Both
NSCC and DTC build several protections into the settlement process,
to ensure that all firms will meet their financial obligation
to pay. Those protections include a
collateral
requirement for each firm.
Since NSCC is responsible for guaranteeing that
trades will be completed in the event of default, it collects
collateral from member firms. The amount required is based on
a number of factors, including the volume of trading and the risks
involved.
At DTC, a firm must keep securities valued at the
required amount in its DTC account. There is also a dollar cap
on what each firm can owe on unsettled transactions, based on
a number of factors, including its trading patterns. That cap
is always less than the assets DTC has on hand to fulfill its
settlement obligations.
Fulfilling obligations
If a firm becomes insolvent between trade and settlement,
its collateral can be liquidated to help pay its outstanding trading
obligations. This way NSCC can guarantee that all transactions
it clears will be settled, or in the case of DTC, that the institutional
trades will not go through if a firm cannot pay or deliver shares
if required.
It takes two, or three
The firms that form the two sides of a trade are called
contraparties. But in the clearing and settlement
process, NSCC serves that role for each firm in equity
transactions.That means a firm that's selling
doesn't have to worry about the creditworthiness
of the firm that is buying, and vice versa.
