Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Eliminate the Offset of Its Obligations With Institutional Delivery Transactions that Settle at The Depository Trust Company for the Purpose of Calculating Its Clearing Fund Under Procedure XV of Its Rules & Procedures, 792-795 [2012-31670]
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Federal Register / Vol. 78, No. 3 / Friday, January 4, 2013 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68549; File No. SR–NSCC–
2012–10]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Proposed Rule Change To Eliminate
the Offset of Its Obligations With
Institutional Delivery Transactions that
Settle at The Depository Trust
Company for the Purpose of
Calculating Its Clearing Fund Under
Procedure XV of Its Rules &
Procedures
December 28, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
17, 2012, the National Securities
Clearing Corporation (‘‘NSCC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change described in Items
I, II and III below, which Items have
been prepared primarily by NSCC. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
NSCC proposes to modify its Rules &
Procedures (‘‘Rules’’) to eliminate the
offset of NSCC obligations with
institutional delivery (‘‘ID’’) transactions
that settle at the Depository Trust
Company (‘‘DTC’’) for the purpose of
calculating the NSCC clearing fund
(‘‘Clearing Fund’’) under Procedure XV
of the Rules.
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II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
NSCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. NSCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.3
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The Commission has modified the text of the
summaries prepared by NSCC.
2 17
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(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
(a) Proposal Overview
A primary objective of NSCC’s
Clearing Fund is to have on deposit
from each applicable Member assets
sufficient to satisfy losses that may
otherwise be incurred by NSCC as the
result of the default of the Member and
the resultant close out of that Member’s
unsettled positions under NSCC’s trade
guaranty. Each Member’s Clearing Fund
required deposit is calculated daily
pursuant to a formula set forth in
Procedure XV of the Rules designed to
provide sufficient funds to cover this
risk of loss. The Clearing Fund formula
accounts for a variety of risk factors
through the application of a number of
components, each described in
Procedure XV.4
The Value-at-Risk component, or
‘‘VaR’’, is a core component of this
formula and is designed to calculate the
amount of money that may be lost on a
portfolio over a given period of time
assumed necessary to liquidate the
portfolio, within a given level of
confidence.5 The Market Maker
Domination component, or ‘‘MMDOM’’,
4 In addition to those described in this filing,
Clearing Fund components also include (i) A markto-market component which, with certain
exclusions, takes into account any difference
between the contract price and market price for net
positions of each security in a Member’s portfolio
through settlement; (ii) a ‘‘special charge’’ in view
of price fluctuations in or volatility or lack of
liquidity of any security; (iii) an additional charge
relating to a Member’s outstanding fail positions;
(iv) a ‘‘specified activity charge’’ for transactions
scheduled to settle on a shortened settlement cycle
(i.e., less than T+3 or T+3 for ‘‘as-of’’ transactions);
(v) an additional charge that NSCC may require of
Members on surveillance status; and (vii) an
‘‘Excess Capital Premium’’ that takes into account
the degree to which a Member’s collateral
requirement compares to the Member’s excess net
capital by applying a charge if a Member’s Required
Deposit, minus any amount applied from the
charges described in (ii) and (iii) above, is above its
required capital.
5 NSCC’s equity VaR model assumes a 99%
confidence interval, uses a 150-day historical lookback period, and assumes a three-day liquidation
period. In effect, NSCC assumes the market
conditions observed over the past 150 days are
predictive of the market conditions expected over
the course of the next three business days. Pursuant
to Procedure XV, NSCC may exclude from the VaR
charge ‘‘Net Unsettled Positions in classes of
securities whose volatility is (x) less amendable to
statistical analysis, such as OTC Bulletin Board or
Pink Sheet issues or issues trading below a
designated dollar threshold, or (y) amendable to
generally accepted statistical analysis in a complex
manner, such as municipal or corporate bonds.’’
The charge for such positions is determined by
multiplying the absolute value of the positions by
a pre-determined percentage.
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is charged to Market Makers,6 or firms
that clear for them. In calculating the
MMDOM, if the sum of the absolute
values of net unsettled positions in a
security for which the firm in question
makes a market is greater than that
firm’s excess net capital, NSCC may
then charge the firm an amount equal to
such excess or the sum of each of the
absolute values of the affected net
unsettled positions, or a combination of
both. MMDOM operates to identify
concentration within a given CUSIP.
Pursuant to Procedure XV of the
Rules, NSCC may calculate the VaR and
MMDOM components of a Member’s
Clearing Fund requirement after taking
into account any offsetting pending (i.e.,
non-fail) ID transactions that have been
confirmed and/or affirmed through an
institutional delivery system acceptable
to NSCC (typically Omgeo LLC
(‘‘Omgeo’’), a joint venture of the
Depository Trust and Clearing
Corporation and Thomson Reuters) (‘‘ID
Offset’’).7 NSCC is proposing to
eliminate the ID Offset from its Clearing
Fund calculations in order to eliminate
the market risk that, in the event NSCC
ceases to act for a Member with pending
ID transactions, it may be unable to
complete those pending ID transactions
in the time frame contemplated by its
current Clearing Fund calculations and,
as a result, may have insufficient margin
in its Clearing Fund.
NSCC reviews its risk management
processes against federal securities laws
and rulemaking promulgated by the
Commission, and applicable regulatory
and industry guidelines, including, but
not limited to the Principles for
Financial Market Infrastructures
(‘‘PFMI’’) of the Committee on Payment
and Settlement Systems and the
Technical Committee of the
International Organization of Securities
Commissions (‘‘CPSS–IOSCO’’).8 In
accordance with Commission rules,9
specifically Rule 17Ad–22(b)(1)
addressing measurement and
management of credit exposures, Rule
17Ad–22(b)(2) addressing margin
requirements, and Rule 17Ad–22(d)(11)
addressing default procedures, and also
in accordance with the PFMIs, this
proposed rule change should enhance
NSCC’s ability to more effectively
6 As used in Procedure XV, the term Market
Maker means a firm that is registered by FINRA as
a Market Maker.
7 The changes proposed by this rule filing will not
impact NSCC’s ID Net Service.
8 CPSS–IOSCO PFMI (April 2012), available at
https://www.bis.org/publ/cpss101a.pdf.
9 Securities and Exchange Commission Release
No. 34–68080; File No. S7–08–11 (available at
https://www.sec.gov/rules/final/2012/34-68080.pdf),
to be effective on January 2, 2013.
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manage its credit exposures to
participants, help ensure that it is able
to cover its credit exposures to its
participant for all products through an
effective, risk-based margin system,
limit NSCC’s exposures and losses, and
enhance protections against market risk
that may arise when it ceases to act for
a Member with open ID transaction
activity.
ID Transactions
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The parties involved in an
institutional trade include the
institutional investor (such as mutual
funds, insurance companies, hedge
funds, bank trust departments, and
pension funds), the investment manager
(who enters trade orders on behalf of
institutional investors), the buying
broker and the selling broker, and
custodian banks.10 Trades between the
buying broker and the selling broker are
typically settled through NSCC’s
Continuous Net Settlement system
(‘‘CNS’’).11
Before ID trades are sent to DTC,
where they settle delivery versus
payment, the trade allocation details are
matched between the executing broker
and the institutional investor. After an
executing broker has provided a final
notice of execution associated with the
client’s order, most institutional clients
will provide trade allocation details to
the executing broker using a service
provided by Omgeo. When the
executing broker accepts and processes
the trade allocations, an electronic
confirmation is provided through
Omgeo’s TradeSuite service to the
institutional investor or its agent
(typically the institutional client’s
custodian bank) for affirmation. Omgeo
links with the various parties to
institutional trades to provide real-time
central matching capabilities,
electronically comparing trade details
and notifying parties of any exceptions.
After the trade allocation details are
affirmed, the trade is considered
matched and institutional delivery
details are sent to DTC for settlement.
10 Prime broker ID transactions settling at NSCC
are not included in the ID Offset, as they are
included in the Member’s NSCC activity once such
transactions are affirmed, and, therefore, are not
addressed in this filing. The ID transactions
included in the ID Offset and described in this rule
filing are activity that is held in custody at a bank.
11 CNS is NSCC’s core netting and allotting
system, where all eligible compared and recorded
transactions for a particular settlement date are
netted by issue into one net long (buy) or net short
(sell) position, and NSCC becomes the contra-party
for settlement purposes, assuming the obligation of
its Members that are receiving securities to receive
and pay for those securities, and the obligation of
Members that are delivering securities to make the
delivery.
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Completion of the money and
securities settlement of institutional
trades occurs at DTC. Because
investment managers are not
participants of and do not have direct
accounts at DTC, their securities are
held in custodial accounts with banks
who are participants at DTC. Therefore,
when the institutional delivery details
for confirmed and affirmed ID trades are
sent to DTC from Omgeo, the delivering
investment manager’s custodian bank,
or broker, as the case may be, must
authorize the delivery, generating a
deliver order that will settle in
accordance with DTC’s rules.
NSCC Risk Management receives a
daily feed from Omgeo, including both
ID trades that have only been confirmed
as well as those that have also been
affirmed. For purposes of the ID Offset,
NSCC includes ID trades that are
confirmed and/or affirmed on trade date
(T) and those ID trades which have been
affirmed on T+1 and remain affirmed
through settlement date (SD).
ID Offset
Procedure XV currently allows for a
Member’s net unsettled NSCC position
in a particular CUSIP to be compared to
any pending ID transactions settling at
DTC for potential offset for purposes of
calculating the VaR and the MMDOM
components of a Member’s Clearing
Fund requirement, defined as the ID
Offset. The ID Offset is based on the
assumption that, in the event of a
Member insolvency, NSCC will be able
to close out any trades for which there
is a corresponding ID transaction
settling at DTC by completing that ID
transaction. Therefore, the VaR and the
MMDOM components are calculated
after taking into account any offsetting
pending (i.e., non-fail) ID transactions
that have been confirmed and/or
affirmed, reducing the Clearing Fund
requirement for those Members with ID
transactions. ID transactions are
included in the ID Offset only if they are
on the opposite side of the market from
the Member’s net NSCC position (i.e.,
only if they reduce that net position).
Potential Inability To Complete ID
Transactions
Generally, when NSCC ceases to act
for a Member, it is obligated, for those
transactions to which the trade guaranty
has attached, to pay for deliveries made
by non-defaulting Members that are due,
through CNS, to the failed Member
(‘‘Long Allocations’’) on the day of
insolvency and the days following. As
described above, the current calculation
of the VaR and MMDOM components of
NSCC’s Clearing Fund are based on the
assumption that, in the event of a
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793
Member default, NSCC will be able to
complete the pending ID transactions
that were used to offset that Member’s
unsettled NSCC position. If NSCC is
unable to complete the ID transactions
as contemplated by this calculation,
then NSCC may need to liquidate a
portfolio that could be substantially
different than the portfolio that NSCC
collected Clearing Fund for, leaving
NSCC potentially under collateralized
and exposed to market risk.
There are a number of reasons why
NSCC may not be able to complete an
insolvent Member’s open ID
transactions. First, NSCC does not
guarantee ID transactions and
completion of these transactions by the
counterparty of the ID transaction,
which is not a Member of NSCC, is
voluntary. Further, the institutional
customer is not a Member of NSCC, is
not bound by NSCC’s Rules, and is not
party to any legally binding contract
with NSCC that requires the
institutional customer or its custodian
to complete the transaction. Finally,
based on news that a Member may be
in distress or insolvent, the institutional
customer or its investment advisor may
feel compelled to take immediate
market action with respect to the
institutional buy or sell transaction, in
order to reduce its market risk; this
effectively eliminates the option for
NSCC to complete these transactions,
either entirely or on the timetable
assumed by the Clearing Fund
calculation.
While NSCC’s Risk Management
systems net ID transactions by CUSIP
across all settlement days for the
purposes of the ID Offset, ID
transactions settle trade by trade
between the executing broker and the
custodian. As a result, the netted ID
position used to offset the NSCC
position could potentially be comprised
of thousands of individual trades with
hundreds of different counterparties. It
would be time consuming for NSCC to
contact each counterparty individually
to get their agreement to complete ID
transactions, which would delay the
determination of the portfolio requiring
liquidation in the event of a cease to act,
and thus hold up the prompt close out
of the defaulter’s open positions,
exposing NSCC to additional market
risk not covered by the margin
collected.
Implementation Time Frame
Following Commission approval, in
order to mitigate the impact of this
proposed rule change, NSCC proposes
to implement the changes set forth in
this filing on over an 18-month period.
On a date no earlier than 10 days
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following notice to Members by
Important Notice (‘‘Initial
Implementation Date’’), NSCC proposes
to eliminate the ID Offset from ID
transactions that have only been
confirmed, but have not yet been
affirmed. At this time, NSCC will
continue to apply the ID Offset to ID
transactions that have been affirmed.
During the 12-month period following
the Initial Implementation Date, NSCC
will discuss with Members, whose
business will be affected by the
elimination of the ID Offset,
mechanisms to mitigate this impact.
Beginning on a date approximately 12
months from the Initial Implementation
Date, and no earlier than 10 days
following notice to Members by
Important Notice, NSCC will eliminate
from the ID Offset all affirmed ID
transactions that have reached
settlement date at the time the Clearing
Fund calculations are run. Three
months later, or approximately 15
months following the Initial
Implementation Date, and on a date no
earlier than 10 days following notice to
Members by Important Notice, NSCC
will eliminate from the ID Offset all
affirmed ID transactions that have
reached either settlement date or the
day prior to settlement date. Finally, on
a date approximately 18 months
following the Initial Implementation
Date, and no earlier than 10 days
following notice to Members by
Important Notice, NSCC will eliminate
the ID Offset entirely for all ID
transactions. Members will be advised
of each proposed implementation date
through issuance of NSCC Important
Notices, which are publically available
at www.dtcc.com.
The table below illustrates this
proposed implementation schedule:
PROPOSED IMPLEMENTATION SCHEDULE FOR ELIMINATION OF ID OFFSETS
Action
Scheduled implementation
Eliminate from ID Offset those ID transactions that have only been confirmed, but have not yet been affirmed.
Following approval of rule filing, and on a date no earlier than 10 days
following notice to Members by Important Notice (‘‘Initial Implementation Date’’).
12 months following the Initial Implementation Date, and on a date no
earlier than 10 days following notice to Members by Important Notice.
15 months following the Initial Implementation Date, and on a date no
earlier than 10 days following notice to Members by Important Notice.
18 months following the Initial Implementation Date , and on a date no
earlier than 10 days following notice to Members by Important Notice.
Eliminate from ID Offset all affirmed ID transactions that have reached
Settlement Date (‘‘SD’’).
Eliminate from ID Offset all affirmed ID transactions that have reached
SD and the day prior to SD (SD–1).
Eliminate from ID Offset all ID transactions .............................................
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Proposed Rule Changes
NSCC proposes to amend Procedure
XV to eliminate the ID Offset from
calculation of the VaR and Market
Maker Domination components of a
Member’s Clearing Fund requirement as
currently provided for in, with respect
to CNS transactions, Section I(A)(1)(a)(i)
and Section I(A)(1)(d), and, with respect
to Balance Order transactions, Section
I(A)(2)(a)(i) and Section I(A)(2)(c).
(b) As a central counterparty, NSCC
occupies an important role in the
securities settlement system by
interposing itself between
counterparties to financial transactions
and thereby reducing the risk faced by
participants and contributing to global
financial stability. In this role, however,
NSCC is necessarily subject to certain
risks in the event of the default or
failure of a Member. NSCC believes that
the proposed rule change should help
mitigate the risk that NSCC will be
under collateralized when it ceases to
act for that Member and is unable to
complete the Member’s ID transactions
in the time frame contemplated by its
Clearing Fund calculation. As such,
NSCC believes the proposal is
consistent with the requirements of the
Act, specifically Section 17A(b)(3)(F),12
12 15
U.S.C. 78q–1(b)(3)(F).
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and the rules and regulations
thereunder applicable to NSCC,
specifically Rule 17Ad–22(b)(1)
addressing measurement and
management of credit exposures, Rule
17Ad–22(b)(2) addressing margin
requirements, and Rule 17AD–22(d)(11)
addressing default procedures.13
(B) Self-Regulatory Organization’s
Statement on Burden on Competition
NSCC believes that the proposed rule
change will not impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act. The rule change
will mitigate the market risk that may
arise after NSCC has ceased to act for
that Member if it is unable to complete
the ID transactions in the time frame
contemplated by its Clearing Fund
calculation, leaving NSCC potentially
under collateralized. By mitigating its
exposure to this market risk, NSCC
believes that the proposed rule change
should contribute to the goal of
financial stability in the event of
Member default, and will render not
unreasonable or inappropriate any
13 Securities and Exchange Commission Release
No. 34–68080; File No. S7–08–11 (available at
https://www.sec.gov/rules/final/2012/34-68080.pdf),
to be effective on January 2, 2013.
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burden on competition that the changes
could be regarded as imposing.
Further, NSCC intends to implement
this rule change over an extended
period of time, as described herein,
allowing Members to address any
impact this change may have on their
business. This implementation schedule
is designed to be fair and not
disproportionately impact any Members
more than others, and the proposal to
implement this rule change over an
extended period of time will provide all
impacted Members with time to identify
mechanisms to mitigate the impact of
this proposal on their business.
(C) Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
While written comments relating to
the proposed rule change have not yet
been solicited, NSCC has received a
letter on behalf of certain Members
seeking further review of the impact of
the proposed rule change, and
consideration of alternatives. NSCC
notified the Commission of the contents
of the letter and promptly delivered a
response to those Members addressing
their concerns. A Member working
group has been established to discuss
mechanisms for impacted Members to
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mitigate the potential impact of the rule
changes described in this filing.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.14 The clearing agency shall
post notice on its Web site of proposed
changes that are implemented.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NSCC–2012–10 on the
subject line.
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filings also will be available for
inspection and copying at the principal
office of NSCC and on NSCC’s Web site
at https://www.dtcc.com/downloads/
legal/rule_filings/2012/nscc/NSCC2012-10.pdf. All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NSCC–
2012–10 and should be submitted on or
before January 25, 2013.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012–31670 Filed 1–3–13; 8:45 am]
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–NSCC–2012–10. This file
number should be included on the
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Paper Comments
BILLING CODE 8011–01–P
14 NSCC also filed the proposals contained in this
proposed rule change as an advance notice
Pursuant to Section 806(e)(1) of the Payment,
Clearing, and Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’) and Rule 19b–
4(n)(1)(i) thereunder. 12 U.S.C. 5465(e)(1); 17 CFR
240.19b–4(n)(i). Proposed changes filed under the
Clearing Supervision Act may be implemented
either: at the time the Commission notifies the
clearing agency that it does not object to the
proposed change and authorizes its
implementation, or, if the Commission does not
object to the proposed rule change, within 60 days
of the later of (i) the date that the advance notice
was filed with the Commission or (ii) the date that
any additional information requested by the
Commission is received. 12 U.S.C. 5465(e)(1)(G).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68548; File No. SR–DTC–
2012–10]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing of Proposed Rule Change To
Reduce Liquidity Risk Relating to Its
Processing of Maturity and Income
Presentments and Issuances of Money
Market Instruments
795
notice is hereby given that on December
17, 2012, The Depository Trust
Company (‘‘DTC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change described in Items I, II and III
below, which Items have been prepared
primarily by DTC. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
DTC is proposing to change the
current Largest Provisional Net Credit
(‘‘LPNC’’) risk management control in
order to increase withholding from one
to two largest provisional credits (on an
acronym 3 basis). DTC is also proposing
to modify its Rules as they relate to the
Issuing/Paying Agent’s (‘‘IPA’s’’) refusal
to pay process. DTC is proposing not to
permit reversal of a transaction when
issuances of Money Market Instruments
(‘‘MMIs’’) in an acronym exceed, in
dollar value, the maturity or income
presentments (‘‘Maturity Obligations’’)
of MMIs in the same acronym on the
same day. As a result, at the point in
time when issuances of MMIs in an
acronym exceed, in dollar value, the
Maturity Obligations of the MMIs in the
same acronym on that day, DTC will
remove the LPNC control with respect
to the affected acronym.
II. Clearing Agency’s Statement of
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
DTC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. DTC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of such statements.4
(A) Self-Regulatory Organization’s
Statement of Purpose of, and Statutory
Basis for, the Proposed Rule Change
MMI presentment processing is
initiated automatically by DTC each
morning for MMIs maturing that day.
The automatic process electronically
sweeps all maturing positions of MMI
December 28, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
15 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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3 DTC employs a four-character acronym to
designate an issuer’s Money Market Instrument
program. An issuer can have multiple acronyms.
The Issuing/Paying Agent’s bank uses the
acronym(s) when submitting an instruction for a
given issuer’s Money Market Instrument securities.
4 The Commission has modified the text of the
summaries prepared by DTC.
E:\FR\FM\04JAN1.SGM
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]]>Agencies
[Federal Register Volume 78, Number 3 (Friday, January 4, 2013)]
[Notices]
[Pages 792-795]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-31670]
[[Page 792]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68549; File No. SR-NSCC-2012-10]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change To Eliminate the
Offset of Its Obligations With Institutional Delivery Transactions that
Settle at The Depository Trust Company for the Purpose of Calculating
Its Clearing Fund Under Procedure XV of Its Rules & Procedures
December 28, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 17, 2012, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change described in Items I, II and
III below, which Items have been prepared primarily by NSCC. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
NSCC proposes to modify its Rules & Procedures (``Rules'') to
eliminate the offset of NSCC obligations with institutional delivery
(``ID'') transactions that settle at the Depository Trust Company
(``DTC'') for the purpose of calculating the NSCC clearing fund
(``Clearing Fund'') under Procedure XV of the Rules.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, NSCC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. NSCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.\3\
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\3\ The Commission has modified the text of the summaries
prepared by NSCC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(a) Proposal Overview
A primary objective of NSCC's Clearing Fund is to have on deposit
from each applicable Member assets sufficient to satisfy losses that
may otherwise be incurred by NSCC as the result of the default of the
Member and the resultant close out of that Member's unsettled positions
under NSCC's trade guaranty. Each Member's Clearing Fund required
deposit is calculated daily pursuant to a formula set forth in
Procedure XV of the Rules designed to provide sufficient funds to cover
this risk of loss. The Clearing Fund formula accounts for a variety of
risk factors through the application of a number of components, each
described in Procedure XV.\4\
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\4\ In addition to those described in this filing, Clearing Fund
components also include (i) A mark-to-market component which, with
certain exclusions, takes into account any difference between the
contract price and market price for net positions of each security
in a Member's portfolio through settlement; (ii) a ``special
charge'' in view of price fluctuations in or volatility or lack of
liquidity of any security; (iii) an additional charge relating to a
Member's outstanding fail positions; (iv) a ``specified activity
charge'' for transactions scheduled to settle on a shortened
settlement cycle (i.e., less than T+3 or T+3 for ``as-of''
transactions); (v) an additional charge that NSCC may require of
Members on surveillance status; and (vii) an ``Excess Capital
Premium'' that takes into account the degree to which a Member's
collateral requirement compares to the Member's excess net capital
by applying a charge if a Member's Required Deposit, minus any
amount applied from the charges described in (ii) and (iii) above,
is above its required capital.
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The Value-at-Risk component, or ``VaR'', is a core component of
this formula and is designed to calculate the amount of money that may
be lost on a portfolio over a given period of time assumed necessary to
liquidate the portfolio, within a given level of confidence.\5\ The
Market Maker Domination component, or ``MMDOM'', is charged to Market
Makers,\6\ or firms that clear for them. In calculating the MMDOM, if
the sum of the absolute values of net unsettled positions in a security
for which the firm in question makes a market is greater than that
firm's excess net capital, NSCC may then charge the firm an amount
equal to such excess or the sum of each of the absolute values of the
affected net unsettled positions, or a combination of both. MMDOM
operates to identify concentration within a given CUSIP.
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\5\ NSCC's equity VaR model assumes a 99% confidence interval,
uses a 150-day historical look-back period, and assumes a three-day
liquidation period. In effect, NSCC assumes the market conditions
observed over the past 150 days are predictive of the market
conditions expected over the course of the next three business days.
Pursuant to Procedure XV, NSCC may exclude from the VaR charge ``Net
Unsettled Positions in classes of securities whose volatility is (x)
less amendable to statistical analysis, such as OTC Bulletin Board
or Pink Sheet issues or issues trading below a designated dollar
threshold, or (y) amendable to generally accepted statistical
analysis in a complex manner, such as municipal or corporate
bonds.'' The charge for such positions is determined by multiplying
the absolute value of the positions by a pre-determined percentage.
\6\ As used in Procedure XV, the term Market Maker means a firm
that is registered by FINRA as a Market Maker.
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Pursuant to Procedure XV of the Rules, NSCC may calculate the VaR
and MMDOM components of a Member's Clearing Fund requirement after
taking into account any offsetting pending (i.e., non-fail) ID
transactions that have been confirmed and/or affirmed through an
institutional delivery system acceptable to NSCC (typically Omgeo LLC
(``Omgeo''), a joint venture of the Depository Trust and Clearing
Corporation and Thomson Reuters) (``ID Offset'').\7\ NSCC is proposing
to eliminate the ID Offset from its Clearing Fund calculations in order
to eliminate the market risk that, in the event NSCC ceases to act for
a Member with pending ID transactions, it may be unable to complete
those pending ID transactions in the time frame contemplated by its
current Clearing Fund calculations and, as a result, may have
insufficient margin in its Clearing Fund.
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\7\ The changes proposed by this rule filing will not impact
NSCC's ID Net Service.
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NSCC reviews its risk management processes against federal
securities laws and rulemaking promulgated by the Commission, and
applicable regulatory and industry guidelines, including, but not
limited to the Principles for Financial Market Infrastructures
(``PFMI'') of the Committee on Payment and Settlement Systems and the
Technical Committee of the International Organization of Securities
Commissions (``CPSS-IOSCO'').\8\ In accordance with Commission
rules,\9\ specifically Rule 17Ad-22(b)(1) addressing measurement and
management of credit exposures, Rule 17Ad-22(b)(2) addressing margin
requirements, and Rule 17Ad-22(d)(11) addressing default procedures,
and also in accordance with the PFMIs, this proposed rule change should
enhance NSCC's ability to more effectively
[[Page 793]]
manage its credit exposures to participants, help ensure that it is
able to cover its credit exposures to its participant for all products
through an effective, risk-based margin system, limit NSCC's exposures
and losses, and enhance protections against market risk that may arise
when it ceases to act for a Member with open ID transaction activity.
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\8\ CPSS-IOSCO PFMI (April 2012), available at https://www.bis.org/publ/cpss101a.pdf.
\9\ Securities and Exchange Commission Release No. 34-68080;
File No. S7-08-11 (available at https://www.sec.gov/rules/final/2012/34-68080.pdf), to be effective on January 2, 2013.
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ID Transactions
The parties involved in an institutional trade include the
institutional investor (such as mutual funds, insurance companies,
hedge funds, bank trust departments, and pension funds), the investment
manager (who enters trade orders on behalf of institutional investors),
the buying broker and the selling broker, and custodian banks.\10\
Trades between the buying broker and the selling broker are typically
settled through NSCC's Continuous Net Settlement system (``CNS'').\11\
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\10\ Prime broker ID transactions settling at NSCC are not
included in the ID Offset, as they are included in the Member's NSCC
activity once such transactions are affirmed, and, therefore, are
not addressed in this filing. The ID transactions included in the ID
Offset and described in this rule filing are activity that is held
in custody at a bank.
\11\ CNS is NSCC's core netting and allotting system, where all
eligible compared and recorded transactions for a particular
settlement date are netted by issue into one net long (buy) or net
short (sell) position, and NSCC becomes the contra-party for
settlement purposes, assuming the obligation of its Members that are
receiving securities to receive and pay for those securities, and
the obligation of Members that are delivering securities to make the
delivery.
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Before ID trades are sent to DTC, where they settle delivery versus
payment, the trade allocation details are matched between the executing
broker and the institutional investor. After an executing broker has
provided a final notice of execution associated with the client's
order, most institutional clients will provide trade allocation details
to the executing broker using a service provided by Omgeo. When the
executing broker accepts and processes the trade allocations, an
electronic confirmation is provided through Omgeo's TradeSuite service
to the institutional investor or its agent (typically the institutional
client's custodian bank) for affirmation. Omgeo links with the various
parties to institutional trades to provide real-time central matching
capabilities, electronically comparing trade details and notifying
parties of any exceptions. After the trade allocation details are
affirmed, the trade is considered matched and institutional delivery
details are sent to DTC for settlement.
Completion of the money and securities settlement of institutional
trades occurs at DTC. Because investment managers are not participants
of and do not have direct accounts at DTC, their securities are held in
custodial accounts with banks who are participants at DTC. Therefore,
when the institutional delivery details for confirmed and affirmed ID
trades are sent to DTC from Omgeo, the delivering investment manager's
custodian bank, or broker, as the case may be, must authorize the
delivery, generating a deliver order that will settle in accordance
with DTC's rules.
NSCC Risk Management receives a daily feed from Omgeo, including
both ID trades that have only been confirmed as well as those that have
also been affirmed. For purposes of the ID Offset, NSCC includes ID
trades that are confirmed and/or affirmed on trade date (T) and those
ID trades which have been affirmed on T+1 and remain affirmed through
settlement date (SD).
ID Offset
Procedure XV currently allows for a Member's net unsettled NSCC
position in a particular CUSIP to be compared to any pending ID
transactions settling at DTC for potential offset for purposes of
calculating the VaR and the MMDOM components of a Member's Clearing
Fund requirement, defined as the ID Offset. The ID Offset is based on
the assumption that, in the event of a Member insolvency, NSCC will be
able to close out any trades for which there is a corresponding ID
transaction settling at DTC by completing that ID transaction.
Therefore, the VaR and the MMDOM components are calculated after taking
into account any offsetting pending (i.e., non-fail) ID transactions
that have been confirmed and/or affirmed, reducing the Clearing Fund
requirement for those Members with ID transactions. ID transactions are
included in the ID Offset only if they are on the opposite side of the
market from the Member's net NSCC position (i.e., only if they reduce
that net position).
Potential Inability To Complete ID Transactions
Generally, when NSCC ceases to act for a Member, it is obligated,
for those transactions to which the trade guaranty has attached, to pay
for deliveries made by non-defaulting Members that are due, through
CNS, to the failed Member (``Long Allocations'') on the day of
insolvency and the days following. As described above, the current
calculation of the VaR and MMDOM components of NSCC's Clearing Fund are
based on the assumption that, in the event of a Member default, NSCC
will be able to complete the pending ID transactions that were used to
offset that Member's unsettled NSCC position. If NSCC is unable to
complete the ID transactions as contemplated by this calculation, then
NSCC may need to liquidate a portfolio that could be substantially
different than the portfolio that NSCC collected Clearing Fund for,
leaving NSCC potentially under collateralized and exposed to market
risk.
There are a number of reasons why NSCC may not be able to complete
an insolvent Member's open ID transactions. First, NSCC does not
guarantee ID transactions and completion of these transactions by the
counterparty of the ID transaction, which is not a Member of NSCC, is
voluntary. Further, the institutional customer is not a Member of NSCC,
is not bound by NSCC's Rules, and is not party to any legally binding
contract with NSCC that requires the institutional customer or its
custodian to complete the transaction. Finally, based on news that a
Member may be in distress or insolvent, the institutional customer or
its investment advisor may feel compelled to take immediate market
action with respect to the institutional buy or sell transaction, in
order to reduce its market risk; this effectively eliminates the option
for NSCC to complete these transactions, either entirely or on the
timetable assumed by the Clearing Fund calculation.
While NSCC's Risk Management systems net ID transactions by CUSIP
across all settlement days for the purposes of the ID Offset, ID
transactions settle trade by trade between the executing broker and the
custodian. As a result, the netted ID position used to offset the NSCC
position could potentially be comprised of thousands of individual
trades with hundreds of different counterparties. It would be time
consuming for NSCC to contact each counterparty individually to get
their agreement to complete ID transactions, which would delay the
determination of the portfolio requiring liquidation in the event of a
cease to act, and thus hold up the prompt close out of the defaulter's
open positions, exposing NSCC to additional market risk not covered by
the margin collected.
Implementation Time Frame
Following Commission approval, in order to mitigate the impact of
this proposed rule change, NSCC proposes to implement the changes set
forth in this filing on over an 18-month period. On a date no earlier
than 10 days
[[Page 794]]
following notice to Members by Important Notice (``Initial
Implementation Date''), NSCC proposes to eliminate the ID Offset from
ID transactions that have only been confirmed, but have not yet been
affirmed. At this time, NSCC will continue to apply the ID Offset to ID
transactions that have been affirmed. During the 12-month period
following the Initial Implementation Date, NSCC will discuss with
Members, whose business will be affected by the elimination of the ID
Offset, mechanisms to mitigate this impact.
Beginning on a date approximately 12 months from the Initial
Implementation Date, and no earlier than 10 days following notice to
Members by Important Notice, NSCC will eliminate from the ID Offset all
affirmed ID transactions that have reached settlement date at the time
the Clearing Fund calculations are run. Three months later, or
approximately 15 months following the Initial Implementation Date, and
on a date no earlier than 10 days following notice to Members by
Important Notice, NSCC will eliminate from the ID Offset all affirmed
ID transactions that have reached either settlement date or the day
prior to settlement date. Finally, on a date approximately 18 months
following the Initial Implementation Date, and no earlier than 10 days
following notice to Members by Important Notice, NSCC will eliminate
the ID Offset entirely for all ID transactions. Members will be advised
of each proposed implementation date through issuance of NSCC Important
Notices, which are publically available at www.dtcc.com.
The table below illustrates this proposed implementation schedule:
Proposed Implementation Schedule for Elimination of ID Offsets
------------------------------------------------------------------------
Action Scheduled implementation
------------------------------------------------------------------------
Eliminate from ID Offset those ID Following approval of rule
transactions that have only been filing, and on a date no
confirmed, but have not yet been earlier than 10 days following
affirmed. notice to Members by Important
Notice (``Initial
Implementation Date'').
Eliminate from ID Offset all affirmed 12 months following the Initial
ID transactions that have reached Implementation Date, and on a
Settlement Date (``SD''). date no earlier than 10 days
following notice to Members by
Important Notice.
Eliminate from ID Offset all affirmed 15 months following the Initial
ID transactions that have reached SD Implementation Date, and on a
and the day prior to SD (SD-1). date no earlier than 10 days
following notice to Members by
Important Notice.
Eliminate from ID Offset all ID 18 months following the Initial
transactions. Implementation Date , and on a
date no earlier than 10 days
following notice to Members by
Important Notice.
------------------------------------------------------------------------
Proposed Rule Changes
NSCC proposes to amend Procedure XV to eliminate the ID Offset from
calculation of the VaR and Market Maker Domination components of a
Member's Clearing Fund requirement as currently provided for in, with
respect to CNS transactions, Section I(A)(1)(a)(i) and Section
I(A)(1)(d), and, with respect to Balance Order transactions, Section
I(A)(2)(a)(i) and Section I(A)(2)(c).
(b) As a central counterparty, NSCC occupies an important role in
the securities settlement system by interposing itself between
counterparties to financial transactions and thereby reducing the risk
faced by participants and contributing to global financial stability.
In this role, however, NSCC is necessarily subject to certain risks in
the event of the default or failure of a Member. NSCC believes that the
proposed rule change should help mitigate the risk that NSCC will be
under collateralized when it ceases to act for that Member and is
unable to complete the Member's ID transactions in the time frame
contemplated by its Clearing Fund calculation. As such, NSCC believes
the proposal is consistent with the requirements of the Act,
specifically Section 17A(b)(3)(F),\12\ and the rules and regulations
thereunder applicable to NSCC, specifically Rule 17Ad-22(b)(1)
addressing measurement and management of credit exposures, Rule 17Ad-
22(b)(2) addressing margin requirements, and Rule 17AD-22(d)(11)
addressing default procedures.\13\
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\12\ 15 U.S.C. 78q-1(b)(3)(F).
\13\ Securities and Exchange Commission Release No. 34-68080;
File No. S7-08-11 (available at https://www.sec.gov/rules/final/2012/34-68080.pdf), to be effective on January 2, 2013.
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(B) Self-Regulatory Organization's Statement on Burden on Competition
NSCC believes that the proposed rule change will not impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. The rule change will mitigate
the market risk that may arise after NSCC has ceased to act for that
Member if it is unable to complete the ID transactions in the time
frame contemplated by its Clearing Fund calculation, leaving NSCC
potentially under collateralized. By mitigating its exposure to this
market risk, NSCC believes that the proposed rule change should
contribute to the goal of financial stability in the event of Member
default, and will render not unreasonable or inappropriate any burden
on competition that the changes could be regarded as imposing.
Further, NSCC intends to implement this rule change over an
extended period of time, as described herein, allowing Members to
address any impact this change may have on their business. This
implementation schedule is designed to be fair and not
disproportionately impact any Members more than others, and the
proposal to implement this rule change over an extended period of time
will provide all impacted Members with time to identify mechanisms to
mitigate the impact of this proposal on their business.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
While written comments relating to the proposed rule change have
not yet been solicited, NSCC has received a letter on behalf of certain
Members seeking further review of the impact of the proposed rule
change, and consideration of alternatives. NSCC notified the Commission
of the contents of the letter and promptly delivered a response to
those Members addressing their concerns. A Member working group has
been established to discuss mechanisms for impacted Members to
[[Page 795]]
mitigate the potential impact of the rule changes described in this
filing.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.\14\ The clearing
agency shall post notice on its Web site of proposed changes that are
implemented.
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\14\ NSCC also filed the proposals contained in this proposed
rule change as an advance notice Pursuant to Section 806(e)(1) of
the Payment, Clearing, and Settlement Supervision Act of 2010
(``Clearing Supervision Act'') and Rule 19b-4(n)(1)(i) thereunder.
12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(i). Proposed changes filed
under the Clearing Supervision Act may be implemented either: at the
time the Commission notifies the clearing agency that it does not
object to the proposed change and authorizes its implementation, or,
if the Commission does not object to the proposed rule change,
within 60 days of the later of (i) the date that the advance notice
was filed with the Commission or (ii) the date that any additional
information requested by the Commission is received. 12 U.S.C.
5465(e)(1)(G).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NSCC-2012-10 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NSCC-2012-10. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available
for inspection and copying at the principal office of NSCC and on
NSCC's Web site at https://www.dtcc.com/downloads/legal/rule_filings/2012/nscc/NSCC-2012-10.pdf. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NSCC-2012-10 and should be submitted on or before
January 25, 2013.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-31670 Filed 1-3-13; 8:45 am]
BILLING CODE 8011-01-P
