Appendix A 145

Appendix A 

Designation of Systemically Important Financial Market Utilities

On July 18, 2012, the Financial Stability Oversight Council (Council) designated 

eight financial market utilities (FMUs) as systemically important under Title VIII 

of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). 

The designated FMUs are:

•	 The Clearing House Payments Company L.L.C. (PaymentsCo) on the 

basis of its role as operator of the Clearing House Interbank Payments 

System (CHIPS)

•	 CLS Bank International (CLS Bank or CLS)

•	 Chicago Mercantile Exchange, Inc. (CME)

•	 The Depository Trust Company (DTC)

•	 Fixed Income Clearing Corporation (FICC)

•	 ICE Clear Credit LLC (ICE Clear Credit)

•	 National Securities Clearing Corporation (NSCC)

•	 The Options Clearing Corporation (OCC)

Title VIII provides four specific factors the Council must take into consideration 

when determining whether an FMU is, or is likely to become, systemically 

important.1 These factors are also incorporated with more detail provided in 

the Council’s regulations regarding the designation of FMUs.2 The four specific 

factors are (A) the aggregate monetary value of transactions processed by the 

FMU; (B) the aggregate exposure of the FMU to its counterparties; (C) the 

relationship, interdependencies, or other interactions of the FMU with other 

FMUs or payment, clearing, or settlement activities; and (D) the effect that the 

failure of or a disruption to the FMU would have on critical markets, financial 

institutions, or the broader financial system. Title VIII also requires the Council 

to take into consideration any other factors that the Council deems appropriate. 

The Council believes that the four identified factors provided an appropriate 

basis for making determinations, and thus the Council did not explicitly rely on 

any other factors. 

This appendix provides a description of each FMU, as well as an analysis of its 

systemic importance based on the factors listed here. Each FMU received a letter 

on May 22, 2012 informing it that the Council had proposed its designation and 

providing it with the same rationale for the Council’s determination provided 

in this appendix. This appendix does not, however, include any confidential 

data that were part of the Council’s analysis, though such confidential data 

were included in the May 22 letters to each FMU. The FMUs each had 30 days 

to request a hearing if they disagreed with the proposed determination of the 

Council or the Council’s proposed findings of fact, but no FMU requested such 
146 2012 FSOC // Annual Report

a hearing. Accordingly, the Council has unanimously voted in favor of final 

designations on the following FMUs based on the analyses described here:

A. The Clearing House Payments Company L.L.C.

Description of the Clearing House Payments Company L.L.C.

PaymentsCo, a Delaware corporation, is the legal person that operates CHIPS, 

which is a multilateral system operated for the purpose of transferring payments 

among its 52 participants. Therefore, PaymentsCo, as a person that operates a 

multilateral system whose purpose is transferring payments among financial 

institutions, meets the definition of FMU set out in Title VIII.3

CHIPS is the only private sector system in the United States for settling largevalue U.S. dollar payments continuously throughout the day. Large-value 

payment systems play a key role in financial markets by providing a means for 

banks to discharge payment obligations related to important financial market 

activities such as money market and commercial transactions. Payments settled 

by such systems are often high in value and require secure, reliable, and timely 

settlement. For example, two banks might use a large-value payment system to 

settle a time-sensitive interbank loan. For commercial transactions, a corporation 

may instruct its bank to use a large-value payment system to make critical 

payments to its suppliers.

Large-value payments settled over CHIPS often represent the U.S. dollar sides 

of transfers between U.S. money center banks and foreign banks operating in 

the United States, such as foreign exchange and Eurodollar transactions. CHIPS 

traffic also includes an increasing share of payments for transactions such as the 

adjustment of correspondent balances and payments associated with commercial 

transactions, bank loans, and securities transactions.

The 52 CHIPS participants are U.S. commercial banks, foreign banks with offices 

in the United States, and one private banker. These participants constitute some 

of the largest banks in the world by asset size and include bank subsidiaries of 

22 financial institutions considered to be global systemically important financial 

institutions by the Financial Stability Board.4 Participants also send and receive 

payments over CHIPS on behalf of thousands of customers, including a large 

number of correspondent banks. U.S. depository institutions account for a 

substantial percentage of all value sent. Forty participants are headquartered 

outside the United States.

An important feature of CHIPS is that it can bilaterally and multilaterally net 

payments for settlement, which permits CHIPS to settle its daily average of 

payments with a fraction of funding. A disruption to CHIPS could therefore have 

a multiplier effect on the liquidity needs of participants.

Participants do not bear credit risk within CHIPS, as they do not extend credit 

to each other over the system. They do, however, bear liquidity risk. Because 

payment messages in the CHIPS queue are not guaranteed to settle, participants 

may not receive, either during the day or at the end of the day, payments they 
Appendix A 147

are expecting to receive over CHIPS. Liquidity risk is high during the end-of-day 

settlement process when participants have a final expected position that depends 

on other participants meeting their final funding requirements. If a participant 

fails to fulfill its final funding requirement, CHIPS will net and release as many 

of the payments remaining in the queue as possible and then delete the rest 

from the system. The participants that were expecting to receive those deleted 

payments must then arrange to receive that liquidity outside of CHIPS.

Analysis of Systemic Importance

(A) Aggregate monetary value of transactions processed by CHIPS

The volume and value of payments settled over CHIPS demonstrate the high 

degree to which the U.S. banking system relies on CHIPS to facilitate significant 

financial flows, particularly those involving transfers between U.S. money center 

banks and foreign banks operating in the United States. As context for the value 

of payments settling through CHIPS, every two weeks, CHIPS settles payments 

equivalent to the gross domestic product of the United States. 

Settlement volumes and values. CHIPS, settling $1.6 trillion on average a day, has 

a substantial share by volume and value in the U.S. large-value payments market. 

A significant percentage of CHIPS volume is sent or received by participants on 

behalf of third parties that are not participants. At least 7,500 third parties are 

listed in the database that CHIPS maintains to facilitate the routing of payments 

straight through to their end beneficiaries.

Funding. The average and peak total participant funding for the CHIPS 

account at the Federal Reserve Bank of New York (FRBNY) per day in 2011 was 

substantial, with a significant portion being supplied by a small group of funding 

agents acting on behalf of nonfunding participants. Total funding is low relative 

to the value of payments settled over CHIPS because the bilateral and multilateral 

netting feature of the system allows for a high leverage of liquidity compared to a 

pure real-time gross settlement system, where payments are settled individually as 

they are submitted.

(B) Aggregate exposure of CHIPS to its counterparties 

Credit exposures. There are no credit exposures within CHIPS, and there is 

no obligation to ensure the settlement of queued payments. Payment messages 

are not settled until they are released from the CHIPS queue, and all payment 

messages that are released are fully funded and settled with finality in real time.

Liquidity exposures. CHIPS does not bear liquidity exposures to its 

counterparties because it does not guarantee settlement of any payment messages 

that are not fully funded. While this feature, which is inherent to the design and 

rules of CHIPS, eliminates liquidity risk to the system, participants bear liquidity 

risk arising from unsettled payments in the queue. Participants are further 

exposed to liquidity risk because the funds used to settle payment messages 

over CHIPS are held in the CHIPS account at FRBNY as opposed to in the 

participants’ own accounts.
148 2012 FSOC // Annual Report

Liquidity exposures for CHIPS participants are high because payment messages 

in the CHIPS queue are not guaranteed to settle. There is a possibility that 

participants may not receive, either during the day or at the end of the day, 

payments they are expecting to receive over CHIPS. This risk decreases over the 

course of the day because of the intraday finality of settled payments, but there 

is inherent liquidity risk in the end-of-day process, when participants must meet 

their final funding requirements and CHIPS must successfully execute payouts.

Settlement of the payments remaining in the queue at the end of the day 

is dependent on all participants successfully meeting their final funding 

requirements, which, on average, is in the billions of dollars. If some participants 

do not fulfill their final funding requirement, CHIPS will settle as many 

remaining payments as possible and then delete the rest from the system 

unsettled. There has been only one instance where a participant failed to meet 

its final funding requirement, resulting in payment messages worth $7.3 billion 

failing to settle over CHIPS. 

Since that disruption, the typical value of the payments settled at the end of the 

day has fallen to less than 1 percent of total daily value, yet that amount is still 

sizeable. If a large proportion of those payments failed to settle because of a 

disruption caused by the failure of one or more participants to make a final payin, it could put liquidity pressure on the intended recipients of those payments, 

which would need to make up that liquidity outside of CHIPS. Following the 

completion of final funding, a disruption impairing the ability of CHIPS to make 

payouts could trigger more significant disruptions to the liquidity positions of 

participants. In 2011, the daily average and peak of total CHIPS payouts at the 

end of the day were significant.

Under either disruption scenario, participants might have to borrow funds in the 

market late in the day to replace the payments or payouts not received in order 

to meet their payment obligations outside of CHIPS or Federal Reserve account 

balance requirements such as required reserves. This could be particularly 

challenging for a participant with more limited access to U.S. dollar funding 

markets, such as a bank in a weakened condition. For any participant, obtaining 

replacement funding late in the day could prove difficult or costly, as the liquidity 

of funding markets such as the Fed funds and repo markets declines toward the 

end of the business day.

(C) Relationships, interdependencies, or other interactions of CHIPS with other FMUs 

or payment, clearing, or settlement activities

The structure of participation in CHIPS indicates a tight, interdependent network 

of institutional relationships and payment flows, such that a disruption could 

reverberate throughout the financial system. Participants rely heavily on CHIPS 

to settle significant U.S. dollar financial flows each day, including transactions 

related to third-party activity for thousands of additional institutions. Activity 

underlying CHIPS payments spans foreign exchange, trade finance, remittance, 

correspondent banking, securities, and bank funding.
Appendix A 149

Concentration of participants and degree of tiering. CHIPS activity is highly 

concentrated with a small number of participants accounting for a relatively large 

percentage of the value of the payment messages sent and received. Funding for 

CHIPS is further concentrated with a small number of participants representing a 

majority of the funding. 

Although no FMUs depend on CHIPS directly, the participants that send and 

receive the most value over CHIPS and contribute the most funding are also 

some of the most active participants by value in CLS Bank, DTC, FICC, NSCC, 

CME, ICE Clear Credit, and OCC. The liquidity problems caused by a disruption 

to CHIPS might therefore adversely affect the payment activities of CHIPS 

participants over those FMUs. Conversely, payment obligations arising within 

those other FMUs that were expected to settle over CHIPS could be disrupted. 

Interdependencies indirectly link CHIPS not only to other FMUs and payment, 

clearing, and settlement activities, but also to the third-party customers that are 

the originators or beneficiaries of payments settled over CHIPS. Participants 

submit a majority of their CHIPS traffic by volume on behalf of one of 

thousands of third-party customers. Examples of third-party customers include 

affiliates and branches of CHIPS participants, other financial institutions, and 

nonfinancial corporations. Because of the scope and nature of these customers, 

a disruption to CHIPS could have a broader impact on both the financial system 

and the real economy than might be assumed from consideration of only the 

direct participants.

(D) Effect that the failure of or disruption to CHIPS would have on critical markets, 

financial institutions, or the broader financial system

Market effects of a failure of or long-term disruption to the functioning of 

CHIPS. There are two types of disruption to CHIPS that could have significant 

effects on critical markets, financial institutions, and the broader financial 

system. First, a disruption triggered by the failure of one or more participants to 

make a required pay-in at the end of the day could cause several billion dollars 

of payments not to settle over CHIPS, creating liquidity shortfalls for some 

participants and their customers late in the day. Second, a disruption triggered 

by an operational problem with CHIPS could cause significantly higher amounts 

of payments not to settle over CHIPS. An operational disruption could also cut 

off participants’ access to the funds in the CHIPS account, which could be a 

significant amount by the end of the day.

The typical value of the payments settled at the end of the day is sizeable and 

varies based on market conditions and the amount of supplemental funding 

contributed by participants during the day. If one or more participants failed to 

make a required pay-in at the end of the day, a portion of those payments would 

not settle over CHIPS. As a result, the participants and their customers expecting 

to receive those payments would need to make them up outside of CHIPS and 

could, therefore, face liquidity shortfalls late in the day.

In the case of an operational disruption to CHIPS, participants could use the 

Fedwire Funds Service to settle payments. Their ability to do so would depend 
150 2012 FSOC // Annual Report

on each participant’s access to Fedwire, internal system capabilities, and access 

to sufficient intraday liquidity. In particular, the availability of liquidity varies 

by institution, such that some participants might need access to additional 

liquidity in order to reroute their CHIPS traffic. At a minimum, that increased 

liquidity demand could create incentives for participants to delay sending 

large outgoing payments over Fedwire until they first received large incoming 

payments. Delayed settlement of those outgoing payments could in turn delay 

the settlement of all downstream payments reliant on those funds, likely causing 

liquidity problems to spread.

Effects of a short-term disruption to the FMU. Depending on its timing, an 

operational disruption to CHIPS could leave participants without access to 

the increasingly significant amounts of liquidity held in the CHIPS account. 

As discussed under Consideration (B), the value of funds held in the CHIPS 

account rises steadily throughout the day, with the funds returned to participants 

as payouts at the end of day. A disruption that prevented CHIPS from making 

payouts at the end of the day could cause significant liquidity shortages for 

participants at a time of day when liquidity in funding markets may be least 

available. This is particularly true for the subset of CHIPS participants that 

do not have access to intraday credit from a Federal Reserve Bank. These 

participants might need to seek funding in the Fed funds and repo markets, 

where, as discussed previously, liquidity declines towards the end of the business 

day. Further, liquidity in these markets would likely be especially tight under 

the stressed market conditions surrounding a failure of or disruption to CHIPS. 

Without this funding late in the day, participants might not be able to meet their 

payment obligations outside of CHIPS or meet Federal Reserve account balance 

requirements, such as reserve requirements.

Under either scenario, a disruption to CHIPS could reverberate throughout the 

financial system, affecting the thousands of institutions worldwide that may be 

reliant on payments settled over CHIPS. As discussed under Consideration (A), 

CHIPS settles a sizeable overall share in the U.S. large-value payments market. 

Furthermore, a significant portion of the volume of payment messages sent over 

CHIPS is sent or received on behalf of one of thousands of third-party customers. 

In addition to disrupting third-party customers, as discussed under Consideration 

(C), a disruption to CHIPS might also indirectly disrupt other FMUs in the U.S. 

financial sector through the channel of shared participants.

Conclusion

Large-value payment systems such as CHIPS play a key role in financial markets 

by providing a means for banks to discharge payment obligations related to 

important financial market activities. CHIPS is a particularly large system, settling 

$1.6 trillion on average a day representing a significant percentage of the value 

of the U.S. dollar large-value payment market. A disruption to CHIPS could 

significantly increase the amount of unsettled payments in the CHIPS queue, 

disrupt the ability of participants to manage their CHIPS traffic, and sufficiently 

alter the payment and funding patterns over CHIPS so as to cause liquidity 

disruptions affecting all participants, including 22 global systemically important 

institutions, and potentially spread to their customers and to other FMUs and 
Appendix A 151

the broader financial system. The resulting widespread liquidity shortage could 

prove difficult or costly to ameliorate, particularly if the disruption were to cut 

off access to the funding in the CHIPS account and to occur at the end of the day 

amid already stressed market conditions.

Taking into consideration the significant value and proportion of large-value 

payments that settle over CHIPS, the increased liquidity required to reroute those 

payments to settle outside of CHIPS, and the risk to other FMUs and downstream 

financial institutions and nonfinancial companies that rely on those payments 

to settle, it is the assessment of the Council that a failure of or disruption to 

CHIPS could increase the risk of significant liquidity problems spreading among 

financial institutions or markets and thereby threaten the stability of the financial 

system of the United States. For the reasons set out here, the Council has 

determined that PaymentsCo should be designated as a systemically important 

FMU pursuant to Title VIII of the Act.

B. CLS Bank International

Description of CLS Bank International

CLS Bank, a legal person chartered by the Board of Governors of the Federal 

Reserve System under the Edge Act, operates a multilateral system that settles 

foreign exchange (FX) transactions among its financial institution members.5

Therefore, CLS Bank meets the definition of FMU set out in Title VIII of the Act.6

The FX market is one of the largest and most liquid global financial markets 

with an average aggregate daily value settled of 8.0 trillion U.S. dollar equivalent 

(USDE).7 The FX market plays a pivotal international role in determining the 

relative value of a currency, providing liquidity to the international banking 

system, and facilitating cross-border trade and investment. Because of its 

importance, the FX market has long been a focus of attention by finance 

ministries, central banks, and banking supervisors.

The FX market is an over-the-counter (OTC) market with globally dispersed 

participants that connect local trading centers into a liquid, global market. The 

three largest trading centers are located in the United Kingdom, the United 

States, and Japan respectively, although a number of other countries also host 

major centers. Due to the dispersion of market participants, the FX market is 

also a 24-hour market with large volumes of cross-border transactions. The three 

major instruments in the FX market are spot, forward, and FX swaps, which 

collectively account for approximately 94 percent of FX market activity. These 

instruments are typically considered part of the short-term international money 

market, serving as critically important cross-currency funding tools for a wide 

variety of participants. Settlement risk is the primary risk in the FX market and is 

a key source of systemic risk. 

CLS Bank is the sole multi-currency settlement system of its kind, offering both 

liquidity savings and settlement risk mitigation across all major currencies, and 

the only one that operates on a global basis across all the major currencies.8

CLS Bank settles an average daily value of 4.77 trillion USDE, representing 68 
152 2012 FSOC // Annual Report

percent of FX market activity in CLS Bank-eligible currencies and products. The 

CLS Bank system links thousands of institutions, including many of the largest 

banks, investment companies, and nonfinancial corporations, both domestic 

and foreign. Through CLS Bank, these institutions are able to reduce their 

settlement risk in the FX market through the use of payment-versus-payment 

(PVP) settlement.9 CLS Bank is also used by and uses a number of other FMUs 

to settle multi-currency payment flows. Among other potential effects, a failure 

of or disruption to the functioning of CLS Bank could substantially increase 

participants’ liquidity risk and reintroduce significant settlement risk among 

institutions in the FX market.

Analysis of Systemic Importance

A) Aggregate monetary value of transactions processed by CLS Bank

CLS Bank settles a significant and increasing volume and value of activity in 

the FX market. Through its services, CLS Bank significantly reduces settlement 

risk and provides substantial liquidity savings through its use of multilateral net 

funding. If the volumes and values settled by CLS Bank continue to grow, CLS 

Bank’s role in the FX market, and market participants’ reliance on CLS Bank, will 

become even more significant.

Settlement volumes and values. CLS Bank estimates that it settles, by value, 

68 percent of FX market activity in eligible currencies and products. In 2011, 

CLS Bank settled an average daily gross volume of 820,600 sides and an average 

aggregate daily value of 4.77 trillion USDE. In addition, through PVP settlement, 

CLS Bank mitigated a substantial amount of the settlement risk associated with 

the average daily gross volume settled. In 2011, CLS Bank settled a peak daily 

gross volume of 1,957,417 sides; on its peak settlement value day, March 19, 2008, 

CLS Bank settled approximately 10.3 trillion USDE.

In 2011, U.S. dollar transactions settled at CLS Bank accounted for a substantial 

amount of the average daily gross settlement volume and the average aggregate 

daily settlement value. In addition, U.S.-based settlement members accounted for a 

significant portion of the average aggregate daily value settled in 2011 at CLS Bank.

In 2011, the volume and value of transactions settled at CLS Bank increased by 

4.7 percent and 15.5 percent, respectively, from 2010. Since 2007, the volume of 

transactions processed by CLS Bank has grown at a compound annual rate of 

22 percent, with U.S. dollar transaction volumes growing at a compound annual 

rate of 23 percent. In addition, since 2007, the value of transactions processed by 

CLS Bank has grown at a compound annual rate of 7.3 percent, with the value 

of U.S. dollar transactions growing at a compound annual rate of 7.2 percent. In 

comparison, from 2007 through 2010, the total value of the FX market grew at a 

compound annual rate of 3.7 percent. 

Funding. Members fund and defund their multi-currency accounts at CLS Bank 

through 17 real-time gross settlement (RTGS) systems, including the Federal 

Reserve’s Fedwire Funds Service for U.S. dollar payments. Funding occurs on a 

multilateral net basis, which provides substantial netting efficiencies. In order to 
Appendix A 153

smooth out the liquidity needs of its members, CLS Bank permits its members 

and their nostro agents to pay in over a five-hour funding window. 

B) Aggregate exposure of CLS Bank to its counterparties 

Although CLS Bank has a robust risk management framework, it is still exposed 

to significant credit and liquidity risk.

Credit exposures. CLS Bank may extend credit to its members in the form of 

haircut-adjusted short positions, which are collateralized by a member’s long 

positions and capped at the aggregate short position limit (ASPL) for each 

settlement member. ASPLs vary among members based on an assessment of each 

member’s credit, liquidity, and operational capabilities.10

Based on the ASPL for each settlement member, CLS Bank’s maximum potential 

credit exposure is in the billions of USDE.11 Though these exposures are 

collateralized by haircut-adjusted long positions, as a result of extreme exchange 

rate volatility, CLS Bank may have insufficient liquidity and incur financial losses, 

which it would allocate to its surviving members.

Liquidity exposures. In the event that a settlement member fails to pay in the 

currency required to cover a short position by the end of the funding window, 

CLS Bank will attempt to swap the failing member’s remaining long positions 

for the currency required to fulfill CLS Bank’s payout obligations. As a result, 

CLS Bank has obtained committed lines of liquidity across the 17 currencies that 

are eligible for settlement. U.S. dollar liquidity is provided by a group of U.S. 

depository institutions, each of which is also a settlement member. 

In the case of a single member pay-in failure, the peak liquidity that CLS 

Bank would require from its committed liquidity providers is equivalent to the 

maximum ASPL. Provided that its currency haircuts are sufficient to mitigate 

market risk, CLS Bank’s committed lines of liquidity should be sufficient to 

complete payouts in the appropriate currency, even if the failing member is a 

liquidity provider in the required currency. However, if CLS Bank’s currency 

haircuts are insufficient to absorb a significant depreciation in the value of the 

members’ long positions relative to the value of their short positions, CLS Bank’s 

liquidity needs may exceed its committed liquidity lines, and CLS Bank may incur 

financial losses. Further, in the event that its liquidity providers are unwilling 

or unable to provide the committed liquidity, CLS Bank will credit its affected 

member(s) in an alternate currency, which its members may choose to receive 

as a payout or hold overnight at CLS Bank, thereby shifting liquidity risk to its 

member(s) and potentially resulting in liquidity disruptions to U.S. and foreign 

financial markets.

C) Relationships, interdependencies, or other interactions of CLS Bank with other 

FMUs or payment, clearing, or settlement activities

CLS Bank settlement activity is highly concentrated amongst its largest members. 

In addition, CLS Bank is highly interconnected with a number of other FMUs 

and trade repositories. These relationships and interdependencies increase the 
154 2012 FSOC // Annual Report

potential for a disruption at CLS Bank to spread to other participants, FMUs, 

markets, and throughout the U.S. financial system.

Concentration of participants and degree of tiering. The value of instructions 

settled by CLS Bank is highly concentrated among the largest of its 63 members. 

Further, third-party settlement activity is highly concentrated among a group 

of members. Since the value of instructions settled in CLS Bank is highly 

concentrated, a disruption to one large member would have a significant impact 

on the risks faced by CLS Bank (see factor (D) for the impact of a failure to pay 

by one or more participants). However, the inclusion of the largest FX market 

participants in CLS Bank ensures that a significant proportion of the FX market 

is settled at CLS Bank using its PVP risk mitigating features.

In 2011, 27 of CLS Bank’s 63 members were active in submitting instructions on 

behalf of third parties, though the majority of activity was concentrated among a 

few institutions. In aggregate, third-party transactions represent approximately 11 

percent of the aggregate value settled by CLS Bank. In addition, the three largest 

U.S.-based third-party service providers account for more than 48 percent of total 

third-party activity. 

Dependencies of other FMUs and trade repositories on CLS Bank. CLS 

Bank settles non-PVP instructions for The Warehouse Trust Company’s Trade 

Information Warehouse (TIW), which is a subsidiary of DTCC, as well as the 

CME, ICE Clear Europe, Eurex, and LCH.Clearnet. Specifically, CLS Bank settles 

FX futures-related payments for the CME and ICE Clear Europe, and credit 

derivative-related payments for TIW, Eurex, and LCH.Clearnet. Settlement at CLS 

Bank provides operational and funding efficiencies for these FMUs and trade 

repositories. The link with the TIW is particularly notable, as it allows payments 

for OTC credit derivatives, which are calculated and bilaterally netted across 

participants, to be directly submitted for settlement at CLS Bank. 

D) Effect that the failure of or disruption to CLS Bank would have on critical markets, 

financial institutions, or the broader financial system

A failure of or long-term disruption to CLS Bank may significantly increase 

settlement risk and liquidity demands in the FX market. In turn, these 

developments may reduce FX market activity and the flow of funds in U.S. and 

foreign financial markets and to the broader economy.

Market effects of a failure of or long-term disruption to the functioning of 

CLS Bank. In addition to potentially transmitting credit risk to its members via 

loss allocation, a failure of or long-term disruption to CLS Bank may result in a 

reversion to non-PVP settlement and therefore reintroduce significant credit risk 

to the FX market. Because CLS Bank is the sole global multi-currency settlement 

system that eliminates FX settlement risk across all major currencies, a failure 

of or long-term disruption to CLS Bank would require members to settle FX 

transactions through non-PVP settlement arrangements, including bilateral 

gross settlement, bilateral net settlement, and “on-us” settlement. A reversion 

to non-PVP settlement arrangements could reintroduce a substantial amount 

of settlement risk to the FX market daily. As a result, members would initially 
Appendix A 155

experience a sudden increase in settlement risk that may significantly exceed 

counterparty settlement limits set by their internal credit risk management 

function and may have to suddenly and drastically reduce their trading activity 

to stay under prudent counterparty settlement limits. Alternatively, members 

would need to collect large amounts of collateral from counterparties or accept 

significantly higher levels of counterparty credit risk that may exceed their capital.

A reduction in trading activity would reduce the flow of funds between CLS 

Bank participants, including domestic and foreign banks, investment companies, 

and nonfinancial corporations, and would impair FX market liquidity. As FX 

instruments are typically considered part of the short-term international money 

market, a reduction of FX market liquidity would seriously disrupt cross-border 

funding markets. As a result, the impact of a failure of or long-term disruption 

to CLS Bank would be felt in U.S. and foreign financial markets, as well as in 

the broader economy. Further, in the absence of PVP settlement, a failure of 

an FX market participant would expose counterparties to significant credit risk 

that could lead to additional failures of, or an erosion of confidence in, other 

FX market participants. In addition, because CLS Bank settles transactions 

both directly and indirectly for thousands of institutions, including banks, 

investment companies, and nonfinancial corporations, the failure of CLS 

Bank or a disruption of its settlement services could have a crippling impact on 

international trade with adverse second-order effects on the real economy and 

U.S. financial stability.

In the absence of CLS Bank and multilateral net funding in the FX market, 

members would be required to provide additional liquidity to complete 

settlement, thereby increasing liquidity demands on market participants. As such 

funding may occur in stressed market conditions and require access to large and 

alternative sources of liquidity at short notice, there could be significant liquidity 

disruptions to financial markets. In particular, since the U.S. dollar accounts for 

a substantial percentage of settlement value at CLS Bank, demands for additional 

U.S. dollar liquidity may be substantial and could have a significant impact on 

major U.S.-based banks and the U.S. financial system. Assuming that members 

revert to bilateral gross settlement in the absence of CLS Bank, liquidity needs 

would increase substantially, therefore providing another incentive for members 

of CLS Bank to significantly reduce their trading activity and the flow of funds 

between CLS Bank participants.

In addition to a reduction in FX market activity and an increase in liquidity 

demands, the absence of CLS Bank would require that non-PVP settlement 

arrangements absorb an additional average daily volume of 795,000 sides. A 

sudden increase in the volume of non-PVP transactions, however, may result 

in immediate operational challenges due to capacity constraints, potentially 

preventing a significant volume of FX transactions from settling in a timely 

fashion and thereby spreading liquidity risk among participants and their 

counterparties. Further, to the extent that a failure of or disruption to the 

functioning of CLS Bank results in non-PVP settlement, the relevant RTGS 

systems would experience sudden increases in the volume and value of 

instructions settled. In the United States, for example, the Fedwire Funds Service 
156 2012 FSOC // Annual Report

and CHIPS may be required to absorb a significant amount in additional U.S. 

dollar payment activity daily.

CLS Bank also provides settlement of payments related to credit derivatives and FX 

futures for multiple FMUs, both domestic and foreign. These FMUs benefit from 

funding efficiencies and straight-through processing by settling at CLS Bank and, 

in the short term, the absence of CLS Bank would be disruptive to these FMUs, 

as they would have to reroute payments over the relevant RTGS systems. Based on 

data compiled by the Federal Reserve Board, the U.S.-based members of CLS Bank 

are also members in several other FMUs. In the event that CLS Bank is unable to 

complete settlement and these members are unable to obtain timely settlement of 

their payment instructions through alternative settlement arrangements, liquidity 

disruptions may be transmitted to other key FMUs and markets.

Effects of a short-term disruption to the FMU. In the event that an operational, 

market, or funding-related event results in a short-term disruption to CLS Bank, 

CLS Bank would be required to defer settlement, but may be able to complete 

settlement before the end of the settlement day. Settlement, however, is heavily 

dependent on the closing times of the RTGS systems used to transfer funds to 

and from members’ multi-currency accounts at CLS Bank and may require an 

extension of the operating hours of certain RTGS systems on which CLS Bank 

is dependent. Further, CLS Bank currently estimates that the largest single 

settlement member pay-in failure (in terms of its aggregate impact on the 

settlement of transaction at CLS Bank) would result in a significant percentage 

of transactions not settling. As a result, members would need to settle these 

transactions on a non-PVP basis outside of CLS Bank, thereby increasing the 

amount of settlement risk in the FX market significantly. In a pay-in failure 

situation, however, surviving members would receive additional pay-in calls, which, 

if met, would significantly reduce the value of unsettled transactions at CLS Bank.

In the event of a large single member default, CLS Bank could issue additional 

pay-in calls across the surviving members to fund additional liquidity.12 As such 

funding may occur in stressed market conditions and require access to large and 

alternative sources of liquidity at short notice, there could be significant liquidity 

disruptions to financial markets. Further, as most additional funding will occur 

in U.S. dollars when U.S. markets are closed (between 3 a.m. and 6 a.m. ET), the 

impact on the financial system of the United States could be more severe.

The peak liquidity that CLS Bank could require from its committed liquidity 

providers is equivalent to the maximum ASPL. Provided that its currency 

haircuts are sufficient to mitigate market risk, CLS Bank’s committed lines of 

liquidity should be sufficient for CLS Bank to satisfy its payout obligations in 

the appropriate currency, even if the failing member is a liquidity provider in 

the required currency. However, if additional members fail to fully satisfy the 

additional pay-in calls that result from the original pay-in failure, then CLS Bank’s 

liquidity needs may exceed its committed liquidity lines. As a result, CLS Bank may 

be unable to meet its payout obligations, in which case it would pay an equivalent 

amount in an alternate currency and transfer its liquidity risk to its members.
Appendix A 157

Conclusion

CLS Bank is the sole global multi-currency settlement system of its kind, offering 

both liquidity savings and settlement risk mitigation across all major currencies. 

A failure of or long-term disruption to CLS Bank would have negative effects on 

both its members and the FX market, resulting in significant credit, liquidity, 

and operational disruptions. These effects would likely spill over into U.S. and 

global financial markets, as the FX market is critical to meeting cross-currency 

funding needs of global financial institutions. Further, PVP settlement in the FX 

market continues to be encouraged by central banks, market regulators, and other 

authorities in order to reduce settlement risk. Should the growth in the values 

and volumes settled by CLS Bank persist, perhaps due to the continued growth of 

the FX market and the inclusion of additional participants, settlement currencies, 

and settlement sessions, CLS Bank will assume an even more dominant role in the 

FX market. In the absence of alternative settlement arrangements offering both 

settlement risk mitigation and liquidity savings across a similar set of FX products 

and currencies, CLS Bank’s expansion will reduce overall risk but also concentrate 

the risk associated with a potential disruption to or failure of CLS Bank.

Based on the significant values and volumes of FX market activity settled at CLS 

Bank, the extensive network of financial and nonfinancial institutions that depend 

on CLS Bank, the dependence of other critical FMUs on CLS Bank to effect 

settlement, and the lack of substitutes offering both settlement risk mitigation and 

liquidity savings, the Council has determined that CLS Bank should be designated 

as a systemically important FMU pursuant to Title VIII of the Act. 

C. Chicago Mercantile Exchange, Inc.

Description of Chicago Mercantile Exchange, Inc.

CME is a subsidiary of CME Group, Inc. (CME Group), a public company. CME, 

through its U.S. clearing division (CME Clearing), provides clearing services 

among futures commission merchants (which are included in the definition of 

financial institution in Section 803 of the Act) and between futures commission 

merchants (FCMs) and customers. Therefore, CME meets the definition of FMU 

set out in Title VIII.13

CME is one of the largest central counterparty clearing services providers in 

the world, clearing 96 percent of the entire market for U.S. futures, options 

on futures, and commodity options.14 CME clears all contracts traded on the 

designated contract markets (DCMs)15 owned by CME Group, namely the Chicago 

Mercantile Exchange (CME DCM), Board of Trade of the City of Chicago, Inc. 

(CBOT), the New York Mercantile Exchange (NYMEX), and the Commodity 

Exchange, Inc. (COMEX). In addition, CME offers clearing services for the global 

OTC market through, inter alia, CME ClearPort. 

CME provides central counterparty clearing services for futures, options, and 

swaps that can be used by market participants for a variety of purposes. Products 

cleared by CME range from commodity futures, which are essential to price 

discovery and liquidity for the underlying commodities, to interest rate swaps 

(IRS) and equity index contracts, which can be used as hedges or as investments 
158 2012 FSOC // Annual Report

themselves. CME clears the largest and most liquid futures contracts based on 

the Standard & Poor’s (S&P) 500 Index, Eurodollar, U.S. Treasury securities, 

and energy products, as well as IRS. CME functions as the central counterparty 

to market participants and clears a large number of transactions supported by 

significant collateral. As a central counterparty, CME stands between its members 

for every transaction cleared, serving as the seller to every buyer and the buyer to 

every seller. In effect, members substitute CME’s credit for each other’s credit. 

While the purpose of the contracts cleared by CME can vary, all such contracts 

initially expose the participants on both sides of the contract to credit risk. 

By guaranteeing to each counterparty that the other side of the contract will 

be fulfilled, CME acts as a central counterparty to mitigate such risks. CME 

collects margin from each of its clearing members to offset the risks of a clearing 

member’s contracts and nets margin calls across all of each member’s contracts. 

On average, CME clears contracts with a notional value in the trillions of U.S. 

dollars and maintains collateral deposits averaging in the billions of U.S. dollars. 

Analysis of Systemic Importance

A) Aggregate monetary value of transactions processed by CME

Number of transactions processed, cleared or settled. In 2011, CME cleared an 

average daily gross volume in the millions of futures and options contracts and 

average daily notional amounts in the millions of U.S. dollars for OTC CDS and 

OTC USD IRS; in the millions of euros for OTC euro IRS; and in the millions 

of pound sterling for OTC GBP IRS. CME cleared a peak daily gross volume in 

the millions of contracts and peak daily notional amounts in the billions of U.S. 

dollars of OTC CDS and OTC USD IRS, in the billions of euros of OTC euro IRS, 

and in the billions of pound sterling of OTC GBP IRS.

Value of transactions processed, cleared or settled. In 2011, CME cleared 

contracts with an average daily gross notional value in the trillions of U.S. dollars 

and average daily gross notional values in the millions of U.S. dollars of OTC 

CDS; millions of U.S. dollars of OTC USD IRS; millions of euros of OTC euro 

IRS; and millions of pounds sterling of OTC GBP IRS. The peak daily gross value 

of the contracts CME cleared was in the trillions of U.S. dollars for futures and 

options, billions of U.S. dollars for OTC CDS, billions of U.S. dollars for OTC 

USD IRS, billions of euros for OTC euro IRS, and billions of pound sterling for 

OTC GBP IRS.

Value of other financial flows. For all listed derivatives, except cleared OTC IRS 

and cleared OTC CDS, the average daily flow of funds (average daily variation 

margin plus change in average daily initial margin) in 2011 was in the billions 

of U.S. dollars, with a peak in the billions of U.S. dollars on August 8, 2011. The 

peak daily open interest was in the millions of U.S. dollars on August 25, 2011.

B) Aggregate exposure of CME to its counterparties 

Credit exposures. The period-end aggregate value of all collateral posted as of 

December 30, 2011, was in the billions of U.S. dollars. On December 30, 2011, 

the member guaranty fund requirement across all three guaranty funds was $4.5 

billion, CME designated capital across the guaranty funds was $300.0 million, 
Appendix A 159

and the consolidated initial margin requirement was billions of U.S. dollars. For 

2011, CME’s guaranty fund held average deposits of $3.8 billion, with a peak value 

of $4.5 billion. 

CME maintains minimum coverage of 99 percent for a liquidation period of one 

day for futures, 99 percent for a liquidation period of five days for OTC IRS, and 

99 percent for a liquidation period of five days for OTC CDS.

The average aggregate daily value of collateral (after haircuts) posted to CME was 

in the billions of U.S. dollars. The peak aggregate dollar value of collateral (after 

haircuts) posted to CME was in the billions of U.S. dollars on June 2, 2011. For 

the 12 months ended December 30, 2011, the average intraday variation margin 

at CME was in the billions of U.S. dollars. The peak intraday variation margin at 

CME for all listed derivatives, excluding cleared OTC IRS and cleared OTC CDS, 

was in the billions of U.S. dollars on September 22, 2011. 

For the 12 months ended December 30, 2011, the average daily value of initial 

margin at CME was in the billions of U.S. dollars. The peak daily value of initial 

margin at CME was in the billions of U.S. dollars on June 1, 2011. 

It is anticipated that with the introduction of mandatory clearing for swaps, 

clearing volume and open interest will significantly increase, and margin on 

deposit and exposure will increase proportionally.

Liquidity resources. On December 30, 2011, the amount of liquidity resources 

(including only cash and U.S. Treasury and agency notes) at CME was in the 

billions of U.S. dollars, with billions of U.S. dollars of liquidity resources on June 

2, 2011. As of December 30, 2011, the total value of lines of credit from banks or 

others was several billion U.S. dollars. 

Liquidity exposures. For the 12 months ended December 30, 2011, the average 

daily variation margin CME paid to clearing members was in the billions of U.S. 

dollars. The peak daily variation margin CME paid to clearing members was 

in the billions of U.S. dollars on August 8, 2011. The largest intraday variation 

margin collect was in the billions of U.S. dollars on October 27, 2011.

C) Relationships, interdependencies, or other interactions of CME with other FMUs or 

payment, clearing, or settlement activities

Participants. CME has a total of 64 clearing members, including futures 

commission merchants (some of which are also broker-dealers), bank affiliates, 

and proprietary trading firms. Twenty-nine of CME’s clearing members are foreign 

clearing members (including U.S. operations of non-U.S. entities). CME’s clearing 

members include some of the largest banking and brokerage firms in the world. 

Other FMUs. CME has a cross-margining agreement with OCC, which is dually 

registered as a Derivatives Clearing Organization (DCO) and as a securities 

clearing agency. The average amount of margin subject to the cross-margining 

agreement is in the millions of U.S. dollars. CME also has a cross-margining 

arrangement with FICC, which generated a savings of millions of U.S. dollars 
160 2012 FSOC // Annual Report

on December 30, 2011 for clearing firms. In addition, CME has a mutual offset 

arrangement with Singapore Exchange Ltd. The mutual offset arrangement with 

Singapore Exchange Ltd. enables market participants to open a futures position 

in one of the following five contracts on one exchange and liquidate it on the 

other: Eurodollars, Euroyen TIBOR, Yen- and Dollar-Denominated Nikkei 225 

futures, and E-micro S&P CNX Nifty (Nifty 50) futures. 

Trading platforms. CME provides clearing services for the CME, CBOT, 

NYMEX, and COMEX exchanges that are all part of CME Group. CME also 

provides clearing services for the Green Exchange, a DCM that offers trading 

in environmental futures and options, and for Eris Exchange, LLC, a DCM that 

offers trading in IRS futures. The Dubai Mercantile Exchange, an energy-focused 

commodities exchange regulated by the Dubai Financial Services Authority, 

clears all of its trades through NYMEX, which outsources its clearing operations 

to CME Clearing.

Other external service providers. CME uses the following platforms: Bloomberg, 

Javelin, Tradeweb, Marketwire, Icelink, CME Globex, CME Clearport, and the 

CME’s physical trading floor. In addition, CME uses the services of the following 

companies: ION, Sungard, WTD, FFastFill, ATEO, and Whentech. CME also 

maintains settlement bank relationships.

Average daily value of flows and other transactions with key financial 

institutions. For the 12-month period ended December 30, 2011, the average daily 

value of flows with key financial institutions was in the billions of U.S. dollars. 

Average daily value of trades and other transactions on key trading platforms. 

CME’s average daily value of trades was in the millions of U.S. dollars.

D) Effect that the failure of or disruption to CME would have on critical markets, 

financial institutions, or the broader financial system

Role of CME in the market served. In 2011, CME cleared 96 percent of the total 

U.S. futures and CFTC-regulated options market volume.16

Availability of substitutes. While several other clearinghouses clear products 

that may be viewed as serving as substitutes for some of the products cleared by 

CME, it would be impractical, in the short term, for another clearinghouse to 

substitute for CME.

Concentration by product type. As mentioned, CME clears 96 percent of all U.S. 

futures, options on futures, and commodity options volume. 

Financial Data/Metrics. On December 30, 2011, CME had in the billions of U.S. 

dollars in cash and cash equivalents, in the billions of U.S. dollars in government 

securities, in the millions of U.S. dollars in valued securities, in the billions 

of U.S. dollars in letters of credit, and in the millions of U.S. dollars in escrow 

deposits of contracts.
Appendix A 161

Clearinghouses reduce the costs and operational risks of clearing and settlement 

among multiple market participants by mitigating counterparty risk, settling 

or netting participants’ obligations, or providing other clearing services or 

arrangements that mutualize or transfer credit risk among participants. CME 

houses one of the largest clearinghouses worldwide. 

The primary trigger of a default by CME would be a default by one or more 

clearing members with extraordinary losses in excess of CME’s default resources. 

While such a default could conceivably result from circumstances local to 

those members, a default scenario would more likely be associated with a 

disruption to the markets more generally, including scenarios such as historically 

extraordinary volatility, extreme changes to normal price correlations, and acute 

reductions in liquidity. 

An alternative trigger of a default by CME would be a failure by one of its 

settlement banks, in particular its concentration bank, because a substantial 

portion of CME’s financial resources, as well as those of its members, are on 

deposit with these banks. Thus, if those financial resources were to suddenly 

become unavailable, CME’s operations would be adversely affected to a 

considerable extent. 

In addition, a CME default could result from a failure to maintain a generally 

sound financial condition, such as a failure to maintain sufficient capital or other 

financial resources against its general business risk or against the risk of one or 

more clearing member defaults. 

As discussed previously, it would be impractical, in the short term, for another 

clearinghouse to substitute for CME. Moreover, even if swap transactions were 

replaced on a bilateral basis, if the market had moved since the trades were 

submitted to CME, it is unclear how the original counterparties would reinstate 

the original bilateral transaction. In addition, it could be difficult or impossible 

to reinstate the original transactions bilaterally if they were made on a trading 

platform. Because multilateral netting reduces the exposure of a clearinghouse’s 

members to each other, the de-netting of positions resulting from a CME 

default would immediately increase counterparty risk, which could have serious 

consequences for market participants, including exposure to credit risk and 

demand for collateral. 

Furthermore, netting provides a market benefit in that the margin required to 

collateralize the exposure of a portfolio is generally smaller than collateralizing 

its individual components, because the prices of the portfolio’s components 

are often correlated. Central counterparty netting is more powerful, as each 

member’s obligations to every other member can be netted and offset.17

Moreover, in the bilateral market, if A wishes to neutralize, e.g., a long exposure 

to B, A would typically enter into a transaction with a short exposure to another 

counterparty, e.g., C. This would offset A’s market risk, but would leave A with 

credit risk to each of B and C. In a cleared market, if A has cleared a transaction 

with a long exposure and enters into a cleared transaction with an offsetting 
162 2012 FSOC // Annual Report

short exposure, those exposures would be offset, leaving A with neither market 

nor credit risk.

Thus, the amount of collateral posted in a set of bilateral transactions to obtain 

the same level of protection that could be obtained through clearing would likely 

increase exponentially, thereby leading to some combination of a substantial 

increase in required collateral (with a consequent drain in liquidity), an increase 

in the number and exposure of uncollateralized transactions (creating greater 

exposures from further failures), and a decrease in the total number of transactions 

that are entered into (based on a reduction of credit, which would likely have a 

deleterious impact on the financial activity that those transactions hedge). 

In addition, any disruption in the clearing or trading of these products would 

likely severely impede price discovery, which would result in both a decrease in 

market efficiency and a loss of liquidity for these products.

Moreover, there would likely be a negative impact on any economic activity that 

presupposes the protection of hedging activity.18 For example, livestock producers 

that do not want to take on the risk of changing prices in the cash markets may 

abandon production entirely if they cannot use the futures market to lock in 

a price ahead of actual merchandising, and those that do choose to continue 

production may face an uneven playing field against other competitors, thereby 

effectively making them not competitive in the global markets. 

Similarly, a natural gas producer might use a futures contract to set a price now 

for gas that it will sell in the future to avoid being exposed to the possibility of 

lower prices. Without the protection of hedging, natural gas producers may 

reduce production activities to lower their price exposures. As hedging activities 

decrease, products become difficult to price and, without clear and competitive 

prices, the markets for those products become less liquid. As liquidity decreases 

in a market, market participants will likely demand additional collateral and, as 

the amount of available capital decreases, there will be an increased demand for 

credit, which, in an unstable market environment, will be difficult to obtain.

As positions move to the uncleared, bilateral market and are de-netted, settled 

and replaced, operational risks and costs would likely increase, thereby decreasing 

the number of reliable and readily available hedging opportunities. As a result, 

financial institutions and other market participants may reduce their investment 

activities, which could further stress the U.S. financial markets.

Finally, the contagion effect of a CME default if it were to lack sufficient resources 

to make timely payments obligations on variation margin could severely disrupt 

operations at other clearinghouses because of a crisis of confidence that 

interrupts the orderly functioning of the market and/or because of the impact 

that the loss of funds would have on an entity’s ability (or willingness) to pay (1) 

losses owed to other DCOs, (2) increased collateral requirements for offsetting 

losing positions, (3) deposits in pension fund cash accounts or (4) bank financing 

charges. Essentially, the failure of CME would create enormous uncertainty about 

the status of initiated transactions as well as the financial positions of its clearing 
Appendix A 163

members and their customers and could jeopardize the orderly functioning of 

other DCOs and the U.S. financial markets as a whole.

Conclusion

The data reviewed by the Council indicate that CME processes a significant 

volume of high-dollar-value transactions on a daily basis for critical U.S. 

markets.19 Moreover, it is questionable whether finding a substitute for CME’s 

products is a viable short-term solution. Accordingly, even the shortest disruption 

of CME could disrupt clearing for a variety of futures and options transactions 

and could effectively freeze the futures and options markets, thereby creating 

liquidity and credit problems in the U.S. futures markets. The loss of central 

counterparty clearing in the products CME clears would increase collateral 

demands exponentially, resulting in a corresponding drain of liquidity.

A CME failure could also have an adverse impact on price discovery, which 

could, in turn, lead to inefficient markets and a correlated increase in liquidity 

problems. Finally, the contagion effect of a CME failure could impose material 

financial losses on CME’s clearing members and other market participants (such 

as customers) and could lead to increased liquidity demands and credit problems 

across financial institutions, especially those that are active in the futures and 

options markets. Where these financial institutions are active in multiple U.S. 

markets, this contagion effect would have a broader impact and, as the markets 

experience growing stress, would likely lead to increased demand for credit, 

which would, in turn, likely lead to less liquidity. Thus, the Council believes that 

a significant disruption or failure of CME could have a major adverse impact 

on the U.S. financial markets, the impact of which would be exacerbated by 

the limited number of clearing alternatives currently available for the products 

cleared by CME. Accordingly, a failure or disruption of CME would likely have a 

significant detrimental effect on the liquidity of the futures and options markets, 

clearing members, which include large financial institutions, and other market 

participants, which would, in turn, likely threaten the stability of the broader U.S. 

financial system.

For the reasons set out here, the Council has determined that CME should be 

designated as a systemically important FMU pursuant to Title VIII of the Act. 

D. The Depository Trust Company

Description of The Depository Trust Company

DTC is an FMU as defined in Title VIII of the Act because it manages or operates a 

multilateral system for the purpose of clearing and settling securities transactions 

among financial institutions and between financial institutions and DTC.20

DTC serves as the central securities depository (CSD) for substantially all 

corporate and municipal debt and equity securities available for trading in 

the United States. DTC is a wholly owned subsidiary of DTCC and is generally 

administered as an industry-owned utility on an at-cost basis.
164 2012 FSOC // Annual Report

DTC provides depository services and asset servicing for a wide range of security 

types such as money market instruments (MMIs), equities, warrants, rights, 

corporate debt and notes, municipal bonds, government securities, asset-backed 

securities (ABS), and collateralized mortgage obligations. DTC’s custodial 

services include the safekeeping, record keeping, book entry transfer, and pledge 

of securities among its participants. DTC substantially eliminates the physical 

movement of securities by providing book-entry deliveries of securities, which 

transfer the ownership of securities electronically among broker-dealers on 

behalf of the beneficial owners of the securities. In addition to processing bookentry transfers, including those trades cleared through the NSCC, DTC provides 

services to securities issuers, such as maintaining current ownership records and 

distributing payments to shareholders. In 2011, DTC maintained custody and 

ownership records for approximately $39.5 trillion in securities.

DTC has 298 full service members and 72 limited service members. DTC 

members include U.S. broker-dealers, U.S. and non-U.S. banks or trust companies 

(including a trust company having limited powers), non-U.S. CSDs, U.S. 

government-sponsored enterprises (GSEs), and FRBNY. DTC direct participants 

include some of the largest banks in the world by asset size, and include affiliates 

of 25 of the 29 financial institutions considered to be globally systemically 

important.21 Trades that DTC settles for NSCC are executed on more than 50 

trading venues (including all U.S. securities exchanges and alternative trading 

systems) and with other domestic and foreign clearing agencies. 

Analysis of Systemic Importance

A) Aggregate monetary value of transactions processed through DTC

In 2011, DTC processed millions of book-entry securities deliveries and settled 

transactions with a substantial value. Average daily gross volume was 804,502 

deliver orders, payment orders, and pledges, with an average daily gross 

transaction value of approximately $573 billion. The peak daily gross number of 

transactions processed by DTC in 2011 was 1.24 million on June 29, 2011. In 2011, 

the average daily gross value of transactions processed by DTC was $573 billion, 

$339 billion of the total being MMIs and $234 billion of the total being other 

securities. The peak daily gross value of transactions processed by DTC in 2011 

was equal to $728.8 billion on August 12, 2011.

The average aggregate credit balance paid to participants as a result of the day’s 

settlement activity in the end-of-day cross-endorsed DTC-NSCC settlement was 

equal to $32.8 billion in 2011, with a peak aggregate credit balance payment of 

$78.3 billion on August 1, 2011. The average daily value of scheduled payments 

of dividend and principal and interest (P&I) payments due on DTC-eligible 

securities in 2011 was $10.1 billion. The peak daily value of these P&I payments in 

2011 was $41.0 billion. 

B) Aggregate exposure of DTC to its counterparties 

DTC is the central securities depository for the United States and is responsible 

for the safekeeping, custody, and certain ownership records of $39.5 trillion of 

securities as of December 31, 2011. As of December 31, 2011, total contributions 

to DTC’s participants fund equaled approximately $1.76 billion. The participants 
Appendix A 165

fund is available to secure participants’ obligations and certain liabilities of DTC, 

should they occur, such as when a participant fails to perform required payment 

or securities delivery obligations. DTC’s participants fund supports the clearance 

and settlement of a substantial portion of all corporate and municipal debt, 

equity securities, ABS, exchange-traded funds (ETFs), and MMIs available for 

trading in the United States. 

DTC extends intraday credit to its participants by allowing them to have net 

funds debit balances, which helps to facilitate the settlement process. These net 

debits are capped at a maximum of $1.8 billion per legal entity and $3 billion per 

affiliated family of participants. Through the various processes described here, 

DTC requires all transactions to be fully collateralized by its participants and 

therefore considers Value at Risk (VaR) not to apply to its operations.

DTC’s liquidity resources are limited to a committed, secured line of credit and 

the value of assets held in the participants fund—including certain assets of the 

defaulting participant held in anticipation of settlement. DTC’s line of credit, 

established with a syndicate of 31 banks, totaled $1.9 billion as of December 31, 

2011. DTC also maintained uncommitted credit lines totaling Can$150 million 

with a participant to support Canadian settlement during 2011. Further, a $50 

million shared uncommitted credit line with NSCC and DTCC is maintained with 

a participant to support potential short-term operating cash requirements. In 2011, 

the peak liquidity exposure to a single affiliated family of counterparties was $3 

billion, which is the maximum net debit limit permitted for any participant family. 

DTC rules require such exposures to be fully collateralized in each instance. 

C) Relationships, interdependencies, or other interactions of DTC with other FMUs or 

payment, clearing, or settlement activities 

DTC’s operations and the current market structure for securities trading 

and clearing involve significant interdependence between DTC and other 

FMUs, settlement banks, clearing members, credit facility lenders, custodians, 

exchanges, cross-margining entities, and pricing vendors. For example, NSCC—

which provides clearance, settlement, and central counterparty services for nearly 

all broker-to-broker equity and corporate and municipal debt trades executed 

on major U.S. exchanges and other equity trading venues—relies on an interface 

with DTC to settle obligations via the book-entry movement of securities. 

Throughout the day, the debits and credits in a DTC participant’s settlement 

account are netted to calculate, at any time, the net debit balance or net credit 

balance for the account. At end-of-day settlement, DTC and NSCC net the 

settlement balances of each DTC participant that is also a member of NSCC.

DTC maintains relationships with a number of other internationally important 

FMUs as well. In particular, DTC has established the Canadian-Link service 

with CDS Clearing and Depository Services, Inc. (CDS, Inc.), which enables 

DTC participants to clear and settle two categories of securities transactions: (1) 

cross-border Canadian dollar securities transactions with participants of CDS, 

Inc. and (2) intra-DTC Canadian dollar securities transactions with other DTC 

participants. DTC also has established accounts at two non-U.S. CSDs, namely 

Clearstream Bank AG in Germany and SIS SegaInterSettle AG in Switzerland. 
166 2012 FSOC // Annual Report

Non-U.S. CSDs with DTC accounts include: (1) CREST Nominees Ltd. (an 

affiliate of Euroclear) in the U.K. and Ireland; (2) Caja de Valores, S.A. in 

Argentina; (3) Tel Aviv Stock Exchange Clearing House (TASECH) in Israel; 

(4) Monte Titoli, S.p.A. in Italy; (5) Japan Securities Depository Center, Inc.; 

(6) Central Depository (Pte.) Ltd. in Singapore; and (7) Hong Kong Securities 

Clearing Company Limited. In addition, BM&F BOVESPA in Brazil and CDS, 

Inc. have pledgee accounts at DTC in order to receive U.S. securities collateral 

at DTC. Notably, however, the level of activity by CSD participants at DTC is 

insignificant in comparison to total DTC activity.

DTC has also formed a relationship with Omgeo, which provides global trade 

confirmation and trade matching systems for institutional trades. Trades by 

institutional investors are affirmed in Omgeo’s trade confirmation and tradematching systems, and the compared trade details are then passed on directly 

to DTC’s settlement system for settlement on a delivery-versus-payment/receiptversus-payment (DVP/RVP) basis.

D) Effect that the failure of or disruption to DTC would have on critical markets, 

financial institutions, or the broader financial system

The immediate effects of a failure of or a disruption to the functioning of DTC 

would include a major disruption to the markets for which DTC is the central 

securities depository as well as financial losses for many of DTC’s participants. A 

disruption to DTC’s services would first lead to complete or partial disruption of 

a significant amount in gross transaction value settled by DTC and to dividend, 

interest, and certain principal payments made on a daily basis. Such a disruption 

similarly would completely or partially disrupt the additional $23.8 billion 

average daily net settlement obligations that NSCC’s Continuous Net Settlement 

system instructs at DTC on behalf of NSCC and its members. The markets would 

be impacted further by an inability to access or trade some or all of the $39.5 

trillion in securities for which DTC acts as custodian. The absence of DTC’s 

services could also delay or prevent payment of dividends, principal, and interest 

to investors that own securities serviced by DTC. If a failure or disruption was 

triggered by losses to DTC, those losses might be shared by and cause stress to 

other FMUs, such as NSCC, with which it has a cross-guarantee agreement.

In addition, a failure or a disruption to the functioning of DTC would likely 

result in significant spillover effects on the rest of the U.S. economy, reducing the 

amount of credit available generally, reducing the value of household savings and 

corporate reserves, affecting the financing activities of corporations, destabilizing 

U.S. money market funds, and reducing the availability of secured credit. 

Conclusion

DTC plays an important role in financial markets in particular because it holds in 

its custody substantially all corporate debt and equity securities available for trading 
Appendix A 167

in the United States. Accordingly, a failure or disruption to the functioning of 

DTC could:

•	 Directly and negatively affect an enormous dollar value of financial assets 

held in custody and a substantial dollar value and volume of financial 

transactions in equity and debt markets;

•	 Impose material direct losses on participants and their customers for 

whom DTC acts as custodian;

•	 Cause liquidity or credit problems resulting from its failure or disruption 

to spread quickly and broadly among financial institutions and other 

markets; and

•	 Have cumulative negative effects on U.S. domestic equity and debt 

markets, financial institutions, and the broader financial system that 

are substantial in their own right and so severe as to create a risk that 

liquidity and credit problems experienced could spread among financial 

institutions and other markets and, therefore, threaten the stability of the 

financial system.

Accordingly, it is the assessment of the Council that a failure of or a disruption 

to DTC could increase the risk of significant liquidity problems spreading 

among financial institutions or markets and thereby threaten the stability of the 

financial system of the United States. For the reasons set out here, the Council 

has determined that DTC should be designated as a systemically important FMU 

pursuant to Title VIII of the Act.

E. Fixed Income Clearing Corporation

Description of Fixed Income Clearing Corporation

FICC is an FMU as defined in Section 803(6)(A) of the Act because it manages 

or operates a multilateral system for the purpose of clearing and settling 

securities transactions among financial institutions and between financial 

institutions and FICC.22

FICC plays a prominent role in the fixed income market as the sole clearing 

agency in the United States acting as a central counterparty (CCP) and provider 

of significant clearance and settlement services for cash settled U.S. Treasury 

and agency securities and the non-private label mortgage-backed securities 

(MBS) markets. FICC is a wholly owned subsidiary of DTCC and is generally 

administered as an industry-owned utility on an at-cost basis.

FICC is made up of two divisions, the Government Securities Division (FICC/

GSD) and Mortgage Backed Securities Division (FICC/MBSD), each providing 

clearing services in a different portion of the fixed income market. FICC/

GSD provides clearing, settlement, risk management, central counterparty 

services, and a guarantee of trade completion for (1) U.S. Treasury bills, notes, 

bonds, Treasury inflation-protected securities (TIPS), and Separate Trading of 

Registered Interest and Principal Securities (STRIPS); and (2) Federal agency 

notes, bonds, and zero-coupon securities that are book-entry, Fedwire eligible, 

and non-mortgage backed (collectively, U.S. government and agency securities). 
168 2012 FSOC // Annual Report

FICC/GSD accepts buy-sell transactions, repurchase and reverse repos, and 

Treasury auction purchases in several types of U.S. government securities. In 

2011, the two divisions cleared transactions valued at $1.1 quadrillion on a gross 

basis and $64.8 trillion on a gross basis, respectively.

FICC/MBSD is the only centralized clearing facility in the non-private label MBS 

market. FICC/MBSD provides clearing, netting, settlement, risk management, 

and pool notification services to major market participants trading in passthrough MBS issued by the Ginnie Mae (GNMA), Freddie Mac, and Fannie Mae. 

FICC/MBSD also processes options trades for “to-be-announced” transactions. 

On April 2, 2012, FICC/MBSD began providing central counterparty services and 

a guarantee of trade completion for MBS.

Both FICC/GSD and FICC/MBSD have relationships with more than 100 

participants. FICC/GSD’s members include the nation’s major brokers and 

dealers, as well as a wide range of entities that trade U.S. government securities. 

FICC/GSD’s direct members include some of the largest banks in the world by 

asset size and include affiliates of 23 of the 29 financial institutions considered to 

be globally systemically important.23 FICC/MBSD’s participants generally include 

the following: (a) banks and trust companies, (b) dealers, (c) inter-dealer brokers, 

(d) government securities issuers, (e) registered investment companies, and (f) 

unregistered investment pools. 

A distinguishing characteristic of FICC is the wide range of risks it faces and 

its ability to manage those risks. As a CCP, FICC faces credit risk, liquidity risk, 

custody and investment risks, and operational risk. FICC uses a combination of 

risk management tools to some of these risks to ensure it can meet its obligations. 

These tools include (1) membership standards with regard to financial resources 

and operational capacity, (2) collection of collateral deposits to meet clearing 

fund requirements and mark-to-market payments in the form of margin, and 

(3) close out and loss allocation procedures designed to facilitate an orderly 

liquidation in the event of a member default.

Another important feature of FICC is that it uses multilateral netting through 

which FICC/GSD and FICC/MBSD are able to reduce significantly the value of 

securities and payments that must be exchanged each day. A disruption to FICC 

could therefore have a multiplier effect on the liquidity needs of participants.

Analysis of Systemic Importance

A) Aggregate monetary value of transactions processed through FICC

In 2011, FICC/GSD processed 40.5 million transactions in U.S. government and 

agency securities worth $1.1 quadrillion on a gross basis. Through multilateral 

netting, FICC/GSD reduced the value of financial obligations requiring 

settlement in 2011 from $1.1 quadrillion to $230 trillion. In 2011, FICC/MBSD 

processed MBS transactions worth approximately $64.8 trillion, which through 

multilateral netting was reduced in value to $3 trillion. 

On an average day in 2011, FICC/GSD cleared 120,780 purchases and sales 

of U.S. government securities, 39,156 repo transactions, and 1,122 GCF repo 
Appendix A 169

transactions, which in aggregate were reduced to 24,515 net obligations daily. 

The peak daily gross number of trades for these three categories was 255,241 

purchase and sales, 44,238 repo transactions, and 1,636 GCF repo transactions, 

respectively. Peak aggregate netted obligations were 28,464 on July 29, 2011. 

Daily trading volume at FICC/MBSD averaged 10,556 compared sides in 2011. 

The daily gross number of compared sides at FICC/MBSD peaked at 30,237 on 

October 6, 2011. 

In 2011, the average daily gross value of trades compared by FICC/GSD was 

$893.7 billion for sales and purchases of U.S. government securities, $1.7 trillion 

for repos, and $796 billion for GCF repo transactions. The average daily net value 

settlement in all three categories was $921 billion for FICC/GSD, and the average 

daily funds only settlement (FOS) was $1.0 billion. The daily gross value of sales 

and purchases of U.S. government securities in 2011 peaked at $1.6 trillion on 

August 9, 2011. For repos and GCF repo transactions, the daily gross value of 

trades peaked at $1.9 trillion and $1.2 trillion, respectively. These peaks occurred 

on August 3, 2011, and September 8, 2011, respectively. The peak total of netted 

transactions in 2011 for FICC/GSD was $999.4 billion on July 29, 2011, and FOS 

peaked at $2.6 billion on August 10, 2011. FICC/MBSD compared, on average, 

$284.7 billion worth of transactions each day in 2011. FICC/MBSD’s comparisons 

of trade par value peaked at $988.2 billion on October 6, 2011. 

FICC/GSD’s peak increase in daily total clearing fund deposits in 2011 equaled 

$0.5 billion on August 10, 2011. The average daily total of funds only settlement 

debit was $0.3 billion, and funds only settlement debits peaked at $1.8 billion on 

August 10, 2011. FICC/MBSD’s average daily gross mark-to-market change for 

2011, including changes in average daily initial margin, was $3.4 billion, and its 

daily variation margin (mark to market) peaked at $10.4 billion on January 6, 2011.

B) Aggregate exposure of FICC to its counterparties 

In 2011, FICC/GSD maintained a clearing fund that averaged $11.1 billion, while 

FICC/MBSD maintained a participants fund that averaged $7.7 billion. The sizes 

of these funds peaked at $25.0 billion for FICC/GSD on March 22, 2011 and $15.2 

billion for FICC/MBSD on March 22, 2011. The average daily VaR estimates at a 

99 percent confidence level for FICC/GSD in 2011 was $6.2 billion. The average 

VaR for FICC/MBSD in 2011 was $5.0 billion. All of the collateral in the two 

funds was held in cash and in U.S. government and agency securities. 

FICC/GSD has liquidity needs for day-to-day securities settlement, daily funds 

settlement obligations, and in the event of member default. FICC/MBSD, by 

contrast, in 2011, had liquidity needs only for daily funds settlement obligations, 

as it did not begin acting as central counterparty until April 2012. FICC/GSD’s 

liquidity resources include the following: (1) the cash portion of the clearing 

fund; (2) the cash that would be obtained by entering into repo transactions 

using the eligible securities portion of the clearing fund (Treasury securities, 

agency securities guaranteed by the U.S. government, and certain U.S. agency/

GSE pass-through securities); and (3) the cash that would be obtained by entering 

into repos using the securities underlying transactions that would have been 

delivered to the defaulting member had it not defaulted. In addition, FICC/GSD 
170 2012 FSOC // Annual Report

could receive funds from its cross-margining and cross-guaranty arrangements 

if its resources proved insufficient to cover losses stemming from a member’s 

default. FICC/GSD does not maintain any committed lines of credit.

In 2011, FICC/GSD’s peak liquidity exposure to a single counterparty totaled $111 

billion. In 2011, FICC/MBSD’s peak liquidity exposure to a single counterparty 

totaled $25 billion. This exposure was required to be covered by the settlement 

obligations of other FICC/MBSD participants or through use of the FICC/MBSD 

participants fund. For the year ended December 31, 2011, FICC/GSD had an 

average of $10.6 billion in liquidity resources, which was comprised of $3.7 billion 

in cash and $6.9 billion in U.S. Treasury and agency securities. FICC/MBSD had 

an average of $7.1 billion in liquidity resources in 2011, of which $3.5 billion was 

in cash and $3.6 billion was in U.S. Treasury and agency securities. 

C) Relationships, interdependencies, or other interactions of FICC with other FMUs or 

payment, clearing, or settlement activities 

FICC/GSD has formed relationships with other market participants to mitigate 

the risks attending the potential default of a mutual participant. FICC/GSD has 

established a cross-margining arrangement with CME, and FICC has established 

a multilateral cross-guaranty agreement with both the OCC and FICC’s affiliates, 

NSCC and DTC, to cover certain obligations of a common defaulting member 

to the extent of available resources of the member. FICC/GSD has also formed 

a relationship with NYPC, a U.S. futures clearing corporation, to allow joint 

clearing members to cross-margin certain positions cleared at FICC/GSD with 

certain positions cleared at NYPC in a “one pot” margin portfolio.

FICC/GSD has only two clearing banks, JPMorgan Chase and Bank of New York 

Mellon. These two entities are critically important to FICC for GCF repos and 

security settlement processing. FICC/GSD also relies on FRBNY, both to issue 

U.S. Treasury securities and to collect and pay margin deposits. Payments to and 

from FICC/MBSD are made via DTC’s sub-account at FRBNY. 

In addition, FICC’s parent company, DTCC, provides significant services to 

FICC pursuant to a service agreement, including internal audit, corporate 

communications, corporate and regulatory compliance, executive services, 

finance, administration services, and legal services.

D) Effect that the failure of or disruption to FICC would have on critical markets, 

financial institutions, or the broader financial system

A failure of or a disruption to the functioning of FICC/GSD would be broad and 

severe. First, it could cause a complete or partial disruption of the substantial 

number and value of transactions typically pending to be cleared and settled 

through FICC/GSD in a two-day settlement cycle. Additionally, FICC/GSD 

members could face financial losses equal to the average net value of transactions 

guaranteed by FICC/GSD over the two-day settlement cycle, due to the full or 

partial absence of the FICC/GSD trade guarantee. These potential losses would 

be compounded by liquidity pressures due to at least a temporary limitation on 

a member’s ability to access collateral in the clearing and participant funds. As 
Appendix A 171

of December 31, 2011, the approximate values of such contributions were $11.1 

billion for FICC/GSD and $6.5 billion for FICC/MBSD.

There would also be a disruption to new trading activity in U.S. government 

securities and MBS markets. Because there are no other clearing agencies 

providing services similar to those of FICC, trades would need to be settled on a 

bilateral basis.

In addition, a failure of or a disruption to the functioning of FICC would likely 

result in significant spillover effects on the rest of the U.S. economy, reducing 

the amount of credit available generally, drawing assets away from other 

productive uses, reducing the value of corporate reserves and household savings, 

destabilizing U.S. money market funds, and negatively affecting financing 

activities of the U.S. government and GSEs. 

Conclusion

FICC plays an important role in financial markets due to the high gross notional 

value of the trades FICC/GSD and FICC/MBSD clear and the efficiencies 

they provide through multilateral netting of trades and payments among their 

members. In particular, because FICC/GSD is the sole clearing agency in the 

United States acting as a central counterparty for cash-settled U.S. government 

and agency securities, and FICC/MBSD is the predominant provider of clearance 

and settlement services for U.S. MBS markets, a failure or disruption to the 

functioning of FICC could:

•	 Directly and negatively affect an enormous dollar value and volume of 

financial transactions in the U.S. government securities and MBS markets;

•	 Impose material direct losses on FICC counterparties and create 

new demands for liquidity and new credit problems among financial 

institutions and others that rely on such markets for credit or liquidity;

•	 Cause liquidity or credit problems resulting from its failure or disruption 

to spread quickly and broadly among financial institutions and other 

markets; and

•	 Have cumulative negative effects on U.S. government and MBS markets, 

financial institutions, and the broader financial system that are substantial 

in their own right and so severe as to create a risk that liquidity and credit 

problems experienced could spread among financial institutions and 

other markets and, therefore, threaten the stability of the financial system.

Accordingly, it is the assessment of the Council that a failure of or a disruption 

to FICC could increase the risk of significant liquidity problems spreading 

among financial institutions or markets and thereby threaten the stability of the 

financial system of the United States. For the reasons set out here, the Council 

has determined that FICC should be designated as a systemically important FMU 

pursuant to Title VIII of the Act. 
172 2012 FSOC // Annual Report

F. ICE Clear Credit LLC

Description of ICE Clear Credit LLC

ICE Clear Credit is a Delaware limited liability company and an indirect 

subsidiary of Intercontinental Exchange, Inc., a Delaware corporation. ICE Clear 

Credit provides central counterparty clearing services to direct participants that 

are financial institutions, as well as to indirect market participants (customers). 

Therefore, ICE Clear Credit is an FMU as set out in Title VIII of the Act.24

ICE Clear Credit clears a majority of the CDS products in the United States that 

are eligible for clearing by a central counterparty. ICE Clear Credit currently 

clears 46 North American CDS contracts (Index Contracts), 132 single-name 

components of North American CDS contracts (Single-Name Contracts), and 

four foreign sovereign CDS contracts (Sovereign Contracts).25 Specifically, ICE 

Clear Credit clears all of the active North American CDS indices for the 5-year 

and 10-year tenors, and—save for certain financials—the most liquid U.S. single 

names in the CDS market. Of the products that are accepted for clearing by ICE 

Clear Credit, as of December 31, 2011, ICE Clear Credit cleared approximately 66 

percent of all bilateral trades where both the buyer and the seller are ICE Clear 

Credit clearing participants. In addition, ICE Clear Credit is currently the only 

clearinghouse worldwide that clears foreign sovereign CDS. Since 2009, ICE Clear 

Credit has cleared over 300,000 CDS transactions whose notional value is in the 

trillions of U.S. dollars.26

ICE Clear Credit has a total of 27 clearing members, 14 of which are financial 

or banking groups and 9 of which are non-U.S. domiciled. ICE Clear Credit’s 

clearing members include some of the largest financial institutions designated as 

G-SIFIs by the Financial Stability Board.

Irrespective of whether a CDS is being used to hedge risk or take on exposure to 

certain credit markets, as a bilateral contract between two market participants, 

a CDS creates credit and liquidity risk exposure between the counterparties to 

the CDS contract. For centrally cleared CDS contracts, ICE Clear Credit reduces 

these risks by serving as a central counterparty, interposing itself between the 

two original bilateral counterparties. Additionally, ICE Clear Credit improves 

market transparency and functioning by establishing robust daily settlement 

prices for the CDS trades that it clears, which periodically its members are 

required to stand behind, as well as monitoring and reporting open positions 

among clearing members.

Analysis of Systemic Importance

A) Aggregate monetary value of transactions processed by ICE Clear Credit

Number of transactions processed, cleared or settled. In 2011, ICE Clear Credit 

cleared an average daily gross volume of 821 Index Contracts, 1,145 Single-Name 

Contracts, and 397 Sovereign Contracts. ICE Clear Credit cleared a peak daily 

gross volume of 7,222 Index Contracts, 14,708 Single-Name Contracts, and 5,680 

Sovereign Contracts. 
Appendix A 173

Value of transactions processed, cleared or settled. In 2011, ICE Clear Credit 

cleared contracts with an average daily gross notional value in the billions of 

dollars in each of Index Contracts, Single-Name Contracts, and Sovereign 

Contracts. The peak daily gross notional values of the contracts ICE Clear Credit 

cleared were in the hundred billion dollar range for each of Index Contracts, 

Single-Name Contracts, and Sovereign Contracts.

Value of other financial flows. For all listed derivatives, the average daily flow of 

funds (average daily mark-to-market valuation plus change in average daily initial 

margin) was in the millions of dollars for initial margin and in the hundred million 

dollar range for adjusted mark-to-market, and for all intraday fees (adjusted markto-market, upfront fee, coupon plus credit event). The peak daily flow of funds was 

over a billion dollars for initial margin and in the hundreds of millions of dollars 

for adjusted mark-to-market and for all intraday fees (adjusted mark-to-market, 

upfront fee, coupon plus credit event). The peak daily open interest was in the 

hundreds of billions for each of Index Contracts and Single-Name Contracts, and 

in the tens of billions of dollars range for Sovereign Contracts.

B) Aggregate exposure of ICE Clear Credit to its counterparties 

Credit exposures. During 2011, the average size of ICE Clear Credit’s guaranty 

fund was in the billions of U.S. dollars, with a peak size of billions of U.S. dollars. 

It is anticipated that following the implementation of a clearing requirement for 

swaps, clearing volume and open interest will significantly increase, and margin 

on deposit and exposure will increase proportionally.

Liquidity resources. The average amount of liquidity resources (including only 

cash and U.S. Treasury and agency notes) at ICE Clear Credit was billions of U.S. 

dollars, with a peak amount in the billions of U.S. dollars. As of December 31, 

2011, the total value of lines of credit from banks or others was millions of dollars. 

Liquidity exposures. The average aggregate daily dollar value of payouts by ICE 

Clear Credit to clearing members was in the millions of U.S. dollars, with a peak 

in the millions of U.S. dollars. The peak liquidity need with a single counterparty 

was in the millions of U.S. dollars.

C) Relationships, interdependencies, or other interactions of ICE Clear Credit with 

other FMUs or payment, clearing, or settlement activities

Participants. ICE Clear Credit has a total of 27 clearing members,27 14 of which 

are financial or banking groups and 9 of which are non-U.S. domiciled. ICE Clear 

Credit’s clearing members include some of the largest banking and brokerage 

firms in the world.

Other FMUs. ICE Clear Credit does not have any relationships with other FMUs, 

other than its affiliate relationships.

Trading platforms. ICE Clear Credit clears OTC swaps (all cleared CDS 

transactions are executed bilaterally) and therefore does not have a relationship 

with any trading platforms. However, it is expected that ICE Clear Credit will 
174 2012 FSOC // Annual Report

begin clearing transactions executed on DCMs or swap execution facilities with 

the commencement of CDS trading through such venues.

Other external service providers. ICE Clear Credit uses The Clearing 

Corporation for license fee and management services and ICE for technology and 

management services. 

Average daily value of flows and other transactions with key financial institutions. 

ICE Clear Credit does not have any flows with unaffiliated key financial institutions 

other than its clearing members, settlement banks, and repo counterparties. 

Average daily value of trades and other transactions on key trading platforms. 

ICE Clear Credit clears OTC swaps and therefore does not have a relationship 

with any trading platforms.

Average daily value of services provided and other transactions with other 

external service providers not captured. ICE Clear Europe uses ICE Clear Credit 

for technology and management services.

D) Effect that the failure of or disruption to ICE Clear Credit would have on critical 

markets, financial institutions, or the broader financial system

Role of ICE Clear Credit in the market served. In 2011, of the North American 

Index and Single-Name CDS market CDS products that ICE Clear Credit accepts 

for clearing, ICE Clear Credit cleared approximately 66 percent of all bilateral 

trades where both the buyer and the seller are ICE Clear Credit Clearing 

participants. It is also the only clearinghouse worldwide that clears foreign 

sovereign CDS.

Availability of substitutes. Currently, no other DCOs clear the breadth of 

products cleared by ICE Clear Credit. Accordingly, it is impracticable to expect 

that one could continue clearing ICE Clear Credit’s CDS products immediately or 

in the short term following a disruption of ICE Clear Credit’s operations. 

Concentration by product type. ICE Clear Credit is currently the only 

clearinghouse worldwide that clears foreign sovereign CDS. In addition, ICE 

Clear Credit clears all of the active North American CDS indexes for the 5-year 

and 10-year tenors, and—save for certain financials—the most liquid U.S. single 

names in the CDS market.

Financial Data/Metrics. On December 30, 2011, ICE Clear Credit had in the 

billions of U.S. dollars in cash and cash equivalents and in the billions of U.S. 

dollars in government securities.

ICE Clear Credit reduces systemic risk in the CDS market in a number of ways. 

First, ICE Clear Credit lowers counterparty risk exposures among market 

participants through the novation of CDS contracts. Second, ICE Clear Credit 

lowers the likelihood of a default leading to a financial contagion of defaults 

across major CDS counterparties by maintaining substantial financial resources 

to manage the default of its two largest clearing members. Third, ICE Clear 
Appendix A 175

Credit reduces credit, liquidity, and operational risk by facilitating the timely 

settlement of trade-related payment obligations. ICE Clear Credit is one of the 

largest clearers of CDS transactions worldwide. 

The primary trigger of a default by ICE Clear Credit would be a default by one 

or more clearing members with extraordinary losses in excess of ICE Clear 

Credit’s default resources. While such a default could conceivably result from 

circumstances local to those members, a default scenario would more likely be 

associated with a disruption to the markets more generally, including scenarios 

such as extreme volatility, extreme changes to normal price correlations, and 

acute reductions in liquidity. ICE Clear Credit may be more exposed to such 

circumstances than other central counterparties, because it has significant 

exposure to credit default swaps, which have jump-to-default risk. 

An alternative trigger of a default by ICE Clear Credit would be a failure 

of its settlement bank or one of ICE Clear Credit’s overnight reverse repo 

counterparties, because a substantial portion of ICE Clear Credit’s financial 

resources are on deposit with such entities. Thus, if those financial resources were 

to suddenly become unavailable, ICE Clear Credit’s operations would be adversely 

affected to a considerable extent. In addition, an ICE Clear Credit default could 

result from a failure to maintain a generally sound financial condition, such as 

a failure to maintain sufficient capital or other financial resources against its 

general business risk or against the risk of one or more clearing member defaults. 

An ICE Clear Credit failure, or a disruption in the functioning of its clearing 

services, would effectively mean the immediate loss of the dominant clearing 

platform for the credit default products it clears. This disruption would likely 

expose ICE Clear Credit’s clearing members and other market participants 

to credit and liquidity risks. The significant margin deposits held by ICE 

Clear Credit could lead to a period wherein affected entities may be unable to 

access, or in a worst case scenario would lose, the collateral they posted with 

the clearinghouse. Furthermore, if ICE Clear Credit does not have sufficient 

financial resources to satisfy its obligations to surviving market participants, 

the ability of those participants to meet other financial obligations could be 

adversely impacted. An ICE Clear Credit failure or disruption of its services could 

directly pose credit and liquidity risk to other financial market infrastructures, 

which include depositories, other clearinghouses, custodians, DCMs, trade 

repositories, and swap execution facilities. Since many of ICE Clear Credit’s 

clearing members are G-SIFIs, a disruption or failure could indirectly pose credit 

and liquidity issues to every major market in the United States, every significant 

market participant in the United States, and all significant financial market 

infrastructures in the United States. 

In the event of an ICE Clear Credit failure, it is unlikely in the short term that 

a substitute could take over ICE Clear Credit’s clearing operations. Moreover, 

market participants would have to post substantially more collateral to enter 

into transactions in a bilateral space and obtain the same level of protection 

or exposure than they would through ICE Clear Credit. For example, in 

the bilateral market, if A wishes to neutralize, e.g., a long exposure to B, A 
176 2012 FSOC // Annual Report

would typically enter into a transaction with a short exposure to another 

counterparty, e.g., C. This would offset A’s market risk, but would leave A with 

credit risk to each of B and C that A would need to collateralize. Furthermore, 

the margin required to collateralize the exposure of a portfolio is generally 

smaller than collateralizing its individual components because the prices of 

the portfolio’s components are often correlated. Central counterparty netting 

is more powerful, as each member’s obligations to every other member can 

be treated as one portfolio that is netted and offset.28 There could also be an 

increase in the number and exposure of uncollateralized transactions (creating 

greater exposures from further failures) and a decrease in the total number of 

transactions. This would likely have a deleterious impact on the financial activity 

that relates to those transactions. 

In addition, any disruption in the clearing of these products would likely impede 

the price discovery benefit of central counterparty clearing, which would result in 

a decrease or loss of liquidity for these products and lead to market opacity. Large 

aggregate exposures to counterparties under CDS contracts could be hidden 

in opaque markets until the bankruptcy of a major CDS market participant is 

imminent. The circumstances of such an event, which figured prominently in 

the recent U.S. financial crisis, could have additional consequences on the ability 

of U.S. financial institutions to obtain credit. Bank lending could freeze until 

such time as market participants’ CDS exposure can be adequately priced and 

it becomes clear market participants are able to honor contract obligations in a 

stressed financial environment.

Furthermore, not only would price discovery and liquidity be impacted by such an 

event, but there also would likely be a negative impact on any economic activity 

that presupposes the protection of hedging activity. Assume, for example, that a 

large U.S. based financial institution (FI1) hedged its exposure to the corporation 

A corporate bonds it purchased by buying CDS protection from another financial 

institution, and the trade was then cleared at ICE Clear Credit. If any of ICE 

Clear Credit’s members default and ICE Clear Credit does not have, and cannot 

obtain, sufficient financial resources to maintain operations, this CDS protection 

would no longer be active. If corporation A were then to suddenly default, FI1 

could have a large loss on the corporation A bonds; a loss that, but for ICE Clear 

Credit’s failure, should have been hedged by the CDS. As positions move to the 

bilateral market and are de-netted, settled, and replaced, operational risks and 

costs would likely increase, thereby decreasing the number of reliable and readily 

available hedging opportunities. As a result, financial institutions and other 

market participants may reduce their investment activities, which could further 

stress the U.S. financial markets. 

In addition, an ICE Clear Credit failure or disruption would pose a substantial 

adverse impact to the CDS market for the products cleared by ICE Clear Credit. 

Market participants would likely experience substantial uncertainty around, 

and possibly outright loss of their CDS positions at ICE Clear Credit. Market 

participants would no longer be able use CDS to manage credit risk without 

increasing bilateral counterparty credit risk. This, in turn, is likely to cause 

a loss of confidence in the CDS market in general. For holders of the debt of 
Appendix A 177

reference entities to CDS, those participants may be forced to sell large amounts 

of securities at potentially fire-sale prices if their CDS protection ceases to exist. 

Market participants that transact with any reference entity and use CDS to hedge 

credit risk may be forced to reduce or cease financial and other transactions with 

those entities. Banks or other users of index CDS as broad-based, macroeconomic 

hedges to credit risk may need to quickly sell securities or reduce lending activity 

in order to comply with capital requirements in the absence of CDS hedging 

benefits. Market participants that use sovereign CDS to hedge direct exposures 

to those countries, indirect exposures to entities domiciled in those countries or 

overall country risk may be forced to quickly sell securities and reduce or cease 

financial and other transactions with those entities. All of these effects represent 

the substantial risk of contagion from a disruption in the CDS market. 

Finally, the contagion effect of an ICE Clear Credit default, if it were to lack 

sufficient resources to make timely payments for mark-to-market obligations, 

could severely disrupt operations at other clearinghouses because of a crisis 

of confidence that interrupts the orderly functioning of the market and/or 

because of the impact that the loss of funds would have on an entity’s ability 

(or willingness) to pay (1) losses owed to other DCOs, (2) increased collateral 

requirements for offsetting out-of-the money positions, (3) deposits in pension 

fund cash accounts, or (4) bank financing charges. Essentially, the failure of ICE 

Clear Credit would create enormous uncertainty about the status of initiated 

transactions, as well as the financial positions of its clearing members and their 

customers, and could jeopardize the orderly functioning of clearing members, 

other DCOs, and the U.S. financial markets as a whole.

Based on its review of the information set forth here, the Council recognizes 

that ICE Clear Credit currently clears a specific range of the total credit 

derivatives market.29 ICE Clear Credit also has a membership of 27 clearing 

members, including 14 financial or banking groups. Accordingly, when viewed 

narrowly the effects of a failure or disruption of ICE Clear Credit could be 

considered to affect a finite number of the world’s largest financial institutions, 

each of which has, theoretically, immediate access to the bilateral markets for 

CDS products and various other sources of credit and liquidity in the event of 

such a failure or disruption.

However, the immediate loss of a clearing platform for most of the products 

cleared by ICE Clear Credit would effectively lead to at least a temporary 

disruption of the CDS market for these products as the market infrastructure 

through which positions are established, maintained, and closed out would be 

gone. This, together with the increased risks and costs in the bilateral markets, 

would create great uncertainty about the capacity of already strained markets to 

accommodate any anticipated corresponding liquidity needs, which would likely 

lead to increased credit and liquidity problems for market participants. As these 

risks and costs increase, institutions may reduce their investment activities due to 

a lack of reliable and readily available hedging opportunities, which could further 

stress the U.S. financial markets. 
178 2012 FSOC // Annual Report

Moreover, under rules recently promulgated by the CFTC30 and equivalent rules 

being considered by the SEC pursuant to the Act, ICE Clear Credit will likely be 

required to expand its membership base to include smaller financial institutions 

and permit the direct involvement of buy-side firms for the first time. These 

new regulatory standards will also result in numerous financial institutions 

being required to clear trades with other financial institutions when clearing is 

offered by one or more FMUs and thereby increase their practical reliance on 

ICE Clear Credit in a manner consistent with the policy direction established by 

the Act. Thus, and especially upon these new standards taking effect, a failure 

or disruption of ICE Clear Credit would necessarily involve a broader segment 

of the financial community and have a wider impact on the financial system of 

the United States than would have been true in the recent past. These more 

widespread effects reinforce the Council’s conclusion that a failure or disruption 

to the functioning of ICE Clear Credit could create or increase the risk of 

liquidity and credit problems spreading among financial institutions or markets 

and thereby threaten the stability of the financial system of the United States. 

Conclusion

The data reviewed by the Council indicate that ICE Clear Credit processes highdollar-value transactions on a daily basis for critical U.S. financial markets31 and 

holds large amounts of collateral on deposit. Coupled with the unique nature 

of CDS and the attendant jump-to-default risk that has to be managed, as well 

as the size and nature of ICE Clear Credit’s clearing members, a significant 

disruption to or failure of ICE Clear Credit could create instability in the U.S. 

CDS and securities markets. Moreover, there are currently no substitute DCOs for 

many of ICE Clear Credit’s products. The loss of central counterparty clearing 

in the products ICE Clear Credit clears would increase collateral demands 

exponentially, resulting in a corresponding drain of liquidity. 

An ICE Clear Credit failure could also have an adverse impact on price discovery, 

which could, in turn, lead to inefficient markets and a correlated increase in 

liquidity problems. Finally, the contagion effect of an ICE Clear Credit failure 

could impose material financial losses on ICE Clear Credit’s clearing members 

and other market participants (such as customers) that could lead to increased 

liquidity demands and credit problems across financial institutions. Where these 

financial institutions are active in multiple U.S. markets, this contagion effect 

would have a broader impact and, as the markets experience growing stress, 

would likely lead to increased demand for credit, which would, in turn, likely 

lead to less liquidity. Thus, the Council believes that a significant disruption or 

failure of ICE Clear Credit could have a major adverse impact on the stability of 

the U.S. financial markets, the impact of which would be exacerbated by the lack 

of clearing alternatives currently available for many of the products cleared by 

ICE Clear Credit. Accordingly, a failure or disruption of ICE Clear Credit would 

likely have a significant detrimental effect on the liquidity of the swaps markets 

and impose significant financial losses on clearing members, which include large 

financial institutions and other market participants, which would, in turn, likely 

threaten the stability of the broader U.S. financial system.
Appendix A 179

For the reasons set out here, the Council has determined that ICE Clear Credit 

should be designated as a systemically important FMU pursuant to Title VIII of 

the Act. 

G. National Securities Clearing Corporation

Description of National Securities Clearing Corporation

NSCC is a FMU as set out in Title VIII of the Act because it manages or operates a 

multilateral system for the purpose of clearing and settling securities transactions 

among financial institutions and between financial institutions and NSCC.32

NSCC plays a prominent role in providing clearance, settlement, and CCP 

services for nearly all broker-to-broker equity and corporate and municipal 

debt trades executed on major U.S. exchanges and other equity trading venues. 

NSCC is a wholly owned subsidiary of DTCC and is generally administered as an 

industry-owned utility on an at-cost basis.

NSCC provides clearing, settlement, risk management, central counterparty 

services and a guarantee of completion for virtually all broker-to-broker trades 

involving equity securities, corporate and municipal debt securities, American 

depository receipts (ADRs), ETFs, and unit investment trusts (UITs). Clearance 

and settlement generally occurs through NSCC’s Continuous Net Settlement 

(CNS) system, under which all eligible compared and recorded transactions for 

a particular settlement date are netted by issue into one net long (buy) or net 

short (sell) position. NSCC guarantees the settlement of matched trades and, as 

a CCP, is the legal counterparty to all of its members’ net settlement obligations. 

NSCC’s CCP services reduce its members’ costs and risks associated with securities 

transfers. In 2011, NSCC, on a gross basis, cleared 20.9 billion equity, corporate and 

municipal bond, ADR, ETF, and UIT trades worth $220.7 trillion on a gross basis.

NSCC has 187 full service members and 647 limited service members. NSCC 

members consist of registered broker-dealers, or banks or trust companies 

(including a trust company having limited powers) that are members of the 

Federal Reserve System or are supervised and examined by state or federal 

authorities having supervision over banks or registered clearing agencies. NSCC 

direct members include some of the largest banks in the world by asset size and 

include affiliates of 24 of the 29 financial institutions considered to be globally 

systemically important.33 Trades that NSCC clears and settles for its members are 

executed on more than 50 trading venues for which it provides services (including 

all U.S. securities exchanges and alternative trading systems) and with other 

domestic and foreign clearing agencies.

A distinguishing characteristic of NSCC is the wide range of risks it faces and 

its ability to manage those risks. As a CCP, NSCC faces credit risk, liquidity risk, 

custody and investment risks, and operational risk. NSCC uses a combination 

of risk management tools to mitigate some of these risks to ensure it can meet 

its obligations. These tools include (1) membership standards with regard to 

financial resources and operational capacity, (2) collection of collateral deposits 

to meet clearing fund requirements and mark-to-market payments in the form
180 2012 FSOC // Annual Report

of margin, and (3) close out and loss allocation procedures designed to facilitate 

an orderly liquidation in the event of a member default.

Another important feature of NSCC is that it uses multilateral netting through 

which NSCC is able to reduce significantly the value of securities and payments 

that must be exchanged each day. A disruption to NSCC could therefore have a 

multiplier effect on the liquidity needs of members.

Analysis of Systemic Importance

A) Aggregate monetary value of transactions processed through NSCC

In 2011, NSCC cleared $220.7 trillion worth of trades on a gross basis, which 

represented nearly all broker-to-broker equity and debt trades executed on the 

major U.S. exchanges and most other equity trading venues. 

On an average trading day in 2011, NSCC cleared 83 million securities trades. 

The peak daily gross number of trades in 2011 was 199 million trades on August 

8, 2011, with peak netted obligations equal to 204,000 trades. The historic peak 

day for trades occurred on October 10, 2008, when NSCC cleared 209.4 million 

transactions. In 2011, the average daily gross value of transactions settled by 

NSCC was $883 billion, with average aggregate netted obligations of $23.8 billion. 

The peak daily gross value of trades in 2011 was equal to $1.9 trillion on August 8, 

2011, with the peak daily netted obligation equal to $78 billion. 

The average daily value of mark-to-market contributions to and distributions 

from NSCC’s clearing fund for 2011 was $408.5 million. The peak daily value of 

contributions to and distributions from NSCC’s clearing fund was $4.4 billion on 

August 9, 2011.

B) Aggregate exposure of NSCC to its counterparties 

In 2011, the average daily size of the NSCC clearing fund requirement was $3.9 

billion and the peak size of the NSCC clearing fund requirement was $10.2 billion 

(on August 9, 2011). The average daily VaR estimate at a 99 percent confidence 

level for NSCC in 2011 was $2.9 billion, and the peak VaR for NSCC was $6.3 

billion on August 12, 2011. Using the scenario of a default of NSCC’s largest 

participant family, NSCC’s peak daily liquidity exposure to a single counterparty 

in 2011 was $13 billion. In 2011 the average daily value of all collateral posted 

to NSCC, including excess deposits, was $5.1 billion, and the peak value of 

all collateral posted to NSCC was $11.9 billion (on August 9, 2011). All of the 

collateral in the clearing fund was held by NSCC in cash and U.S. government 

and agency securities. 

NSCC seeks to maintain sufficient liquidity to enable it to settle transactions 

in the default of the member-family to which NSCC has the largest aggregate 

settlement exposure over the three days between the time when its guarantee 

is issued, generally one day following the trade date (T+1), and final settlement 

(T+3). NSCC’s liquidity resources are limited to a line of credit, its retained 

earnings, and the value of assets held as collateral, including certain securities of 

the defaulting member delivered in anticipation of settlement. NSCC’s liquidity 

facility is a $6.2 billion committed line of credit through a syndicated loan facility. 
Appendix A 181

The amount of funds available to NSCC under the committed credit facility 

is limited not only by the overall size of the facility, but also by the amount of 

assets available to NSCC to pledge as collateral to lenders supporting the facility. 

NSCC is also required to contribute up to 25 percent of its retained earnings 

in the event the clearing fund and other collateral is not sufficient to cover a 

loss. NSCC’s retained earnings were $151 million as of December 31, 2011. For 

2011, the average daily amount of NSCC’s liquidity resources held in cash and 

U.S. Treasury and agency securities was $4.7 billion. The peak amount of such 

liquidity resources was $7.9 billion. 

C) Relationships, interdependencies, or other interactions of NSCC with other FMUs 

or payment, clearing, or settlement activities 

NSCC’s CNS system relies on an interface with its affiliate DTC for the bookentry movement of beneficial ownership of securities through securities accounts 

established at DTC to settle obligations. CNS short positions (i.e., obligations 

to deliver) are compared against members’ DTC accounts to determine issue 

availability. If securities are available, they are transferred from the NSCC 

member’s account at DTC to NSCC’s account at DTC. The allocation of CNS long 

positions (i.e., obligations to receive) to receiving NSCC members is processed 

in an order determined by an algorithm built into the system. Securities are 

automatically allocated to NSCC members’ long positions as the securities are 

received by NSCC. 

 Throughout the day, the debits and credits in a DTC participant’s settlement 

account are netted to calculate, at any time, the net debit balance or net credit 

balance for the account. At end-of-day settlement, DTC and NSCC net the 

settlement balances of each DTC participant that is also a member of NSCC. After 

end-of-day netting with NSCC (also known as cross-endorsement), DTC reports 

final figures for each DTC participant. Because each DTC participant must settle 

through a “Settling Bank,” there is a “roll-up” for each Settling Bank which is a 

net-net balance payable from or to such Settling Bank. Payments are made to and 

from DTC’s account at FRBNY through the Federal Reserve National Settlement 

Service System. Payments are made to and from NSCC on the National 

Settlement System through the FRBNY sub-account of DTC. DTC and NSCC are 

also parties to a netting contract and limited cross-guaranty agreement.

CDS Clearing and Depository Services Inc. (CDS, Inc.), the Canadian central 

securities depository and central counterparty, is a full service member of NSCC, 

as well as a participant of DTC. This relationship enables CDS, Inc. participants 

to clear and settle OTC trades with U.S. broker-dealers through sponsored 

accounts maintained by CDS, Inc. with DTC and NSCC and entitles them to 

the privileges of direct membership in both organizations. However, CDS, Inc. 

participants are not members of DTC and NSCC and therefore must look only to 

CDS, Inc. for satisfaction of clearance and settlement obligations. Thus, if a CDS, 

Inc. participant defaults on its obligation to DTC or NSCC, CDS, Inc. is required 

to meet that obligation. CDS, Inc. mitigates its exposure to potential losses by 

requiring participants to commit collateral to CDS, Inc. in amounts equivalent to 

those required as collateral by NSCC and DTC.
182 2012 FSOC // Annual Report

NSCC receives transactions on exercises and assignments of options from OCC 

that are cleared and settled through NSCC. NSCC and OCC rely on one another 

for coverage of certain risks through a Third Amended and Restated Options 

Exercise Settlement Agreement between them (the Accord). The arrangement is 

designed to facilitate the settlement of the underlying securities upon the exercise 

or assignment of such options by mitigating duplicative margin requirements. 

The Accord provides for a two-way guaranty between OCC and NSCC of the 

mark-to-market amounts for options transactions for which NSCC has guaranteed 

completion in the event of a mutual participant’s failure. The failure of OCC 

to meet its obligations under that agreement, and vice versa, could impair the 

ability of the parties to ensure access to adequate margin with respect to a failing 

participant that is a common member of both NSCC and OCC. Additionally, 

there is an agreement with OCC providing for the settlement of exercises and 

assignments of options on securities cleared and settled through NSCC in the 

event of a mutual participant’s failure.

In addition, NSCC’s parent company, DTCC, provides significant services to 

NSCC pursuant to a service agreement, including internal audit, corporate 

communications, corporate and regulatory compliance, executive services, 

finance, administration services, and legal services.

D) Effect that the failure of or disruption to NSCC would have on critical markets, 

financial institutions, or the broader financial system

The primary effect of a failure of or a disruption to the functioning of NSCC 

would be a disruption to the settlement of the $3.5 trillion in notional value of 

transactions typically pending to be cleared and settled through NSCC on an 

average day. Additionally, initiating new trades would be difficult at best due to 

the lack of any clearing agencies offering similar services. Given the enormous 

efficiencies of multilateral netting provided by NSCC, bilateral settlement of 

transactions at current normal volumes would not be practical. 

A failure of or a disruption to the functioning of NSCC would have several other 

likely effects. Members of NSCC could experience financial losses or liquidity 

shortages due to NSCC’s inability to honor its central counterparty obligations 

and due to members’ inability to access clearing fund contributions. There 

would also be financial and operational stresses placed on other FMUs such as 

DTC and OCC, which have closely related operations. Additionally, if bilateral 

gross settlement of NSCC-cleared trades were attempted, DTC’s capacity could 

be overwhelmed as it experiences enormous increases in values and volumes 

of transactions. 

In addition, a failure or a disruption to the functioning of NSCC would likely 

result in significant spillover effects on the rest of the U.S. economy, reducing the 

amount of credit available generally, drawing assets away from other productive 

uses, reducing the value of household savings, and affecting the financing 

activities of corporations and municipalities. 
Appendix A 183

Conclusion

NSCC plays an important role in financial markets due to the high gross 

notional value of the trades NSCC clears and the efficiencies it provides through 

multilateral netting of trades and payments among its members. In particular, 

because NSCC clears and settles virtually all broker-to-broker equity and 

corporate and municipal debt securities transactions in the United States and 

supports more than 50 trading venues for which it provides services (including all 

U.S. securities exchanges and alternative trading systems), a failure or disruption 

to the functioning of NSCC could:

•	 Directly and negatively affect an enormous dollar value and volume of 

financial transactions in equity and debt markets;

•	 Impose material direct losses on NSCC counterparties and create 

new demands for liquidity and new credit problems among financial 

institutions and others that rely on such markets for credit or liquidity;

•	 Cause liquidity or credit problems resulting from its failure or disruption 

to spread quickly and broadly among financial institutions and other 

markets; and

•	 Have cumulative negative effects on U.S. domestic equity and debt 

markets, financial institutions, and the broader financial system that 

are substantial in their own right and so severe as to create a risk that 

liquidity and credit problems experienced could spread among financial 

institutions and other markets and, therefore, threaten the stability of the 

financial system.

Accordingly, it is the assessment of the Council that a failure of or a disruption to 

NSCC could increase the risk of significant liquidity problems spreading among 

financial institutions or markets and thereby threaten the stability of the financial 

system of the United States. For the reasons set out here, the Council determined 

that NSCC should be designated as a systemically important FMU pursuant to 

Title VIII of the Act.

H. The Options Clearing Corporation

Description of The Options Clearing Corporation

The Options Clearing Corporation (OCC) is an FMU as defined in Title VIII 

of the Act because it manages or operates a multilateral system for the purpose 

of clearing and settling securities transactions among financial institutions and 

between financial institutions and OCC.34

OCC is the predominant clearing organization for U.S. options markets. OCC 

provides its clearing members with clearing and settlement services that eliminate 

the need for individual counterparties to bilaterally exchange option premiums 

and collect and maintain margin on a daily basis. These services increase 

the speed and efficiency of trading and settlement while reducing members’ 

operational expenses. Additionally, OCC acts as a central counterparty for certain 

options and other derivatives therefore reducing credit risk for its members.
184 2012 FSOC // Annual Report

OCC’s clearing members serve institutional investors, professional traders, and 

retail customers. OCC currently has approximately 120 clearing members, which 

comprise some of the largest domestic and foreign financial institutions including 

banks, broker-dealers, futures commission merchants, investment advisers, and 

investment funds. OCC’s members include some of the largest banks in the world 

by asset size and include affiliates of 17 of the 29 financial institutions considered 

to be globally systemically important.35

The primary services that OCC provides relate to the clearing and settlement 

of options and futures. The types of options cleared include those on equities, 

indices, currency, and commodities though equity options accounted for 

approximately 93 percent of total clearing volume. OCC is the sole issuer and 

settling agent for all stock options, equity index options, and single-stock futures 

listed on U.S. exchanges. 

When OCC accepts a trade for clearing, it becomes a central counterparty for the 

transaction and therefore is subject to credit risk resulting from the transactions 

it clears. OCC mitigates the risk from these transactions by collecting margin 

collateral from its members and by maintaining a clearing fund. However, it is 

still exposed to market risk should it be necessary to liquidate collateral as well as 

model risk that exists relating to the methodology used to calculate margin calls. 

Analysis of Systemic Importance

(A) Aggregate monetary value of transactions processed through OCC

OCC also cleared stock lending transactions covering a total of 7.3 billion shares 

in 2011. The dollar value and volume of options transactions handled by OCC 

includes substantially all of the equity options traded on U.S. options exchanges. 

In 2011, OCC cleared an average daily gross volume of 18.1 million option 

contracts, 152,000 futures contracts and 29 million stock loan shares. The peak 

daily gross volume for OCC in 2011 was approximately 41.5 million option 

contracts, 383,000 futures contracts and 89.3 million stock loan shares. OCC’s 

average month-end open interest for 2011 was 305 million option contracts and 

960,000 futures contracts. Daily open interest peaked at approximately 386 

million option contracts on August 19, 2011 and 1.2 million futures contracts on 

December 16, 2011. 

In 2011, the average daily gross value of premium exchanged by OCC was $5.95 

billion for option contracts and $1.2 billion for stock loan transactions. The peak 

daily gross value of premium exchanged during 2011 was $20.3 billion for options 

contracts and $3.1 billion for stock loan transactions, respectively. The average 

notional value of open interest for contracts cleared by OCC in 2011 was $3.3 

trillion based on month-end data.

OCC processed an average of $1.2 billion in daily changes in initial and variation 

margin payments in 2011, and the peak daily initial and variation margin 

payments processed by OCC was $22.1 billion on August 8, 2011. 
Appendix A 185

(B) Aggregate exposure of OCC to its counterparties 

As of December 31, 2011, OCC held $76.3 billion in margin deposits on behalf 

of its clearing members, $57.3 billion of which consisted of cash and other 

underlying securities accepted as margin by OCC and approximately $19 billion 

of which consisted of equity and index option escrow deposits accepted in lieu 

of margin. As of December 31, 2011, OCC also maintained a clearing fund for 

options and futures clearing activity totaling $2.9 billion. All of the collateral in 

the clearing fund was held in the form of cash and U.S. Treasury securities.

In 2011, the average aggregate daily value of collateral (after haircut) posted to 

OCC was $89.8 billion. OCC’s VaR estimate at a 99 percent confidence level was 

on average $15 billion in 2011, and the average collateral required to be deposited 

with OCC to cover that exposure was $33.6 billion. The daily average size of the 

OCC clearing fund in 2011 was $2.8 billion, and the remaining $53.4 billion in 

collateral deposits consisted of mark-to-market charges to cover changes in the 

value of option positions and stock and index option contracts held in escrow 

in lieu of margin. The average collateral coverage ratio for OCC during 2011 

was 135 percent based on the ratio of valued collateral (not including option 

collateral held in escrow) over estimated margin requirements, using monthend data over a 12-month period. The aggregate dollar value of collateral (after 

haircut) posted to OCC peaked at $123.7 billion on August 9, 2011. In 2011, the 

peak VaR was $35.7 billion, the peak collateral requirement was $63.5 billion, and 

the peak clearing fund requirement was $3.4 billion. 

OCC’s liquidity resources include the defaulting member’s collateral, the assets 

in the clearing fund, and a $2 billion secured line of credit.36 The amount of 

funds available to OCC under the committed secured credit facility is constrained 

not only by the overall size of the facility, but also by the amount of assets that 

OCC can pledge as collateral to lenders supporting the facility, which is limited 

to the securities in OCC’s clearing fund. OCC’s bylaws give it the authority to 

use a defaulting clearing member’s margin and clearing fund deposits to obtain 

temporary liquidity for purposes of meeting obligations arising out of (1) the 

default or suspension of a clearing member or any action taken by OCC in 

connection therewith or (2) the failure of any bank or any clearing organization 

to perform any obligation owed to OCC. In addition, OCC may use such assets 

to borrow or otherwise obtain funds through any means determined to be 

reasonable by its Chairman, Management Vice Chairman, or President of the 

Corporation in his or her discretion (including, without limitation, pledging such 

assets as security for loans and/or using such assets to effect repurchase, securities 

lending, or other transactions). OCC rules provide, among other things, that 

upon the suspension of a clearing member, OCC shall promptly liquidate, in the 

most orderly manner practicable, all of the clearing member’s margin. 

For 2011, the average amount of OCC’s liquidity resources held in cash and 

U.S. Treasury and agency notes was $12 billion, and the peak amount of liquid 

resources was $25.8 billion. The peak liquidity exposure OCC experienced 

with a single counterparty occurred on September 19, 2011, when the exposure 

totaled $3 billion. OCC did not provide information regarding the average peak 

exposure to individual members during the course of 2011.
186 2012 FSOC // Annual Report

(C) Relationships, interdependencies, or other interactions of OCC with other FMUs 

or payment, clearing, or settlement activities 

OCC’s operations and the current market structure for listed options trading 

and clearing involve significant interdependence between OCC, other FMUs, 

settlement banks, clearing members, credit facility lenders, custodians, 

exchanges, cross-margining entities, and pricing vendors. 

OCC maintains two active cross-margin relationships with the CME and ICE 

Clear U.S. OCC clearing members use these cross-margin relationships to realize 

the benefits of net settlement across the securities and futures markets, as well 

as billions of dollars of savings on clearinghouse margin requirements. OCC’s 

average margin amount in 2011 subject to these cross-margining arrangements 

was approximately $2.3 billion.

OCC is party to a multilateral cross-guaranty agreement with DTC, FICC, and 

NSCC, which provides for the sharing of residual close-out proceeds from 

a defaulting member between these clearing agencies in the event that one 

clearinghouse is in an excess position and another is in a shortfall position. 

In addition, OCC maintains an agreement with NSCC that governs the loss or 

profit sharing resulting from the settlement of exercised or assigned options of 

a common defaulting member. That arrangement is designed to facilitate the 

settlement of the underlying securities upon the exercise or assignment of such 

options by mitigating duplicative margin requirements.

DTC, in its role as a securities depository, provides services to OCC clearing 

members, including the ability to pledge collateral held in DTC accounts to 

OCC for collateral purposes. The most prevalent form of collateral—valued 

securities—is pledged to OCC in this manner. DTC also provides the operational 

support for securities lending transactions to be executed in both the bilateral 

stock loan program and the AQS Market Loan platform.

(D) Effect that the failure of or disruption to OCC would have on critical markets, 

financial institutions, or the broader financial system

Should there be a failure of or disruption to the functioning of OCC, the 

immediate effects could be manifested in two primary forms. The first is direct 

financial stress placed on clearing members who would be at least temporarily 

unable to access margin collateral and clearing fund deposits. Additionally, there 

could be a complete or partial disruption of the $3.3 trillion in average notional 

value of open interest for which OCC is issuer and guarantor as well as a sudden 

decrease in options trading activity in the markets for which OCC is the sole 

clearing agent due to increased risk and decreased efficiency in OCC’s absence. 

As of December 31, 2011, OCC held $57.3 billion in margin deposits on behalf 

of its clearing members, $2.9 billion in clearing fund deposits, and $19 billion 

in equity and index option escrow deposits accepted in lieu of margin. A failure 

of or disruption to the functioning of OCC could temporarily limit participants’ 

access to these deposits in the short term and possibly result in losses of the $19 

billion of escrow deposits.
Appendix A 187

In addition, in the event OCC is no longer available as an issuer and guarantor, 

options cleared and settled through OCC may have to be replaced, to the extent 

practicable, including through entering into transactions in the underlying 

instruments, with an average replacement value of approximately $3.3 trillion. In 

the event such a disruption were to occur, settlement of many future transactions 

in options contracts currently cleared by OCC could be required to occur on a 

bilateral basis between the parties to the respective transactions in a daily average 

amount of $5.95 billion. The same is true of stock loan transactions with an 

average daily gross value of $1.2 billion.

In addition, a failure or disruption to the functioning of OCC would likely result 

in significant spillover effects on the rest of the U.S. economy, reducing the 

amount of credit available generally, drawing assets away from other productive 

uses, disrupting the markets for securities and indexes underlying options cleared 

by OCC, reducing the value of household savings, and reducing the ability of 

corporations to use options to manage risks. 

Conclusion

OCC is the sole clearing agency providing clearance and settlement services for 

U.S.-listed options. A failure or disruption of OCC could:

•	 Directly and negatively affect significant dollar value and volume of 

financial transactions in options and futures markets;

•	 Impose material direct losses on OCC counterparties and create 

new demands for liquidity and new credit problems among financial 

institutions and others that rely on options markets for risk management 

and other purposes;

•	 Cause liquidity or credit problems resulting from its failure or disruption 

to spread quickly and broadly among financial institutions and other 

markets; and

•	 Have cumulative negative effects on U.S. domestic options and futures 

markets, financial institutions, and the broader financial system that 

are substantial in their own right and so severe as to create a risk that 

liquidity and credit problems experienced could spread among financial 

institutions and other markets.

Accordingly, it is the assessment of the Council that a failure of or a disruption to 

OCC could increase the risk of significant liquidity or credit problems spreading 

among financial institutions or markets and thereby threaten the stability of the 

financial system of the United States. For the reasons set out here, the Council 

has determined that OCC should be designated as a systemically important FMU 

pursuant to Title VIII of the Act.