It doesn't appear that DTCC has "insurance" (at least in the way we think of it); it has a "loss allocation waterfall"

After looking through 4 documents on the DTCC website, I find no mention of some $XX trillion "insurance."

What I did find is this:

• If a DTCC participant (like a HF) defaults, it must begin liquidating its portfolio.
• If there is still debt after complete liquidation, it looks like the DTCC has some "corporate contribution" (I don't know the amount) to apply.
• If there is still debt, the "loss allocation waterfall" kicks in, and then the other DTCC participants have to pay on a pro rata (proportional) basis, in (if necessary) repeated rounds of payments. A list of DTCC participants is here (HFs, brokers, banks, etc.). According to a DTCC infographic for this year, they are a depository for active issues valued at $131 trillion, so I think that's the value of all the participants' assets.
• If all participants fail, well, DTC is a member of the US Federal Reserve System (source), and the US Treasury Dept. has designated the DTC, NSCC, OCC, and FICC as Systemically-Important Financial Market Utilities (SIFMUs) (source); their reasoning is explained here. In other words, they are deemed "too big to fail" and will be bailed out if necessary.

TL;DR: Someone who buys and hodls 💎🤲 will get the tendies, from someone, when the stock rises 🚀🚀🚀

Smooth-brained apes: Do not read any further, or you'll get a headache! Have a great day!

Wrinkle-brained apes: Below are excerpts from (and links to) those 4 documents. Let me know if I got something wrong.

NSCC Rules and Procedures (effective 5/7/21):

"The Corporation shall apply the Corporate Contribution to losses and liabilities that arise out of or relate to one or more Defaulting Member Events and/or Declared Non-Default Loss Events that occur within an Event Period. If losses and liabilities with respect to such Event Period remain unsatisfied following application of the Corporate Contribution, the Corporation shall allocate such losses and liabilities to Members, subject to the requirements and limitations below.

Each Member that is a Member on the first day of an Event Period shall be obligated to pay its pro rata share of losses and liabilities arising out of or relating to each Defaulting Member Event (other than a Defaulting Member Event with respect to which it is the Defaulting Member) and each Declared Non-Default Loss Event occurring during the Event Period. Any Member for which the Corporation ceases to act on a non-Business Day, triggering an Event Period that commences on the next Business Day, shall be deemed to be a Member on the first day of that Event Period.

A loss allocation “round” means a series of loss allocations relating to an Event Period, the aggregate amount of which is limited by the sum of the Loss Allocation Caps of affected Members (a “round cap”). When the aggregate amount of losses allocated in a round equals the round cap, any additional losses relating to the applicable Event (RULE 4) 46 Period would be allocated in one or more subsequent rounds, in each case subject to a round cap for that round. The Corporation may continue the loss allocation process in successive rounds until all losses from the Event Period are allocated among Members that have not submitted a Loss Allocation Withdrawal Notice in accordance with Section 6 of this Rule. (45)

NSCC Disclosure Framework for Covered Clearing Agencies and Financial Market Infrastructures (12/2020):

In the case of a Member default or insolvency, NSCC may cease to act for the Member, and in that event, proceed to close out the open CNS positions of the Member . . . Once NSCC has ceased to act for a participant, its Rules provide it with the authority to promptly close out and manage the positions of a defaulter and to apply the defaulter’s collateral. . . . As the liquidation of a defaulting Member’s portfolio completes (including the sale of collateral used to secure a borrowing), the proceeds from the close-out would be used to repay liquidity borrowings, thus replenishing NSCC’s liquidity resources. Should close-out proceeds be insufficient to fully repay a liquidity borrowing, then NSCC would look to its loss waterfall to repay any outstanding borrowings. (18, 82-83)

​

If, after closing out and liquidating a defaulting Member’s positions, NSCC were to suffer a loss, such loss would first be satisfied by the amounts on deposit to the Clearing Fund and Eligible Clearing Fund Securities pledged from the defaulting Member (along with any other resources of, or attributable to, the defaulting Member that NSCC may access under its Rules). This includes any amounts available to NSCC under clearing agency cross-guaranty agreements (agreements with other registered clearing agencies that relate to the guaranty of certain obligations of a common defaulting member, by one or more clearing agency parties to other clearing agency parties). This would include any amounts available to NSCC under the terms and conditions of the Cross-Guaranty Agreement.

NSCC has also entered into a multilateral netting contract and limited cross-guaranty agreement with DTC, FICC and OCC, under which these clearing agencies have agreed to make payments to each other for unsatisfied obligations of a common defaulting participant to the extent they have excess resources of the defaulting participant. Under this arrangement, no party ever needs to pay “out of pocket” and no party can receive more than its loss.

NSCC Rule 4 contains the loss waterfall provisions. Under Rule 4, if there is a loss (i) as a result of an obligation of a defaulting Member to NSCC that was not fully satisfied by the application of its resources or the proceeds from the liquidation of its portfolio, or (ii) due to an event other than a Member default (“non-default loss”, as described in more detail below), NSCC has recourse to the loss allocation waterfall.

For purposes of loss allocation, triggering events, which may include both Member defaults and non-default events, would be grouped together chronologically into discrete “event periods” of ten business days. Losses arising from a group of events that occurred within the same event period, whether a default loss or a non-default loss, would be allocated as follows:

1. Before the allocation of losses to Members, NSCC would apply 50 percent of its General Business Risk Capital Requirement as of the end of the calendar quarter immediately preceding the applicable event period (referred to as the “Corporate Contribution”),or such greater amount as the Board of Directors may determine, to satisfy the losses. The amount of the Corporate Contribution to be applied to any losses arising from events that may occur in subsequent event periods during the next 250 business days would be reduced to the remaining unused portion of contribution, if any.

2. If a loss remains after applying the Corporate Contribution, NSCC will allocate the remaining amount among Members that were Members on the first day of the applicable event period, ratably in accordance with their average daily required deposit to the Clearing Fund over the prior 70 business days or such shorter period of time that the Member has been a Member, divided by the sum of average required fund deposit amounts of all Members subject to loss allocation in such round. Each Member must pay its allocation amount within two business days of receiving notice of the amount.

3. Losses relating to the events within the same event period may be allocated iteratively. (84)

DTC Disclosure Framework for Covered Clearing Agencies and Financial Market Infrastructures (12/2020):

If there is a loss or liability due to a Participant default, (i) as a result of an obligation of a defaulting Participant to DTC that was not fully satisfied by the application of its resources or the proceeds from the liquidation of its collateral, and DTC has ceased to act for the Participant, or (ii) due to an event other than a Participant default as specified under Rule 4 (“non-default loss”), DTC has recourse to the loss allocation waterfall provided in Rule 4.

For purposes of loss allocation, triggering events, which may include both Participant defaults and nondefault events, would be grouped together chronologically into discrete periods of ten business days. Losses arising from a group of events that occurred within the same period, whether a default loss or non-default loss, would be allocated as follows:

1. Before the allocation of losses to Participants, DTC would apply 50 percent of its General Business Risk Capital Requirement as of the end of the calendar quarter immediately preceding the Event Period (or such greater amount as the Board may determine) to the losses. DTC’s contributions to any losses arising from events that occurred in subsequent periods during the next 250 days would be reduced to the remaining unused portion of contribution, if any.

2. If a loss remains after DTC’s corporate contribution, DTC will allocate the remaining amount among Participants that were Participants on the first day of the applicable period, ratably in accordance with their required deposit to the Participants Fund on the first day of the period. Each Participant must pay its allocation amount within two business days of receiving notice of the amount. DTC has the right to debit the allocated amount to a Participant’s Settlement Account. Losses relating to the events within the same period may be allocated iteratively.

A Participant is able to limit its liability for loss allocation, up to a loss allocation cap specified under Rule 4, by withdrawing from participation within the specified timeframe. However, it will remain obligated for any prior loss allocations for which a withdrawal election was not timely made, and, subject to the specified cap, would be obligated for subsequent loss allocations to which it is otherwise subject. (85)

DTC Rules, By-Laws, and Organization Certificate (11/2020):

Each CTA Participant shall be obligated to the Corporation for the entire amount of any loss or liability incurred by the Corporation arising out of or relating to any Default Loss Event with respect to such CTA Participant. To the extent that such loss or liability is not satisfied pursuant to Section 3 of this Rule, the Corporation shall apply a Corporate Contribution thereto and charge the remaining amount of such liability or loss ratably to other Participants, as further provided below.

The Corporation shall apply the Corporate Contribution to losses and liabilities that arise out of or relate to one or more Default Loss Events and/or Declared Non-Default Loss Events that occur within an Event Period. If losses and liabilities with respect to such Event Period remain unsatisfied following application of the Corporate Contribution, the Corporation shall allocate such losses and liabilities to Participants, subject to the requirements and limitations below.

Each Participant that is a Participant on the first day of an Event Period shall be obligated to pay its pro rata share of losses and liabilities arising out of or relating to each Default Loss Event (other than a Default Loss Event with respect to which it is the CTA Participant) and each Declared Non-Default Loss Event occurring during the Event Period. Any Participant for which the Corporation ceases to act on a non-Business Day, triggering an Event Period that commences on the next Business Day, shall be deemed to be a Participant on the first day of that Event Period. A loss allocation “round” means a series of loss allocations relating to an Event Period, the aggregate amount of which is limited by the sum of the Loss Allocation Caps of affected Participants (a “round cap”). When the aggregate amount of losses allocated in a round equals the round cap, any additional losses relating to the applicable Event Period shall be allocated in one or more subsequent rounds, in each case subject to a round cap for that round. The Corporation may continue the loss allocation process in successive rounds until all losses from the Event Period are allocated among Participants that have not submitted a Termination Notice in accordance with Section 6(b) of this Rule. (42)

Edit: added to 3rd & 4th bullet points