Understanding the NSCC: Risk Management for U.S. Securities Markets

The National Securities Clearing Corporation (NSCC) provides risk management, settlement, and clearing services to the U.S securities exchange market. It acts as a central clearing counterparty (CCP) for trade in equities, foreign exchangeForeign ExchangeForeign exchange (Forex or FX) is the conversion of one currency into another at a specific rate known as the foreign exchange rate. The conversion rates for almost all currencies are constantly floating as they are driven by the market forces of supply and demand., corporate debt, and other investments in the U.S. market.

Founded as a business corporation in 1976, the National Securities Clearing Corporation is administered by the U.S. Securities and Exchange Commission (SEC)Securities and Exchange Commission (SEC)The US Securities and Exchange Commission, or SEC, is an independent agency of the US federal government that is responsible for implementing federal securities laws and proposing securities rules. It is also in charge of maintaining the securities industry and stock and options exchanges. Hence, NSCC must meet the requirements established by the SEC and incorporated in the Exchange Act.

The NSCC needs to maintain credible risk management controls and fulfill the statutory requirements according to the Exchange Act. The requirements are established as “Covered Clearing Agency” rules to improve the legal structure for the oversight of clearing agencies. The Depository Trust and Clearing Corporation (DTCC), the parent company of the NSCC, acts as a contra-party for the exchange of securities and a central depository of securities.

Summary

• The National Securities Clearing Corporation (NSCC) provides clearing, settlement, and other post-trade financial services to the U.S. securities exchange market.
• The NSCC uses its Universal Trade Capture System and Continuous Net Settlement System for trade capture and settlement of transactions, respectively.
• The clearance and settlement services are provided on an end-of-day basis, where the members are issued one security position and a net debit or credit settlement obligation.

Functions of the National Securities Clearing Corporation

1. Captures trade

The National Securities Clearing Corporation captures trade-related data daily from 50 trading venues in the U.S. using the Universal Trade Capture (UTC) system. The data is then validated, the buying and sale transactions are matched, and the trade comparison results are reported to the members.

Currently, marketplace comparison is already performed on 90% of the trade data captured. The NSCC validates and records the data using the UTC system and reports it to the members.

2. Clearance and settlement

The NSCC uses its Continuous Net Settlement (CNS) System for clearance and settlement services. The CNS system issues each member one short (sell), net long (buy), or flat position for a certain settlement date by netting all the validated and recorded transactions. As it is a continuous settlement system, the new positions issued and the positions that remain open after their original settlement date are netted so that the failed positions are closed.

For settlement purposes, the NSCC assumes the responsibility for its members for receiving and paying for the securitiesMarketable SecuritiesMarketable securities are unrestricted short-term financial instruments that are issued either for equity securities or for debt securities of a publicly listed company. The issuing company creates these instruments for the express purpose of raising funds to further finance business activities and expansion. and delivering the securities. The netted system of CNS reduces the number of securities needed to transfer to settle the transactions, thus reducing the cost. The NSCC processes the transactions for the securities that are eligible for book-entry transfer on Depository Trust Corporation (DTC) books.

3. Balance order accounting

The National Securities Clearing Corporation provides a Balance Accounting System for the securities that are not eligible for CNS processing. The system produces instructions for receipt and delivery of netted and allotted positions to the NSCC members. The balance order portion settled through the NSCC is called the “clearance cash adjustment,” which provides a modification to mark-to-market price to process the allotted and netted balance orders.

The NSCC does not participate in the balance order transactions; however, it provides the deliver and receive parties a trade guaranty effective until the close of business on the particular settlement date.

4. Daily money settlement

At the NSCC, settlement of money takes place at the end of the day. The process is centralized with the Depository Trust Company’s money settlement so that common participants can be provided with consolidated reports and a single access point for settlement information. The NSCC summarizes and nets the money debit and credit transaction data recorded throughout the day, and for each participant, generates an aggregate money credit or debit.

The transactions for DTC participants are also recorded and netted. The net money settlement commitment for each participant of each clearing agency is generated by netting the final numbers for each participant of both the clearing agencies.

5. Correspondent clearing service

The National Securities Clearing Corporation permits clearance and settlement transactions of members to be done by other members acting as an executing broker known as a special representative.

For an original buying order, the transaction would see the member as a buyer and the special representative as a seller, thus netting out the executing broker of the original trade transaction. The Universal Trade Capture System is used to process the correspondent clearing services.

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