to the largest extent possible unsecured investments.
- Recommendation 8: Operational risk
  - Test and review NSCC backup sites to critical participants’ backup sites.
- Recommendation 9: Money settlements
  - Provide NSCC direct access to Fedwire Securities to settle DVP transactions in central bank money.
- Recommendation 13: Governance
  - NSCC’s governance arrangements should be more clearly specified and transparent, including criteria for the composition and selection of Board members.
- Recommendation 15: Transparency and oversight
  - SEC should formally required NSCC to perform a self-assessment with respect to the CPSS-IOSCO recommendations.
  - Ensure the compliance of the SEC rules with the CPSS/IOSCO Recommendations.
  - Provide legal mandate to the Federal Reserve to oversee NSCC, which is systemically important system, as a complementary function to the existing SEC regulation and supervision.

### Authorities’ response to the assessment
- "The U.S. authorities welcome the IMF’s assessment of the National Securities Clearing Corporation (NSCC) against the CPSS-IOSCO Recommendations for Central Counterparties (RCCP).  We appreciate the significant undertaking associated with an FSAP review of the biggest financial sector in the world, as well as the challenges that accompany the first assessment of a large advanced country in the wake of the crisis."
- "The authorities are pleased to note that the IMF’s assessment reflects the high degree of compliance of NSCC with the RCCPs, and will work with NSCC in considering the assessment’s specific comments and recommendations."
- "Again, the authorities appreciate the significant undertaking associated with the assessment of NSCC and the contribution that the assessment process makes to the stability and effective regulation and oversight of systemically-important payment, clearing and settlement systems."

*IMF staff assessment of NSCC against the CPSS-IOSCO Recommendations for Central Counterparties (excerpt).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10129.pdf_