Board of Governors of the Federal Reserve System

July 12, 2024

Central Clearing Counterparties in the Financial Accounts of the United States

Matthew Guse, Matthew Hoops, and Maria Perozek¹

Introduction

The March 7, 2024, release of the Z.1 Financial Accounts of the United States (the Accounts) introduced a new supplementary table, Central Clearing Counterparties (table L.132.c), which separately reports financial assets and liabilities of central clearing counterparties (CCPs). CCPs in the Accounts are financial intermediaries that support the functioning of financial markets by taking on counterparty credit risk and providing clearing and settlement of securities and derivatives.² In the United States, CCPs clear a large majority of securities and derivatives transactions in the markets they operate in and are therefore critical to the functioning and stability of the financial system. For example, in 2022, the three subsidiaries of the Depository Trust and Clearing Corporation (DTCC) collectively processed $2.5 quadrillion in securities transactions and the Chicago Mercantile Exchange (CME) Group processed clearing transfers of $6 billion each day.³

The purpose of this note is to describe the important role that CCPs play in financial markets and to discuss their relevance in financial statistics, with particular focus on how the assets and liabilities of CCPs are measured and classified in the Accounts. The note will also highlight notable developments that influenced the growth of CCP balance sheet assets and changes in the composition of holdings over time.

Background

CCPs in the Accounts are designated financial market utilities (FMUs) that provide clearing and settlement services for a large share of securities and derivatives transactions.⁴ In this role, CCPs act as the counterparty to both the buyer and seller in a transaction, guaranteeing payment if the other party defaults. This central counterparty structure allows the CCP to facilitate multilateral netting of exposures across the clearing members, which typically reduces the amount of funds needed to settle transactions. This system also promotes financial stability by eliminating counterparty risk for the participants and mitigating knock-on effects that could otherwise be triggered by a large single counterparty default.

To manage the risks associated with guaranteeing clearing and settlement activity, CCPs require clearing members to make margin deposits and contribute to clearing funds, which can be used to offset large losses, such as the simultaneous default of two large clearing members. If an individual counterparty's margin deposits are insufficient to cover its obligations, the total pool of clearing funds is available to cover additional losses, further reducing the risk of significant loss and potential knock-on effects in the financial system.

Central Clearing Counterparties in the Accounts

Since the 2008-2009 global financial crisis (GFC), there has been increased demand for official statistics on CCPs. In particular, proposed updates to the international guidelines that govern the compilation of the Accounts, known as the System of National Accounts (SNA), recommend that CCPs be separately identified in the financial accounts as a subsector of other financial corporations.⁵ The G20 Data Gaps Initiative phase II, recommendation II.5 also requests detailed data on nonbank financial intermediaries, including CCPs, to be reported within the SNA framework.⁶ In response to this increased demand, Board staff began compiling publicly available data on CCPs for use in the Accounts. CCP statistics are now integrated in the Accounts and are provided for international data collections such as the Financial Stability Board Nonbank Financial Intermediary annual monitoring exercise.⁷

In the March 10, 2022, Z.1 release, financial assets and liabilities of CCPs were incorporated into the Accounts' other financial business sector (tables F.132 and L.132).⁸ The sector currently includes five CCPs: the Chicago Mercantile Exchange; ICE Clear Credit; the Options Clearing Corporation; and two of three subsidiaries of the Depository Trust and Clearing Corporation, the Fixed Income Clearing Corporation, and the National Securities Clearing Corporation. Three of the eight designated FMUs are not considered CCPs because they do not interpose themselves between counterparties in trades and positions.^9,10,11 More recently, in the March 7, 2024, Z.1 release, a new supplementary table, Central clearing counterparties (table L.132.c), was added to provide detail on financial assets and liabilities of CCPs separately from other entities in the other financial business sector.

Source data for each of the five CCPs in the Accounts are obtained from public annual and quarterly financial statements beginning 2000:Q1.¹² The financial statements provide balance sheet information, including clearing fund investments and liabilities, cash and other assets, and other liabilities.

The assets of CCPs primarily consist of margin and clearing fund contributions from members that can be in the form of cash, securities, or other non-cash assets. Only cash margin, cash contributions, or securities where economic ownership is transferred to the CCP are recorded as assets on the CCP balance sheet.¹³ For these contributions, a corresponding liability to clearing members is also recorded. In the Accounts, these collective liabilities are called "clearing fund contributions" and are classified as loans in the financial instrument category "other loans and advances" (tables F.216 and L.216).¹⁴ This aligns with the current Accounts treatment of securities brokers and dealers' payables to customers, which include margin deposits, and are also classified as loans. In the SNA, margin deposits may be classified as other deposits under certain circumstances, but such a classification is ruled out in this case for two reasons. First, these contributions are not available for discretionary withdrawal by members and are returned at settlement; second, only repayable margin deposits may be classified as deposits; however, CCP financial statements do not contain sufficient detail to separately identify margin deposits from other clearing fund contributions in most cases.¹⁵

CCPs in the Financial Accounts Tables

The new supplementary table for CCPs in the Accounts (L.132.c, shown below) records the financial assets and liabilities of CCPs separately from other entities captured in the other financial business sector.¹⁶ On the liability side, line 10 shows other loans and advances (clearing fund contributions), which accounts for almost all CCP liabilities. Table L.216 (also shown below) from the core Accounts shows the sector counterparties to these contributions. Security brokers and dealers claims on CCPs for clearing fund contributions account for around 60 percent of the total in 2023:Q4, while U.S.-chartered depository institutions account for 9 percent.¹⁷ The remainder is attributed to other non-CCP entities in the other financial business sector because there is no readily available data to distinguish other counterparties, which may include insurance companies, asset managers, and entities in the rest of the world. Other CCP liabilities on L.132.c include relatively small amounts of commercial paper (line 11), and other miscellaneous liabilities (line 12).¹⁸

Table 1: L.132.c Central Clearing Counterparties (1)

Table 2: L.216 Other Loans and Advances

On the asset side of the CCP balance sheet, nearly all $236.6 billion in total financial assets shown in line 1 on table L.132.c for 2023:Q4 are held in highly liquid assets, reflecting the need for funds to be available for immediate use to manage margin or in the event of a member default. The largest share of liquid assets is held in deposits, primarily Federal Reserve deposits (line 3), which accounted for 62.8 percent in 2023:Q4. Treasury securities (line 7) were 26.3 percent and also account for a significant portion of CCP assets for the same period. Other types of assets, such as money market funds (line 5), security repurchase agreements (line 6), and miscellaneous assets (line 8), each account for a small share of the total.

In the core sector tables in the Accounts, CCPs are included in the other financial business (OFB) sector, tables F.132 and L.132, along with other financial corporations that are not captured elsewhere in the Accounts.¹⁹ In the L.132 table shown below, lines 1, 2, 3, 4, 7, 13 include assets of CCPs, and lines 14, 15, 17, 19, 21, and 25 include liabilities of CCPs. Notably, the clearing fund contributions to CCPs account for virtually all other loans and advances liabilities for the sector (line 21).

Table 3: L.132 Other Financial Business (1)

Historical Trends in the Data

This section highlights a few notable changes in financial assets and shifts in portfolio holdings of CCPs over time. First, we note that CCP assets tend to increase markedly during times of financial stress; for instance, during the GFC in 2008 and again at the onset of the COVID pandemic in 2020, CCP financial assets nearly doubled over a single quarter. As shown in Figure 1 below, total financial assets increased from $38.4 billion to $70.3 billion during the GFC from 2008:Q3 to 2008:Q4. Figure 1 also shows that CCP financial assets spiked at the outset of the COVID pandemic, increasing from $121.3 billion in 2019:Q4 to $227.2 billion in 2020:Q1. As noted above, CCPs holdings of assets are driven by the clearing fund contribution liabilities. During periods of high market volatility where daily financial market prices are changing rapidly, members may be required to increase margin and clearing fund contributions to mitigate risk. Indeed, volatility increased sharply during both episodes in 2008:Q4 and 2020:Q1, and required margin and clearing contributions increased in these quarters.²⁰

Figure 1. Central Clearing Counterparty Financial Assets

Another notable historical development concerns the reallocation of CCP financial assets from Treasury securities to deposits at Federal Reserve banks (Fed deposits) over the period 2015:Q3 through 2017:Q1. During this period, CCPs gained access to Fed deposits after being designated as systemically important by the Financial Stability Oversight Council (FSOC). Figure 1 shows that Fed deposits reported in the Accounts (the blue shaded area) increased from 2.5 percent of total financial assets in 2015:Q2 to 60.7 percent of assets in 2017:Q1.²¹ The offset mainly stems from a shift out of Treasury securities (green shaded area) which decreased from 65.2 percent of assets to 25.1 percent of assets over the same time frame.

Conclusion

CCPs play a critical role in U.S. financial system, providing the infrastructure for the clearing and settlement of securities and derivatives, as well as mitigating counterparty risk in financial markets. Data on the financial assets and liabilities of CCPs are an important addition to the Financial Accounts of the United States, providing visibility to an important group of entities not previously captured in the Accounts. CCPs are recorded within the other financial business sector but are also detailed separately on a new supplementary table, L.132.c, which was introduced in the March 7, 2024, Z.1 release.