FINANCIAL SECTOR ASSESSMENT PROGRAM 

UNITED STATES OF AMERICA 

THE FIXED INCOME CLEARING CORPORATION–GOVERNMENT 

SECURITIES DIVISION OBSERVANCE OF THE CPSS/IOSCO

RECOMMENDATIONS FOR CENTRAL COUNTERPARTIES

REPORT ON STANDARDS AND 

CODES (ROSC)

JULY 2010 

INTERNATIONAL MONETARY FUND

MONETARY AND CAPITAL MARKETS DEPARTMENT

 Contents Page 

Glossary .....................................................................................................................................3

I. Introduction and Methodology ...............................................................................................4

II. Institutional and Market Structure—Overview .....................................................................4

III. Main Findings ......................................................................................................................5

IV. Authorities’ Response to the Assessment ..........................................................................10

Tables 

1. Key Statistics of FICC-GSD, 2007–09 ..................................................................................5

2. Summary of Observance with the CPSS-IOSCO Recommendations ...................................7

3. Actions to Improve Compliance ..........................................................................................10
GLOSSARY

CCP Central Counterparty 

CFTC Commodity Futures Trading Commission 

CME Chicago Mercantile Exchange 

CPSS Committee on Payment and Settlement Systems 

DTC Depository Trust Company 

DTCC Depository Trust and Clearing Corporation 

FICC-GSD Fixed Income Clearing Corporation – Government Securities Division 

FICC-MSBD Fixed Income Clearing Corporation – Mortgage Backed Securities Division 

FSS Fedwire Securities Service 

IMF International Monetary Fund 

IOSCO International Organization of Securities Commission 

NSCC National Securities Clearing Corporation 

RCCP Recommendation for Central Counterparties 

RSSS Recommendation for Securities Settlement Systems 

SEC Securities and Exchange Commission 

SSS Securities Settlement System 
 4

I. INTRODUCTION AND METHODOLOGY

1. The Fixed Income Clearing Corporation–Government Securities Division 

(FICC-GSD) observes the majority of the recommendations and broadly observes the others 

of the CPSS-IOSCO Recommendations for central counterparties (RCCPs).1 The system 

properly addresses risks related to clearing, custody, financial resources, operations, and 

links. Some measures to improve resilience against financial risks, governance arrangements, 

and transparency have been identified. It is, however, important that FICC-GSD effectively 

takes additional steps to properly address financial risks. It would also be beneficial that the 

Securities and Exchange Commission (SEC) requires FICC-GSD compliance with RCCPs, 

and the Federal Reserve is provided with a legal mandate to oversee FICC, as a 

complementary function to the existing SEC regulation and supervision.

2. The assessment of FICC-GSD was undertaken in the context of the IMF Financial Sector 

Assessment Program (FSAP).This assessment only covers FICC-GSD, i.e. the CCP providing 

services for transactions in U.S. Government Treasury and Agency securities. The FICC Mortgage 

Backed Securities Division (MBSD), which is not yet providing CCP services, is not covered by this 

FSAP mission. 

3. Prior to the mission, FICC-GSD conducted a self-assessment following the RCCPs 

methodology published by the CPSS-IOSCO in 2004. The assessment also benefited from 

discussions with the SEC, the Federal Reserve Board and Federal Reserve Bank of New York 

representatives, as well as the operator of FICC and some major participants in the system. 2 Relevant 

authorities and the operator of the system have been very co-operative in providing additional 

confidential information and organizing additional meetings, when required. 

4. Given the organization of the Depository Trust & Clearing Corporation (DTCC), the 

assessment of the three entities belonging to the group i.e. the Depository Trust Company (DTC), the 

National Securities Clearing Corporation (NSCC) and the Fixed Income Clearing Corporation (FICC) 

resulted in almost identical recommendations on legal risk (RSSS1 and CCP1), operational risk 

(RSSS11 and RCCP8) governance (RSSS13 and RCCP13), efficiency (RSSS15 and RCCP14) and 

links (RSSS19 and RCCP11). 

II. INSTITUTIONAL AND MARKET STRUCTURE—OVERVIEW

5. The FICC-GSD, wholly-owned subsidiary of DTCC, is a systemically important 

CCP for transactions in U.S. Government Treasury and Agency Securities. It was established 

in 2003 from the merger between the Government Securities Clearing Corporation and the 

Mortgage Backed Securities Clearing Corporation. Its predecessors were established in 1986 

to provide automated trade comparison and settlement services, risk management and 

 

1

 The underlying Detailed Assessment Report was published in May 2010 and is available at 

http://www.imf.org/external/pubs/cat/longres.cfm?sk=23872.0. 

2

 This assessment was carried out by Daniela Russo (external expert) and overseen by Elias Kazarian (IMF). 
 5

operational efficiency to the U.S. Government securities market. Key figures of FICC’s 

activities are provided in Table 1. 

Table 1. Key Statistics of FICC-GSD, 2007–09 

2007 2008 2009

1. Number of contracts and transactions cleared (millions) 30.4 34.4 28.7

2. Value of contracts and transaction cleared (USD billions) 1,006,100 1,014,500 905,100

3. Average daily value of transactions (USD billions) 4 4 3,6

4. Peak value of transactions (USD trillions) 5.9 7.0 5.8

5. Total number of clearing members, of which: 103 97 98

 5.1. Foreign clearing members 11 11 13

6.Clearing fund (USD millions) 1/ 13,701.7 18,896.8 14,141.4

 Source: DTCC. 

 1/ Includes the value of cash and securities.

 

6. FICC-GSD is a registered as a clearing agency and regulated and supervised by the SEC 

(section 17A of the Securities and Exchange Act). Although the SEC has not formally required FICCGSD to perform a self-assessment with respect to the RCCPs, compliance with SEC rules assures 

compliance with most of the recommendations. FICC-GSD, as an affiliate of DTCC, is also subject to 

the oversight of the Federal Reserve.

III. MAIN FINDINGS

Legal Framework (Rec. 1) 

7. FICC’s activities are governed by a consistent set of laws, regulations, and 

contractual arrangements that form a sound legal foundation for clearing, settlement, and 

custody activities. This information is publically available and readily accessible to system 

participants.

Participation requirements (Rec. 2) 

8. The FICC-GSD’s access and exit criteria are publicly disclosed. FICC-GSD requirements 

for participants’ financial resources and credit worthiness are based on the legal nature of the 

participating entities as well as the services used. FICC-GSD also assesses the participants’ 

operational reliability. 

Financial risk management (Rec. 3-6) 

9. FICC-GSD daily measures its exposures to participants and requires payment of 

contributions to the clearing fund. It can, when deemed appropriate, conduct intraday calls for 

additional clearing funds. FICC-GSD members’ positions are monitored by DTCC risk management 

system. FICC mitigates its credit exposures on the basis of the clearing fund requirements, as well as 

cross-guarantee and cross-margining arrangements. The clearing fund is composed of cash and 

securities. In case of insufficient cash resources, FICC-GSD seeks to liquidate the available collateral 

via repo arrangements, although they are not committed facilities, and there is no certainty that they 

would be available in extreme but plausible scenario. The U.S. legal framework ensures the legal 

enforceability of FICC-GSD’s collateral arrangements. 
 6

Custody and investment risks (Rec. 7) 

10. FICC-GSD’s securities and cash of the clearing fund are held in dedicated accounts with the 

two major clearing banks. Cash investments are authorized under a policy, approved by DTC’s Audit 

Committee, which establishes principles for minimizing the risk of losses stemming from unsecured 

investments. The Audit Committee policy also establishes credit limits by counterparties to ensure 

that investments do not exceed a certain level of concentration. 

Operational risk (Rec. 8) 

11. FICC-GSD business continuity arrangements are developed at the level of DTCC holding 

company, including all sites, networks control centers and back-up sites as a unified complex. These 

arrangements are based on the authorities’ requirements. DTCC has in place adequate procedures to 

identify and minimize the sources of operational risk that may arise in the clearing and settlement 

process. Contingency plans and back-up facilities are regularly tested and maintained to ensure the 

resilience of FICC-GSD. 

Money settlements (Rec. 9) 

12. For its end-of-day funds settlement, FICC-GSD uses central bank money with a tiered 

settlement arrangement relying on DTC as settlement agent. The end of day money settlement occurs 

via the settlement banks at the Federal Reserve’s National Settlement Service (NSS). 

Physical deliveries (Rec. 10) 

13. The FICC-GSD’s rules clearly set forth its obligations with respect to securities deliveries. 

In order to protect itself from principal risk, FICC–GSD continuously monitors participants’ 

exposures and collects margin against failed items. 

Risks in links between CCPs (Rec. 11) 

14. FICC-GSD has set up a cross-margining arrangement with the Chicago Mercantile 

Exchange (CME) so that eligible positions at the CME are offset against eligible positions at FICCGSD. For the purpose of this arrangement, a cooperative framework between the Commodity Futures 

and Exchange Commission (CFTC), overseeing the CME, and the SEC, overseeing the FICC-GSD is 

in place. 

Efficiency (Rec. 12) 

15. FICC-GSD regularly reviews its pricing levels, which are cost-based. The cost allocation 

methodology is part of a regular review by both internal and external auditors. FICC-GSD also 

conducts benchmark studies to assess cost effectiveness in the market. DTCC ensured that each 

service of the DTCC group does not cross-subsidise the cost and expenses of the others and that the 

risk management financial resources are not commingled. 

Governance (Rec. 13) 

16. There is a single governance structure for all DTCC subsidiaries, including FICC-GSD. 

Although DTCC’s governance arrangements are made public, not all the relevant information is 

publicly available. DTCC is currently in the process of reviewing its governance arrangements. Public 

interest is taken into account in a number of ways, including the requirement that all proposed 
 7

rule changes of NSCC be filed with the SEC and noticed for public comment, and by 

discussion with industry participants. 

Transparency (Rec. 14) 

17. Market participants are provided with sufficient information regarding FICC-GSD risk 

management. The regulations, rules, and procedures governing FICC-GSD are publicly available, as 

are annual audited financial statements, and participants receive non audited quarterly financial 

statements. The FICC-GSD has completed and published on its website a self-assessment following 

the RCCPs assessment methodology. 

Regulation and oversight (Rec. 15) 

18. The responsibilities and objectives of relevant public authorities with regard to securities 

clearing and settlement systems are clearly defined and publicly disclosed. The SEC supervises 

FICC-GSD given its status of registered clearing agency. In conducting its oversight responsibilities, 

the SEC applies other standards than the RCCPs, although some of the issues covered in the RCCPs 

are also addressed by the standards under the securities laws that are applied by the SEC. As an 

affiliate of DTC, the Federal Reserve has the legal power to examine FICC. The SEC and the Federal 

Reserve have signed exam-specific information sharing arrangements regarding the oversight of 

FICC-GSD. 

Table 2. Summary of Observance with the CPSS-IOSCO Recommendations 

Responsibility Assessment 

Legal risk 

1. A CCP should have a well founded, transparent, 

and enforceable legal framework for each aspect of 

its activities in all relevant jurisdictions. 

FICC-GSD’s activities are governed by a consistent 

and transparent set of laws, regulations, and 

contractual arrangements that form a sound legal 

basis. 

Participation requirement 

2. 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 on an ongoing basis. A CCP’s 

participation requirements should be objective, 

publicly disclosed, and permit fair and open access. 

FICC submitted a rule filing to SEC for expanding its 

membership to include some buy-side unregistered 

investment pools (UIP), such as hedge funds, as a 

new membership category. In its filing to the SEC, 

FICC stated it will impose additional risk 

management measures with respect to UIP 

members, including calculating their Clearing Fund 

requirements at a higher value at risk confidence 

level and instituting an additional qualitative 

assessment requirement. 

Measurement and management of credit 

exposures 

3. A CCP should measure its credit exposures 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 

The definition of margins and clearing funds in the 

published assessment should be made more 

consistent in line with international usage/practice 

and the definitions provided in the glossary of the 

RCCP. 
 8

Responsibility Assessment 

normal market conditions so that the operations of 

the CCP would not be disrupted and non-defaulting 

participants would not be exposed to losses that 

they cannot anticipate or control. 

Margin requirements 

4. If a CCP relies on margin requirements to limit its 

credit exposures to participants, those 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. 

FICC-GSD relies on margin requirements to collect 

contributions to the clearing fund to cover its 

exposure vis-à-vis its members. The clearing fund is 

composed of deposits from the members either in 

cash or in certain securities. FICC-GSD tests 

regularly the risk-based margin requirements. 

Financial resources 

5. A CCP should maintain sufficient financial 

resources to withstand, at a minimum, a default by 

the participant to which it has the largest exposure 

in extreme but plausible market conditions. 

FICC-GSD’s liquidity need is highly concentrated to 

the two major clearing banks. 

FICC-GSD’s liquidity can be increased by repoing 

the securities in the clearing fund. 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 

6. A CCP’s default procedures should be clearly 

stated, and they should ensure that the CCP can 

take timely action to contain losses and liquidity 

pressures and to continue meeting its obligations. 

Key aspects of the default procedures should be 

publicly available. 

FICC-GSD’s default procedures are clearly stated in 

the system’s rules and procedures, which would 

allow FICC-GSD to suspend or terminate a member 

from any service, should it become subject to 

insolvency proceedings or fail to perform its 

obligations to the system. The U.S. legal framework 

provides a high degree of assurance with regard to 

the enforceability of default procedures. 

Custody and investment risk 

7. A CCP should hold assets in a manner whereby 

risk 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. 

FICC-GSD’s assets are highly concentrated to the 

two major clearing banks, and not all FICC-GSD 

investments are secured. 

Operational risk 

8. A CCP should identify sources of operational risk 

and minimize them through the development of 

appropriate systems, controls, 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. 

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). 
 9

Responsibility Assessment 

Money settlements 

9. A CCP should employ money settlement 

arrangements that eliminate or strictly limit its 

settlement bank risks, that is, its credit and liquidity 

risks from the use of banks to effect money 

settlements with its participants. Funds transfers to 

a CCP should be final when effected. 

FICC-GSD uses the central bank model with a 

tiered settlement arrangement relying on DTC as 

settlement agent, for its end-of-day funds 

settlement. 

Physical deliveries 

10. A CCP should clearly state its obligations with 

respect to physical deliveries. The risks from these 

obligations should be identified and managed. 

FICC-GSD does not have direct access to Fedwire 

Securities and Fedwire Funds services. Such 

access would allow FICC-GSD to settle DVP in 

central bank money and reduce the settlement 

concentration to the two clearing banks. 

Risks in links between CCPs 

11. 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 between the relevant regulators 

and overseers.

FICC-GSD has appropriate risk management 

procedures in place to identify and evaluate the 

risks from the links, and there is a supervisory 

coordination between CFTC and SEC for the links to 

CME. 

Efficiency 

12. While maintaining safe and secure operations, 

CCPs should be cost-effective in meeting the 

requirements of participants. 

FICC-GSD regularly reviews its pricing levels, which 

are cost-based. It also conducts benchmark studies 

to assess cost effectiveness in the market. 

Governance 

13. 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. 

FICC-GSD’s governance arrangements are not 

sufficiently specified and transparent, including 

criteria for the composition and selection of Board 

members. 

Transparency 

14. A CCP should provide market participants with 

sufficient information for them to identify and 

evaluate accurately the risks and costs associated 

with using its services. 

The regulations, rules, and procedures governing 

FICC-GSD are publicly available, as are audited 

annual financial statements, and participants receive 

non audited quarterly financial statements. 

Regulation and oversight 

15. 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 cooperate with 

each other and with other relevant authorities. 

The SEC has not formally required FICC-GSD to 

perform a self-assessment based on the RCCPs, 

but compliance with SEC rules ensures compliance with 

most of the recommendations.
 10

Table 3. Actions to Improve Compliance 

Reference 

Recommendation Recommended Action 

Recommendation 3: 

Credit exposures 

management 

Align the definitions of margins and clearing funds with international 

standards. 

Recommendation 5: 

Financial resources 

Consider an additional liquidity buffer to deal with extreme situations where 

repo arrangements cannot be used. 

Minimize FICC-GSD’s exposure and concentration risk vis-à-vis the two 

clearing banks. 

Consider conducting more frequent stress testing than once 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 unsecured investments to the largest extent possible. 

Recommendation 8: 

Operational risk 

Test and review FICC-GSD backup sites to critical participants’ backup 

sites. 

Recommendations 10: 

Physical deliveries 

Provide FICC-GSD direct access to Fedwire Securities and Fedwire Funds 

services to settle DVP transactions in central bank money. 

Recommendation 13: 

Governance 

FICC-GSD’s governance arrangements should be more clearly specified and 

transparent, including criteria for the composition and selection of Board 

members. 

Recommendation 15: 

Regulation and oversight 

SEC should formally require FICC-GSD to perform a self-assessment 

based on the RCCPs. 

Ensure the compliance of the SEC rules with the RCCPs. 

Provide legal mandate to the Federal Reserve to oversee FICC-GSD, which 

is systemically important system, as a complementary function to the SEC 

regulation and supervision. 

IV. AUTHORITIES’ RESPONSE TO THE ASSESSMENT

19. The U.S. authorities welcome the IMF’s assessment of the FICC-GSD against the 

RCCPs. 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 FICC-GSD with 

the RCCPs, and will work with FICC-GSD in considering the assessment’s specific 

comments and recommendations. Again, the authorities appreciate the significant 

undertaking associated with the assessment of FICC-GSD and the contribution that the 

assessment process makes to the stability and effective regulation and oversight of 

systemically-important payment, clearing and settlement systems.

FINANCIAL SECTOR ASSESSMENT PROGRAM 

UNITED STATES OF AMERICA 

THE DEPOSITORY TRUST COMPANY’S OBSERVANCE OF THE 

CPSS-IOSCO RECOMMENDATIONS FOR SECURITIES 

SETTLEMENT SYSTEMS

REPORT ON STANDARDS AND 

CODES (ROSC)

JULY 2010 

INTERNATIONAL MONETARY FUND

MONETARY AND CAPITAL MARKETS DEPARTMENT

Contents Page 

Glossary .....................................................................................................................................3

I. Introduction and Methodology ...............................................................................................4

II. Institutional and Market Structure—Overview .....................................................................4

III. Main Findings ......................................................................................................................5

IV. Authorities’ Response to the Assessment ..........................................................................11

Tables 

1. Key Statistics of Depository Trust Company (DTC), 2007–09 ............................................5 

2. Summary of Observance with the CPSS-IOSCO Recommendations ..................................8

3. Actions to Improve Compliance .........................................................................................10
3 

GLOSSARY

CCP Central Counterparty 

CPSS Committee on Payment and Settlement Systems 

CSD Central Securities Depository 

DTC Depository Trust Company 

DTCC Depository Trust and Clearing Corporation 

DVP Delivery-versus-Payment 

FOP Free of Payment 

FSS Fedwire Securities Service 

IMF International Monetary Fund 

IOSCO International Organization of Securities Commission 

ISO International Organisation for Standardisation 

NSCC National Securities Clearing Corporation 

NSS National Settlement Service 

NYSBD New York State Banking Department 

NYSE New York Stock Exchange 

RCCP Recommendation for Central Counterparties 

RSSS Recommendation for Securities Settlement Systems 

SEC Securities and Exchange Commission 

SWIFT Society for Worldwide Interbank Financial Telecommunication 
 4

I. INTRODUCTION AND METHODOLOGY

1. The assessment of the Depository Trust Company (DTC) against the CPSS-IOSCO 

Recommendations for Securities Settlement Systems (RSSSs)1 reveals that the system 

observes the recommendations, although some enhancements would allow DTC to increase 

its compliance level with all the recommendations. More precisely, actions need to be 

undertaken to improve its risk resilience by strengthening the stress testing, DTC’s financial 

and liquidity resources, in particular, to address the problem that could arise when money 

market does not work smoothly and equities repo cannot be used to raise equities or cash. 

Additional improvements would be to enhance governance arrangements, develop 

procedure for intraday finality for cash settlement. 

2. The assessment of DTC was undertaken in the context of the IMF Financial Sector 

Assessment Program (FSAP).2 Prior to the mission, DTC conducted a self-assessment 

following the methodology of the RSSSs published in 2002 by the CPSS-IOSCO. The 

assessors3

 also benefited from discussion with the Securities and exchange Commission 

(SEC), the Federal Reserve Board and Federal Reserve Bank of New York representatives 

(supervision and oversight), as well as with the operator of DTC and some major 

participants in the system. Relevant authorities and the operator of the system have been 

very co-operative in providing additional confidential information and organizing additional 

meetings, when required. 

3. Given the organization of the Depository Trust & Clearing Corporation (DTCC), the 

assessment of the three entities belonging to the group (The Depository Trust Company – 

DTC, the National Securities Clearing Corporation – NSCC and the Fixed Income Clearing 

Corporation – FICC) resulted in almost identical recommendations concerning legal risk 

(RSSS1 and CCP1), operational risk (RSSS11 and RCCP8) governance (RSSS13 and RCCP 

13) and efficiency (RSSS 15 and RCCP14). 

II. INSTITUTIONAL AND MARKET STRUCTURE—OVERVIEW

4. DTC is a limited purpose trust company under the New York Banking Law, a 

clearing agency registered under the Securities Exchange Act, a clearing organization as 

defined by the Federal Deposit Insurance Corporation Improvement Act, a clearing 

corporation as defined in the Uniform Commercial Code, and a member bank of the Federal 

Reserve System. It is a depository and settlement system that effects issuance, transfer, and 

pledge by computerized book-entry system. DTC, the National Securities Clearing 

Corporation (NSCC), and the Government Securities Division of the Fixed Income Clearing 

 

1

 The underlying Detailed Assessment Report was published in May 2010 and is available at 

http://www.imf.org/external/pubs/cat/longres.cfm?sk=23870.0.

2

 For further discussion see the accompanying Financial System Stability Assessment (FSSA), (www.imf.org). 

3

 This assessment was carried out by Daniela Russo (external expert) and overseen by Elias Kazarian (IMF). 
 5

Corporation (FICC-GSD), assessed in the context of the U.S. FSAP, are all wholly owned 

subsidiaries of the Depository Trust and Clearing Corporation (DTCC). The key statistics of 

DTC are provided in Table 1. 

Table 1. Key Statistics of Depository Trust Company (DTC), 2007–09 

2007 2008 2009

1. Value of transactions processed (USD trillions) 209.8 181.9 121.8

2. Instructions processed (millions) 324.9 316.6 299.5

3. Average value of securities settled (USD billions) 836.0 724.8 483.2

4. Peak value of assets settled (USD billions) 1,322 1,287 791.0

5. Total Value of securities held (USD trillions), of which: 40.0 27.6 33.9

 5.1 Commercial paper 26.7 20.9 15.7

 5.2 Money market certificates of deposits 10.7 12.1 10.4

 5.3 Other money market Instruments securities 20.3 23.3 20.2

6. Number of issues accepted 54,266 53,402 40,067

7. Number of direct participants 467 413 390

8. Overnight credit2

 (USD billions) 1.4 1.9 1.9

9. Collateral provision outstanding (USD millions) 907.00 932.36 1,718.747

 Source: DTCC. 

1. Value of end of day committed credit facility for USD settlements. The facility was not drawn on for any of the days noted. 

The current facility is 364 day facility that expires in May of the following year. 

2. Value of the Participant Fund (all cash). 

5. DTC provides its participants with various settlement services to facilitate the endof-day settlement of obligations resulting from their trading activity in various markets. 

Besides the main settlement services, DTC provides a range of settlement, custody, and taxrelated services for its members. DTC serves three different markets, namely (i) money 

market instruments, (ii) equities, and (iii) corporate and municipal bonds (Table 1). 

6. The oversight, regulation, and supervision of DTC is conducted by different 

authorities owing to the organizational structure of DTC: (i) the Federal Reserve Board that 

derives its supervisory authority from DTC’s membership in the Federal Reserve System as 

a State member bank, (ii) the SEC whose authority stems from DTC’s operations as a 

clearing agency; (iii) the New York Banking State Department (NYSBD) whose 

supervisory authority derives from DTC’s charter as a limited purpose trust company under 

the New York banking law. 

III. MAIN FINDINGS

Legal Framework (Rec. 1) 

7. DTC’s activities are governed by a consistent set of laws, regulations, and 

contractual arrangements that form a sound legal foundation for clearing, settlement and 

custody activities, which are publicly available and readily accessible to system participants. 
 6

Pre-settlement Risk (Rec. 2–5) 

8. DTC does not fully offer trade confirmation services, as it is performed at the broker 

level provided to the NSCC on a “locked-in basis”. OTC equity product and fixed income 

transactions are not matched at the market place of execution. DTC does not match 

settlement instructions prior to settlement. DTC does not monitor settlement fails. For trades 

cleared by NSCC, the CCP monitors settlement fails, the figures of which are available on 

the SEC’s website, and has put in place incentives to settle in time. The settlement cycle for 

trades is generally T+3. Cost-benefit analysis for a shorter settlement fail have been 

conducted under the aegis of SEC. Not all transactions settled by DTC are cleared by NSCC 

or another CCP. For those transactions not cleared by a CCP, neither market participants nor 

U.S. regulators conducted a cost-benefit analysis. 

Settlement Risk (Rec. 6–10) 

9. The majority of securities settled in DTC are represented by physical certificates 

immobilized in the depository, although the trend is towards dematerialization. The vast 

majority of municipal and corporate debt issues distributed through DTC are in book-entry 

only form. Transfer of ownership occurs when securities are transferred between participants 

within the system. DTC relies on a DVP model 2 with securities settled on an intraday gross 

basis and associated funds on a net basis at the end of the day. All valued transactions in 

DTC are settled on a DVP basis. Finality of settlement occurs intraday for securities 

deliveries but at the end of the day for cash transfers outside DTC. To facilitate settlement 

through the day, DTC provides liquidity to participants, based on rigorous risk management 

procedures. DVP transactions are processed by debiting the securities from the account of the 

delivering participant and at the same time crediting the delivering participant the corresponding 

payment amount. DTC then reflects a payment debit and securities credit in the account of the 

receiving participant, treating the securities credit as an incomplete transaction. Should a participant 

default, DTC will be exposed to financial risks depending on its ability to timely liquidate the 

collateral of the defaulting participant. However, full collateralization of any intraday net debit money 

positions assures that, should several major participants fail to pay for their net debit money 

obligations at the end of the day, DTC would have sufficient collateral value (inclusive of haircuts) to 

cover the participants’ unpaid obligation. For cash settlement, DTC relies on settling banks— 

settling for their own and other participants—making the payments from and to DTC’s 

account at the FRBNY. There is a high concentration of payment flows at the top five 

settling banks in DTC. This concentration is currently not monitored by DTC. 

Operational Risk (Rec. 11) 

10. DTCC has developed business continuity arrangements at the level of the holding 

company, covering all sites; networks control centres and business sites as a unified 

complex. In doing so, DTCC has taken into account the requirements of the “Interagency 

paper on sound practices to strengthen the resiliency of the U.S. financial system”.4

 DTCC 

 

4

 “Interagency paper on sound practices to strengthen the resiliency of the U.S. financial system”, Federal 

Reserve Board, Securities and Exchange Commission, Office of the Comptroller of the Currency, 2003. 
 7

has in place adequate procedures to identify and minimize the sources of operational risk 

that may arise in the clearing and settlement process. Contingency plans and back-up 

facilities are regularly tested and maintained to ensure the resilience of DTC. A risk-based 

review of the IT system supporting DTCC functioning is performed by independent external 

auditors. Senior management regularly reviews operational reliability issues. 

Custody Risk (Rec. 12) 

11. DTC operates an indirect holding system where securities (or interest in securities) 

are registered in the name of the direct participants through nominee accounts rather than in 

the name of the end beneficiary. Physical and technical controls as well as periodic audits 

are performed by DTC’s regulators and Internal Audit Department. 

Other Issues (Rec. 13–19) 

12. There is a single governance structure for all the subsidiaries of DTCC. Currently, 

DTCC’s Board is composed of 18 members. Members of the Board are elected by the 

shareholders annually. Although DTCC’s governance arrangements are made public on its 

website, not all the relevant information is publicly available. DTC’s access and exit criteria 

are publicly disclosed and the same eligibility rules apply to all participants depending on 

the scope of the service used regardless of the type, identity and location of the participant. 

DTC reviews in the annual budget process its pricing levels which are cost-based. The cost 

allocation methodology is part of a regular review by both internal and external auditors. 

DTCC ensured that each service of the DTCC group does not cross-subsidise the cost and 

expenses of the others. DTC uses international standards for its cross-border linkages with 

foreign central securities depositories (CSDs). The laws, regulations, rules and procedures 

governing DTC are publicly available. Moreover, following the Federal Reserve Payment 

System Risk Policy, DTC has completed a self assessment following the RSSSs assessment 

methodology. 

13. The responsibilities and objectives of relevant public authorities with regard to DTC 

activities are clearly defined and publicly disclosed. DTC is regulated and overseen by the 

SEC, the Federal Reserve and the NYSBD. The SEC has entered into memoranda of 

understanding with foreign regulators to facilitate the exchange of information with 

authorities of all the countries with which DTC has developed links, except for Peru. 

14. DTC maintains links with 13 foreign CSDs, of which two are bilateral, i.e., both 

inbound link (foreign CSD opened accounts at DTC) and outbound link (DTC opened 

accounts with a foreign CSD). For inbound links, linked CSDs are treated as other 

participants in DTC, while for outbound links DTC conducts an assessment of the risks 

associated with the establishment of the link before allowing its participants to process 

transactions with a foreign CSD’s participants. 
 8

Table 2. Summary of Observance with the CPSS-IOSCO Recommendations

Responsibility Assessment 

Legal risk 

1. Securities settlement systems should have a wellfounded, clear, and transparent legal basis in the 

relevant jurisdiction. 

DTC’s activities are governed by a consistent and 

transparent set of laws, regulations, and contractual 

arrangements that form a sound legal basis. 

Pre-settlement risk 

2. Confirmation of trades between market 

participants should occur as soon as possible after 

trade execution, but no later than the trade date 

(T+0). Where confirmation of trades by indirect 

market participants (such as institutional investors) 

is required, it should occur as soon as possible after 

trade execution, preferably on T+0, but no later than 

T+1.

To enhance risk management procedures, DTC 

should explore the possibility to introduce an 

instructions matching mechanism prior to settlement. 

3. Rolling settlement should be adopted in all 

securities markets. Final settlement should occur no 

later than T+3. The benefits and costs of a 

settlement cycle shorter than T+3 should be 

assessed. 

DTC does not fully offer trade confirmation services, 

and does not match settlement instructions prior to 

settlement. 

4. The benefits and costs of a central counterparty 

should be assessed. Where such a mechanism is 

introduced, the central counterparty should 

rigorously control the risks it assumes. 

No cost-benefit analysis of the introduction of a CCP 

for transactions settled through DTC but not cleared 

by NSCC has been conducted. 

5. Securities lending and borrowing (or repurchase 

agreements and other economically equivalent 

transactions) should be encouraged as a method for 

expediting the settlement of securities transactions. 

Barriers that inhibit the practice of lending securities 

for this purpose should be removed. 

Securities lending and repurchase arrangements in 

the U.S. are largely over-the-counter bilateral 

transactions. It seems that there are no legal 

impediments to securities loan and repo 

transactions. 

Settlement risk 

6. Securities should be immobilized or 

dematerialized and transferred by book entry in CSD 

to the greatest extent possible. 

Many securities issued to the public in the U.S. are 

in the form of physical certificates. However, trend is 

to issue shares in electronic form. 

7. Securities settlement systems should eliminate 

principal risk by linking securities transfers to funds 

transfers in a way that achieves delivery versus 

payment. 

DTC operates a DVP Model 2 settlement system, 

where securities settle on a gross basis intraday 

and associated funds settle on a net basis at the 

end of the day. 

8. Final settlement on a DVP basis should occur no 

later than the end of the settlement day. Intra-day or 

real-time finality should be provided where 

necessary to reduce risks. 

The DVP 2 model is characterized by securities 

delivered during the day, while finality of cash takes 

place at the end of day. DTC has in place measures 

to limit and control the liquidity and credit risks 

associated with this model. 

DTC does not provide intraday finality for cash 

transfer that would allow participants in a net credit 

position to have earlier access to their liquidity and 
 9

Responsibility Assessment 

move them out of DTC.

9. CSDs that extend intraday credit to participants, 

including CSDs that operate net settlement systems, 

should institute risk controls that, at a minimum, 

ensure timely settlement in the event that the 

participant with the largest payment obligation is 

unable to settle. The most reliable set of controls is a 

combination of collateral requirements and limits. 

Although DTC currently has sufficient liquidity 

resources to protect against the failure of the largest 

affiliated family of participants, more extreme cases 

of multiple failures could test DTC’s liquidity 

resources. 

10. Assets used to settle the ultimate payment 

obligations arising from securities transactions 

should carry little or no credit or liquidity risk. If 

Central Bank money is not used, steps must be 

taken to protect CSD members from potential losses 

and liquidity pressures arising from the failure of the 

cash settlement agent whose assets are used for 

that purpose

There is a high concentration of payment flows at 

the top five settling banks, which increases credit 

risk exposures of the settlement banks. Moreover, 

DTC relies on a single bank for the cash settlement 

for Canadian dollar. 

The self-assessment of the Federal Reserve’s NSS 

against the CPSIPS has not been reviewed by the 

relevant authorities and is not public. 

Operational risk 

11. Sources of operational risk arising in the clearing 

and settlement process should be identified and 

minimized through the development of appropriate 

systems, controls, and procedures. Systems should 

be reliable and secure, and have adequate, scalable 

capacity. Contingency plans and back-up facilities 

should be established to allow for timely recovery of 

operations and completion of the settlement 

process.

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). 

Custody risk 

12. Entities holding securities in custody should 

employ accounting practices and safekeeping 

procedures that fully protect customers' securities. It 

is essential that customers' securities be protected 

against the claims of a custodian's creditors. 

DTC has adequate procedures and measures in 

place to ensure the protection of customers’ 

securities. 

Other issues 

13. Governance arrangements for CSDs and central 

counterparties should be designed to fulfill public 

interest requirements and to promote the objectives 

of owners and users.

The governance arrangements for DTC could be 

more transparent, including criteria for the 

composition and selection of Board members. Only 

limited information is available to the public. 

14. CSDs and central counterparties should have 

objectives and publicly disclosed criteria for 

participation that permit fair and open access. 

DTC's rules and by-laws, which are available on its 

website, provide objective access rules and criteria. 

15. While maintaining safe and secure operations, 

securities settlement systems should be costDTC's fees are cost based and DTC returns to its users excess net revenues not needed to fund its 
 10

Responsibility Assessment 

effective in meeting the requirements of users. operations via rebates or other refunds. DTCC 

performs periodic benchmarking studies to assess 

cost effectiveness in the market place. 

16. Securities settlement systems should use or 

accommodate the relevant international 

communication procedures and standards in order 

to facilitate efficient settlement of cross-border 

transactions. 

DTC uses ISO 15022 for cross-border linkages with 

CSDs. The messages (ISO-based and Message 

Queuing) are sent and received over DTC’s 

proprietary system as well as SWIFT. 

17. CSDs and central counterparties should provide 

market participants with sufficient information for 

them to accurately identify the risks and costs 

associated with using the CSD or central 

counterparty services. 

DTC's rules and procedures, including its service 

guides, are publicly available on its website. 

18. Securities settlement systems should be subject 

to regulation and oversight. The responsibilities and 

objectives of the securities regulator and the central 

bank with respect to SSSs should be clearly defined, 

and their roles and major policies should be publicly 

disclosed. They should have the ability and 

resources to perform their responsibilities, including 

assessing and promoting implementation of these 

recommendations. They should cooperate with each 

other and with other relevant authorities. 

The Fed’s oversight of DTC is not based on a 

general statutory payment systems oversight 

authority, but rather on DTC’s status as a State 

Member Bank of the Fed and the Fed’s consequent 

role as banking supervisor. The banking supervision 

and the oversight functions have two different 

objectives and use different tools. 

The SEC has not yet required DTC to perform a self 

assessment with respect to RSSSs, but SEC staff 

would consider recommending to the Commission 

to require such a self-assessment. 

19. CSDs that establish links to settle cross-border 

trades should design and operate such links to 

reduce effectively the risks associated with crossborder settlement. 

DTC has adequate measures and procedures to 

handle the risk associated with links. 

Table 3. Actions to Improve Compliance 

Reference 

Recommendation Recommended Action 

Recommendation 2: Trade confirmation DTC should explore the possibility introducing an instructions 

matching mechanism prior to settlement. 

Recommendation 4: CCPs A cost-benefit analysis of the introduction of a CCP for 

transactions not cleared by NSCC should be conducted. 

DTC should consider conducting additional net funds settlement 

batches during the day in order to provide intraday finality for 

cash transfers. 

Recommendation 9: Risk controls DTC should be given access to central bank liquidity facilities. 
 11

Reference 

Recommendation Recommended Action 

Recommendation 10: Cash settlement DTC should continue to monitor the financial conditions and 

should begin monitoring the exposures of the settlement banks. 

DTC needs to reduce the concentration of settlement cash for 

Canadian dollar. 

DTC may explore the possibility of becoming a direct participant 

of the Canadian RTGS system. 

The self-assessment of the Federal Reserve’s NSS against the 

CPSIPS should be reviewed by the relevant authorities and 

made public. 

Recommendation 11: operational risk DTCC should test its back-up sites to critical participants’ backup 

sites. 

Recommendation 13: Governance DTC’s governance arrangements should be more clearly 

specified and transparent, including criteria for the composition 

and selection of Board members. 

Recommendation 18: Oversight and 

regulation 

Formal co-operation with Authorities in Peru needs to be 

established. 

It would be more effective and transparent to legally entrust the 

Fed the role of overseer of financial market infrastructure, and to 

separate between the banking supervision and the oversight 

functions. 

SEC is encouraged to require clearing agencies to perform 

self-assessments against the CPSS-IOSCO recommendations 

by rules or in a policy statement. 

Recommendation 19:Risks in links DTC should update the information on links on DTCC’s 

website to reflect the current status. 

IV. AUTHORITIES’ RESPONSE TO THE ASSESSMENT

15. The U.S. authorities welcome the IMF’s assessment of DTC against the RSSSs. 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 DTC with the RSSSs, and are largely in agreement with the 

assessment’s comments and recommendations, which the authorities will share with DTC. 

16. Again, the authorities appreciate the significant undertaking associated with the assessment 

of DTC and the contribution that the assessment process makes to the stability and effective 

regulation and oversight of systemically important payment, clearing and settlement systems.
FINANCIAL SECTOR ASSESSMENT PROGRAM 

UNITED STATES OF AMERICA 

THE NATIONAL SECURITIES CLEARING CORPORATION 

OBSERVANCE OF THE CPSS/IOSCO RECOMMENDATIONS FOR 

CENTRAL COUNTERPARTIES

REPORT ON STANDARDS AND 

CODES (ROSC)

JULY 2010 

INTERNATIONAL MONETARY FUND

MONETARY AND CAPITAL MARKETS DEPARTMENT

Contents Page 

Glossary .....................................................................................................................................3 

I. Introduction and Methodology ...............................................................................................4 

II. Institutional and Market Structure—Overview .....................................................................4 

III. Main Findings ......................................................................................................................5 

IV. Authorities’ Response to the Assessment ..........................................................................11 

Tables 

1. Key Statistics of NSCC, 2007–09 ..........................................................................................5 

2. Summary of Detailed Assessment of Observance with the CPSS-IOSCO 

Recommendations ......................................................................................................................7 

3. Actions to Improve Compliance ..........................................................................................10 
3 

GLOSSARY

BCP Business Continuity Plan 

BITS Banking, Infrastructure and Technology Services 

CCP Central Counterparty 

CPSS Committee on Payment and Settlement Systems 

DTC Depository Trust Company 

DTCC Depository Trust and Clearing Corporation 

DVP Delivery-versus-Payment 

FDIA Federal Deposit Insurance Act 

FDICIA Federal Deposit Insurance Corporation Improvement Act 

FDIC Federal Deposit Insurance Corporation 

FICC-GSD Fixed Income Clearing Corporation – Government Securities Division 

FICC-MSBD Fixed Income Clearing Corporation – Mortgage Backed Securities 

Division 

FR Federal Reserve 

FRA Federal Reserve Act 

IMF International Monetary Fund 

IOSCO International Organization of Securities Commission 

ISO International Organisation for Standardisation 

JPMC JP Morgan Chase 

NSCC National Securities Clearing Corporation 

NSS National Settlement Service 

RCCP Recommendation for Central Counterparties 

RSSS Recommendation for Securities Settlement Systems 

SEC Securities and Exchange Commission 

SIFMA Securities Industry and Financial Markets Association 

TRADES Treasury/Reserve Automated Debt Entry System 

UCC Uniform Commercial Code 
4 

I. INTRODUCTION AND METHODOLOGY

1. The National Securities Clearing Corporation (NSCC) observes or broadly observes 

most of the CPSS-IOSCO Recommendations for CCP (RCCPs).1

 The system properly 

addresses legal, credit, custody, and operational risks. Some measures to improve resilience 

against financial risks have been identified, including measures to enhance governance 

arrangements. It is however important that NSCC effectively addresses issues concerning 

financial resources, money settlement (including DVP arrangements), and links between 

CCPs. It would also be beneficial that the Securities and Exchange Commission (SEC) 

require NSCC’s compliance with RCCPs and that the Federal Reserve is provided with a 

legal mandate to oversee the NSCC, which is a systemically important system, as a 

complementary function to the existing SEC regulation and supervision. 

2. The assessment of the NSCC was undertaken in the context of the IMF Financial 

Sector Assessment Program (FSAP).2 Prior to the mission, NSCC conducted a selfassessment following the methodology of the RCCPs published by the CPSS-IOSCO in 

2004. The assessment also benefited from discussions with the SEC, the Federal Reserve 

Board and Federal Reserve Bank of New York representatives, as well as the operator of the 

NSCC and some major participants in the system. 3 Relevant authorities and the operator of 

the system have been very co-operative in providing additional confidential information and 

organizing additional meetings, when required. 

3. Given the organization of the Depository Trust & Clearing Corporation (DTCC), the 

assessment of the three entities belonging to the group: The Depository Trust Company 

(DTC), the NSCC, and the Fixed Income Clearing Corporation (FICC) is almost identical 

for the recommendations on legal risk (RSSS1 and CCP1), operational risk (RSSS11 and 

RCCP8) governance (RSSS13 and RCCP13), efficiency (RSSS15 and RCCP14) and links 

(RSSS19 and RCCP11). 

II. INSTITUTIONAL AND MARKET STRUCTURE—OVERVIEW

4. The NSCC is registered as a clearing agency with the Securities and Exchange 

Commission (SEC) and subject to the SEC’s oversight. It was established in 1976 as a New 

York business corporation, and since 1999 it became a wholly-owned subsidiary of the 

Depository Trust & Clearing Corporation (DTCC). 

5. NSCC provides central counterparty services for certain transactions for the vast 

majority of broker-to-broker trades involving equities, corporate and municipal bonds. In 

 

1

 The underlying Detailed Assessment Report was published in May 2010 and is available at 

http://www.imf.org/external/pubs/cat/longres.cfm?sk=23871.0. 

2

 For further discussion see the accompanying Financial Stability Assessment (FSSA), (www.imf.org). 

3

 This assessment was carried out by Daniela Russo (external expert) and overseen by Elias Kazarian (IMF). 
5 

addition, NSCC provides a range of other services to its members, namely wealth 

management and insurance services, automated customer account transfer services and risk 

management. As of December 2009, NSCC had 206 clearing members, including 3 foreign 

institutions Table 1. 

Table 1. Key Statistics of NSCC, 2007–09 

2007 2008 2009

1. Number of contracts and transactions cleared (millions) 13,537 21,877 23,254

2. Value of contracts and transaction cleared (USD billions) 283,200 315,100 209,690

3. Average daily value of transactions (USD billions) 1,137 1,255 835

4. Peak value of transactions (USD billions) 2,230 3,373 1,091

5. Total number of clearing members, of which: 226 221 206

 5.1 Foreign clearing members 3 4 3

6. Clearing fund (USD millions)1

 4,866.6 6,620.4 2,941.0

 Source: DTCC. 

 1. Includes the value of cash and securities. 

III. MAIN FINDINGS

Legal Framework (Rec. 1) 

6. NSCC’s activities are governed by a consistent set of laws, regulations and 

contractual arrangements that form a sound legal foundation for clearing, settlement and 

custody activities, which are publically available and readily accessible to system 

participants. 

Participation requirements (Rec. 2) 

7. The NSCC’s access and exit criteria are publicly disclosed. NSCC requirements for 

participants’ financial resources and credit worthiness are based on the legal nature of the 

participating entities as well as the services that these entities will use. The NSCC also 

assesses the participants’ financial strength and operational reliability. 

Financial risk management (Rec. 3–6) 

8. The NSCC measures its exposures to participants daily and requires payment of 

contributions to the clearing fund. It can, when deemed appropriate, conduct intraday calls 

for additional clearing funds. The NSCC mitigates its credit exposures on the basis of the 

clearing fund requirements as well as cross-guarantee and cross-margining arrangements. 

The NSCC conducts stress testing monthly, on the basis of scenarios selected from the past 

ten years together with specific historic events. NSCC’s liquidity resources are composed of 

cash and securities and committed credit facility by some banks. In case of insufficient cash 

resources, the NSCC seeks to liquidate the available collateral via repo arrangements. 

NSCC’s default procedures are clearly stated in the system’s rules and procedures. 
6 

Custody and investment risks (Rec. 7) 

9. NSCC’s securities and cash of the clearing fund are held in dedicated accounts with 

the two major clearing banks. Cash investments are authorized under a policy, approved by 

DTC’s Audit Committee, which outlines principles for mitigating the risk of losses stemming 

from unsecured investments. The NSCC assets are held under tri-party custodial 

arrangements. When repos are not available, the assets are invested in overnight commercial 

paper in bank sweep accounts. 

Operational risk (Rec. 8) 

10. NSCC business continuity arrangements are developed at the level of DTCC holding 

company, including all sites, networks control centres, and back-up sites as a unified 

complex. These arrangements are based on the authorities’ requirements. DTCC has in place 

adequate procedures to identify and mitigate the sources of operational risk. Contingency 

plans and back-up facilities are regularly tested and maintained to ensure the resilience of 

NSCC. 

Money settlements (Rec. 9) 

11. The NSCC settles its money obligations in commercial bank money. 

Physical deliveries (Rec. 10) 

12. The NSCC rules clearly set forth its obligations with respect to securities deliveries. 

In order to protect itself from principal risk linked to market movements, NSCC continuously 

monitors participants’ exposures and collect margins when required. The NSCC uses a 

“modified” DVP mechanism, under which securities are delivered with finality to the 

participants only if the NSCC has received the cash or is in a credit position vis-à-vis the 

relevant clearing member. 

Risks in links between CCPs (Rec. 11) 

13. The NSCC has established three links to the Option Clearing Corporation (OCC) and 

the Canadian Clearing and Depository Services Inc (CDS). According to the NSCC, an 

assessment of the associated risks with these links has been conducted. 

Efficiency (Rec. 12) 

14. The NSCC regularly reviews its pricing levels, which are based on cost recovery. The 

cost allocation methodology is part of a regular review by both internal and external auditors. 

NSCC also conducts benchmark studies to assess cost effectiveness in the market. According 

to DTCC, internal auditors ensure that each service provided by DTCC group does not crosssubsidise the cost and expenses of the others, and that the risk management financial 

resources are not commingled. 
7 

Governance (Rec. 13) 

15. There is a single governance structure for all DTCC subsidiaries, including the 

NSCC. Although DTCC’s governance arrangements are made public, not all the relevant 

information is publicly available. DTCC is currently in the process of reviewing its 

governance arrangements. Public interest is taken into account in a number of ways, 

including the requirement that all proposed rule changes of NSCC be filed with the SEC and 

noticed for public comment, and by discussion with industry participants. 

Transparency (Rec. 14) 

16. Market participants are provided with sufficient information regarding NSCC risk 

management. The regulations, rules and procedures governing the NSCC are publicly 

available, as are audited annual financial statements, and participants receive non audited 

quarterly financial statements. The NSCC has completed and publishes on its website a self 

assessment following the RCCPs assessment methodology. 

Regulation and oversight (Rec. 15) 

17. The responsibilities and objectives of relevant public authorities with regard to 

securities clearing and settlement systems are clearly defined and publicly disclosed. The 

SEC supervises the NSCC given its status of a registered clearing agency. In conducting its 

responsibilities, the SEC applies other standards than the RCCPs, although some of the issues 

covered by the RCCPs are also addressed by the standards under the securities laws that are 

applied by the SEC. The Federal Reserve has the authority to examine the NSCC as an 

affiliate of DTC. The SEC and the Federal Reserve have signed exam-specific information 

sharing arrangements regarding the oversight of NSCC. A cooperation framework (MoU) 

between the SEC and the Canadian authorities has been set for the supervision of the links, 

while there is no such arrangement with the Monetary Authority in Singapore (MAS). 

Table 2. Summary of Observance with the CPSS-IOSCO Recommendations 

Responsibility Assessment 

Legal risk 

1. Central counterparties should have a well-founded, 

clear and transparent legal basis in the relevant 

jurisdiction. 

NSCC’s activities are governed by a consistent and 

transparent set of laws, regulations and contractual 

arrangements that form a sound legal basis. 

Participation requirement 

2. A CCP should require participants to have sufficient 

financial resources and robust operational capacity to 

meet obligations arising from participation in the CCP. A

The NSCC has adequate financial requirements for 

participants, which are based on the type of the 

entity and the provided services. NSCC defines a 
8 

Responsibility Assessment 

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. 

net capital requirement, which is above the 

minimum capital requirement imposed by the SEC. 

Moreover, all members contribute to the Clearing 

Fund, with the amount defined by the NSCC. 

The NSCC assesses participants' financial and 

operational capability, including: (a) sufficient 

financial ability to make anticipated contributions to 

the Clearing Fund and to meet obligations to the 

NSCC; (b) an established business history of a 

minimum of six months or personnel with sufficient 

operational background and experience; (c) 

appropriate settling bank arrangements; and (d) 

appropriate communication procedures. 

Measurement and management of credit exposures 

3. 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. 

The definition of margins and clearing funds in the 

published assessment is not consistent with 

international usage/practice and the definitions 

provided in the glossary of the RCCPs. 

Margin requirements 

4. 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 riskbased and reviewed regularly. 

The NSCC relies on margin requirements to collect 

contributions to the clearing fund to cover its 

exposure vis-à-vis its members. The NSCC tests 

regularly participants’ exposures as a basis to 

determine the contributions to the clearing fund. 

Financial resources 

5. 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. 

NSCC’s liquidity can be increased by repoing the 

securities in the clearing fund. 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

6. 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. 

NSCC’s default procedures are clearly stated in the 

system’s rules and procedures, which would allow 

the NSCC to suspend or terminate a member for 

any service, should it become subject to insolvency 

proceedings or fail to perform its obligations to the 
9 

Responsibility Assessment 

 system. The U.S. legal framework provides a high 

degree of assurance with regard to the 

enforceability of default procedures. 

Custody and investment risk 

7. A CCP should hold assets in a manner whereby risk 

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. 

NSCC’s assets are highly concentrated in two 

major commercial banks, and not all NSCC’s 

investments are secured. 

Operational risk 

8. 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 

fulfilment of a CCP’s obligations. 

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). 

Money settlements 

9. 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. 

The NSCC relies on a settlement agent to settle 

end-of-day funds in central bank money since it 

does not have access to Federal Reserve 

accounts. Access to central bank would require 

either the NSCC being chartered as a bank or 

statutory changes to grant the Federal Reserve 

legal authority to provide accounts to the NSCC. 

Physical deliveries 

10. A CCP should clearly state its obligations with 

respect to physical deliveries. The risks from these 

obligations should be identified and managed. 

Securities delivered to the NSCC are promptly 

redelivered to parties that are entitled to receive 

them through an allocation algorithm. 

Risks in links between CCPs 

11. 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. 

The NSCC has appropriate risk management 

procedures in place to identify and evaluate the 

risks from the links. A framework for cooperation 

(MoU) between the SEC and the Canadian 

authorities has been set for the link to the Canadian 

system. 

Efficiency

12. While maintaining safe and secure operations, 

CCPs should be cost-effective in meeting the 

requirements of participants. 

The NSCC regularly reviews its pricing levels, 

which are cost-based. It also conducts benchmark 

studies to assess cost effectiveness in the market. 

Governance

13. Governance arrangements for a CCP should be 

clear and transparent to fulfil public interest 

requirements and to support the objectives of owners 

The NSCC governance arrangements are not 

sufficiently specified and transparent, including 

criteria for the composition and selection 
10 

and participants. In particular, they should promote the 

effectiveness of a CCP’s risk management procedures. 

of Board members. 

Transparency 

14. 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. 

The regulations, rules, and procedures governing 

NSCC are publicly available, as are annual audited 

financial statements, and participants receive 

unaudited quarterly financial statements. 

Regulation and oversight 

15. 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. 

The SEC has not formally required NSCC to 

perform self-assessment based on the RCCPs. 

 

The Federal Reserve does not have a legal 

mandate to oversee the NSCC, other than its 

authority to examine NSCC as an affiliate of DTC. 

Table 3. Actions to Improve Compliance 

Reference 

Recommendation Recommended Action 

Recommendation 3: 

Credit exposures management 

Align the definitions of margins and clearing funds with international 

standards. 

Recommendation 5: 

Financial resources 

Consider additional liquidity buffer to deal with extreme situations where 

repo arrangements cannot be used. 

Consider conducting more frequently stress testing than once 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’s backup sites to critical participants’ backup sites. 

Recommendation 9: 

Money settlements 

Give NSCC access to central bank accounts and Fedwire Securities 

Services. 

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: 

Regulation and oversight 

SEC should formally required NSCC to perform a self-assessment 

based on RCCPs. 

Ensure the compliance of the SEC rules with the RCCPs. 

Provide legal mandate to the Federal Reserve to oversee NSCC, as a 

complement to the SEC regulation and supervision. 
11 

IV. AUTHORITIES’ RESPONSE TO THE ASSESSMENT

18. The U.S. authorities welcome the IMF’s assessment of the NSCC against the 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 the NSCC with the RCCPs, and 

will work with the NSCC in considering the assessment’s specific comments and 

recommendations. Again, the authorities appreciate the significant undertaking associated 

with the assessment of the 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. 
FINANCIAL SECTOR ASSESSMENT PROGRAM 

UNITED STATES OF AMERICA 

THE FEDWIRE SECURITIES SERVICE’S OBSERVANCE’S OF THE 

CPSS-IOSCO RECOMMENDATIONS FOR SECURITIES 

SETTLEMENT SYSTEMS

REPORT ON STANDARDS

AND CODES (ROSC)

JULY 2010 

INTERNATIONAL MONETARY FUND

MONETARY AND CAPITAL MARKETS DEPARTMENT

Contents Page 

Glossary .....................................................................................................................................3 

I. Introduction and Methodology ...............................................................................................4

II. Institutional and Market Structure—Overview .....................................................................4

III. Main Findings ......................................................................................................................5

IV. Authorities’ Response to the Assessment ..........................................................................10

Tables 

1. Key Statistics of FSS, 2007–09 ............................................................................................5

2. Summary of Observance with the CPSS-IOSCO Recommendations ..................................7

3. Recommended Action plan to Improve Observance of 

CPSS-IOSCO Recommendations ............................................................................................10

 
3 

GLOSSARY

CCP Central Counterparty 

CPSS Committee on Payment and Settlement Systems 

CSD Central Securities Depository 

DTC Depository Trust Company 

DTCC Depository Trust and Clearing Corporation 

DVP Delivery-versus-Payment 

FSS Fedwire Securities Service 

FICC Fixed Income Clearing Corporation 

FICC-GSD Fixed Income Clearing Corporation – Government Securities Division 

FICC-MSBD Fixed Income Clearing Corporation – Mortgage Backed Securities 

Division 

GSE Government Sponsored Entity 

IMF International Monetary Fund 

IOSCO International Organization of Securities Commission 

ISO International Organization for Standardization 

NSCC National Securities Clearing Corporation 

PSPAC Payment System Policy Advisory Committee 

RCCP Recommendation for Central Counterparties 

RSSS Recommendation for Securities Settlement Systems 

SEC Securities and Exchange Commission 

SWIFT Society for Worldwide Interbank Financial Telecommunication 

WPO Wholesale Product Office 
 4

I. INTRODUCTION AND METHODOLOGY

1. The assessment of the Fedwire Securities Service (FSS),1 owned and operated by the 

Federal Reserve System, against the CPSS-IOSCO Recommendations for Securities 

Settlement Systems (RSSSs) reveals that the system is sound, efficient, and reliable. For 

operational risks, the U.S. requirements go beyond those of the RSSSs. However, some 

regulatory changes are needed to ensure “fair” and open access to the system by other entities 

than U.S. banks. Although the Federal Reserve Board oversees the system based on its 

supervisory responsibility for the Banks, it would be beneficial and effective to have an 

explicit legal basis for oversight of all systemically important securities clearing and 

settlement systems. 

2. The assessment of FSS was undertaken in the context of the IMF Financial Sector 

Assessment Program (FSAP).2

 Prior to the mission, the Federal Reserve Board assessed the 

FSS following the RSSSs methodology published in 2002 by the CPSS-IOSCO. The 

assessment has been based on the self assessment, and a review of the relevant rules and 

regulations. The assessment also benefited from discussion with the operator of the system 

and meetings with market participants arranged by the authorities. Relevant authorities have 

been very co-operative in providing additional confidential information and organizing 

additional meetings, when required.3 

II. INSTITUTIONAL AND MARKET STRUCTURE—OVERVIEW

3. The Reserve Banks operate FSS on a consolidated basis through the Federal Reserve 

Bank of New York’s Wholesale Product Office. In their capacity as fiscal agents, the Federal 

Reserve Banks act as the central securities depositories (CSD) for securities issued by the 

Treasury, federal agencies, government sponsored entities, and certain institutional 

organizations. The FSS is also the key interbank settlement system for Fedwire-eligible 

securities. FSS’ participants include depository institutions and certain other institutions, 

including U.S. branches and agencies of foreign banks. The key statistics of FSS are 

provided in Table 1. 

4. Various institutional and market arrangements facilitate the issuance, trading, 

clearing, and settlement of Fedwire-eligible securities. The Reserve Banks, through FSS, 

provide key issuance and settlement services. In addition, the FICC and the two clearing 

banks, JP Morgan Chase (JPMC) and Bank of New York Mellon (BoNY), perform clearance 

and settlement functions for market participants. A large share of settlement of Government 

 

1

 The underlying Detailed Assessment Report was published in May 2010 and is available at 

http://www.imf.org/external/pubs/cat/longres.cfm?sk=23869.0. 

2

 For further discussion see the accompanying Financial System Stability Assessment (FSSA), (www.imf.org). 

3

 This assessment was carried out by Daniela Russo (external expert) and overseen by Elias Kazarian (IMF). 
 5

securities is internalized in the two clearing banks. No official figure is available on 

internalization. 

5. The FSS is overseen by the Federal Reserve Board, which regularly assesses the FSS 

against the RSSSs. The assessments have been made publicly available since 2007. 

Furthermore, the Federal Reserve banking supervisors, the Securities Exchange Commission 

(SEC), and the Treasury provide relevant perspectives on the market context in which 

Fedwire operates. In particular, the SEC is the regulator of many participants in the 

government securities market and the central counterparty (CCP). 

Table 1. Key Statistics of FSS, 2007–09 

2007 2008 2009 

1. Turnover (USD trillions) 435.6 419.3 295.7

2. Instructions processed (millions, total for the year) 24.2 25.0 21.1

3. Average daily value of transfers (USD trillions) 1.73 1.66 1.17

4. Peak daily value of securities settled (USD trillions) 2.60 2.81 2.55

5. Total value of securities held (USD trillions,), of which: 43.18 47.27 52.58

 5.1 Treasury securities 4.54 5.80 7.27

 5.2 Securities issues by federal agencies 2.78 3.12 3.82

 5.3 Securities issued by GSE 35.81 38.28 40.41

6. Number of new issues (thousands) 98.4 100.8 74.5

7. Number of participants, of which: 7,500 6,700 6,300

 7.1. Number of active participants 2,645 2,558 2,566

 Source: The Federal Reserve. 

III. MAIN FINDINGS

Legal Framework (Rec. 1) 

6. The FSS activities are governed by a consistent set of laws, regulations, and 

contractual arrangements that form a sound legal foundation for clearing, settlement, and 

custody activities. This set of law and regulations is public and readily accessible to system’s 

participants. 

Pre-settlement Risk (Rec. 2–5) 

7. Confirmation services for FSS eligible securities to direct participants that are cleared 

by CCP are provided by FICC. The FSS does not require settlement instructions to be 

matched prior to settlement. The settlement cycle for FSS eligible securities is generally 

shorter than T+3 with the exception of mortgage backed securities (MBS) that occurs on a 

monthly basis. The costs/benefits of the reduction of the settlement cycle have been assessed, 

and market participants considered establishing the CCP more appropriate than reducing the 

settlement cycle. 
 6

Settlement Risk (Rec. 6–10) 

8. Securities settled in FSS are issued on a dematerialized basis (except for a limited 

number of securities that can be immobilized). Transfer of ownership occurs when securities 

are transferred between participants within the system. The FSS enables delivery versus 

payment (DVP) on a real time basis. The transfer of securities and cash occurs 

simultaneously and is final when the securities and cash accounts are credited and debited. 

Operational Risk (Rec. 11) 

9. The FSS has in place adequate procedures to identify and minimize the sources of 

operational risk that may arise in the settlement process. Contingency plans and back-up 

facilities are regularly tested and maintained to ensure the resilience of the FSS. The business 

continuity plan takes into account the dependence between FSS and Fedwire Funds. A riskbased review of the IT system supporting the FSS functioning is conducted by independent 

external auditors. Senior management regularly monitors operational reliability issues. 

Custody Risk (Rec. 12) 

10. The FSS operates an indirect holding system where securities (or interest in 

securities) are held for the sole benefit of the direct participants whose account has been 

credited and not for the benefit of any other party. Physical and technical controls as well as 

periodic audits are performed to ensure that the Reserve Banks records are accurate and to 

ensure that customers’ securities are adequately managed. 

Other Issues (Rec. 13–19) 

11. The FSS access and exit criteria are publicly disclosed. Currently, some key market 

participants such as nonbank broker-dealers are not allowed to access the FSS on the basis of 

non-risk related criteria. Furthermore, entities not physically present in the United States, 

cannot have access to FSS, as they are not covered by U.S .banking supervision authorities. 

Following the Monetary Control Act (1980), the Federal Reserve Banks are required to 

recover direct but also imputed costs that would have been incurred if a private firm was 

offering this service. The FSS uses a proprietary message format, which can be translated to 

and from international message standards. It is currently not envisaged to use instead SWIFT 

or ISO standards. Market participants are provided with sufficient information on FSS, 

including laws, regulations, rules, and procedures. Moreover, the FSS has completed a self 

assessment following the RSSSs assessment methodology. The self assessments are 

disclosed on the Federal Reserve website. The responsibilities and objectives of relevant 

public authorities with regard to securities settlement systems are clearly defined and 

publicly disclosed. The Federal Reserve Board is exercising oversight over the FSS, based on 

its supervisory responsibility for the Reserve Banks. The Government and Accountability 

Office have the legal power to audit the FSS as a Treasury Agent. 
 7

Table 2. Summary of Observance with the CPSS-IOSCO Recommendations

Responsibility Assessment 

Legal risk 

1. Securities settlement systems should have a 

well-founded, clear, and transparent legal basis 

in the relevant jurisdiction. 

The FSS activities are governed by a consistent and 

transparent set of laws, regulations, and contractual 

arrangements that form a sound legal basis. 

Pre-settlement risk 

2. Confirmation of trades between market 

participants should occur as soon as possible 

after trade execution, but no later than the trade 

date (T+0). Where confirmation of trades by 

indirect market participants (such as institutional 

investors) is required, it should occur as soon as 

possible after trade execution, preferably on T+0, 

but no later than T+1. 

The FSS should explore the possibility of 

introducing an instructions matching mechanism 

prior to settlement. 

3. Rolling settlement should be adopted in all 

securities markets. Final settlement should occur 

no later than T+3. The benefits and costs of a 

settlement cycle shorter than T+3 should be 

assessed. 

The settlement of government bonds occurs on T+1 

while the settlement of the MBS occurs on fixed 

monthly dates. For the compliance with this 

recommendation, MBS should be settled no later 

than T+3. 

4. The benefits and costs of a central 

counterparty should be assessed. Where such a 

mechanism is introduced, the central 

counterparty should rigorously control the risks it 

assumes. 

FICC-GSD acts as CCP for all FSS eligible 

securities except for agency MBS. In this regard, 

FICC has filed a proposed rule change with the SEC 

to allow FICC-MBSD to act as CCP for agency 

MBS. 

5. Securities lending and borrowing (or 

repurchase agreements and other economically 

equivalent transactions) should be encouraged 

as a method for expediting the settlement of 

securities transactions. Barriers that inhibit the 

practice of lending securities for this purpose 

should be removed. 

FSS does not provide a securities lending facility to 

its participants, although there is a well-functioning 

market for securities lending in the United States. 

Settlement risk 

6. Securities should be immobilized or 

dematerialized and transferred by book entry in 

CSD to the greatest extent possible. 

The vast majority of securities settled held in 

custody by FSS are issued in a dematerialized form. 

7. Securities settlement systems should eliminate 

principal risk by linking securities transfers to 

funds transfers in a way that achieves delivery 

versus payment. 

The FSS enables delivery versus payment (DVP) on 

a real time basis. 

8. Final settlement on a DVP basis should occur 

no later than the end of the settlement day. Intraday or real-time finality should be provided where 

necessary to reduce risks. 

The finality of securities and cash transfers occur 

simultaneously and finality is achieved on real time 

when the securities and cash accounts are credited 

and debited. 

9. CSDs that extend intraday credit to The Fed’s net debit caps set limits on the amount of 
 8

Responsibility Assessment 

participants, including CSDs that operate net 

settlement systems, should institute risk controls 

that, at a minimum, ensure timely settlement in 

the event that the participant with the largest 

payment obligation is unable to settle. The most 

reliable set of controls is a combination of 

collateral requirements and limits. 

intraday credit used by participants, which reduces 

the Fed total exposures to credit risk. The Fed 

provides uncollateralized intraday credit in order to 

expedite DVP settlement. 

10. Assets used to settle the ultimate payment 

obligations arising from securities transactions 

should carry little or no credit or liquidity risk. If 

central bank money is not used, steps must be 

taken to protect CSD members from potential 

losses and liquidity pressures arising from the 

failure of the cash settlement agent whose assets 

are used for that purpose. 

There is a high concentration of securities clearing 

and settlement in the two clearing banks, JPMC and 

BoNY, which also serve as the two settlement 

banks for the FICC. Moreover, in order to facilitate 

settlement of buy-sell transactions, dealers heavily 

rely on intraday credit provided by JPMC and BoNY. 

This intraday credit is uncommitted but 

collateralized. 

A problem at one of the clearing banks or a refusal 

to extend credit to a market participant could be 

disruptive to the functioning of the tri-party repo 

market and the settlement of securities transactions. 

Operational risk 

11. Sources of operational risk arising in the 

clearing and settlement process should be 

identified and minimized through the 

development of appropriate systems, controls, 

and procedures. Systems should be reliable and 

secure, and have adequate, scalable capacity. 

Contingency plans and back-up facilities should 

be established to allow for timely recovery of 

operations and completion of the settlement 

process. 

The FSS has in place adequate procedures to 

identify and minimize the sources of operational risk, 

and contingency plans and back-up facilities to 

ensure business continuity. A risk-based review of 

the IT system supporting the FSS functioning is 

conducted by independent external auditors. Senior 

management regularly monitors operational 

reliability issues. 

Custody risk 

12. Entities holding securities in custody should 

employ accounting practices and safekeeping 

procedures that fully protect customers' 

securities. It is essential that customers' 

securities be protected against the claims of a 

custodian's creditors. 

Physical and technical controls as well as periodic 

audits are performed to ensure custody risk is 

minimized by checking, among other things, that the 

Reserve Banks records are accurate and customers’ 

securities are adequately managed. 

Other issues 

13. Governance arrangements for CSDs and 

central counterparties should be designed to 

fulfill public interest requirements and to promote 

the objectives of owners and users. 

The WPO does not include representatives of 

smaller and midsize participants, but rather rely on 

feedback provided through the financial services 

website. This arrangement may not ensure that the 

needs and interests of different kinds of participants 

are taken into account. 

14. CSDs and central counterparties should have 

objectives and publicly disclosed criteria for 

participation that permit fair and open access. 

Certain key market participants such as nonbank 

broker dealers are not eligible to maintain accounts 

at the Federal Reserve. This prevents these 

participants from settling their trades in central bank 
 9

Responsibility Assessment 

money thereby increasing settlement risk. 

Moreover, some key infrastructures are not 

chartered as banks, and as a consequence they 

cannot use directly the services of FSS. 

15. While maintaining safe and secure 

operations, securities settlement systems should 

be cost-effective in meeting the requirements of 

users. 

The operating hours of FSS are relatively short 

when compared to operating hours of other CSDs. 

16. Securities settlement systems should use or 

accommodate the relevant international 

communication procedures and standards in 

order to facilitate efficient settlement of crossborder transactions. 

Since FSS participation requirements prevent direct 

remote access from foreign participants (banks or 

other infrastructure) the requirement for the use of 

international communication procedures for crossborder transactions is not as relevant. However, 

international standards could become relevant 

should remote access of other infrastructure be 

allowed. In general terms, global co-operation calls 

for adoption of (or compatibility with) common global 

standards for major infrastructures at the global 

level. 

17. CSDs and central counterparties should 

provide market participants with sufficient 

information for them to accurately identify the 

risks and costs associated with using the CSD or 

central counterparty services. 

Laws, regulations, system rules, and fees are part 

of the contractual agreements signed by 

participants. In particular, participants’ rights, 

obligations, and costs are defined in these 

agreements, which are also available on the Fed 

website. 

18. Securities settlement systems should be 

subject to regulation and oversight. The 

responsibilities and objectives of the securities 

regulator and the central bank with respect to 

SSSs should be clearly defined, and their roles 

and major policies should be publicly disclosed. 

They should have the ability and resources to 

perform their responsibilities, including assessing 

and promoting implementation of these 

recommendations. They should cooperate with 

each other and with other relevant authorities. 

A clear legal basis for the Federal Reserve Board’s 

supervision of FSS exists. However, it is based on 

its banking supervisory responsibility rather than a 

legal responsibility for clearing and settlement. 

19. CSDs that establish links to settle crossborder trades should design and operate such 

links to reduce effectively the risks associated 

with cross-border settlement. 

No cross-border link is in place because foreign 

CSDs without a legal presence in the United States 

and a banking license are not allowed to open 

accounts at the Fed. 

 

The Fed does not monitor the functioning of indirect 

links, where major custodians are involved in crossborder transfers of FSS eligible securities between 

FSS and foreign CSDs. The RSSS assessment 

methodology, however, does not provide clear 

indications on how assessment of indirect links 

should be conducted. 
 10

Table 3. Recommended Action plan to Improve Observance of CPSS-IOSCO 

Recommendations 

Reference Recommendation Recommended Action 

Recommendation 2:Trade confirmation The FSS should explore the possibility of introducing an 

instructions matching mechanism prior to settlement. 

Recommendation 3: Settlement cycles MBS should be settled no later than T+3. 

Recommendation 9: Risk controls In view of eliminating the residual risk taken by the Fed when 

executing DVP whose cash leg is funded by Fed using 

uncollateralized intraday credit, the Fed should continue to 

monitor these risks and assess whether additional mitigation 

tools such as collateral is needed. 

Recommendation 13: Governance In order to ensure that the needs and interests of different 

kinds of participants are taken into account, the WPO should 

include representatives of smaller and midsize participants in 

its advisory group. 

Recommendation 14: Assess The Federal Reserve should be given the legal authority to ope

accounts and provide services, at a minimum, for other paymen

clearing and settlement infrastructures. 

Recommendation 15: Efficiency The Fed should re-assess the operating hours of FSS. 

Recommendation 16: Communication International standards could become relevant should remote 

access of other infrastructure be allowed. In general terms, 

global co-operation calls for adoption of (or compatibility with) 

common global standards for major infrastructures at the 

global level. 

Recommendation 18 : Regulation and 

oversight 

The Fed should be provided the legal basis to oversee 

systemically important payment, clearing, and settlement 

infrastructures. 

Recommendation 19 : Cross-border links Fed should consider monitoring the functioning of indirect 

links, where major custodians are involved in cross-border 

transfers of FSS eligible securities between FSS and 

foreign CSDs. 

IV. AUTHORITIES’ RESPONSE TO THE ASSESSMENT

12. The U.S. authorities strongly support the FSAP program, welcome this independent 

review, and thank the assessors for all the work to produce this report. They appreciate the 

significant undertaking associated with a 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. 

13. The authorities are pleased to note the assessment reflects the high degree of 

compliance of the Fedwire securities service with the RSSSs, and are largely in agreement 

with the assessment’s comments and recommendations. The authorities will explore the 

possibility of introducing settlement instruction matching in the Fedwire securities service, 

taking into account the relevant costs and benefits associated with such a matching feature. 
 11

The authorities will also reassess the business case for extending FSS service operating hours 

and seek ways to ensure that the needs and interests of smaller and midsize participants 

continue to be taken into account. 

14. The assessment also recommends that a rolling settlement period of no later than T+3 

be adopted in the U.S. mortgage-backed securities (MBS) market. While the authorities agree 

in principle that reducing the settlement period reduces settlement risk, they note that such a 

change for the U.S. MBS market requires careful study and close consultation with market 

participants given the characteristics of the instruments being settled, existing trading 

practices, and significant operational changes that are likely to be needed. The U.S. 

authorities believe that near-term risk reduction efforts should focus on the industry proposal 

to implement a central counterparty for mortgage-backed securities. 

15. With regard to the recommendation concerning residual risks associated with the 

provision of intraday credit to participants in the Fedwire securities service, the authorities 

note that a rigorous program for assessing, monitoring, and mitigating the risks associated 

with the provision of intraday credit to Fedwire accountholders is in place. Nevertheless, the 

authorities are further strengthening this program as a result of a comprehensive policy 

review conducted from 2006 to 2008 and the planned implementation of an explicit 

collateralization policy in late 2010 or early 2011. As a result, the authorities are confident 

that the residual risks noted in the assessment are adequately monitored and controlled.