What is the Fixed Income Clearing Corporation (FICC)?
The Fixed Income Clearing Corporation (FICC) is a crucial regulatory clearing agency in the United States, intricately involved in the confirmation, settlement, and delivery of fixed-income assets. Established in 2003, it operates under the umbrella of the Depository Trust & Clearing Corporation (DTCC). By ensuring the systematic and efficient settlement and clearing of U.S. government securities and mortgage-backed security (MBS) transactions, the FICC plays a fundamental role in maintaining market stability and trust.
Key Insights Into the FICC
- The FICC serves as a clearinghouse for certain fixed-income securities traded in the United States.
- This agency is a subsidiary of the Depository Trust and Clearing Corporation (DTCC).
- Created in 2003 through the merger of the Government Securities Clearing Corporation and the Mortgage-Backed Security Clearing Corporation, the FICC aims to ensure the orderly and effective clearance of government and mortgage-backed securities.
- The primary goal of the FICC is to streamline the settlement process for government securities and mortgage-backed securities.
- FICC operates through two main divisions: the Government Securities Division and the Mortgage-Backed Securities Division.
Understanding the FICC and Its Operations
The Depository Trust and Clearing Corporation (DTCC) was formed in 1999 by merging the Depository Trust Company and the National Securities Clearing Corporation. The primary mission of the DTCC is to offer clearing and settlement services to the financial markets.
Formed in 2003, the FICC functions as a subsidiary of the DTCC, born out of the merger between the Government Securities Clearing Corporation (GSCC) and the Mortgage-Backed Security Clearing Corporation. The U.S. Securities and Exchange Commission (SEC) registers and regulates the FICC, which is essential in ensuring the structured and smooth settlement of U.S. government securities and mortgage-backed securities (MBS).
For instance, Treasury notes and bonds are settled on a T+1 basis, requiring highly efficient systems. The FICC leverages the services of two main clearing banks, Bank of New York Mellon and JPMorgan Chase Bank, to facilitate swift and seamless transactions. The FICC, unique in its field for being the sole clearinghouse for U.S. government securities transactions, guarantees transactions by acting as both the buyer for every seller and the seller for every buyer, thus mitigating counterparty risk.
Special Considerations
In October 2021, the SEC penalized the FICC with an $8 million fine for deficiencies in risk management within its Government Securities Division. The SEC highlighted a lack of appropriate risk management policies from April 2017 to November 2018 and compliance issues regarding industry rules on margin coverage between 2015 and 2016.
The Structure of the Fixed Income Clearing Corporation
The FICC operates through two principal divisions: Government Securities Division (GSD) and Mortgage-Backed Securities Division (MBSD).
Government Securities Division (GSD)
The GSD handles the issuance and resale of government securities. It efficiently nets trades in U.S. government debt markets, including repurchase agreements (repos) and reverse repos. This division processes transactions such as Treasury bills, bonds, notes, zero-coupon securities, government agency securities, and inflation-indexed securities. The GSD offers real-time trade matching via an interactive platform that enables market participants to monitor trade statuses continuously.
Mortgage-Backed Securities Division (MBSD)
The MBSD supports automated and real-time trade matching, trade confirmation, risk management, netting, and electronic pool notification within the MBS market. Utilizing its RTTM (Real-Time Trade Matching) service, the MBSD ensures that trade executions are legally binding immediately. Upon comparison of trade data by the MBSD, a valid and enforceable contract guarantees the settlement of trades at the point of comparison. Key participants in the MBS market include mortgage originators, government-sponsored enterprises, registered broker-dealers, institutional investors, investment managers, mutual funds, commercial banks, insurance companies, and other financial institutions.
Related Terms: Depository Trust and Clearing Corporation, Government Securities Clearing Corporation, Mortgage-Backed Security Clearing Corporation, Risk Management.
References
- Depository Trust & Clearing Corporation. “About DTCC: Fixed Income Clearing Corporation (FICC)”.
- Depository Trust & Clearing Corporation. “DTCC Digital Museum”, Select 1990s, 1999.
- Depository Trust & Clearing Corporation. “Our Capabilities”.
- U.S. Securities and Exchange Commission. “Fixed Income Clearing Corporation Exhibits to Form CA - 1: Exhibit J (Item 19)”.
- U.S. Securities and Exchange Commission. “SEC Charges Fixed Income Clearing Corp. with Having Inadequate Risk Management Policies”.
- Depository Trust & Clearing Corporation. “Fixed Income Clearing - GSD”.
- Depository Trust & Clearing Corporation. “Fixed Income Clearing - MBS Division”.
- Depository Trust & Clearing Corporation. “Real-Time Trade Matching”.
