Moody’s Investors Services just gave the Depository Trust & Clearing Corporation a thumbs up on its recent recovery and wind-down plans.
On August 27 and 28, the US Securities and Exchange Commission (SEC) authorized The Depository Trust & Clearing Corporation’s (DTCC, Aa3 stable) three clearing agencies to implement rule changes that will establish recovery and wind-down plans and more closely align the clearing agencies’ respective loss allocation rules with each other. Moody’s said that these rule changes are credit positive for DTCC and its clearing agencies because they will more clearly delineate their extensive power and authority to deal with member defaults and non-default events.
Also, the ratings agency said the rules’ implementation will provide clearing core transparency over how the clearing agencies’ would plan to recover or wind down following an extremely stressful event.
“Establishing comprehensive recovery and wind-down plans and clear rules on loss allocations is especially important for DTCC’s clearing agencies, since they are systemically important financial market utilities that perform essential functions in the US capital markets,” Moody’s wrote in an alert. “National Securities Clearing Corporation (P-1, clearing counterparty rating Aaa stable) is the sole clearing service with authorization from the SEC to clear all US cash equities. Fixed Income Clearing Corporation’s (P-1 stable) Government Securities Division (clearing counterparty rating Aaa stable) and Mortgage-Backed Securities Division clearing counterparty rating Aaa stable) clear US government securities and government agency mortgage-backed securities, and are the sole clearing services with authorization from the Federal Reserve Bank of New York to clear primary dealer transactions. The Depository Trust Company (P-1, clearing counterparty rating Aaa stable) is the central securities depository for almost all US equities, corporate bonds and municipal bonds.”
In many cases the recovery and wind-down plans would refer to existing rules and contractual arrangements in a “road map” framework and would be used by the clearing agencies’ boards and management should they encounter scenarios that prevent them from providing critical services and continuing as going concerns. The plans will introduce a market disruption and force majeure rule, which would provide clarity around how the clearing agencies would address extraordinary events that occur outside of their control. Examples of such events include the suspension or limitation of trading or banking in the markets in which they operate and the unavailability or failure of any material payment, bank transfer, wire or securities settlement systems.
Under the new rules, the clearing agencies would be able to suspend services and take (or refrain from taking) any actions they consider appropriate to address, alleviate or mitigate the event and facilitate the continuation of their services. They would also be able to direct their members to take (or refrain from taking) actions that achieve the same result. The incorporation of these plans is credit positive for the clearing agencies because it provides them with a stronger legal basis for the critical decisions they take during extraordinary events that could have significant repercussions for their members.
The new rules include a credit-positive stipulation that members are subject to loss allocation for non-default losses after an initial contribution by the clearing agencies. Non-default losses include damage to physical assets, a cyberattack or custody and investment losses. Introducing clear rules on how much the clearing agencies would contribute before mutualizing non-default losses to their members is credit positive because it will cap the clearing agencies’ loss exposure in such cases. Existing rules are somewhat ambiguous with respect to member loss-allocation in such circumstances, and in practice the clearing agencies have generally used their own resources in such cases, for example following Superstorm Sandy in 2012.
