DTCC Recovery and Wind Down (“R&W”) Procedure DD

DD

Welcome back to another in my legal series DD, where members of the DTCC can fuck the market and the world doesn’t matter, until the DTCC says it does.

Howdy apes, as promised, my DD into the R&W plan filing of the NSCC, DTC and FICC; collectively, the DTCC as a whole.

As always, this is not intended to be either financial or legal advice, please ensure to conduct your own research before making any decisions based on a rambling ape.

My customary top TLDR;

TLDR: The NSCC is tightening its rules and wording to afford absolutely no confusion that should a broker or member cause a fat loss, it will incentivise the sharks to eat the sharks to survive, and if not, will absolutely scalp every member for all they are worth (especially if they are involved) as a final fuck you before winding down

With that said, and to coin our good friend u/Deepfuckingvalue, a few things the R&W Procedure is not.

This is not a new procedure implemented recently on the DTCC predicting GME will fuk the market. The timing of the filing though…

This kind of procedure also is not uncommon for an institution of this nature to have, in fact they are required to have it.

In short, this is a plan for when apes decide they like the stock, or I mean, if the market explodes owing to some questionable decision of the DTCC’s members, but that would never happen right?

Every two years, the DTCC and co must update this procedure and it’s about due, but the filing specifically states it will take into account current market conditions

I could explain why such a plan is required by law, but that’s boring.

Instead, think of this plan as a last will and testament; except rather than the DTCC dishing out every asset it has out in good will, it seeks to do the complete opposite and scalp every last penny from its family before either rising again like Dracula after a hearty meal, or finally biting the dust.

As an aside, this filing is 141 pages long (despite 80 pages of redactions, wut?) and about as dry as this forum’s collective love life since they discovered GME. As a result, I will not be going into the specifics of every proposed change, but rather my highlights and speculation on their potential impact.

As I believe the NSCC plays the strongest role in all this, this entire post is derived from the NSCC-2021-004 filing.

If I miss anything, please let me know. Now buckle up apes, let’s dig in.

Onto the DD

• First thing I notice, the DTCC seeks to expand critical service providers to as wide a catchment area as possible.

• Next thing I notice, the DTCC want to change the name from the R&R Steering Group, who will deal with the wind down should the shit hit the fan, to the Recovery and Wind-down Planning Council. This has no effect other than clarifying their role as an advisory body, but it sounds way cooler so we’re off to a good start (end shitpost portion).

• I think it is incredibly important to note, the DTCC’s plan is to survive first. This means utilising any and all possible means to scrape money from whatever source it can before then footing the bill on everyone else.

• Therefore a good proportion of the rule change is to ‘maximise liquidity’ in relation to a member default, in ape speak, to use member bananas to pay owed bananas first.

• There is a mention that they seek to include cash proceeds from debt issuance to the R&W Procedure, therefore in my view likely strongly linking this to the new SLD rule.

• An interesting point, the R&W Procedure wants to update a table to include a procedure which, and I quote ”is being enhanced in support of the bulk transfer initiative, which is an industry effort designed to prepare carrying broker-dealers for an emergency mass transfer of large quantities of customer accounts and assets from a distressed broker to a financially secure broker.

Did anyone just get a flashback of being a boy in Bulgaria?

• The Crisis Continuum, seriously, whoever is coming up with these names needs a raise. Anyway, this rule essentially allows the NSCC to go all NSA on members, track absolutely everything, risk test and ensure even in the worst case scenario a member won’t go poof. What we’re interested in however is this allows the NSCC to ensure members can pay their Clearing Fund requirements (see my other DD) and the change? Basically removes implied volatility from the calculation as it is acknowledged members will be tracked daily and in a more simple manner, i.e. your risk – our capital, whatever is left over, you pay

• The Recovery Corridor and Recovery Phase, OK fine, this one unfortunately is not named as well. But, this rule specifies indicators the NSCC uses to prepare itself for potential recovery. Kind of like a smoke alarm, so you can get your ass out before being burned. Put simply, when the smoke alarm bleeps, as we would run for the door, the NSCC will use this as an excuse to activate its ability to liquidate or hedge on risky member positions to protect itself.

• There is also actually a huge change here, at least from a legal wording stand point. First, the rule will charge the Clearing Fund of a defaulting member first after that, they won’t just take all other member’s ‘contribution’ of $10,000 to the Clearing Fund, but instead charge all members on a pro rata basis. What this boils down to is the more involved you are in the event that fucks us, the more we will make you pay, but this will account for AT LEAST 50% of the NSCC’s overall risk over 12 months. Now that will be some serious $$$.

• Boiled down thereafter, the NSCC seeks to clarify and tighten their wording so as to prevent any possibility of tricky lawyer wording antics, which may produce ambiguity in the rules and prevent any member from trying to squeeze out of the rules on a technicality

• This rule takes effect IMMEDIATELY upon filing, therefore is active as of 23 March 2021, the DTCC can do thisby using an exemption in the law which essentially states as it doesn’t really change what they are legally required to do, they can just do it, so it is in effect as of now, as with their daily position requirement filing; unless the SEC suspends it for 60-120 days for further information (unlikely)

That’s about it apes, before we hit around 80 page redactions intended solely for the SEC. I wonder wtf was on those pages.

To summarise, these rules are in effect immediately and whilst they are not new, they do reflect current market conditions and tighten the wording so as to incorporate the new rules and prevent lawyer trickery.

Put simply, I think its bullish AF on the basis the general sentiment of the document, at least to me, is to provide absolutely no ability for either a defaulting member, or other members to not pay whatever they can to help the DTCC survive a critical event… which in my view is GME

As a closing thought, whilst the 801 rule is not yet active, this rule change could very well spell the start of the DTCC and co preparing themselves for an event which risks their survival, which will make the next trading week very interesting in my view (no dates as always).

Edit: obligatory 🚀🦍 and formatting