NSCC hit by $1.06bn margin breach

In total, the DTCC division reported 96 margin breaches at end-March 2021

The National Securities Clearing Corporation reported a $1.06 billion margin breach in the first quarter of this year, the largest by the Depository Trust & Clearing Corporation's division since public disclosure began in the third quarter of 2015.

The peak breach in Q1 eclipsed the previous record for the NSCC of $318 million posted in Q1 2020.



The clearing house incurred 96 initial margin breaches in the quarter, with an average size of $28.8 million.

Over the three months to end-March, the maximum aggregate initial margin call was $9.6 billion for positions linked to the NSCC. In Q4 2020, the maximum call was $17.2 billion.

Total initial margin held by the NSCC's default fund stood at $15.2 billion, up 26% on end-2020.



The two other clearing houses within DTCC saw margin breaches decrease in size and frequency over Q1.

The government securities division reported 70 margin breaches as of end-March, averaging $29.7 million in size, a peak breach of $269.2 million. 

The mortgage-backed securities division incurred 105 breaches, averaging $8.49 million in size, with the single largest shortfall amounting to $91.3 million.

What is it?

A margin breach occurs when the collateral in a clearing member’s account falls short of the amount needed to cover its marked-to-market exposure. This implies the clearing member has not posted enough cash and securities to the central counterparty to make up for any losses in the event of its collapse. If a breach isn’t covered quickly by a clearing member, it risks being labelled as in default.

Clearing houses subscribing to disclosure rules set by international standard-setters the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions must disclose quarterly the number of times in the past 12 months that these shortfalls occur.

They must also report the average and peak size of these uncovered exposures.

Why it matters

The NSCC is currently facing serious questions over the handling of broker Robinhood during the market frenzy involving surging meme stocks in late January. However, the $1.06 billion margin breach reported in the first quarter is unlikely to be related to the meme-stock volatility.

The DTCC says the peak breach occurred on January 22, 2021, six days before it issued a special margin charge to Robinhood. The central counterparty adds the breach “was mainly driven by a single security exhibiting idiosyncratic risk”, but doesn’t go any further than that in clarifying who was behind it.

The latest CPMI-Iosco quarterly filing on default resources shows the NSCC fund had just $102.6 million of the clearing house’s own capital at the end of March, while clearing members contributed a further $16 billion. This implies that, had a default occurred, it would have been clearing members’ funds that would have been depleted in the aftermath.

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