Understanding the National Securities Clearing Corporation (NSCC): Its Role and Impact
National Securities Clearing Corporation (NSCC) is a subsidiary of the Depository Trust & Clearing Corporation (DTCC) that provides centralized clearing, risk management, information, and settlement services to the financial industry.
The NSCC offers multilateral netting so that brokers can offset buy and sell positions into a single payment obligation. This reduces their financial exposure and capital requirements.
How the National Securities Clearing Corporation (NSCC) Works
The National Securities Clearing Corporation was established in 1976 and is a registered clearing corporation, regulated by the U.S. Securities and Exchange Commission (SEC).
Before its inception, strong demand for paper stock certificates had nearly overwhelmed many stock brokerages, causing stock exchanges to close once a week.
Key Takeaways
- National Securities Clearing Corporation (NSCC) founded in 1976 is a subsidiary of Depository Trust & Clearing Corporation (DTCC).
- The NSCC operates as a seller for every buyer, and buyer for every seller in the financial industry for trades that settle in U.S. markets.
- The organization provides settlement services to the financial industry, along with risk management, information, and centralized clearing.
- The NSCC offers multilateral netting, allowing brokers to offset buy and sell positions into a single payment obligation.
Multilateral netting was proposed to address this problem. This is an arrangement among multiple parties to sum transactions in a centralized way rather than settle them individually. This avoids the need for multiple invoicing and payment settlements among various parties. The decision to implement multilateral netting led to the formation of the NSCC.
The NSCC handles nearly all of the corporate equity and bond trades made each day in the United States. It uses continuous net settlement (CNS) to record transactions throughout the day and net them into single positions at the end of each day.
Today, this corporation serves as the seller for every buyer and buyer for every seller for trades that settle in U.S. markets. The NSCC helps reduce the value of payments exchanged by an average of 98% daily. Additionally, NSCC generally clears and settles trades on a T+2 basis. The NSCC, along with the Depository Trust Company (DTC), another subsidiary of the DTCC, plays a significant role in the settlement and clearing of securities transactions. They are the largest providers of these services worldwide.
NSCC and Depository Trust & Clearing Corporation (DTCC)
NSCC is a subsidiary of DTCC. Along with NSCC, DTCC manages an additional four clearing corporations and one depository. DTCC is the world’s largest financial services corporation dealing in post-trade transactions. DTCC’s core function is to integrate NSCC and DTC, streamlining clearing and depository transactions to reduce costs and increase capital efficiency.
Founded in 1973, DTCC remains one of the world’s largest securities depositories. The entity is organized as a limited purpose trust company and provides electronic safekeeping of securities balances. Also, DTC acts as a clearinghouse to process and settle trades in corporate and municipal securities.
Depository Trust & Clearing Corporation takes offsetting positions with clients in every transaction to ensure that transactions are completed promptly and efficiently. Clearing brokers associated with the DTCC are exchange members, who help ensure that trades settle appropriately and that transactions are successful. Additionally, these clearing brokers maintain paperwork associated with the clearing and executing of a transaction.
Related Terms: Depository Trust & Clearing Corporation (DTCC), multilateral netting, clearing and settlement.
