NSCC’s year of living dangerously

The CCP’s models are falling short time and time again, and the consequences could be disastrous

As the saying goes: third time’s a charm. Except this isn’t the case for the lynchpin of the US equity markets, the National Securities Clearing Corporation (NSCC).

Between January and March last year, the central counterparty (CCP) was caught $600 million short of its Cover 1 obligation. Simply put, it didn’t have enough liquid resources to cover the default of its largest clearing member in an extreme-but-plausible stress scenario.

Had the worst happened, members would have had to plug the hole to avoid the clearing house’s collapse. Luckily, and despite a frenzy of activity driven by the meme-stock volatility that unfolded in Q1, the worst didn’t happen.

Good news all round, some market participants may have thought. Not so fast.

As the second quarter rolled in, the NSCC was again caught off-guard to cover its worst-case hypothetical loss. This time its deficit was even greater. On two separate days in June, the CCP’s funds were short of the level required to absorb the default of its largest member by $5 billion and $1 billion, respectively.

Perhaps the CCP had learned its lesson by the third quarter. Indeed, the utility replenished its liquidity pool over this period, boosting its reserves by 7%. But again its resources proved insufficient. Option expiration days in July and September led to a spike in clearing activity, leaving the CCP’s liquid funds short by $594 million and $32.7 million, respectively. Read more: https://bit.ly/3K7tJ5d

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