Two major controllers of assets, Depository Trust & Clearing Corporation and Blackrock, have said that they will not rush to change policy in the face of the downgrading of US Government debt by Standard & Poor.
Fixed Income Clearing Corporation, a subsidiary of DTCC. DTCC provides custody and servicing for assets of US $36.5 trillion. In 2010, DTCC settled nearly US$1.66 quadrillion in securities transactions. It said of the policy of FICC this week:
“FICC has no current plans to make any changes in our applicable valuations of securities (or haircuts) required for collateral for its Government Securities Division (GSD) Clearing Fund and its Mortgage-Backed Securities Division (MBSD) Participants Fund at this time.
“We continue to monitor market developments and volatility in the coming days to assess if we will need to make any changes in our processes FICC will operate under its normal schedule for input and reporting during the week of August 8.
“DTCC is confident in its ability to protect the capital markets and our members throughout a wide variety of market scenarios including this current situation.”
Blackrock, with $3.659 trillion assets under management, was even more belligerent in proclaiming its ability to withstand the shock, downplaying the S&P downgrade:
“…BlackRock has been preparing for the possibility of downgrade over the past month, and, the firm has no need to execute any forced selling of securities in response to the S&P action.
“In anticipation of a potential ratings downgrade, BlackRock had a task force from across the company review all aspects of our business that transact in U.S. Treasuries and related securities and developed a detailed game plan to follow in the event of a downgrade, which we have executed throughout the weekend. We also are prepared for continued downgrades into next week of the many other issuers and issues that derive their rating from the U.S. government rating – including the GSEs and some corporates…
“…we think it is vital to underscore the fact that the U.S. Treasury sector (and to a slightly lesser extent Agency-backed MBS) remains the largest and most liquid fixed income market in the world with the greatest degree of price transparency and few genuine alternatives.
“While the events that led to the S&P downgrade are certainly of concern, we think the vast majority of investors will continue to utilize the Treasury yield curve as an effective credit risk-free benchmark against which credit spread issues can be judged.
“Treasuries will also continue to see a strong bid from institutional investors of all kinds (including banks) and will continue to serve their traditional role as a hedge to risk assets. While a time may come when the credit risk-free status of Treasury bonds is diminished by continued policy missteps, we do not believe that the S&P downgrade signals that this moment has come now.”
The news of the US credit downgrade and European sovereign debt risks in Italy and Spain hit the Australian and Chinese markets hardest with the exchanges closing down 2.7% and 3.3% respectively. The London Stock Exchange was bolstered on Monday morning by news of the European Central Bank’s decision to buy Italian and Spanish government bonds following assurances of fiscal responsibility from both governments.