Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3, To Institute Supplemental Liquidity Deposits to Its Clearing Fund Designed To Increase Liquidity Resources To Meet Its Liquidity Needs, 75413-75420 [2013-29497]
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Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Notices
(11) Each Fund’s fixed-income
investment portfolio will meet the
listing criteria for index-based, fixedincome exchange-traded funds
contained in NYSE Arca Equities Rule
5.2(j)(3), Commentary .02.
(12) Each Fund’s investments will be
consistent with that Fund’s investment
objective and will not be used to
enhance leverage.
(13) A minimum of 100,000 Shares of
each Fund will be outstanding at the
commencement of trading on the
Exchange.
This approval order is based on all of
the Exchange’s representations,
including those set forth above and in
the Notice, and the Exchange’s
description of the Funds.
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(5) of the Act 51 and the rules and
regulations thereunder applicable to a
national securities exchange.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,52 that the
proposed rule change (SR–NYSEArca–
2013–101), be, and it hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.53
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–29491 Filed 12–10–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70999; File No. SR–NSCC–
2013–02]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Order Approving
Proposed Rule Change, as Modified by
Amendment Nos. 1, 2, and 3, To
Institute Supplemental Liquidity
Deposits to Its Clearing Fund Designed
To Increase Liquidity Resources To
Meet Its Liquidity Needs
emcdonald on DSK67QTVN1PROD with NOTICES
December 5, 2013.
I. Introduction
On March 21, 2013, National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
51 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
53 17 CFR 200.30–3(a)(12).
52 15
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(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 proposed rule change SR–
NSCC–2013–02 (‘‘Proposed Rule
Change’’) to institute supplemental
liquidity deposits to NSCC’s Clearing
Fund designed to increase liquidity
resources to meet NSCC’s liquidity
needs (‘‘SLD Proposal’’).3 On April 10,
2013, the Commission published notice
of the Proposed Rule Change for
comment in the Federal Register.4 On
April 19, 2013, NSCC filed with the
Commission Amendment No. 1 to the
Proposed Rule Change,5 which the
Commission published for comment in
the Federal Register on May 29, 2013
and designated a longer period for
Commission action on the Proposed
Rule Change, as amended.6 The
Commission received 12 comment
letters, including the NFS Letter, to the
SLD Proposal as initially filed and as
modified by Amendment No. 1.7
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 NSCC also filed the SLD Proposal contained in
the Proposed Rule Change as advance notice SR–
NSCC–2013–802 (‘‘Advance Notice’’), as modified
by Amendment No. 1, pursuant to Section 806(e)(1)
of the Payment, Clearing, and Settlement
Supervision Act of 2010 and Rule 19b–4(n)(1)(i)
thereunder. See Release No. 34–69451 (Apr. 25,
2013), 78 FR 25496 (May 1, 2013). On May 20,
2013, the Commission extended the period of
review of the Advance Notice, as modified by
Amendment No. 1. Release No. 34–69605 (May 20,
2013), 78 FR 31616 (May 24, 2013). On June 11,
2013, NSCC filed Amendment No. 2 to the Advance
Notice, as previously modified by Amendment No.
1. Release No. 34–69954 (Jul. 9, 2013), 78 FR 42127
(Jul. 15, 2013). On October 4, 2013, NSCC filed
Amendment No. 3 to the Advance Notice, as
previously modified by Amendment Nos. 1 and 2.
Release No. 34–70689 (Oct. 15, 2013) 78 FR 62893
(Oct. 22, 2013). On December 5, 2013, the
Commission issued a Notice of No Objection to the
Advance Notice, as modified by Amendment Nos.
1, 2, and 3, to Institute Supplemental Liquidity
Deposits to Its Clearing Fund Designed to Increase
Liquidity Resources to Meet Its Liquidity Needs.
Release No. 34–71000.
4 Release No. 34–69313 (Apr. 4, 2013), 78 FR
21487 (Apr. 10, 2013) (‘‘Notice’’).
5 NSCC filed Amendment No. 1 to the Proposed
Rule Change and Advance Notice filings to include
as Exhibit 2 a comment letter from National
Financial Services (‘‘NFS’’), a Fidelity Investments
(‘‘Fidelity’’) company, to NSCC, dated March 19,
2013, regarding the SLD Proposal prior to NSCC
filing the SLD Proposal with the Commission (‘‘NFS
Letter’’). See Release No. 34–69620 (May 22, 2013),
78 FR 32292 (May 29, 2013) (‘‘Notice of
Amendment No. 1’’) and see Exhibit 2 to File No.
SR–NSCC–2013–02 (https://www.sec.gov/rules/sro/
nscc/2013/34–69620-ex2.pdf).
6 Notice of Amendment No. 1, 78 FR 32292.
7 See NFS Letter. See letters to Elizabeth M.
Murphy, Secretary, Commission from: John C.
Nagel, Esq., Managing Director and General
Counsel, Citadel Securities (‘‘Citadel’’), dated April
18, 2013 (‘‘Citadel Letter I’’) and June 13, 2013
(‘‘Citadel Letter II’’); Peter Morgan, Senior Vice
President & Deputy General Counsel, Charles
Schwab & Co., Inc., (‘‘Charles Schwab’’) dated April
22, 2013 (‘‘Charles Schwab Letter I’’) and May 1,
2013 (‘‘Charles Schwab Letter II’’); Thomas Price,
Managing Director, Operations, Technology & BCP,
Securities Industry and Financial Markets
2 17
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75413
On June 11, 2013, NSCC filed with the
Commission Amendment No. 2 to the
Proposed Rule Change, as previously
modified by Amendment No. 1
(‘‘Amended SLD Proposal’’), which the
Commission published for comment in
the Federal Register on July 15, 2013,
with an order instituting proceedings to
determine whether to approve or
disapprove the Proposed Rule Change
(‘‘Order Instituting Proceedings’’).8 The
Commission received nine comment
letters to Amendment No. 2 and the
Order Instituting Proceedings.9 On
September 25, 2013, the Commission
designated a longer period of review for
Commission action on the Order
Instituting Proceedings.10 On October 7,
2013, NSCC filed Amendment No. 3 to
the Proposed Rule Change (‘‘Final SLD
Proposal’’), as previously modified by
Amendment Nos. 1 and 2, which the
Commission published for comment on
October 15, 2013.11 The Commission
received two comment letters to the
Final SLD Proposal (i.e., Amendment
No. 3).12
Association (‘‘SIFMA’’), dated April 23, 2013
(‘‘SIFMA Letter I’’); Julian Rainero, Bracewell &
Giuliani LLP, on behalf of Investment Technology
Group, Inc. (‘‘ITG’’), dated April 25, 2013 (‘‘ITG
Letter I’’); Matthew S. Levine, Managing Director,
Co-Chief Compliance Officer, Knight Capital
Americas LLC (‘‘Knight Capital’’), dated April 25,
2013 (‘‘Knight Capital Letter’’); Giovanni Favretti,
CFA, Managing Director, Deutsche Bank, dated
April 25, 2013 (‘‘Deutsche Bank Letter’’); Scott C.
Goebel, Senior Vice President, General Counsel,
Fidelity, dated April 25, 2013 (‘‘Fidelity Letter I’’);
and Chief Financial Officer & Executive Managing
Director, ConvergEx Execution Solutions LLC
(‘‘ConvergEx’’), dated May 2, 2013 (‘‘ConvergEx
Letter I’’) and May 22, 2013 (‘‘ConvergEx Letter II’’).
8 Release No. 34–69951 (Jul. 9, 2013), 78 FR
42140 (Jul. 15, 2013) (‘‘Notice of Amendment No.
2’’).
9 See letters to Elizabeth M. Murphy, Secretary,
Commission from: Thomas Price, Managing
Director, Operations, Technology & BCP, SIFMA,
dated June 24, 2013 (‘‘SIFMA Letter II’’) and August
7, 2013 (‘‘SIFMA Letter III’’); Scott C. Goebel, Senior
Vice President, General Counsel, Fidelity, dated
June 26, 2013 (‘‘Fidelity Letter II’’); Peter Morgan,
Senior Vice President & Deputy General Counsel,
Charles Schwab, dated August 5, 2013 (‘‘Charles
Schwab Letter III’’) and September 11, 2013
(‘‘Charles Schwab Letter IV’’); Paul T. Clark and
Anthony C.J. Nuland, Seward & Kissel, LLP
(representing Charles Schwab), dated August 5,
2013 (‘‘Charles Schwab Letter V’’); John C. Nagel,
Esq., Managing Director and General Counsel,
Citadel, dated August 5, 2013 (‘‘Citadel Letter III’’)
and September 5, 2013 (‘‘Citadel Letter IV’’); and
Mark Solomon, Managing Director and Deputy
General Counsel, ITG, dated August 5, 2013 (‘‘ITG
Letter II’’).
10 Release No. 34–70501 (Sep. 25, 2013), 78 FR
60347 (Oct. 1, 2013).
11 Release No. 34–70688 (Oct. 15, 2013), 78 FR
62846 (Oct. 22, 2013) (‘‘Notice of Amendment No.
3’’).
12 See letters to Elizabeth M. Murphy, Secretary,
Commission from: Managing Director and Deputy
General Counsel, ITG, dated November 1, 2013
(‘‘ITG Letter III’’); and Scott C. Goebel, Senior Vice
President, General Counsel, Fidelity, dated
November 5, 2013 (‘‘Fidelity Letter III’’).
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Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Notices
By this order, the Commission
approves the Final Proposed Rule
Change.
II. Background
emcdonald on DSK67QTVN1PROD with NOTICES
A. Purpose of the SLD Proposal
NSCC filed the SLD Proposal to
ensure that it would maintain sufficient
liquid financial resources to withstand,
at a minimum, a default by its single
clearing member or clearing member
family (‘‘Clearing Member’’) to which it
has the largest exposure (‘‘Cover One’’),
in compliance with Commission Rule
17Ad–22(b)(3) 13 and a long-standing
NSCC policy.
B. Development of the SLD Proposal
As originally filed, the SLD Proposal
would have created two related funding
obligations: (1) for the 30 Clearing
Members that presented NSCC with the
largest peak liquidity requirements on
days that did not coincide with
quarterly options expiration periods
(‘‘Regular Periods’’), a liquidity deposit
calculated based on the Clearing
Member’s pro rata portion of NSCC’s
aggregate liquidity requirements from
the 30 Clearing Members during Regular
Periods (‘‘Regular SLD’’); and (2) for a
subset of the 30 Clearing Members that
present NSCC with a peak liquidity
requirement above NSCC’s total
liquidity resources on days that
coincide with quarterly options
expiration periods (‘‘Special Periods’’), a
liquidity deposit calculated based on
each Clearing Members’ individual
contribution to NSCC’s liquidity
requirement above its liquidity
resources during Special Periods
(‘‘Special SLD’’).14
Regular SLD would have been
satisfied in cash only; however, a
Clearing Member would have received a
dollar-for-dollar reduction of its Regular
SLD funding obligation to the extent
that it contributed to NSCC’s line-ofcredit (‘‘Credit Facility’’).15 Special SLD
could only be satisfied with cash.16
On June 11, 2013, in response to
comments received, NSCC filed the
Amended SLD Proposal so that, in
summary: (1) Special Periods were
expanded to include monthly options
expirations periods along with quarterly
options expiration periods; (2) Clearing
Members could designate a commercial
lender to commit to the Credit Facility
on the Clearing Member’s behalf,
enabling the Clearing Member to receive
the dollar-for-dollar reduction of its
Regular SLD; (3) any commitments to
13 17
CFR 240.17Ad–22(b)(3).
Notice, 78 FR at 21487–88.
15 Id. at 21489.
16 Id.
14 See
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the Credit Facility made in excess of a
Clearing Member’s Regular SLD would
be allocated ratably among all 30
Clearing Members that would be
required to make a Regular SLD funding
obligation; and (4) ‘‘liquidity exposure
reports’’ would be provided to all NSCC
members, so that members, particularly
Clearing Members, could better assess
their liquidity exposure to NSCC.17
On October 4 and 7, 2013, in response
to further comments received, NSCC
filed the Final SLD Proposal.18 Among
other things, the Final SLD Proposal
eliminated the Regular SLD funding
obligation.
III. Description of the Final SLD
Proposal
The Final SLD Proposal would add
Rule 4A to NSCC’s Rules and
Procedures 19 to establish a
supplemental liquidity funding
obligation designed to cover the
liquidity exposure attributable to those
Clearing Members that regularly incur
the largest gross settlement debits over
a settlement cycle during times of
increased trading and settlement
activity that arise around Special
Periods. More specifically, the
obligation applies to a subset of the 30
Clearing Members that present NSCC
with historic peak liquidity needs on
days that coincide with Special Periods
above NSCC’s current total liquidity
resources. For this subset, NSCC will
require a liquidity deposit based on the
proportion of the historic peak liquidity
exposure that is presented by each
Clearing Member in excess of NSCC’s
then-available total liquidity resources.
NSCC will hold deposits made in
satisfaction of a Special SLD funding
obligation in its Clearing Fund for a
period of seven days after the end of the
Special Period.
Additionally, if a Clearing Member
believes its current trading activity will
present a liquidity need to NSCC above
NSCC’s total liquidity resources, it may
voluntarily deposit funds with NSCC to
cover the shortfall (‘‘Prefund Deposit’’).
NSCC will hold Prefund Deposit funds
for a period of seven days after the end
of the Special Period. If a Clearing
Member presents NSCC with a liquidity
need above total liquidity resources that
is not funded by a Special SLD funding
obligation or a Prefund Deposit the
Final SLD Proposal will empower NSCC
17 See Notice of Amendment No. 2, 78 FR at
42127.
18 NSCC filed the Final Proposed Rule Change on
October 7, 2013, three days after NSCC filed
Amendment No. 3 to the Advance Notice.
19 See Exhibit 5 to File No. SR–NSCC–2013–02,
https://www.sec.gov/rules/sro/nscc/2013/34-70688ex5.pdf.
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to call from that Clearing Member the
amount of the shortfall, or that Clearing
Member’s share if caused by more than
one Clearing Member, and hold it for 90
days (‘‘Call Deposit’’).
IV. Summary of Comments Received
and NSCC’s Responses
The Commission received 23
comment letters to the SLD Proposal 20
from eight commenters,21 including the
NFS Letter.22 Commenters include bank
affiliated and non-bank affiliated NSCC
members, as well as one industry trade
group, SIFMA.23 NSCC also submitted
two responses to comment letters
received.24 The Commission has
reviewed and taken into full
consideration all of the comments
received.
All eight commenters express support
for NSCC’s overall goal of maintaining
sufficient financial resources to
withstand a default by a Clearing
Member (i.e., Cover One).25 One
commenter, who previously supported
approval of the Amended SLD Proposal,
supports approval of the Final SLD
Proposal.26 The remaining seven
commenters oppose the original SLD
Proposal and the Amended SLD
Proposal, as discussed in more detail
below.27 One of those seven
20 Since the SLD Proposal was filed as both the
Proposed Rule Change and the Advance Notice, the
Commission considered all comments received on
the proposal, regardless of whether the comments
were submitted to the Proposed Rule Change or the
Advance Notice. See NFS Letter, Citadel Letter I,
Citadel Letter II, Citadel Letter III, Citadel Letter IV,
Charles Schwab Letter I, Charles Schwab Letter II,
Charles Schwab Letter III, Charles Schwab Letter IV,
Charles Schwab Letter V, SIFMA Letter I, SIFMA
Letter II, SIFMA Letter III, ITG Letter I, ITG Letter
II, ITG Letter III, Knight Capital Letter, Deutsche
Bank Letter, Fidelity Letter I, Fidelity Letter II,
Fidelity Letter III, ConvergEx Letter I, and
ConvergEx Letter II.
21 See Comments to the Proposed Rule Change
(File No. SR–NSCC–2013–02), https://sec.gov/
comments/sr-nscc-2013-02/nscc201302.shtml, and
the Advance Notice (File No. SR–NSCC–2013–802)
(https://sec.gov/comments/sr-nscc-2013-802/
nscc2013802.shtml (‘‘Comments Received’’). For
purposes of discussion, the Commission considers
the comment submitted by Seward & Kissel on
behalf of Charles Schwab as a Charles Schwab
comment, see Charles Schwab Letter V, supra note
9, and the NFS Letter as a Fidelity comment. See
NFS Letter.
22 See NFS Letter.
23 See Comments Received, supra note 21.
24 See letters to Elizabeth M. Murphy, Secretary,
Commission from Larry E. Thompson, Managing
Director and DTCC General Counsel, dated June 10,
2013 (‘‘NSCC Letter I’’) and August 20, 2013
(‘‘NSCC Letter II’’).
25 See NFS Letter, Citadel Letter III, Charles
Schwab Letter II, Charles Schwab Letter III, Charles
Schwab Letter V, SIFMA Letter II, SIFMA Letter III,
Knight Capital Letter, Deutsche Bank Letter,
Fidelity Letter I, Fidelity Letter II, ConvergEx Letter
I, ConvergEx Letter II, ITG Letter II.
26 See Fidelity Letter II, Fidelity Letter III.
27 See NFS Letter, Citadel Letter I, Citadel Letter
II, Citadel Letter III, Citadel Letter IV, Charles
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Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Notices
commenters submitted the sole
comment letter in opposition to the
Final SLD Proposal.28
B. Opposing Comments Received Prior
to the Final SLD Proposal
A. Comments Expressing Support for
the Provision of Adequate Liquidity at
NSCC
emcdonald on DSK67QTVN1PROD with NOTICES
As mentioned above, all eight
commenters to the SLD Proposal agreed
that NSCC must have access to
sufficient liquidity and capital to meet
the Cover One standard, and some
stated NSCC’s critical role as a national
clearance and settlement system.29 For
example, one commenter states ‘‘that a
clearing agency performing central
counterparty services is essential to the
proper functioning of the capital
markets, and that ensuring the clearing
agency is well capitalized and
financially sound serves to benefit both
the clearing agency’s members and the
capital markets as a whole.’’ 30 The
commenter goes on to state that it
‘‘appreciates the need for the NSCC,
both as a central counterparty and as a
financial market utility that has been
designated by the Financial Stability
Oversight Council as systemically
important, to maintain sufficient
financial resources to withstand a
default by the NSCC member or family
of affiliated members to which the
NSCC has the largest exposure . . .
[and] also understands the NSCC’s
desire to broaden the base of support for
its liquidity needs beyond the small
group of firms that has historically
supported these needs through
participation in the NSCC’s revolving
credit facility, and believes it is
important to enable all of the NSCC’s
members to help the NSCC maintain
sufficient financial resources.’’ 31
Another commenter notes that ‘‘NSCC
should have the resources it needs to be
a source of strength for the national
clearing and settlement system
. . . .’’ 32 Additionally, another
commenter states that it ‘‘appreciates
the importance of NSCC’s critical role as
a [c]entral [c]ounterparty . . . and
supports NSCC’s goal in ensuring that it
has access to sufficient capital in the
event that is largest participant fails.’’ 33
Schwab Letter I, Charles Schwab Letter II, Charles
Schwab Letter III, Charles Schwab Letter IV, Charles
Schwab Letter V, SIFMA Letter I, SIFMA Letter II,
SIFMA Letter III, ITG Letter I, ITG Letter II, ITG
Letter III, Knight Capital Letter, Deutsche Bank
Letter, Fidelity Letter I, ConvergEx Letter I, and
ConvergEx Letter II.
28 See ITG Letter III.
29 See supra note 25.
30 See SIFMA Letter II.
31 Id.
32 See Charles Schwab Letter III, Charles Schwab
Letter V.
33 See ConvergEx Letter II.
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1. Comments Inapplicable to the Final
SLD Proposal
The seven commenters opposed to
approval of the SLD Proposal objected
to the SLD Proposal for various reasons,
as discussed below.34 Additionally, five
of the seven commenters that oppose
the SLD Proposal, as well as the
commenter in support of the Final SLD
Proposal, suggested potential alternative
mechanisms for NSCC to satisfy its
liquidity needs.35
Many of the commenters opposed to
the original SLD Proposal and Amended
SLD Proposal raised concerns with a
component of the proposal that NSCC
eliminated in the Final SLD Proposal.36
Those comments included concerns
about: (1) The anticipated costs for
Clearing Members as a result of
implementation of Regular SLD funding
obligation, including costs imposed by a
quick implementation period; 37 (2)
Clearing Members’ inability to
accurately predict or control their
funding obligation and the effects
thereof, including broker-dealers’
inability to plan for funding and
liquidity risks as provided in FINRA
Reg. Notice 10–57; 38 (3) distributional
effects associated with implementation
34 See Citadel Letter I, Citadel Letter II, Citadel
Letter III, Citadel Letter IV, Charles Schwab Letter
I, Charles Schwab Letter II, Charles Schwab Letter
III, Charles Schwab Letter IV, Charles Schwab Letter
V, SIFMA Letter I, SIFMA Letter II, SIFMA Letter
III, ITG Letter I, ITG Letter II, ITG Letter III, Knight
Capital Letter, Deutsche Bank Letter, ConvergEx
Letter I, and ConvergEx Letter II.
35 Alternatives included, but were not limited to:
NSCC should issue long-term debt to increase its
liquidity resources; NSCC should increase intra-day
margin calls; NSCC should increase Clearing
Member fees; NSCC should reduce the settlement
cycle; NSCC should reduce the volume of unsettled
trades; NSCC should establish a bilateral third-party
bank committed facility; and NSCC should change
its capital structure. See NFS Letter, Citadel Letter
II, Citadel Letter III, Charles Schwab Letter II,
Charles Schwab Letter III, SIFMA Letter II, SIFMA
Letter III, ITG Letter II, Fidelity Letter II, Fidelity
Letter III and ConvergEx Letter II. The Commission
notes that these comments are beyond the subject
of the Final SLD Proposal by NSCC that is before
the Commission for approval under Section 19(b) of
the Act (which provides that the Commission shall
approve a proposed rule change if it finds that such
proposed rule change is consistent with the
requirements of this title and the applicable rules
and regulations issued thereunder).
36 See Citadel Letter II, Citadel Letter III, Citadel
Letter IV, Charles Schwab Letter I, Charles Schwab
Letter II, Charles Schwab Letter III, Charles Schwab
Letter IV, Charles Schwab Letter V, SIFMA Letter
I, SIFMA Letter II, SIFMA Letter III, ITG Letter I,
ITG Letter II, Knight Capital Letter, Deutsche Bank
Letter, ConvergEx Letter I, ConvergEx Letter II.
37 See, e.g., ITG Letter I, ITG Letter II, Citadel
Letter III.
38 See Citadel Letter II, Citadel Letter III, Citadel
Letter IV, Charles Schwab Letter II, SIFMA Letter
I, SIFMA Letter II, ITG Letter II, Knight Capital
Letter, Deutsche Bank Letter, ConvergEx Letter II.
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of the Regular SLD funding obligation,
manifested in particular by an anticompetitive and disparate impact on
non-bank affiliated Clearing Members
compared to bank affiliated Clearing
Members with regard to the offsetting
commitments to the Credit Facility; 39
and (4) perceived mechanical flaws with
the application of the Regular SLD
funding obligation.40
Since NSCC has eliminated the aspect
of the SLD Proposal to which these
comments were made, the Commission
believes these comments are not
relevant for its determination on the
Final SLD Proposal.
2. Comments Applicable to the Final
SLD Proposal and NSCC’s Responses
Thereto
Seven of the eight commenters raised
concerns with the SLD Proposal that,
while not necessarily directly associated
with the Special SLD funding
obligation, could apply to elements of
the Special SLD funding obligation and
thus are relevant for the Commission’s
consideration of the Final SLD
Proposal.41 Four commenters argued
that the SLD Proposal is arbitrary and
capricious because it applies to no more
than 30 Clearing Members.42 Six
commenters argued that the SLD
Proposal would have unintended
consequences of forcing a number of
Clearing Members to terminate their
membership and thereby concentrating
the broker clearing business in fewer
Clearing Members, potentially
increasing systemic risk.43 One
39 See Citadel Letter II, Charles Schwab Letter I,
Charles Schwab Letter II, Charles Schwab Letter III,
Charles Schwab Letter IV, Charles Schwab Letter V,
SIFMA Letter II, SIFMA Letter III, ITG Letter I, ITG
Letter II, Knight Capital Letter, ConvergEx Letter I,
ConvergEx Letter II.
40 See ITG Letter II.
41 See Citadel Letter II, Citadel Letter III, Citadel
Letter IV, Charles Schwab Letter I, Charles Schwab
Letter II, Charles Schwab Letter III, Charles Schwab
Letter IV, Charles Schwab Letter V, SIFMA Letter
I, SIFMA Letter II, SIFMA Letter III, ITG Letter I,
ITG Letter II, ITG Letter III, Knight Capital Letter,
Deutsche Bank Letter, ConvergEx Letter I,
ConvergEx Letter II.
42 See Citadel Letter II, ITG Letter I, Charles
Schwab Letter IV, Charles Schwab Letter V, SIFMA
Letter III, ITG Letter II, ITG Letter III. All four
commenters argue that the imposition of a funding
obligation to no more than 30 Clearing Members
was arbitrary and capricious referred to the Regular
SLD funding obligation, in which a Regular SLD
funding obligation is satisfied pro rata by 30
Clearing Members irrespective of whether each
Clearing Member presented a peak liquidity need
above NSCC total available liquidity resources. One
of the four commenters claims that the same
argument persists for the Special SLD Funding
Obligation; as such, the Commission will consider
the comment here. See Charles Schwab Letter V.
43 See Citadel Letter II, Charles Schwab Letter II,
Charles Schwab Letter III, SIFMA Letter I, SIFMA
Letter II, SIFMA Letter III, ITG Letter I, ITG Letter
II, Knight Capital Letter, ConvergEx Letter II.
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commenter stated that historic peak
liquidity needs, which would be used
by NSCC to determine the liquidity
need presented by each Clearing
Member, is not necessarily predictive of
future liquidity needs.44 Three
commenters argued that NSCC
incorrectly calculates its liquidity needs
in the SLD Proposal, either because the
liquidity need is calculated using
Clearing Member gross settlement debits
instead of net settlement debits or
because the settlement debits were
aggregated over a four-day cycle.45
Seven commenters stated that treatment
of funds delivered to NSCC to satisfy a
funding obligation under the SLD
Proposal for Commission Rule 15c3–1
purposes was unclear.46
In response to comments that
imposition of a funding obligation is
arbitrary and capricious, NSCC revised
the SLD Proposal to eliminate the
Regular SLD funding obligation
component,47 which would have: (i)
Assigned a funding obligation to the 30
Clearing Members that presented NSCC
with the largest peak liquidity needs
irrespective of whether the peak
liquidity need itself would have
surpassed NSCC available liquidity
resources, and (ii) allocated a funding
obligation to each of those 30 Clearing
Members driven substantially by the
peak liquidity need presented to NSCC
by the largest Clearing Member.48 In
response to comments regarding
unintended consequences of the SLD
Proposal, such as Clearing Members
terminating their membership, NSCC
stated that the Clearing Member is in the
best position to monitor and manage the
liquidity risks presented by its own
activity.49 Similarly, NSCC states that
the maintenance of adequate liquidity
resources at NSCC is a key element in
the reduction of systemic risk at a
systemically-important financial market
utility and also a key component of
NSCC’s ability to prevent the failure of
a Clearing Member from having a
cascading effect on other Clearing
Members.50
NSCC agreed that historic peak
liquidity needs are not necessarily
predictive of future liquidity needs, and
as a result NSCC has proposed a
44 See
ITG Letter II.
Citadel Letter III, ITG Letter II, ConvergEx
Letter I, ConvergEx Letter II.
46 See 17 CFR 240.15c3–1. See, e.g., Citadel Letter
II, Citadel Letter III, Charles Schwab Letter II,
Charles Schwab Letter III, SIFMA Letter II, ITG
Letter I, ITG Letter II, ITG Letter III, Knight Capital
Letter, ConvergEx Letter II.
47 See Notice of Amendment No. 3, 78 FR at
62847.
48 Id. at 62846–47.
49 NSCC Letter I.
50 See NSCC Letter I, NSCC Letter II.
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45 See
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mechanism whereby Clearing Members
may voluntarily prefund liquidity needs
that the Clearing Member anticipates
will surpass total liquidity resources
available at NSCC through the Prefund
Deposit.51 Furthermore, in the event a
Clearing Member does not elect to
prefund potential liquidity needs but
does present a liquidity need to NSCC
above total liquidity resources that is
not accounted for by a Special SLD
funding obligation, NSCC has proposed
a mechanism to require the Clearing
Member to fund the liquidity need
through the Call Deposit.52 With respect
to comments that NSCC incorrectly
calculates its liquidity need by using
gross settlement debits instead of net
settlement debits, NSCC responded that,
as a central counterparty for its
members, its risk-exposure is reflected
by the gross settlement debits presented
to it, not net settlement debits, in the
event of a Clearing Member default.53
Furthermore, NSCC stated that
calculating liquidity obligations over a
four-day settlement cycle is consistent
with NSCC’s practical liquidity
obligation in the event of a Clearing
Member default.54 Finally, in response
to comments that the treatment of funds
posted in satisfaction of an SLD funding
obligation for Rule 15c3–1 purposes is
unclear, NSCC stated that it structured
the SLD Proposal so that deposits made
pursuant to an SLD funding obligation
would constitute Clearing Fund
deposits, which have clear regulatory
capital treatment under Rule 15c3–1.55
Six commenters stated that the SLD
Proposal did not provide a sufficient
evaluation of its burden on competition
and lacked necessary detail so as to
elicit meaningful comment.56 Many of
these commenters argued that, while
they supported NSCC’s need for
liquidity resources generally, NSCC did
not demonstrate a specific need for
additional liquidity in connection with
the SLD Proposal.57 Five commenters
argued the SLD Proposal lacked
sufficient Clearing Member input prior
to submitting the proposal.58 Three
51 See Notice of Amendment No. 3, 78 FR at
62847.
52 See Notice, 78 FR at 21489.
53 See NSCC Letter I.
54 Id.
55 Id.
56 See Citadel Letter II, Charles Schwab Letter I,
Charles Schwab Letter II, Charles Schwab Letter III,
Charles Schwab Letter V, SIFMA Letter II, ITG
Letter I, ITG Letter II, Knight Capital Letter,
ConvergEx Letter I, ConvergEx Letter II.
57 See Citadel Letter II, Citadel Letter III, SIFMA
Letter II, SIFMA Letter III, ITG Letter II, ITG Letter
III, ConvergEx Letter II.
58 See Citadel Letter III, Charles Schwab Letter I,
ITG Letter I, ITG Letter II, Knight Capital Letter,
Deutsche Bank Letter.
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commenters also argued that the SLD
Proposal did not adequately protect
investors.59 One commenter argued that
the fact that NSCC submitted the SLD
Proposal without Clearing Member
input is indicative of a lack of fair
representation for Clearing Members in
the governance of NSCC.60 One
commenter stated that NSCC did not
take into account the potential impact of
other central counterparties instituting
similar liquidity provisions.61 Five
commenters argued in opposition of
cash being the only source by which a
Clearing Member could satisfy a
supplemental liquidity deposit.62
In response to comments received
regarding insufficient detail of the SLD
Proposal, NSCC provided detail
regarding: the specific need for liquidity
resources,63 implementation timeframes
for the SLD Proposal,64 and a suite of
tools, such as monthly and daily
reports, to enable Clearing Members to
more accurately predict a potential
Regular SLD funding obligation.65 NSCC
stated that it would work with Clearing
Members to help them understand and
develop tools to forecast liquidity
exposure and mitigate their peak
liquidity exposure.66 NSCC also stated
that it would provide monthly and daily
reports to Clearing Members that would
show liquidity exposure during relevant
periods.67 NSCC also stated that
fluctuating peak activity recently has
exceeded NSCC available total liquidity
resources.68 NSCC believes these
liquidity needs are largely driven by
industry consolidation, developments in
59 See Deutsche Bank Letter, Charles Schwab
Letter II, Charles Schwab IV, Charles Schwab Letter
V, SIFMA Letter II.
60 See Citadel Letter III.
61 See Charles Schwab Letter II, Charles Schwab
Letter III. Additionally, one commenter argued that
NSCC attempted to improperly amend the SLD
Proposal through a response to comments. See
Charles Schwab Letter V. The Commission notes
that NSCC filed the Final SLD Proposal subsequent
to the Commission’s receipt of this comment in
accordance with the rule filing process. See Notice
of Amendment No. 3, 78 FR 62846.
62 See NFS Letter, Charles Schwab Letter II,
Charles Schwab Letter III, Citadel Letter II, Citadel
Letter III, SIFMA Letter I, Fidelity Letter II, ITG
Letter II.
63 See NSCC Letter II (stating that ‘‘NSCC has seen
continued increases in potential liquidity needs,
driven by consolidation in the industry,
developments in trading techniques (including a
rise in high frequency trading), and a reduction in
volatility from the post-[2008] crisis highs which
result in reduced Clearing Fund requirements’’).
64 See Notice of Amendment No. 3, 78 FR 62846
(stating that the Final SLD Proposal would be
implemented on February 1, 2014).
65 See NSCC Letter I, NSCC Letter II, Notice of
Amendment No. 2, 78 FR 42140, Notice of
Amendment No. 3, 78 FR 62846.
66 See NSCC Letter I.
67 See NSCC Letter I, NSCC Letter II.
68 See NSCC Letter II.
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trading techniques, including an
increased use of high frequency trading,
and a reduction in volatility from post2008 financial crisis levels, generally
resulting in a reduction in Clearing
Fund requirements.69 In response to
comments received regarding
insufficient analysis of the burden on
competition that might ensue from
implementation of the SLD Proposal,
NSCC substantially revised the SLD
Proposal twice to expand its analysis of
the burden on competition to include,
for example, individual subsections
specifically addressing competition
concerns raised by commenters,70 and
to reduce any disparate impact on
Clearing Members stemming from
implementation of the SLD Proposal,
first to provide a mechanism by which
non-bank affiliated Clearing Members
could contribute to Credit Facility, and
second to eliminate the Regular SLD
from the Final SLD Proposal.71
In response to comments regarding
the lack of Clearing Member input in the
SLD Proposal and that the development
of the SLD Proposal without Clearing
Member input was indicative of a lack
of fair representation of all Clearing
Members at NSCC, NSCC stated that it
engaged in discussions with Clearing
Members likely to be impacted by the
SLD Proposal, including more than 100
meetings with Clearing Members to
enhance Clearing Members’
understanding of liquidity risks
presented to NSCC and the SLD
Proposal generally.72 The Proposed Rule
Change and subsequent amendments
were published for comment four times,
so Clearing Members had an
opportunity to comment, and NSCC also
substantially revised the SLD Proposal
twice as a direct response to comments
received on the SLD Proposal.73 Finally,
on September 18, 2013, NSCC
announced to its membership that it
was forming the Clearing Agency
Liquidity Council (‘‘CALC’’), an
advisory group to continue the dialogue
between NSCC and its Clearing
Members regarding liquidity issues in a
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69 Id.
70 See Notice of Amendment No. 2, 78 FR 42140.
See also NSCC Letter I. NSCC argued that the SLD
Proposal would apply fairly across Clearing
Members and, while recognizing potential
competitive impacts on such members, believed the
SLD Proposal addressed important financial
resource requirements. NSCC also stated that it was
revising the SLD Proposal to address competition
concerns.
71 See Notice of Amendment No. 3, 78 FR 62846.
See also NSCC Letter II.
72 See NSCC Letter I.
73 See Notice of Amendment No. 2, 78 FR 42140,
Notice of Amendment No. 3, 78 FR 62846. See also
NSCC Letter II.
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formal setting.74 According to NSCC,
the CALC intends to explore additional
liquidity resources in advance of the
2014 renewal of NSCC’s Credit Facility,
in order to address, for example, NSCC’s
liquidity needs outside of Special
Periods and the refinancing risk
associated with the annual renewal of
the Credit Facility.75 According to
NSCC, twenty-four Clearing Members
joined the CALC, including all eight
commenters to the SLD Proposal, which
has met on multiple occasions since its
inception.
NSCC responded to comments that
the SLD Proposal did not contain
sufficient information by amending the
SLD Proposal twice to further identify
the potential impact of the SLD Proposal
on Clearing Members and to make
substantive revisions to the SLD
Proposal to address those concerns.76
NSCC responded to comments that the
SLD Proposal did not protect investors
by stating that the maintenance of
adequate liquidity resources at NSCC, a
designated systemically-important
financial market utility 77 that plays a
fundamental role in the United States
cash equities market, will protect
against the transmission of systemic risk
among Clearing Members in the event of
a failure of one Clearing Member,
thereby promoting the prompt and
accurate settlement of securities
transactions and the protection of
investors.78 NSCC responded to the
comment that it did not take into
account other central counterparties
imposing similar liquidity requirements
by stating that such a concern was
unlikely given the difference in
liquidity risk between cash market
central counterparties (i.e., NSCC),
where potential liquidity needs
typically are orders of magnitude greater
than the market risk that their margin
collections are designed to cover, and
74 DTCC Important Notice a7706, Creation of
DTCC Clearing Agency Liquidity Council and
Nomination Process (Sep. 18, 2013), https://
dtcc.com/downloads/legal/imp_notices/2013/nscc/
a7706.pdf.
75 See NSCC Letter II. See also Notice of
Amendment No. 2, 78 FR 42140, Notice of
Amendment No. 3, 78 FR 62846.
76 See Notice of Amendment No. 2, 78 FR 42140,
Notice of Amendment No. 3, 78 FR 62846. See also
NSCC Letter II.
77 Financial Stability Oversight Council (‘‘FSOC’’)
2012 Annual Report, Appendix A, https://
www.treasury.gov/initiatives/fsoc/Documents/
2012%20Annual%20Report.pdf (‘‘FSOC
Designation’’).
78 See NSCC Letter I, NSCC Letter II. Designation
as systemically-important by FSOC means that a
failure of or disruption to its functioning could
create, or increase, the risk of significant credit or
liquidity problems spreading among financial
institutions or markets, thereby threatening
financial stability. See 12 U.S.C. 5462(9). See also
FSOC Designation, supra note 77.
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75417
derivatives central counterparties,
where liquidity needs generally are
more closely aligned to market risk of
members’ portfolios and the members’
margin requirements.79 In response to
comments opposed to cash being the
sole funding source by which a Clearing
Member could satisfy a supplemental
liquidity deposit, NSCC eliminated
Regular SLD, thereby eliminating
concern relating to disparate treatment
that might ensue by requiring Clearing
Members that do not make a
commitment to lend to NSCC through
the Credit Facility to make their Regular
SLD funding obligation in cash, and
NSCC states that the CALC will evaluate
potential alternative collateral
approaches that could be used to fund
a portion of a Clearing Member’s
funding obligation.80
C. Comments to the Final SLD Proposal
The Commission received two
comments on the Final SLD Proposal.
Both commenters supported NSCC’s
decision to eliminate the Regular SLD
funding obligation from the SLD
Proposal.81 One commenter argued for
approval of the Final SLD Proposal,
since the Final SLD Proposal ‘‘is a
helpful development in the process of
determining how best to increase
NSCC’s liquidity resources to meet its
liquidity needs.’’ 82 Moreover, the
commenter believes that ‘‘NSCC has
addressed the area of greatest [m]ember
concern in removing provisions of the
[SLD] Proposal that collectively deal
with the imposition of the Regular
[SLD].’’ 83 One commenter argued for
disapproval of the Final SLD Proposal,
stating that flawed concepts remain and
approval would unnecessarily inhibit
the development of ideas from NSCC’s
CALC.84 NSCC did not submit a
response to comments received after
submission of the Final SLD Proposal.
V. Discussion and Commission Findings
After careful review, the Commission
finds that the Final SLD Proposal is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a registered
clearing agency.85 In particular, the
79 See
NSCC Letter II.
See also discussion below noting that any
cash deposit is driven by the Clearing Member’s
own trading activity.
81 See ITG Letter III, Fidelity Letter III.
82 See Fidelity Letter III.
83 Id.
84 See ITG Letter III.
85 In approving the Proposed Rule Change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f). Comments about
80 Id.
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Commission finds that the Final SLD
Proposal is consistent with the
following provisions of the Act: (i)
Section 17A(b)(3)(A),86 which requires
that a clearing agency ‘‘is so organized
and has the capacity to be able to
facilitate the prompt and accurate
clearance and settlement of securities
transactions . . . to safeguard securities
and funds in its custody and control and
for which it is responsible . . . and to
enforce . . . compliance by its
participants with the rules of the
clearing agency;’’ (ii) Section
17A(b)(3)(F),87 which requires that: the
rules of a clearing agency not be
designed to permit unfair
discrimination among participants in
the use of the clearing agency; and the
rules of a clearing agency promote the
prompt and accurate clearance and
settlement of securities transactions and
protect investors and the public interest;
(iii) Section 17A(b)(3)(D),88 which
requires that the rules of a clearing
agency provide for the equitable
allocation of reasonable dues, fees, and
other changes among its participants;
and (iv) Section 17A(b)(3)(I),89 which
requires the rules of a clearing agency
not impose any burden on competition
not necessary or appropriate in
furtherance of the purposes of the
Exchange Act.
The Commission’s Order Instituting
Proceedings solicited comment on a
number of issues. After carefully
considering the Final SLD Proposal and
the comments received on the SLD
Proposal and NSCC responses thereto,
the Commission finds that the Final
SLD Proposal is consistent with the
Exchange Act and therefore must be
approved.
The Commission recognizes that some
commenters did not support certain
aspects of the SLD Proposal. The
Commission, however, must approve a
proposed rule change if it finds that the
proposed rule change is consistent with
the requirements of the Exchange Act
and the applicable rules and regulations
thereunder. No comments convinced
the Commission that the Final SLD
Proposal was not consistent with the
Exchange Act and the applicable rules
and regulations thereunder. The
Commission believes that, overall, the
Final SLD Proposal: (i) Will improve
financial safety at NSCC by increasing
its ability to meet its liquidity needs; (ii)
provides for the equitable allocation of
the potential competitive impact of the Proposed
Rule Change are addressed above and below.
86 15 U.S.C. 78q–1(b)(3)(A).
87 15 U.S.C. 78q–1(b)(3)(F).
88 15 U.S.C. 78q–1(b)(3)(D).
89 15 U.S.C. 78q–1(b)(3)(I).
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reasonable expenses; and (iii) does not
permit unfair discrimination among
Clearing Members in the use of NSCC or
impose an unnecessary burden on
competition. The Commission’s analysis
of the comments applicable to the Final
SLD Proposal and the Final SLD
Proposal’s consistency with the
Exchange Act are discussed below.
As stated above, several commenters
argued that the original SLD Proposal
suffered from certain defects, such as a
failure of NSCC to consult with Clearing
Members prior to submitting the SLD
Proposal,90 that the SLD Proposal
contained an insufficient evaluation of
the burden on competition, and an
insufficient description of the SLD
Proposal,91 and that NSCC did not
demonstrate a specific need for
additional liquidity in connection with
the SLD Proposal.92
The Commission believes that the
Final SLD Proposal is consistent with
the Exchange Act and the applicable
rules and regulations thereunder. NSCC
made substantial revisions to the SLD
Proposal directly responsive to
comments raised during the comment
period, created the CALC to continue
the dialogue between NSCC and
Clearing Members regarding liquidity
generally, and provided a more robust
description of the SLD Proposal and its
potential effects on the competition
between Clearing Members,93 in
particular describing how the Final SLD
Proposal addresses those potential
effects.94
As stated above, all commenters
expressed support for the notion that
NSCC must have access to sufficient
liquidity.95 One commenter stated that
‘‘NSCC’s critical role as a national
clearance and settlement system’’ made
it so that adequate liquidity resources at
NSCC was of paramount importance.96
The Commission believes that NSCC’s
maintenance of adequate Cover One
liquidity resources helps ensure that
orderly settlement can be completed
notwithstanding the failure of its largest
Clearing Member. The Commission
further believes approval of the Final
SLD Proposal is necessary to improve
the overall financial safety of NSCC and
its ability to complete settlement.
The Commission also notes that NSCC
has stated that fluctuating peak liquidity
90 See
supra note 58.
supra note 56.
92 See supra note 57.
93 See Notice of Amendment No. 2, 78 FR 42140,
Notice of Amendment No. 3, 78 FR 62846, NSCC
Letter I, NSCC Letter II.
94 See Notice of Amendment No. 3, 78 FR 62846,
NSCC Letter II.
95 See supra note 25.
96 See ConvergEx Letter II.
91 See
PO 00000
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Fmt 4703
Sfmt 4703
needs presented to NSCC have exceeded
total liquidity resources available to
NSCC, emphasizing the need for NSCC
to develop a mechanism to help ensure
that it maintains adequate liquidity as
soon as possible.97 These liquidity
needs are driven by Clearing Members’
trading activity, and the Final SLD
Proposal is designed as a mechanism to
allocate a funding obligation to those
Clearing Members with peak liquidity
needs that surpass NSCC available
liquidity resources.
The Commission also believes that the
Final SLD Proposal provides a
mechanism to help ensure that NSCC
maintains sufficient liquidity
prospectively. The Commission agrees
with commenters that have suggested
that historic peak liquidity is not
necessarily predictive of future liquidity
needs. To this point, the Final SLD
Proposal permits Clearing Members to
use a Prefund Deposit in cases where a
Clearing Member anticipates that its
current trading activity will surpass
total liquidity resources at NSCC.
Furthermore, in the event that a
Clearing Member does not elect to make
a Prefund Deposit but does present a
liquidity need to NSCC above total
liquidity resources that is not accounted
for by a Special SLD funding obligation,
NSCC may require the Clearing
Members to fund the liquidity need by
making a Call Deposit. The Commission
believes that these tools provide NSCC
with the means to access sufficient
liquidity prospectively. For the above
reasons, the Commission believes the
SLD Proposal is consistent with the
requirements of Exchange Act Sections
17A(b)(3)(A) and (F) regarding the
prompt and accurate settlement of
securities transactions.
The Commission takes specific note of
comments arguing that the costs of the
Final SLD Proposal would have the
unintended consequence of causing
many Clearing Members to terminate
their membership with NSCC and
thereby concentrating the brokerage
clearing business in fewer Clearing
Members, potentially leading to an
increase of systemic risk. The
Commission recognizes that there are
costs of the Final SLD Proposal for
Clearing Members for which the Special
SLD funding obligation applies.
Clearing Members would be required to
meet the Special SLD funding obligation
in cash, which would be maintained by
NSCC for a period of seven business
days following the end of the Special
Period.98 Furthermore, funds delivered
to NSCC pursuant to a Call Deposit will
97 See
98 See
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be maintained by NSCC for a period of
90 days.99
Under the Final SLD Proposal,
Clearing Members would only be
required to provide funding to the
extent that the Clearing Member’s
trading activity during a two-year lookback period of correlated Special Period
dates would have resulted in NSCC
having insufficient liquidity resources
to cover the default of that Clearing
Member after taking into account all of
NSCC’s available liquidity resources at
the time of default.100 The Special SLD
funding obligation provides for an
allocation formula that ratably applies
to a subset of the 30 Clearing Members
that present largest peak liquidity needs
to NSCC above NSCC’s total liquidity
resources during Special Periods.101 By
allocating the funding obligation to
those Clearing Members that directly
create the liquidity need, the Final SLD
Proposal helps to ensure that those
Clearing Members who impose
equivalent liquidity burdens on NSCC
bear equivalent financial costs and
allows each Clearing Member to
exercise a degree of control over the
funding obligation it bears. Accordingly,
and notwithstanding the views
expressed by commenters, the
Commission believes that applying a
liquidity obligation only to those
Clearing Members that present a
liquidity need to NSCC based on a
historical look-back period above the
total liquidity resources available to
NSCC is an equitable allocation of
expenses as required by Exchange Act
Section 17A(b)(3)(D).
NSCC’s application of the Special
SLD funding obligation to no more than
the 30 Clearing Members that present
the highest peak liquidity exposures
over a two-year look-back period during
Special Periods 102 prima facie has the
effect of limiting that obligation to a
subset of Clearing Members. However, a
Special SLD funding obligation will not
be imposed on a Clearing Member,
irrespective of the rank of that Clearing
`
Member’s peak liquidity need vis-a-vis
other Clearing Members, unless that
Clearing Member’s peak liquidity need
surpassed NSCC’s total liquidity
resources.103
99 See Exhibit 5 to File No. SR–NSCC–2013–02,
https://www.sec.gov/rules/sro/nscc/2013/34-70688ex5.pdf.
100 Id. See also Notice, 78 FR at 21489.
101 See Notice of Amendment No. 3, 78 FR at
62847.
102 Id. See also Exhibit 5 to File No. SR–NSCC–
2013–02, https://www.sec.gov/rules/sro/nscc/2013/
34-70688-ex5.pdf.
103 See Notice of Amendment No. 3, 78 FR at
62847.
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Since whether an individual Clearing
Member will have a Special SLD
funding obligation is dependent solely
upon the liquidity needs presented by
that Clearing Member during the lookback period in excess of NSCC’s thenavailable total liquidity resources, the
Commission believes that expanding the
Special SLD funding obligation to all
Clearing Members is not necessary given
the practical application of the rule to
a subset of the 30 Clearing Members.
Accordingly, despite the views
expressed by some commenters, the
Commission believes that limiting
application of the Special SLD
requirement to no more than 30 Clearing
Members is consistent with the
requirement of Exchange Act Section
17A(b)(3)(D) that expenses be equitably
allocated among Clearing Members.
As stated above, the Commission
recognizes that costs will be imposed
through the Final SLD Proposal on
Clearing Members for which the Special
SLD funding obligation applies. The
Commission also recognizes that some
Clearing Members may make an
economic decision to terminate their
NSCC membership to avoid these costs.
The Commission believes, however, that
the Final SLD Proposal is a reasonable
measure of the associated liquidity
expenses experienced by NSCC and that
the associated costs are necessary and
appropriate for NSCC to ensure that it
has the liquidity resources required to
continue to operate in a safe and sound
manner.
Under the Final SLD Proposal, a
funding obligation is generated when a
Clearing Member’s trading activity
during a historic Special Period would
have resulted in NSCC having
insufficient liquidity resources to cover
the default of that Clearing Member after
taking into account all of NSCC’s
available liquidity resources at that
time. As a result, a Special SLD funding
obligation is the amount of the
difference between a demonstrated peak
total liquidity need created and current
total liquidity resources available,
which difference NSCC would be
unable to account for through other
liquidity resources.
As for the unintended consequences
associated with the Final SLD Proposal,
the Commission agrees with NSCC that
the maintenance of adequate liquidity at
NSCC is a fundamental element in
addressing the goal of reducing the
potential systemic risk posed by a
systemically-important financial market
utility 104 and also a key component of
NSCC’s ability to prevent the failure of
a Clearing Member from having a
104 See
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Sfmt 4703
75419
cascading effect on other Clearing
Members. The Commission also believes
that since Clearing Members exercise a
degree of control over whether they will
face an SLD funding obligation, they
could explore alternatives to
termination of membership to avoid
incurring a Special SLD funding
obligation, including changes to trading
behavior so that their trading activity
does not present a liquidity need to
NSCC above NSCC’s total available
liquidity resources, as informed by the
daily and monthly ‘‘liquidity
transaction’’ reports to be provided by
NSCC as part of the Final SLD
Proposal.105 Accordingly, the
Commission believes the expenses
charged by NSCC through imposition of
the Special SLD funding obligation are
reasonable as required by Exchange Act
Section 17A(b)(3)(D).
For these reasons stated above, the
Commission believes that the Final
Proposed Rule Change containing the
Final SLD Proposal meets the Section
17A(b)(3)(D) Exchange Act standard of
equitable allocation of reasonable dues,
fees, and other charges among its
participants. The Commission finds it
equitable that Clearing Members address
the liquidity exposure that they actually
present to NSCC during Special Periods
and that such liquidity exposure is not
borne by Clearing Members whose
trading activity does not generate the
liquidity need. Similarly, the
Commission finds the Final SLD
Proposal equitable in that two Clearing
Members that produce the same
liquidity need in excess of NSCC’s total
liquidity resources will be assessed the
same Special SLD funding obligation.
Furthermore, the Final SLD Proposal is
equitable because it allows Clearing
Members to anticipate and manage their
own liquidity exposure to the clearing
agency by changing their trading
behavior. Finally, the Commission
believes that the limitation in NSCC’s
rules to apply the Special SLD funding
obligation to not more than 30 Clearing
Members is not arbitrary or capricious
because a Clearing Member’s Special
SLD funding obligation will depend
solely upon its trading activity in
relation to NSCC’s total liquidity
resources.
Several commenters raised concerns
regarding the perceived burdens on
competition and asserted that there are
105 See Notice of Amendment No. 2, 78 FR 42140,
Notice of Amendment No. 3, 78 FR 62846, NSCC
Letter II. With respect to the comments described
above about NSCC requiring cash be deposited as
collateral, the Commission believes that NSCC has
addressed these comments and has stated that the
CALC will evaluate potential alternative collateral
approaches.
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Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Notices
emcdonald on DSK67QTVN1PROD with NOTICES
unfair and discriminatory impacts of the
SLD Proposal, in particular with respect
to an aspect of the eliminated Regular
SLD funding obligation.106 However, no
commenters argued that the Final SLD
Proposal discriminated among Clearing
Members in the use of the clearing
agency or imposed an unnecessary or
inappropriate burden on competition.
Because a Special SLD funding
obligation will be imposed only to the
extent that an individual Clearing
Member’s trading activity over a twoyear historical look-back period on
corresponding days surpasses the total
liquidity resources available to NSCC,
only a small number of Clearing
Members likely will incur a Special SLD
funding obligation. While the Special
SLD funding obligation will very likely
only be met by a small number of
Clearing Members, NSCC (i) will
provide all members with a daily report
regarding the liquidity exposure
presented by such member, (ii) will
provide similar monthly reports
specifically to Clearing Members to help
Clearing Members determine whether
they should make Prefund Deposits or
otherwise manage their liquidity
exposure,107 and (iii) has created the
CALC to ensure that the Special SLD
funding obligation will continue to only
reasonably and fairly impose a
requirement on those Clearing Members
that can foresee the liquidity exposure
that they may present to NSCC during
Special Periods.108
As a result, the Commission believes
that the Final SLD Proposal meets the
requirements of Sections 17A(b)(3)(F)
and (I) of the Exchange Act. To the
extent the imposition of the Special SLD
funding obligation results in a burden
on competition because it levies a
funding obligation on some Clearing
Members but not others, such burden is
necessary or appropriate for NSCC to
ensure that it has the liquidity resources
required to continue to operate in a safe
and sound manner. Furthermore, the
Special SLD funding obligation does not
amount to unfair discrimination among
Clearing Members in the use of the
clearing agency because the funding
requirement is correlated directly with
trading activity that creates the actual
liquidity need.
106 See Citadel Letter II, Charles Schwab Letter I,
Charles Schwab Letter II, Charles Schwab Letter III,
Charles Schwab Letter IV, Charles Schwab Letter V,
SIFMA Letter I, SIFMA Letter II, ITG Letter I, ITG
Letter II, Knight Capital Letter, ConvergEx Letter I,
ConvergEx Letter II.
107 See Notice of Amendment No. 2, 78 FR 42140,
Notice of Amendment No. 3, 78 FR 62846, NSCC
Letter II.
108 See NSCC Letter I, NSCC Letter II.
VerDate Mar<15>2010
17:00 Dec 10, 2013
Jkt 232001
VI. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the Act
and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,109 that the
proposed rule change SR–NSCC–2013–
02, as modified by Amendment Nos. 1,
2, and 3, be and hereby is approved, as
of the date of this order or the date of
the ‘‘Notice of No Objection to Advance
Notice Filing, as Modified by
Amendment Nos. 1, 2, and 3, to Institute
Supplemental Liquidity Deposits to
[NSCC’s] Clearing Fund Designed to
Increase Liquidity Resources to Meet Its
Liquidity Needs,’’ SR–NSCC–2012–802,
whichever is later.
By the Commission.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–29497 Filed 12–10–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70991; File No. SR–BOX–
2013–57]
Self-Regulatory Organizations; BOX
Options Exchange LLC; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change To Amend
Interpretive Material To Rule 5050 To
Eliminate the Cap on the Number of
Additional Series That May be Listed
Per Expiration Month for Each
Quarterly Options Series in ExchangeTraded Fund Options
December 5, 2013.
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
3, 2013, BOX Options Exchange LLC
(the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
from interested persons.
109 15
U.S.C. 78s(b)(2).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
interpretive material to Rule 5050
(Series of Options Contracts Open for
Trading) to eliminate the cap on the
number of additional series that may be
listed per expiration month for each
Quarterly Option Series (‘‘QOS’’) in
exchange-traded fund (‘‘ETF’’) options.
The text of the proposed rule change is
available from the principal office of the
Exchange, at the Commission’s Public
Reference Room and also on the
Exchange’s Internet Web site at https://
boxexchange.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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.
The self-regulatory organization has
prepared summaries, set forth in
Sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is proposing to amend
Interpretive Material (‘‘IM’’) 5050–4 to
Rule 5050 (Series of Options Contracts
Open for Trading) to eliminate the cap
on the number of additional series that
may be listed per expiration month for
each QOS in ETF options.3 This is a
competitive filing that is based on
proposals recently submitted by NYSE
Arca, Inc. (‘‘NYSE Acra’’) and NYSE
MKT LLC (‘‘NYSE MKT’’) that were
recently noticed by the Commission.4
As set out in IM–5050–4, the Exchange
3 A Quarterly Option Series is a series of an
option class that is approved for listing and trading
on the Exchange in which the series is opened for
trading on any business day, and that expires at the
close of business on the last business day of a
calendar quarter. The Exchange lists series that
expire at the end of the next consecutive four (4)
calendar quarters, as well as the fourth quarter of
the next calendar year. See Rule 100(a)(54) and IM–
5050–4(a).
4 See Securities Exchange Act Release Nos. 70855
(November 13, 2013) 78 FR 69493 (November 19,
2013) (Notice of Filing and Immediate Effectiveness
of SR–NYSEArca–2013–120) and 070854
(November 13, 2013) 78 FR 69465 (November 19,
2013) (Notice of Filing and Immediate Effectiveness
of SR–NYSEMKT–2013–90).
E:\FR\FM\11DEN1.SGM
11DEN1
]]>Agencies
[Federal Register Volume 78, Number 238 (Wednesday, December 11, 2013)]
[Notices]
[Pages 75413-75420]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29497]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-70999; File No. SR-NSCC-2013-02]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change, as Modified by
Amendment Nos. 1, 2, and 3, To Institute Supplemental Liquidity
Deposits to Its Clearing Fund Designed To Increase Liquidity Resources
To Meet Its Liquidity Needs
December 5, 2013.
I. Introduction
On March 21, 2013, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ proposed rule change SR-NSCC-2013-02 (``Proposed Rule
Change'') to institute supplemental liquidity deposits to NSCC's
Clearing Fund designed to increase liquidity resources to meet NSCC's
liquidity needs (``SLD Proposal'').\3\ On April 10, 2013, the
Commission published notice of the Proposed Rule Change for comment in
the Federal Register.\4\ On April 19, 2013, NSCC filed with the
Commission Amendment No. 1 to the Proposed Rule Change,\5\ which the
Commission published for comment in the Federal Register on May 29,
2013 and designated a longer period for Commission action on the
Proposed Rule Change, as amended.\6\ The Commission received 12 comment
letters, including the NFS Letter, to the SLD Proposal as initially
filed and as modified by Amendment No. 1.\7\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ NSCC also filed the SLD Proposal contained in the Proposed
Rule Change as advance notice SR-NSCC-2013-802 (``Advance Notice''),
as modified by Amendment No. 1, pursuant to Section 806(e)(1) of the
Payment, Clearing, and Settlement Supervision Act of 2010 and Rule
19b-4(n)(1)(i) thereunder. See Release No. 34-69451 (Apr. 25, 2013),
78 FR 25496 (May 1, 2013). On May 20, 2013, the Commission extended
the period of review of the Advance Notice, as modified by Amendment
No. 1. Release No. 34-69605 (May 20, 2013), 78 FR 31616 (May 24,
2013). On June 11, 2013, NSCC filed Amendment No. 2 to the Advance
Notice, as previously modified by Amendment No. 1. Release No. 34-
69954 (Jul. 9, 2013), 78 FR 42127 (Jul. 15, 2013). On October 4,
2013, NSCC filed Amendment No. 3 to the Advance Notice, as
previously modified by Amendment Nos. 1 and 2. Release No. 34-70689
(Oct. 15, 2013) 78 FR 62893 (Oct. 22, 2013). On December 5, 2013,
the Commission issued a Notice of No Objection to the Advance
Notice, as modified by Amendment Nos. 1, 2, and 3, to Institute
Supplemental Liquidity Deposits to Its Clearing Fund Designed to
Increase Liquidity Resources to Meet Its Liquidity Needs. Release
No. 34-71000.
\4\ Release No. 34-69313 (Apr. 4, 2013), 78 FR 21487 (Apr. 10,
2013) (``Notice'').
\5\ NSCC filed Amendment No. 1 to the Proposed Rule Change and
Advance Notice filings to include as Exhibit 2 a comment letter from
National Financial Services (``NFS''), a Fidelity Investments
(``Fidelity'') company, to NSCC, dated March 19, 2013, regarding the
SLD Proposal prior to NSCC filing the SLD Proposal with the
Commission (``NFS Letter''). See Release No. 34-69620 (May 22,
2013), 78 FR 32292 (May 29, 2013) (``Notice of Amendment No. 1'')
and see Exhibit 2 to File No. SR-NSCC-2013-02 (https://www.sec.gov/rules/sro/nscc/2013/34-69620-ex2.pdf).
\6\ Notice of Amendment No. 1, 78 FR 32292.
\7\ See NFS Letter. See letters to Elizabeth M. Murphy,
Secretary, Commission from: John C. Nagel, Esq., Managing Director
and General Counsel, Citadel Securities (``Citadel''), dated April
18, 2013 (``Citadel Letter I'') and June 13, 2013 (``Citadel Letter
II''); Peter Morgan, Senior Vice President & Deputy General Counsel,
Charles Schwab & Co., Inc., (``Charles Schwab'') dated April 22,
2013 (``Charles Schwab Letter I'') and May 1, 2013 (``Charles Schwab
Letter II''); Thomas Price, Managing Director, Operations,
Technology & BCP, Securities Industry and Financial Markets
Association (``SIFMA''), dated April 23, 2013 (``SIFMA Letter I'');
Julian Rainero, Bracewell & Giuliani LLP, on behalf of Investment
Technology Group, Inc. (``ITG''), dated April 25, 2013 (``ITG Letter
I''); Matthew S. Levine, Managing Director, Co-Chief Compliance
Officer, Knight Capital Americas LLC (``Knight Capital''), dated
April 25, 2013 (``Knight Capital Letter''); Giovanni Favretti, CFA,
Managing Director, Deutsche Bank, dated April 25, 2013 (``Deutsche
Bank Letter''); Scott C. Goebel, Senior Vice President, General
Counsel, Fidelity, dated April 25, 2013 (``Fidelity Letter I''); and
Chief Financial Officer & Executive Managing Director, ConvergEx
Execution Solutions LLC (``ConvergEx''), dated May 2, 2013
(``ConvergEx Letter I'') and May 22, 2013 (``ConvergEx Letter II'').
---------------------------------------------------------------------------
On June 11, 2013, NSCC filed with the Commission Amendment No. 2 to
the Proposed Rule Change, as previously modified by Amendment No. 1
(``Amended SLD Proposal''), which the Commission published for comment
in the Federal Register on July 15, 2013, with an order instituting
proceedings to determine whether to approve or disapprove the Proposed
Rule Change (``Order Instituting Proceedings'').\8\ The Commission
received nine comment letters to Amendment No. 2 and the Order
Instituting Proceedings.\9\ On September 25, 2013, the Commission
designated a longer period of review for Commission action on the Order
Instituting Proceedings.\10\ On October 7, 2013, NSCC filed Amendment
No. 3 to the Proposed Rule Change (``Final SLD Proposal''), as
previously modified by Amendment Nos. 1 and 2, which the Commission
published for comment on October 15, 2013.\11\ The Commission received
two comment letters to the Final SLD Proposal (i.e., Amendment No.
3).\12\
---------------------------------------------------------------------------
\8\ Release No. 34-69951 (Jul. 9, 2013), 78 FR 42140 (Jul. 15,
2013) (``Notice of Amendment No. 2'').
\9\ See letters to Elizabeth M. Murphy, Secretary, Commission
from: Thomas Price, Managing Director, Operations, Technology & BCP,
SIFMA, dated June 24, 2013 (``SIFMA Letter II'') and August 7, 2013
(``SIFMA Letter III''); Scott C. Goebel, Senior Vice President,
General Counsel, Fidelity, dated June 26, 2013 (``Fidelity Letter
II''); Peter Morgan, Senior Vice President & Deputy General Counsel,
Charles Schwab, dated August 5, 2013 (``Charles Schwab Letter III'')
and September 11, 2013 (``Charles Schwab Letter IV''); Paul T. Clark
and Anthony C.J. Nuland, Seward & Kissel, LLP (representing Charles
Schwab), dated August 5, 2013 (``Charles Schwab Letter V''); John C.
Nagel, Esq., Managing Director and General Counsel, Citadel, dated
August 5, 2013 (``Citadel Letter III'') and September 5, 2013
(``Citadel Letter IV''); and Mark Solomon, Managing Director and
Deputy General Counsel, ITG, dated August 5, 2013 (``ITG Letter
II'').
\10\ Release No. 34-70501 (Sep. 25, 2013), 78 FR 60347 (Oct. 1,
2013).
\11\ Release No. 34-70688 (Oct. 15, 2013), 78 FR 62846 (Oct. 22,
2013) (``Notice of Amendment No. 3'').
\12\ See letters to Elizabeth M. Murphy, Secretary, Commission
from: Managing Director and Deputy General Counsel, ITG, dated
November 1, 2013 (``ITG Letter III''); and Scott C. Goebel, Senior
Vice President, General Counsel, Fidelity, dated November 5, 2013
(``Fidelity Letter III'').
---------------------------------------------------------------------------
[[Page 75414]]
By this order, the Commission approves the Final Proposed Rule
Change.
II. Background
A. Purpose of the SLD Proposal
NSCC filed the SLD Proposal to ensure that it would maintain
sufficient liquid financial resources to withstand, at a minimum, a
default by its single clearing member or clearing member family
(``Clearing Member'') to which it has the largest exposure (``Cover
One''), in compliance with Commission Rule 17Ad-22(b)(3) \13\ and a
long-standing NSCC policy.
---------------------------------------------------------------------------
\13\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------
B. Development of the SLD Proposal
As originally filed, the SLD Proposal would have created two
related funding obligations: (1) for the 30 Clearing Members that
presented NSCC with the largest peak liquidity requirements on days
that did not coincide with quarterly options expiration periods
(``Regular Periods''), a liquidity deposit calculated based on the
Clearing Member's pro rata portion of NSCC's aggregate liquidity
requirements from the 30 Clearing Members during Regular Periods
(``Regular SLD''); and (2) for a subset of the 30 Clearing Members that
present NSCC with a peak liquidity requirement above NSCC's total
liquidity resources on days that coincide with quarterly options
expiration periods (``Special Periods''), a liquidity deposit
calculated based on each Clearing Members' individual contribution to
NSCC's liquidity requirement above its liquidity resources during
Special Periods (``Special SLD'').\14\
---------------------------------------------------------------------------
\14\ See Notice, 78 FR at 21487-88.
---------------------------------------------------------------------------
Regular SLD would have been satisfied in cash only; however, a
Clearing Member would have received a dollar-for-dollar reduction of
its Regular SLD funding obligation to the extent that it contributed to
NSCC's line-of-credit (``Credit Facility'').\15\ Special SLD could only
be satisfied with cash.\16\
---------------------------------------------------------------------------
\15\ Id. at 21489.
\16\ Id.
---------------------------------------------------------------------------
On June 11, 2013, in response to comments received, NSCC filed the
Amended SLD Proposal so that, in summary: (1) Special Periods were
expanded to include monthly options expirations periods along with
quarterly options expiration periods; (2) Clearing Members could
designate a commercial lender to commit to the Credit Facility on the
Clearing Member's behalf, enabling the Clearing Member to receive the
dollar-for-dollar reduction of its Regular SLD; (3) any commitments to
the Credit Facility made in excess of a Clearing Member's Regular SLD
would be allocated ratably among all 30 Clearing Members that would be
required to make a Regular SLD funding obligation; and (4) ``liquidity
exposure reports'' would be provided to all NSCC members, so that
members, particularly Clearing Members, could better assess their
liquidity exposure to NSCC.\17\
---------------------------------------------------------------------------
\17\ See Notice of Amendment No. 2, 78 FR at 42127.
---------------------------------------------------------------------------
On October 4 and 7, 2013, in response to further comments received,
NSCC filed the Final SLD Proposal.\18\ Among other things, the Final
SLD Proposal eliminated the Regular SLD funding obligation.
---------------------------------------------------------------------------
\18\ NSCC filed the Final Proposed Rule Change on October 7,
2013, three days after NSCC filed Amendment No. 3 to the Advance
Notice.
---------------------------------------------------------------------------
III. Description of the Final SLD Proposal
The Final SLD Proposal would add Rule 4A to NSCC's Rules and
Procedures \19\ to establish a supplemental liquidity funding
obligation designed to cover the liquidity exposure attributable to
those Clearing Members that regularly incur the largest gross
settlement debits over a settlement cycle during times of increased
trading and settlement activity that arise around Special Periods. More
specifically, the obligation applies to a subset of the 30 Clearing
Members that present NSCC with historic peak liquidity needs on days
that coincide with Special Periods above NSCC's current total liquidity
resources. For this subset, NSCC will require a liquidity deposit based
on the proportion of the historic peak liquidity exposure that is
presented by each Clearing Member in excess of NSCC's then-available
total liquidity resources. NSCC will hold deposits made in satisfaction
of a Special SLD funding obligation in its Clearing Fund for a period
of seven days after the end of the Special Period.
---------------------------------------------------------------------------
\19\ See Exhibit 5 to File No. SR-NSCC-2013-02, https://www.sec.gov/rules/sro/nscc/2013/34-70688-ex5.pdf.
---------------------------------------------------------------------------
Additionally, if a Clearing Member believes its current trading
activity will present a liquidity need to NSCC above NSCC's total
liquidity resources, it may voluntarily deposit funds with NSCC to
cover the shortfall (``Prefund Deposit''). NSCC will hold Prefund
Deposit funds for a period of seven days after the end of the Special
Period. If a Clearing Member presents NSCC with a liquidity need above
total liquidity resources that is not funded by a Special SLD funding
obligation or a Prefund Deposit the Final SLD Proposal will empower
NSCC to call from that Clearing Member the amount of the shortfall, or
that Clearing Member's share if caused by more than one Clearing
Member, and hold it for 90 days (``Call Deposit'').
IV. Summary of Comments Received and NSCC's Responses
The Commission received 23 comment letters to the SLD Proposal \20\
from eight commenters,\21\ including the NFS Letter.\22\ Commenters
include bank affiliated and non-bank affiliated NSCC members, as well
as one industry trade group, SIFMA.\23\ NSCC also submitted two
responses to comment letters received.\24\ The Commission has reviewed
and taken into full consideration all of the comments received.
---------------------------------------------------------------------------
\20\ Since the SLD Proposal was filed as both the Proposed Rule
Change and the Advance Notice, the Commission considered all
comments received on the proposal, regardless of whether the
comments were submitted to the Proposed Rule Change or the Advance
Notice. See NFS Letter, Citadel Letter I, Citadel Letter II, Citadel
Letter III, Citadel Letter IV, Charles Schwab Letter I, Charles
Schwab Letter II, Charles Schwab Letter III, Charles Schwab Letter
IV, Charles Schwab Letter V, SIFMA Letter I, SIFMA Letter II, SIFMA
Letter III, ITG Letter I, ITG Letter II, ITG Letter III, Knight
Capital Letter, Deutsche Bank Letter, Fidelity Letter I, Fidelity
Letter II, Fidelity Letter III, ConvergEx Letter I, and ConvergEx
Letter II.
\21\ See Comments to the Proposed Rule Change (File No. SR-NSCC-
2013-02), https://sec.gov/comments/sr-nscc-2013-02/nscc201302.shtml,
and the Advance Notice (File No. SR-NSCC-2013-802) (https://sec.gov/comments/sr-nscc-2013-802/nscc2013802.shtml (``Comments Received'').
For purposes of discussion, the Commission considers the comment
submitted by Seward & Kissel on behalf of Charles Schwab as a
Charles Schwab comment, see Charles Schwab Letter V, supra note 9,
and the NFS Letter as a Fidelity comment. See NFS Letter.
\22\ See NFS Letter.
\23\ See Comments Received, supra note 21.
\24\ See letters to Elizabeth M. Murphy, Secretary, Commission
from Larry E. Thompson, Managing Director and DTCC General Counsel,
dated June 10, 2013 (``NSCC Letter I'') and August 20, 2013 (``NSCC
Letter II'').
---------------------------------------------------------------------------
All eight commenters express support for NSCC's overall goal of
maintaining sufficient financial resources to withstand a default by a
Clearing Member (i.e., Cover One).\25\ One commenter, who previously
supported approval of the Amended SLD Proposal, supports approval of
the Final SLD Proposal.\26\ The remaining seven commenters oppose the
original SLD Proposal and the Amended SLD Proposal, as discussed in
more detail below.\27\ One of those seven
[[Page 75415]]
commenters submitted the sole comment letter in opposition to the Final
SLD Proposal.\28\
---------------------------------------------------------------------------
\25\ See NFS Letter, Citadel Letter III, Charles Schwab Letter
II, Charles Schwab Letter III, Charles Schwab Letter V, SIFMA Letter
II, SIFMA Letter III, Knight Capital Letter, Deutsche Bank Letter,
Fidelity Letter I, Fidelity Letter II, ConvergEx Letter I, ConvergEx
Letter II, ITG Letter II.
\26\ See Fidelity Letter II, Fidelity Letter III.
\27\ See NFS Letter, Citadel Letter I, Citadel Letter II,
Citadel Letter III, Citadel Letter IV, Charles Schwab Letter I,
Charles Schwab Letter II, Charles Schwab Letter III, Charles Schwab
Letter IV, Charles Schwab Letter V, SIFMA Letter I, SIFMA Letter II,
SIFMA Letter III, ITG Letter I, ITG Letter II, ITG Letter III,
Knight Capital Letter, Deutsche Bank Letter, Fidelity Letter I,
ConvergEx Letter I, and ConvergEx Letter II.
\28\ See ITG Letter III.
---------------------------------------------------------------------------
A. Comments Expressing Support for the Provision of Adequate Liquidity
at NSCC
As mentioned above, all eight commenters to the SLD Proposal agreed
that NSCC must have access to sufficient liquidity and capital to meet
the Cover One standard, and some stated NSCC's critical role as a
national clearance and settlement system.\29\ For example, one
commenter states ``that a clearing agency performing central
counterparty services is essential to the proper functioning of the
capital markets, and that ensuring the clearing agency is well
capitalized and financially sound serves to benefit both the clearing
agency's members and the capital markets as a whole.'' \30\ The
commenter goes on to state that it ``appreciates the need for the NSCC,
both as a central counterparty and as a financial market utility that
has been designated by the Financial Stability Oversight Council as
systemically important, to maintain sufficient financial resources to
withstand a default by the NSCC member or family of affiliated members
to which the NSCC has the largest exposure . . . [and] also understands
the NSCC's desire to broaden the base of support for its liquidity
needs beyond the small group of firms that has historically supported
these needs through participation in the NSCC's revolving credit
facility, and believes it is important to enable all of the NSCC's
members to help the NSCC maintain sufficient financial resources.''
\31\ Another commenter notes that ``NSCC should have the resources it
needs to be a source of strength for the national clearing and
settlement system . . . .'' \32\ Additionally, another commenter states
that it ``appreciates the importance of NSCC's critical role as a
[c]entral [c]ounterparty . . . and supports NSCC's goal in ensuring
that it has access to sufficient capital in the event that is largest
participant fails.'' \33\
---------------------------------------------------------------------------
\29\ See supra note 25.
\30\ See SIFMA Letter II.
\31\ Id.
\32\ See Charles Schwab Letter III, Charles Schwab Letter V.
\33\ See ConvergEx Letter II.
---------------------------------------------------------------------------
B. Opposing Comments Received Prior to the Final SLD Proposal
1. Comments Inapplicable to the Final SLD Proposal
The seven commenters opposed to approval of the SLD Proposal
objected to the SLD Proposal for various reasons, as discussed
below.\34\ Additionally, five of the seven commenters that oppose the
SLD Proposal, as well as the commenter in support of the Final SLD
Proposal, suggested potential alternative mechanisms for NSCC to
satisfy its liquidity needs.\35\
---------------------------------------------------------------------------
\34\ See Citadel Letter I, Citadel Letter II, Citadel Letter
III, Citadel Letter IV, Charles Schwab Letter I, Charles Schwab
Letter II, Charles Schwab Letter III, Charles Schwab Letter IV,
Charles Schwab Letter V, SIFMA Letter I, SIFMA Letter II, SIFMA
Letter III, ITG Letter I, ITG Letter II, ITG Letter III, Knight
Capital Letter, Deutsche Bank Letter, ConvergEx Letter I, and
ConvergEx Letter II.
\35\ Alternatives included, but were not limited to: NSCC should
issue long-term debt to increase its liquidity resources; NSCC
should increase intra-day margin calls; NSCC should increase
Clearing Member fees; NSCC should reduce the settlement cycle; NSCC
should reduce the volume of unsettled trades; NSCC should establish
a bilateral third-party bank committed facility; and NSCC should
change its capital structure. See NFS Letter, Citadel Letter II,
Citadel Letter III, Charles Schwab Letter II, Charles Schwab Letter
III, SIFMA Letter II, SIFMA Letter III, ITG Letter II, Fidelity
Letter II, Fidelity Letter III and ConvergEx Letter II. The
Commission notes that these comments are beyond the subject of the
Final SLD Proposal by NSCC that is before the Commission for
approval under Section 19(b) of the Act (which provides that the
Commission shall approve a proposed rule change if it finds that
such proposed rule change is consistent with the requirements of
this title and the applicable rules and regulations issued
thereunder).
---------------------------------------------------------------------------
Many of the commenters opposed to the original SLD Proposal and
Amended SLD Proposal raised concerns with a component of the proposal
that NSCC eliminated in the Final SLD Proposal.\36\ Those comments
included concerns about: (1) The anticipated costs for Clearing Members
as a result of implementation of Regular SLD funding obligation,
including costs imposed by a quick implementation period; \37\ (2)
Clearing Members' inability to accurately predict or control their
funding obligation and the effects thereof, including broker-dealers'
inability to plan for funding and liquidity risks as provided in FINRA
Reg. Notice 10-57; \38\ (3) distributional effects associated with
implementation of the Regular SLD funding obligation, manifested in
particular by an anti-competitive and disparate impact on non-bank
affiliated Clearing Members compared to bank affiliated Clearing
Members with regard to the offsetting commitments to the Credit
Facility; \39\ and (4) perceived mechanical flaws with the application
of the Regular SLD funding obligation.\40\
---------------------------------------------------------------------------
\36\ See Citadel Letter II, Citadel Letter III, Citadel Letter
IV, Charles Schwab Letter I, Charles Schwab Letter II, Charles
Schwab Letter III, Charles Schwab Letter IV, Charles Schwab Letter
V, SIFMA Letter I, SIFMA Letter II, SIFMA Letter III, ITG Letter I,
ITG Letter II, Knight Capital Letter, Deutsche Bank Letter,
ConvergEx Letter I, ConvergEx Letter II.
\37\ See, e.g., ITG Letter I, ITG Letter II, Citadel Letter III.
\38\ See Citadel Letter II, Citadel Letter III, Citadel Letter
IV, Charles Schwab Letter II, SIFMA Letter I, SIFMA Letter II, ITG
Letter II, Knight Capital Letter, Deutsche Bank Letter, ConvergEx
Letter II.
\39\ See Citadel Letter II, Charles Schwab Letter I, Charles
Schwab Letter II, Charles Schwab Letter III, Charles Schwab Letter
IV, Charles Schwab Letter V, SIFMA Letter II, SIFMA Letter III, ITG
Letter I, ITG Letter II, Knight Capital Letter, ConvergEx Letter I,
ConvergEx Letter II.
\40\ See ITG Letter II.
---------------------------------------------------------------------------
Since NSCC has eliminated the aspect of the SLD Proposal to which
these comments were made, the Commission believes these comments are
not relevant for its determination on the Final SLD Proposal.
2. Comments Applicable to the Final SLD Proposal and NSCC's Responses
Thereto
Seven of the eight commenters raised concerns with the SLD Proposal
that, while not necessarily directly associated with the Special SLD
funding obligation, could apply to elements of the Special SLD funding
obligation and thus are relevant for the Commission's consideration of
the Final SLD Proposal.\41\ Four commenters argued that the SLD
Proposal is arbitrary and capricious because it applies to no more than
30 Clearing Members.\42\ Six commenters argued that the SLD Proposal
would have unintended consequences of forcing a number of Clearing
Members to terminate their membership and thereby concentrating the
broker clearing business in fewer Clearing Members, potentially
increasing systemic risk.\43\ One
[[Page 75416]]
commenter stated that historic peak liquidity needs, which would be
used by NSCC to determine the liquidity need presented by each Clearing
Member, is not necessarily predictive of future liquidity needs.\44\
Three commenters argued that NSCC incorrectly calculates its liquidity
needs in the SLD Proposal, either because the liquidity need is
calculated using Clearing Member gross settlement debits instead of net
settlement debits or because the settlement debits were aggregated over
a four-day cycle.\45\ Seven commenters stated that treatment of funds
delivered to NSCC to satisfy a funding obligation under the SLD
Proposal for Commission Rule 15c3-1 purposes was unclear.\46\
---------------------------------------------------------------------------
\41\ See Citadel Letter II, Citadel Letter III, Citadel Letter
IV, Charles Schwab Letter I, Charles Schwab Letter II, Charles
Schwab Letter III, Charles Schwab Letter IV, Charles Schwab Letter
V, SIFMA Letter I, SIFMA Letter II, SIFMA Letter III, ITG Letter I,
ITG Letter II, ITG Letter III, Knight Capital Letter, Deutsche Bank
Letter, ConvergEx Letter I, ConvergEx Letter II.
\42\ See Citadel Letter II, ITG Letter I, Charles Schwab Letter
IV, Charles Schwab Letter V, SIFMA Letter III, ITG Letter II, ITG
Letter III. All four commenters argue that the imposition of a
funding obligation to no more than 30 Clearing Members was arbitrary
and capricious referred to the Regular SLD funding obligation, in
which a Regular SLD funding obligation is satisfied pro rata by 30
Clearing Members irrespective of whether each Clearing Member
presented a peak liquidity need above NSCC total available liquidity
resources. One of the four commenters claims that the same argument
persists for the Special SLD Funding Obligation; as such, the
Commission will consider the comment here. See Charles Schwab Letter
V.
\43\ See Citadel Letter II, Charles Schwab Letter II, Charles
Schwab Letter III, SIFMA Letter I, SIFMA Letter II, SIFMA Letter
III, ITG Letter I, ITG Letter II, Knight Capital Letter, ConvergEx
Letter II.
\44\ See ITG Letter II.
\45\ See Citadel Letter III, ITG Letter II, ConvergEx Letter I,
ConvergEx Letter II.
\46\ See 17 CFR 240.15c3-1. See, e.g., Citadel Letter II,
Citadel Letter III, Charles Schwab Letter II, Charles Schwab Letter
III, SIFMA Letter II, ITG Letter I, ITG Letter II, ITG Letter III,
Knight Capital Letter, ConvergEx Letter II.
---------------------------------------------------------------------------
In response to comments that imposition of a funding obligation is
arbitrary and capricious, NSCC revised the SLD Proposal to eliminate
the Regular SLD funding obligation component,\47\ which would have: (i)
Assigned a funding obligation to the 30 Clearing Members that presented
NSCC with the largest peak liquidity needs irrespective of whether the
peak liquidity need itself would have surpassed NSCC available
liquidity resources, and (ii) allocated a funding obligation to each of
those 30 Clearing Members driven substantially by the peak liquidity
need presented to NSCC by the largest Clearing Member.\48\ In response
to comments regarding unintended consequences of the SLD Proposal, such
as Clearing Members terminating their membership, NSCC stated that the
Clearing Member is in the best position to monitor and manage the
liquidity risks presented by its own activity.\49\ Similarly, NSCC
states that the maintenance of adequate liquidity resources at NSCC is
a key element in the reduction of systemic risk at a systemically-
important financial market utility and also a key component of NSCC's
ability to prevent the failure of a Clearing Member from having a
cascading effect on other Clearing Members.\50\
---------------------------------------------------------------------------
\47\ See Notice of Amendment No. 3, 78 FR at 62847.
\48\ Id. at 62846-47.
\49\ NSCC Letter I.
\50\ See NSCC Letter I, NSCC Letter II.
---------------------------------------------------------------------------
NSCC agreed that historic peak liquidity needs are not necessarily
predictive of future liquidity needs, and as a result NSCC has proposed
a mechanism whereby Clearing Members may voluntarily prefund liquidity
needs that the Clearing Member anticipates will surpass total liquidity
resources available at NSCC through the Prefund Deposit.\51\
Furthermore, in the event a Clearing Member does not elect to prefund
potential liquidity needs but does present a liquidity need to NSCC
above total liquidity resources that is not accounted for by a Special
SLD funding obligation, NSCC has proposed a mechanism to require the
Clearing Member to fund the liquidity need through the Call
Deposit.\52\ With respect to comments that NSCC incorrectly calculates
its liquidity need by using gross settlement debits instead of net
settlement debits, NSCC responded that, as a central counterparty for
its members, its risk-exposure is reflected by the gross settlement
debits presented to it, not net settlement debits, in the event of a
Clearing Member default.\53\ Furthermore, NSCC stated that calculating
liquidity obligations over a four-day settlement cycle is consistent
with NSCC's practical liquidity obligation in the event of a Clearing
Member default.\54\ Finally, in response to comments that the treatment
of funds posted in satisfaction of an SLD funding obligation for Rule
15c3-1 purposes is unclear, NSCC stated that it structured the SLD
Proposal so that deposits made pursuant to an SLD funding obligation
would constitute Clearing Fund deposits, which have clear regulatory
capital treatment under Rule 15c3-1.\55\
---------------------------------------------------------------------------
\51\ See Notice of Amendment No. 3, 78 FR at 62847.
\52\ See Notice, 78 FR at 21489.
\53\ See NSCC Letter I.
\54\ Id.
\55\ Id.
---------------------------------------------------------------------------
Six commenters stated that the SLD Proposal did not provide a
sufficient evaluation of its burden on competition and lacked necessary
detail so as to elicit meaningful comment.\56\ Many of these commenters
argued that, while they supported NSCC's need for liquidity resources
generally, NSCC did not demonstrate a specific need for additional
liquidity in connection with the SLD Proposal.\57\ Five commenters
argued the SLD Proposal lacked sufficient Clearing Member input prior
to submitting the proposal.\58\ Three commenters also argued that the
SLD Proposal did not adequately protect investors.\59\ One commenter
argued that the fact that NSCC submitted the SLD Proposal without
Clearing Member input is indicative of a lack of fair representation
for Clearing Members in the governance of NSCC.\60\ One commenter
stated that NSCC did not take into account the potential impact of
other central counterparties instituting similar liquidity
provisions.\61\ Five commenters argued in opposition of cash being the
only source by which a Clearing Member could satisfy a supplemental
liquidity deposit.\62\
---------------------------------------------------------------------------
\56\ See Citadel Letter II, Charles Schwab Letter I, Charles
Schwab Letter II, Charles Schwab Letter III, Charles Schwab Letter
V, SIFMA Letter II, ITG Letter I, ITG Letter II, Knight Capital
Letter, ConvergEx Letter I, ConvergEx Letter II.
\57\ See Citadel Letter II, Citadel Letter III, SIFMA Letter II,
SIFMA Letter III, ITG Letter II, ITG Letter III, ConvergEx Letter
II.
\58\ See Citadel Letter III, Charles Schwab Letter I, ITG Letter
I, ITG Letter II, Knight Capital Letter, Deutsche Bank Letter.
\59\ See Deutsche Bank Letter, Charles Schwab Letter II, Charles
Schwab IV, Charles Schwab Letter V, SIFMA Letter II.
\60\ See Citadel Letter III.
\61\ See Charles Schwab Letter II, Charles Schwab Letter III.
Additionally, one commenter argued that NSCC attempted to improperly
amend the SLD Proposal through a response to comments. See Charles
Schwab Letter V. The Commission notes that NSCC filed the Final SLD
Proposal subsequent to the Commission's receipt of this comment in
accordance with the rule filing process. See Notice of Amendment No.
3, 78 FR 62846.
\62\ See NFS Letter, Charles Schwab Letter II, Charles Schwab
Letter III, Citadel Letter II, Citadel Letter III, SIFMA Letter I,
Fidelity Letter II, ITG Letter II.
---------------------------------------------------------------------------
In response to comments received regarding insufficient detail of
the SLD Proposal, NSCC provided detail regarding: the specific need for
liquidity resources,\63\ implementation timeframes for the SLD
Proposal,\64\ and a suite of tools, such as monthly and daily reports,
to enable Clearing Members to more accurately predict a potential
Regular SLD funding obligation.\65\ NSCC stated that it would work with
Clearing Members to help them understand and develop tools to forecast
liquidity exposure and mitigate their peak liquidity exposure.\66\ NSCC
also stated that it would provide monthly and daily reports to Clearing
Members that would show liquidity exposure during relevant periods.\67\
NSCC also stated that fluctuating peak activity recently has exceeded
NSCC available total liquidity resources.\68\ NSCC believes these
liquidity needs are largely driven by industry consolidation,
developments in
[[Page 75417]]
trading techniques, including an increased use of high frequency
trading, and a reduction in volatility from post-2008 financial crisis
levels, generally resulting in a reduction in Clearing Fund
requirements.\69\ In response to comments received regarding
insufficient analysis of the burden on competition that might ensue
from implementation of the SLD Proposal, NSCC substantially revised the
SLD Proposal twice to expand its analysis of the burden on competition
to include, for example, individual subsections specifically addressing
competition concerns raised by commenters,\70\ and to reduce any
disparate impact on Clearing Members stemming from implementation of
the SLD Proposal, first to provide a mechanism by which non-bank
affiliated Clearing Members could contribute to Credit Facility, and
second to eliminate the Regular SLD from the Final SLD Proposal.\71\
---------------------------------------------------------------------------
\63\ See NSCC Letter II (stating that ``NSCC has seen continued
increases in potential liquidity needs, driven by consolidation in
the industry, developments in trading techniques (including a rise
in high frequency trading), and a reduction in volatility from the
post-[2008] crisis highs which result in reduced Clearing Fund
requirements'').
\64\ See Notice of Amendment No. 3, 78 FR 62846 (stating that
the Final SLD Proposal would be implemented on February 1, 2014).
\65\ See NSCC Letter I, NSCC Letter II, Notice of Amendment No.
2, 78 FR 42140, Notice of Amendment No. 3, 78 FR 62846.
\66\ See NSCC Letter I.
\67\ See NSCC Letter I, NSCC Letter II.
\68\ See NSCC Letter II.
\69\ Id.
\70\ See Notice of Amendment No. 2, 78 FR 42140. See also NSCC
Letter I. NSCC argued that the SLD Proposal would apply fairly
across Clearing Members and, while recognizing potential competitive
impacts on such members, believed the SLD Proposal addressed
important financial resource requirements. NSCC also stated that it
was revising the SLD Proposal to address competition concerns.
\71\ See Notice of Amendment No. 3, 78 FR 62846. See also NSCC
Letter II.
---------------------------------------------------------------------------
In response to comments regarding the lack of Clearing Member input
in the SLD Proposal and that the development of the SLD Proposal
without Clearing Member input was indicative of a lack of fair
representation of all Clearing Members at NSCC, NSCC stated that it
engaged in discussions with Clearing Members likely to be impacted by
the SLD Proposal, including more than 100 meetings with Clearing
Members to enhance Clearing Members' understanding of liquidity risks
presented to NSCC and the SLD Proposal generally.\72\ The Proposed Rule
Change and subsequent amendments were published for comment four times,
so Clearing Members had an opportunity to comment, and NSCC also
substantially revised the SLD Proposal twice as a direct response to
comments received on the SLD Proposal.\73\ Finally, on September 18,
2013, NSCC announced to its membership that it was forming the Clearing
Agency Liquidity Council (``CALC''), an advisory group to continue the
dialogue between NSCC and its Clearing Members regarding liquidity
issues in a formal setting.\74\ According to NSCC, the CALC intends to
explore additional liquidity resources in advance of the 2014 renewal
of NSCC's Credit Facility, in order to address, for example, NSCC's
liquidity needs outside of Special Periods and the refinancing risk
associated with the annual renewal of the Credit Facility.\75\
According to NSCC, twenty-four Clearing Members joined the CALC,
including all eight commenters to the SLD Proposal, which has met on
multiple occasions since its inception.
---------------------------------------------------------------------------
\72\ See NSCC Letter I.
\73\ See Notice of Amendment No. 2, 78 FR 42140, Notice of
Amendment No. 3, 78 FR 62846. See also NSCC Letter II.
\74\ DTCC Important Notice a7706, Creation of DTCC Clearing
Agency Liquidity Council and Nomination Process (Sep. 18, 2013),
https://dtcc.com/downloads/legal/imp_notices/2013/nscc/a7706.pdf.
\75\ See NSCC Letter II. See also Notice of Amendment No. 2, 78
FR 42140, Notice of Amendment No. 3, 78 FR 62846.
---------------------------------------------------------------------------
NSCC responded to comments that the SLD Proposal did not contain
sufficient information by amending the SLD Proposal twice to further
identify the potential impact of the SLD Proposal on Clearing Members
and to make substantive revisions to the SLD Proposal to address those
concerns.\76\ NSCC responded to comments that the SLD Proposal did not
protect investors by stating that the maintenance of adequate liquidity
resources at NSCC, a designated systemically-important financial market
utility \77\ that plays a fundamental role in the United States cash
equities market, will protect against the transmission of systemic risk
among Clearing Members in the event of a failure of one Clearing
Member, thereby promoting the prompt and accurate settlement of
securities transactions and the protection of investors.\78\ NSCC
responded to the comment that it did not take into account other
central counterparties imposing similar liquidity requirements by
stating that such a concern was unlikely given the difference in
liquidity risk between cash market central counterparties (i.e., NSCC),
where potential liquidity needs typically are orders of magnitude
greater than the market risk that their margin collections are designed
to cover, and derivatives central counterparties, where liquidity needs
generally are more closely aligned to market risk of members'
portfolios and the members' margin requirements.\79\ In response to
comments opposed to cash being the sole funding source by which a
Clearing Member could satisfy a supplemental liquidity deposit, NSCC
eliminated Regular SLD, thereby eliminating concern relating to
disparate treatment that might ensue by requiring Clearing Members that
do not make a commitment to lend to NSCC through the Credit Facility to
make their Regular SLD funding obligation in cash, and NSCC states that
the CALC will evaluate potential alternative collateral approaches that
could be used to fund a portion of a Clearing Member's funding
obligation.\80\
---------------------------------------------------------------------------
\76\ See Notice of Amendment No. 2, 78 FR 42140, Notice of
Amendment No. 3, 78 FR 62846. See also NSCC Letter II.
\77\ Financial Stability Oversight Council (``FSOC'') 2012
Annual Report, Appendix A, https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf (``FSOC Designation'').
\78\ See NSCC Letter I, NSCC Letter II. Designation as
systemically-important by FSOC means that a failure of or disruption
to its functioning could create, or increase, the risk of
significant credit or liquidity problems spreading among financial
institutions or markets, thereby threatening financial stability.
See 12 U.S.C. 5462(9). See also FSOC Designation, supra note 77.
\79\ See NSCC Letter II.
\80\ Id. See also discussion below noting that any cash deposit
is driven by the Clearing Member's own trading activity.
---------------------------------------------------------------------------
C. Comments to the Final SLD Proposal
The Commission received two comments on the Final SLD Proposal.
Both commenters supported NSCC's decision to eliminate the Regular SLD
funding obligation from the SLD Proposal.\81\ One commenter argued for
approval of the Final SLD Proposal, since the Final SLD Proposal ``is a
helpful development in the process of determining how best to increase
NSCC's liquidity resources to meet its liquidity needs.'' \82\
Moreover, the commenter believes that ``NSCC has addressed the area of
greatest [m]ember concern in removing provisions of the [SLD] Proposal
that collectively deal with the imposition of the Regular [SLD].'' \83\
One commenter argued for disapproval of the Final SLD Proposal, stating
that flawed concepts remain and approval would unnecessarily inhibit
the development of ideas from NSCC's CALC.\84\ NSCC did not submit a
response to comments received after submission of the Final SLD
Proposal.
---------------------------------------------------------------------------
\81\ See ITG Letter III, Fidelity Letter III.
\82\ See Fidelity Letter III.
\83\ Id.
\84\ See ITG Letter III.
---------------------------------------------------------------------------
V. Discussion and Commission Findings
After careful review, the Commission finds that the Final SLD
Proposal is consistent with the requirements of the Act and the rules
and regulations thereunder applicable to a registered clearing
agency.\85\ In particular, the
[[Page 75418]]
Commission finds that the Final SLD Proposal is consistent with the
following provisions of the Act: (i) Section 17A(b)(3)(A),\86\ which
requires that a clearing agency ``is so organized and has the capacity
to be able to facilitate the prompt and accurate clearance and
settlement of securities transactions . . . to safeguard securities and
funds in its custody and control and for which it is responsible . . .
and to enforce . . . compliance by its participants with the rules of
the clearing agency;'' (ii) Section 17A(b)(3)(F),\87\ which requires
that: the rules of a clearing agency not be designed to permit unfair
discrimination among participants in the use of the clearing agency;
and the rules of a clearing agency promote the prompt and accurate
clearance and settlement of securities transactions and protect
investors and the public interest; (iii) Section 17A(b)(3)(D),\88\
which requires that the rules of a clearing agency provide for the
equitable allocation of reasonable dues, fees, and other changes among
its participants; and (iv) Section 17A(b)(3)(I),\89\ which requires the
rules of a clearing agency not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
---------------------------------------------------------------------------
\85\ In approving the Proposed Rule Change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f). Comments about the
potential competitive impact of the Proposed Rule Change are
addressed above and below.
\86\ 15 U.S.C. 78q-1(b)(3)(A).
\87\ 15 U.S.C. 78q-1(b)(3)(F).
\88\ 15 U.S.C. 78q-1(b)(3)(D).
\89\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
The Commission's Order Instituting Proceedings solicited comment on
a number of issues. After carefully considering the Final SLD Proposal
and the comments received on the SLD Proposal and NSCC responses
thereto, the Commission finds that the Final SLD Proposal is consistent
with the Exchange Act and therefore must be approved.
The Commission recognizes that some commenters did not support
certain aspects of the SLD Proposal. The Commission, however, must
approve a proposed rule change if it finds that the proposed rule
change is consistent with the requirements of the Exchange Act and the
applicable rules and regulations thereunder. No comments convinced the
Commission that the Final SLD Proposal was not consistent with the
Exchange Act and the applicable rules and regulations thereunder. The
Commission believes that, overall, the Final SLD Proposal: (i) Will
improve financial safety at NSCC by increasing its ability to meet its
liquidity needs; (ii) provides for the equitable allocation of
reasonable expenses; and (iii) does not permit unfair discrimination
among Clearing Members in the use of NSCC or impose an unnecessary
burden on competition. The Commission's analysis of the comments
applicable to the Final SLD Proposal and the Final SLD Proposal's
consistency with the Exchange Act are discussed below.
As stated above, several commenters argued that the original SLD
Proposal suffered from certain defects, such as a failure of NSCC to
consult with Clearing Members prior to submitting the SLD Proposal,\90\
that the SLD Proposal contained an insufficient evaluation of the
burden on competition, and an insufficient description of the SLD
Proposal,\91\ and that NSCC did not demonstrate a specific need for
additional liquidity in connection with the SLD Proposal.\92\
---------------------------------------------------------------------------
\90\ See supra note 58.
\91\ See supra note 56.
\92\ See supra note 57.
---------------------------------------------------------------------------
The Commission believes that the Final SLD Proposal is consistent
with the Exchange Act and the applicable rules and regulations
thereunder. NSCC made substantial revisions to the SLD Proposal
directly responsive to comments raised during the comment period,
created the CALC to continue the dialogue between NSCC and Clearing
Members regarding liquidity generally, and provided a more robust
description of the SLD Proposal and its potential effects on the
competition between Clearing Members,\93\ in particular describing how
the Final SLD Proposal addresses those potential effects.\94\
---------------------------------------------------------------------------
\93\ See Notice of Amendment No. 2, 78 FR 42140, Notice of
Amendment No. 3, 78 FR 62846, NSCC Letter I, NSCC Letter II.
\94\ See Notice of Amendment No. 3, 78 FR 62846, NSCC Letter II.
---------------------------------------------------------------------------
As stated above, all commenters expressed support for the notion
that NSCC must have access to sufficient liquidity.\95\ One commenter
stated that ``NSCC's critical role as a national clearance and
settlement system'' made it so that adequate liquidity resources at
NSCC was of paramount importance.\96\ The Commission believes that
NSCC's maintenance of adequate Cover One liquidity resources helps
ensure that orderly settlement can be completed notwithstanding the
failure of its largest Clearing Member. The Commission further believes
approval of the Final SLD Proposal is necessary to improve the overall
financial safety of NSCC and its ability to complete settlement.
---------------------------------------------------------------------------
\95\ See supra note 25.
\96\ See ConvergEx Letter II.
---------------------------------------------------------------------------
The Commission also notes that NSCC has stated that fluctuating
peak liquidity needs presented to NSCC have exceeded total liquidity
resources available to NSCC, emphasizing the need for NSCC to develop a
mechanism to help ensure that it maintains adequate liquidity as soon
as possible.\97\ These liquidity needs are driven by Clearing Members'
trading activity, and the Final SLD Proposal is designed as a mechanism
to allocate a funding obligation to those Clearing Members with peak
liquidity needs that surpass NSCC available liquidity resources.
---------------------------------------------------------------------------
\97\ See NSCC Letter II.
---------------------------------------------------------------------------
The Commission also believes that the Final SLD Proposal provides a
mechanism to help ensure that NSCC maintains sufficient liquidity
prospectively. The Commission agrees with commenters that have
suggested that historic peak liquidity is not necessarily predictive of
future liquidity needs. To this point, the Final SLD Proposal permits
Clearing Members to use a Prefund Deposit in cases where a Clearing
Member anticipates that its current trading activity will surpass total
liquidity resources at NSCC. Furthermore, in the event that a Clearing
Member does not elect to make a Prefund Deposit but does present a
liquidity need to NSCC above total liquidity resources that is not
accounted for by a Special SLD funding obligation, NSCC may require the
Clearing Members to fund the liquidity need by making a Call Deposit.
The Commission believes that these tools provide NSCC with the means to
access sufficient liquidity prospectively. For the above reasons, the
Commission believes the SLD Proposal is consistent with the
requirements of Exchange Act Sections 17A(b)(3)(A) and (F) regarding
the prompt and accurate settlement of securities transactions.
The Commission takes specific note of comments arguing that the
costs of the Final SLD Proposal would have the unintended consequence
of causing many Clearing Members to terminate their membership with
NSCC and thereby concentrating the brokerage clearing business in fewer
Clearing Members, potentially leading to an increase of systemic risk.
The Commission recognizes that there are costs of the Final SLD
Proposal for Clearing Members for which the Special SLD funding
obligation applies. Clearing Members would be required to meet the
Special SLD funding obligation in cash, which would be maintained by
NSCC for a period of seven business days following the end of the
Special Period.\98\ Furthermore, funds delivered to NSCC pursuant to a
Call Deposit will
[[Page 75419]]
be maintained by NSCC for a period of 90 days.\99\
---------------------------------------------------------------------------
\98\ See Notice, 78 FR at 21490.
\99\ See Exhibit 5 to File No. SR-NSCC-2013-02, https://www.sec.gov/rules/sro/nscc/2013/34-70688-ex5.pdf.
---------------------------------------------------------------------------
Under the Final SLD Proposal, Clearing Members would only be
required to provide funding to the extent that the Clearing Member's
trading activity during a two-year look-back period of correlated
Special Period dates would have resulted in NSCC having insufficient
liquidity resources to cover the default of that Clearing Member after
taking into account all of NSCC's available liquidity resources at the
time of default.\100\ The Special SLD funding obligation provides for
an allocation formula that ratably applies to a subset of the 30
Clearing Members that present largest peak liquidity needs to NSCC
above NSCC's total liquidity resources during Special Periods.\101\ By
allocating the funding obligation to those Clearing Members that
directly create the liquidity need, the Final SLD Proposal helps to
ensure that those Clearing Members who impose equivalent liquidity
burdens on NSCC bear equivalent financial costs and allows each
Clearing Member to exercise a degree of control over the funding
obligation it bears. Accordingly, and notwithstanding the views
expressed by commenters, the Commission believes that applying a
liquidity obligation only to those Clearing Members that present a
liquidity need to NSCC based on a historical look-back period above the
total liquidity resources available to NSCC is an equitable allocation
of expenses as required by Exchange Act Section 17A(b)(3)(D).
---------------------------------------------------------------------------
\100\ Id. See also Notice, 78 FR at 21489.
\101\ See Notice of Amendment No. 3, 78 FR at 62847.
---------------------------------------------------------------------------
NSCC's application of the Special SLD funding obligation to no more
than the 30 Clearing Members that present the highest peak liquidity
exposures over a two-year look-back period during Special Periods \102\
prima facie has the effect of limiting that obligation to a subset of
Clearing Members. However, a Special SLD funding obligation will not be
imposed on a Clearing Member, irrespective of the rank of that Clearing
Member's peak liquidity need vis-[agrave]-vis other Clearing Members,
unless that Clearing Member's peak liquidity need surpassed NSCC's
total liquidity resources.\103\
---------------------------------------------------------------------------
\102\ Id. See also Exhibit 5 to File No. SR-NSCC-2013-02, https://www.sec.gov/rules/sro/nscc/2013/34-70688-ex5.pdf.
\103\ See Notice of Amendment No. 3, 78 FR at 62847.
---------------------------------------------------------------------------
Since whether an individual Clearing Member will have a Special SLD
funding obligation is dependent solely upon the liquidity needs
presented by that Clearing Member during the look-back period in excess
of NSCC's then-available total liquidity resources, the Commission
believes that expanding the Special SLD funding obligation to all
Clearing Members is not necessary given the practical application of
the rule to a subset of the 30 Clearing Members. Accordingly, despite
the views expressed by some commenters, the Commission believes that
limiting application of the Special SLD requirement to no more than 30
Clearing Members is consistent with the requirement of Exchange Act
Section 17A(b)(3)(D) that expenses be equitably allocated among
Clearing Members.
As stated above, the Commission recognizes that costs will be
imposed through the Final SLD Proposal on Clearing Members for which
the Special SLD funding obligation applies. The Commission also
recognizes that some Clearing Members may make an economic decision to
terminate their NSCC membership to avoid these costs. The Commission
believes, however, that the Final SLD Proposal is a reasonable measure
of the associated liquidity expenses experienced by NSCC and that the
associated costs are necessary and appropriate for NSCC to ensure that
it has the liquidity resources required to continue to operate in a
safe and sound manner.
Under the Final SLD Proposal, a funding obligation is generated
when a Clearing Member's trading activity during a historic Special
Period would have resulted in NSCC having insufficient liquidity
resources to cover the default of that Clearing Member after taking
into account all of NSCC's available liquidity resources at that time.
As a result, a Special SLD funding obligation is the amount of the
difference between a demonstrated peak total liquidity need created and
current total liquidity resources available, which difference NSCC
would be unable to account for through other liquidity resources.
As for the unintended consequences associated with the Final SLD
Proposal, the Commission agrees with NSCC that the maintenance of
adequate liquidity at NSCC is a fundamental element in addressing the
goal of reducing the potential systemic risk posed by a systemically-
important financial market utility \104\ and also a key component of
NSCC's ability to prevent the failure of a Clearing Member from having
a cascading effect on other Clearing Members. The Commission also
believes that since Clearing Members exercise a degree of control over
whether they will face an SLD funding obligation, they could explore
alternatives to termination of membership to avoid incurring a Special
SLD funding obligation, including changes to trading behavior so that
their trading activity does not present a liquidity need to NSCC above
NSCC's total available liquidity resources, as informed by the daily
and monthly ``liquidity transaction'' reports to be provided by NSCC as
part of the Final SLD Proposal.\105\ Accordingly, the Commission
believes the expenses charged by NSCC through imposition of the Special
SLD funding obligation are reasonable as required by Exchange Act
Section 17A(b)(3)(D).
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\104\ See NSCC Letter I.
\105\ See Notice of Amendment No. 2, 78 FR 42140, Notice of
Amendment No. 3, 78 FR 62846, NSCC Letter II. With respect to the
comments described above about NSCC requiring cash be deposited as
collateral, the Commission believes that NSCC has addressed these
comments and has stated that the CALC will evaluate potential
alternative collateral approaches.
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For these reasons stated above, the Commission believes that the
Final Proposed Rule Change containing the Final SLD Proposal meets the
Section 17A(b)(3)(D) Exchange Act standard of equitable allocation of
reasonable dues, fees, and other charges among its participants. The
Commission finds it equitable that Clearing Members address the
liquidity exposure that they actually present to NSCC during Special
Periods and that such liquidity exposure is not borne by Clearing
Members whose trading activity does not generate the liquidity need.
Similarly, the Commission finds the Final SLD Proposal equitable in
that two Clearing Members that produce the same liquidity need in
excess of NSCC's total liquidity resources will be assessed the same
Special SLD funding obligation. Furthermore, the Final SLD Proposal is
equitable because it allows Clearing Members to anticipate and manage
their own liquidity exposure to the clearing agency by changing their
trading behavior. Finally, the Commission believes that the limitation
in NSCC's rules to apply the Special SLD funding obligation to not more
than 30 Clearing Members is not arbitrary or capricious because a
Clearing Member's Special SLD funding obligation will depend solely
upon its trading activity in relation to NSCC's total liquidity
resources.
Several commenters raised concerns regarding the perceived burdens
on competition and asserted that there are
[[Page 75420]]
unfair and discriminatory impacts of the SLD Proposal, in particular
with respect to an aspect of the eliminated Regular SLD funding
obligation.\106\ However, no commenters argued that the Final SLD
Proposal discriminated among Clearing Members in the use of the
clearing agency or imposed an unnecessary or inappropriate burden on
competition. Because a Special SLD funding obligation will be imposed
only to the extent that an individual Clearing Member's trading
activity over a two-year historical look-back period on corresponding
days surpasses the total liquidity resources available to NSCC, only a
small number of Clearing Members likely will incur a Special SLD
funding obligation. While the Special SLD funding obligation will very
likely only be met by a small number of Clearing Members, NSCC (i) will
provide all members with a daily report regarding the liquidity
exposure presented by such member, (ii) will provide similar monthly
reports specifically to Clearing Members to help Clearing Members
determine whether they should make Prefund Deposits or otherwise manage
their liquidity exposure,\107\ and (iii) has created the CALC to ensure
that the Special SLD funding obligation will continue to only
reasonably and fairly impose a requirement on those Clearing Members
that can foresee the liquidity exposure that they may present to NSCC
during Special Periods.\108\
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\106\ See Citadel Letter II, Charles Schwab Letter I, Charles
Schwab Letter II, Charles Schwab Letter III, Charles Schwab Letter
IV, Charles Schwab Letter V, SIFMA Letter I, SIFMA Letter II, ITG
Letter I, ITG Letter II, Knight Capital Letter, ConvergEx Letter I,
ConvergEx Letter II.
\107\ See Notice of Amendment No. 2, 78 FR 42140, Notice of
Amendment No. 3, 78 FR 62846, NSCC Letter II.
\108\ See NSCC Letter I, NSCC Letter II.
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As a result, the Commission believes that the Final SLD Proposal
meets the requirements of Sections 17A(b)(3)(F) and (I) of the Exchange
Act. To the extent the imposition of the Special SLD funding obligation
results in a burden on competition because it levies a funding
obligation on some Clearing Members but not others, such burden is
necessary or appropriate for NSCC to ensure that it has the liquidity
resources required to continue to operate in a safe and sound manner.
Furthermore, the Special SLD funding obligation does not amount to
unfair discrimination among Clearing Members in the use of the clearing
agency because the funding requirement is correlated directly with
trading activity that creates the actual liquidity need.
VI. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act and the
rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\109\ that the proposed rule change SR-NSCC-2013-02, as modified by
Amendment Nos. 1, 2, and 3, be and hereby is approved, as of the date
of this order or the date of the ``Notice of No Objection to Advance
Notice Filing, as Modified by Amendment Nos. 1, 2, and 3, to Institute
Supplemental Liquidity Deposits to [NSCC's] Clearing Fund Designed to
Increase Liquidity Resources to Meet Its Liquidity Needs,'' SR-NSCC-
2012-802, whichever is later.
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\109\ 15 U.S.C. 78s(b)(2).
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-29497 Filed 12-10-13; 8:45 am]
BILLING CODE 8011-01-P
