Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection To Advance Notice Filing, 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, 75400-75406 [2013-29498]
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Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Notices
exceptions in the rule to allow dealer
consent to changes in authorizing
documents are limited in nature so as to
protect existing bond holders, while
addressing concerns of issuers about
obtaining consents to amendments of
their authorizing documents in certain
situations. In addition, the Commission
believes that the proposed rule change
will enhance transparency regarding the
practice of obtaining bond owner
consents from dealers.
At the same time, the Commission
notes that the MSRB has represented
that the proposed rule change does not
grant an affirmative right to dealers to
provide consents to changes to
authorizing documents and does not
alter the dealer’s obligations applicable
under other MSRB rules, including its
fair dealing obligations under Rule G–
17. Accordingly, dealers may not simply
rely on the exceptions prescribed in the
rule but rather are obligated to consider
and comply with their Rule G–17
obligations in seeking to provide
consents to amendments in authorizing
documents at the request of an issuer in
accordance with the exceptions
provided.
For these reasons, the Commission
believes that the proposed rule change
is consistent with the Act.
IV. Conclusion
For the foregoing reasons, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
the MSRB, and in particular, Section
15B(b)(2)(C) of the Act.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,13 that the
proposed rule change (SR–MSRB–2013–
08) be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–29488 Filed 12–10–13; 8:45 am]
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BILLING CODE 8011–01–P
13 15
14 17
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71000; File No. SR–NSCC–
2013–802]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of No Objection To
Advance Notice Filing, 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 806(e) of Title VIII
of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (‘‘DoddFrank Act’’),1 entitled the Payment,
Clearing, and Settlement Supervision
Act of 2010 (‘‘Clearing Supervision Act’’
or ‘‘Title VIII’’) and Rule 19b–4(n) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’),2 advance notice SR–
NSCC–2013–802 (‘‘Advance Notice’’) 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 19, 2013, NSCC filed with
the Commission Amendment No. 1 to
the Advance Notice.4 On May 1, 2013,
1 12
U.S.C. 5465(e)(1).
CFR 240.19b–4.
3 NSCC also filed the SLD Proposal contained in
the Advance Notice as proposed rule change SR–
NSCC–2013–02 (‘‘Proposed Rule Change’’). Release
No. 34–69313 (Apr. 4, 2013), 78 FR 21487 (Apr. 10,
2013). On April 19, 2013, NSCC filed with the
Commission Amendment No. 1 to the Proposed
Rule Change. Release No. 34–69620 (May 22, 2013),
78 FR 32292 (May 29, 2013). On June 11, 2013,
NSCC filed with the Commission Amendment No.
2 to the Proposed Rule Change, as previously
modified by Amendment No. 1. Release No. 34–
69951 (Jul. 9, 2013), 78 FR 42140 (Jul. 15, 2013).
On October 7, 2013, NSCC filed Amendment No. 3
to the Proposed Rule Change, as previously
modified by Amendment Nos. 1 and 2. Release No.
34–70688 (Oct. 15, 2013), 78 FR 62846 (Oct. 22,
2013). On December 5, 2013, the Commission
issued an Order Approving the 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. Release No.
34–70999.
4 NSCC filed Amendment No. 1 to the Advance
Notice and Proposed Rule Change 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. 34–69451 (Apr. 25, 2013),
78 FR 25496 (May 1, 2013) (‘‘Notice’’) and see
2 17
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the Commission published notice of the
Advance Notice, as modified by
Amendment No. 1, for comment in the
Federal Register.5 On May 24, 2013, the
Commission published notice of its
extension of its review period of the
Advance Notice, as modified by
Amendment No. 1.6 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
On June 11, 2013, NSCC filed with the
Commission Amendment No. 2 to the
Advance Notice, as previously modified
by Amendment No. 1 (‘‘Amended SLD
Proposal’’), which the Commission
published for comment in the Federal
Register on July 15, 2013.8 The
Commission received nine comment
letters to Amendment No. 2.9
Exhibit 2 to File No. SR–NSCC–2013–802, http://
www.sec.gov/rules/sro/nscc/2013/34-69451ex2.pdf.
5 See Notice, 78 FR 25496.
6 Release No. 34–69605 (May 20, 2013), 78 FR
31616 (May 24, 2013) (‘‘Notice of Amendment No.
1’’).
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’’).
8 Release No. 34–69954 (Jul. 9, 2013), 78 FR
42127 (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’’).
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Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Notices
On October 4, 2013, NSCC filed
Amendment No. 3 to the Advance
Notice (‘‘Final SLD Proposal’’), as
previously modified by Amendment
Nos. 1 and 2, which the Commission
published for comment on October 15,
2013.10 The Commission received two
comment letters to the Final SLD
Proposal (i.e., Amendment No. 3).11
This publication serves as notice of no
objection to the Advance Notice, as
modified by Amendment Nos. 1, 2, and
3.
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) 12 and a long-standing
NSCC policy.
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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’’).13
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
10 Release No. 34–70689 (Oct. 15, 2013), 78 FR
62893 (Oct. 22, 2013) (‘‘Notice of Amendment No.
3’’).
11 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’’).
12 17 CFR 240.17Ad–22(b)(3).
13 See Notice, 78 FR at 25496.
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that it contributed to NSCC’s line-ofcredit (‘‘Credit Facility’’).14 Special SLD
could only be satisfied with cash.15
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.16
On October 4 and 7, 2013, in response
to further comments received, NSCC
filed the Final SLD Proposal.17 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 18 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
14 Id.
at 25498.
15 Id.
16 See
Notice of Amendment No. 2, 78 FR 42127.
filed the Amendment No. 3 to the
Proposed Rule Change on October 7, 2013, three
days after the Final Advance Notice.
18 See Exhibit 5 to File No. SR–NSCC–2013–802,
http://www.sec.gov/rules/sro/nscc/2013/34-70689ex5.pdf.
17 NSCC
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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
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 19
from eight commenters,20 including the
NFS Letter.21 Commenters include bank
affiliated and non-bank affiliated NSCC
members, as well as one industry trade
group, SIFMA.22 NSCC also submitted
two responses to comment letters
received.23 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
19 Since the SLD Proposal was filed as both the
Proposed Rule Change and the Advance Notice, the
Commission considered all public 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.
20 See Comments to the Advance Notice (File No.
SR–NSCC–2013–802), http://sec.gov/comments/srnscc-2013-802/nscc2013802.shtml and the
Proposed Rule Change (File No. SR–NSCC–2013–
02), http://sec.gov/comments/sr-nscc-2013-02/
nscc201302.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.
21 See NFS Letter.
22 See Comments Received, supra note 20.
23 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’’).
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important to enable all of the NSCC’s
members to help the NSCC maintain
sufficient financial resources.’’ 30
Another commenter notes that ‘‘NSCC
should have the resources it needs to be
a source of strength for the national
clearing and settlement system. . . .’’ 31
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.’’ 32
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.28 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.’’ 29 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
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withstand a default by a Clearing
Member (i.e., Cover One).24 One
commenter, who previously supported
approval of the Amended SLD Proposal,
supports approval of the Final SLD
Proposal.25 The remaining seven
commenters oppose the original SLD
Proposal and the Amended SLD
Proposal, as discussed in more detail
below.26 One of those seven
commenters submitted the sole
comment letter in opposition to the
Final SLD Proposal.27
B. Opposing Comments Received Prior
to the Final SLD Proposal
24 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.
25 See Fidelity Letter II, Fidelity Letter III.
26 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.
27 See ITG Letter III.
28 See supra note 24.
29 See SIFMA 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.33 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.34
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.35
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; 36 (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; 37 (3) distributional
effects associated with implementation
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; 38
and (4) perceived mechanical flaws with
the application of the Regular SLD
funding obligation.39
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.40 Four commenters argued
that the SLD Proposal is arbitrary and
capricious because it applies to no more
than 30 Clearing Members.41 Six
30 Id.
31 See Charles Schwab Letter III, Charles Schwab
Letter V.
32 See ConvergEx Letter II.
33 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.
34 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.
35 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.
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36 See, e.g., ITG Letter I, ITG Letter II, Citadel
Letter III.
37 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.
38 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.
39 See ITG Letter II.
40 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.
41 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
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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.42 One
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.43 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.44
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.45
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,46 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.47 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.48 Similarly, NSCC states that
argument persists for the Special SLD Funding
Obligation; as such, the Commission will consider
the comment here. See Charles Schwab Letter V.
42 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.
43 See ITG Letter II.
44 See Citadel Letter III, ITG Letter II, ConvergEx
Letter I, ConvergEx Letter II.
45 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.
46 See Notice of Amendment No. 3, 78 FR at
62894–95.
47 Id. at 62894.
48 NSCC Letter I.
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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.49
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.50 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.51 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.52
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.53 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 15c3–1.54
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.55 Many of
49 See
50 See
NSCC Letter I.
Notice of Amendment No. 3, 78 FR at
62895.
51 See Notice, 78 FR at 25498.
52 See NSCC Letter I.
53 Id.
54 Id.
55 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.
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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.56 Five commenters
argued the SLD Proposal lacked
sufficient Clearing Member input prior
to submitting the proposal.57 Three
commenters argued that the SLD
Proposal did not meet the standard
required for an advance notice filing
because it did not discuss expected
effects on risks to NSCC’s Clearing
Members or NSCC’s management of
those risks.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
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
56 See Citadel Letter II, Citadel Letter III, SIFMA
Letter II, SIFMA Letter III, ITG Letter II, ITG Letter
III, ConvergEx Letter II.
57 See Citadel Letter III, Charles Schwab Letter I,
ITG Letter I, ITG Letter II, Knight Capital Letter,
Deutsche Bank Letter.
58 See Citadel Letter II, Charles Schwab Letter II,
Charles Schwab Letter III, ConvergEx Letter II.
59 See Deutsche Bank Letter, Charles Schwab
Letter II, Charles Schwab Letter 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 62893.
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 62893
(stating that the Final SLD Proposal would be
implemented on February 1, 2014).
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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
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 Advance
Notice and subsequent amendments
were published for comment three
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.
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,78 will protect
against the transmission of systemic risk
72 See
NSCC Letter I.
Notice of Amendment No. 2, 78 FR 42127;
Notice of Amendment No. 3, 78 FR 62893. See also
NSCC Letter II.
74 DTCC Important Notice a7706, Creation of
DTCC Clearing Agency Liquidity Council and
Nomination Process (Sep. 18, 2013), http://
dtcc.com/downloads/legal/imp_notices/2013/nscc/
a7706.pdf.
75 See NSCC Letter II. See also Notice of
Amendment No. 2, 78 FR 42127, Notice of
Amendment No. 3, 78 FR 62893.
76 See Notice of Amendment No. 2, 78 FR 42127;
Notice of Amendment No. 3, 78 FR 62893. See also
NSCC Letter II.
77 Financial Stability Oversight Council (‘‘FSOC’’)
2012 Annual Report, Appendix A, http://
www.treasury.gov/initiatives/fsoc/Documents/
2012%20Annual%20Report.pdf (‘‘FSOC
Designation’’).
78 See 12 U.S.C. 5462(9).
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73 See
65 See NSCC Letter I, NSCC Letter II, Notice of
Amendment No. 2, 78 FR 42127, Notice of
Amendment No. 3, 78 FR 62893.
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 42127.
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. 2, 78 FR 42127;
Notice of Amendment No. 3, 78 FR 62893. See also
NSCC Letter I, NSCC Letter II.
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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.79 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.80 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.81
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.82 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.’’ 83 Moreover, the
commenter believes that ‘‘NSCC has
addressed the area of greatest [m]ember
concern in removing provisions of the
79 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.
80 See NSCC Letter II.
81 Id. See also discussion below noting that any
cash deposit is driven by the Clearing Member’s
own trading activity.
82 See ITG Letter III, Fidelity Letter III.
83 See Fidelity Letter III.
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[SLD] Proposal that collectively deal
with the imposition of the Regular
[SLD].’’ 84 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.85 NSCC did not submit a
response to comments received after
submission of the Final SLD Proposal.
V. Discussion and Commission Findings
Although Title VIII does not specify a
standard of review for an advance
notice, the purpose of Title VIII is
instructive.86 The stated purpose of
Title VIII is to mitigate systemic risk in
the financial system and promote
financial stability by, among other
things, promoting uniform risk
management standards for and
strengthening the liquidity of
systemically-important financial market
utilities.87
Section 805(a)(2) of the Clearing
Supervision Act 88 authorizes the
Commission to prescribe risk
management standards for the payment,
clearing, and settlement activities of
designated clearing entities and
financial institutions engaged in
designated activities for which it is the
supervisory agency or the appropriate
financial regulator. Section 805(b) of the
Clearing Supervision Act 89 states that
the objectives and principles for the risk
management standards prescribed under
Section 805(a) shall be to:
• promote robust risk management;
• promote safety and soundness;
• reduce systemic risks; and
• support the stability of the broader
financial system.
The Commission adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act on October 22, 2012, (‘‘Clearing
Agency Standards’’).90 The Clearing
Agency Standards became effective on
January 2, 2013, and require clearing
agencies that perform central
counterparty services to establish,
implement, maintain, and enforce
written policies and procedures that are
reasonably designed to meet certain
minimum requirements for their
operations and risk management
practices on an ongoing basis.91 As
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84 Id.
85 See
ITG Letter III.
U.S.C. 5461(b).
87 Id. See also FSOC Designation, supra note 77.
88 12 U.S.C. 5464(a)(2).
89 12 U.S.C. 5464(b).
90 Release No. 34–68080 (Oct. 22, 2012), 77 FR
66219 (Nov. 2, 2012).
91 The Clearing Agency Standards are
substantially similar to the risk management
standards established by the Board of Governors
86 12
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such, it is appropriate for the
Commission to review advance notices
against these risk management
standards that the Commission
promulgated under Section 805(a) and
the objectives and principles of these
risk management standards as described
in Section 805(b). Commission Rule
17Ad-22(b)(3), adopted as part of the
Clearing Agency Standards, requires a
central counterparty to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to maintain
sufficient financial resources to
withstand, at a minimum, a default by
the participant family to which it has
the largest exposure in extreme but
plausible market conditions.92
After carefully considering the Final
SLD Proposal and the comments
received 93 on the SLD Proposal and
NSCC responses thereto, the
Commission finds that NSCC has
demonstrated that its Final SLD
Proposal is in furtherance of the
objectives and principles of Title VIII
and the risk management standards
prescribed thereunder by the
Commission and accordingly it is
appropriate for the Commission to issue
a no-objection to the Final SLD
Proposal.
The Commission recognizes that some
commenters did not support certain
aspects of the SLD Proposal. However,
the Commission believes that the Final
SLD Proposal eliminated most of the
aspects of the SLD Proposal which
concerns were raised, and no comments
convinced the Commission that the
Final SLD Proposal was not consistent
with Title VIII. The Commission
believes that, overall, the increased
liquidity resources available to NSCC as
a result of the Final SLD Proposal: (i)
governing the operations of systemically-important
financial market utilities that are not clearing
entities and financial institutions engaged in
designated activities for which the Commission or
the Commodity Futures Trading Commission is the
Supervisory Agency. See Financial Market Utilities,
77 FR 49507 (Aug. 2, 2012).
92 17 CFR 240.17Ad-22(b)(3).
93 In its assessment of this advance notice of the
Final SLD Proposal, the Commission assessed
whether the issues raised by the commenters relate
to the level or nature of risks presented by the Final
SLD Proposal. Comments received that relate to
issues that do not relate to the Final SLD Proposal’s
effect on the level or nature of risks presented by
NSCC are not considered within the context of his
Notice of No Objection to the Advance Notice under
Title VIII; rather, they are considered within an
analysis of the Final SLD Proposal’s consistency
with the Exchange Act and applicable rules and
regulations thereunder, which the Commission has
done in the Order Approving the 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. See supra
note 3.
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75405
Will improve financial safety at NSCC
by increasing its ability meet its
liquidity needs; (ii) reduce systemic
risks and support the stability of the
broader financial system; and (iii)
accordingly is reasonably designed to
ensure NSCC maintains sufficient
financial resources to withstand, at a
minimum, a default by the participant
family to which it has the largest
exposure in extreme but plausible
market conditions. The Commission’s
analysis of the comments applicable to
the Final SLD Proposal and the Final
SLD Proposal’s consistency with Title
VIII of the Dodd-Frank Act and risk
management standards prescribed
thereunder by the Commission 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 submitted the SLD
Proposal,94 that the SLD Proposal did
not adequately address items required
by Title VIII,95 and that NSCC did not
demonstrate a specific need for
additional liquidity in connection with
the SLD Proposal.96 The Commission
believes that the Final SLD Proposal is
consistent with Title VIII. NSCC made
substantial revisions to the SLD
Proposal directly responsive to
comments raised during the comment
period, the creation of the CALC to
continue the dialogue between NSCC
and Clearing Members regarding
liquidity generally, and a more robust
description of the SLD Proposal and its
potential effects on the competition
between Clearing Members. The
Commission notes the stated intention
of the CALC to revisit and further
impose NSCC’s practices with respect to
liquidity risk management as also being
relevant in this respect.
The Commission notes that all
commenters supported NSCC’s objective
of maintaining sufficient financial
resources to withstand a default by a
Clearing Member and acknowledged
that NSCC must have sufficient liquidity
for these purposes. The Commission
agrees with commenters and with NSCC
that the maintenance of sufficient
liquidity resources at NSCC is of
94 See Citadel Letter III, Charles Schwab Letter I,
ITG Letter I, ITG Letter II, Knight Capital Letter,
Deutsche Bank Letter, Fidelity Letter I.
95 See Citadel Letter II, Charles Schwab Letter II,
Charles Schwab Letter III, ConvergEx Letter II.
96 See Citadel Letter II, Citadel Letter III, SIFMA
Letter II, SIFMA Letter III, ITG Letter II, ITG Letter
III, ConvergEx 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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paramount importance to promote
safety and soundness and support the
broader stability of the financial system.
This is underscored by NSCC’s
designation as a systemically-important
financial market utility for which a
failure or disruption of its operations
would create or increase risk of
significant credit or liquidity problems
spreading among financial institutions
or markets and thereby threaten the
stability of the financial system of the
U.S.97
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.98 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 takes specific note of
comments arguing that implementation
of the SLD Proposal could result in an
increase of systemic risk by
concentrating clearing services into
fewer firms if Clearing Members opt to
terminate their NSCC membership
instead of meeting a Special SLD
funding obligation. The Commission has
carefully considered those comments,
but does not believe a risk of increased
concentration is a significant risk under
the Final SLD Proposal for several
reasons. First, since a Special SLD
funding obligation is correlated directly
to the liquidity need presented to NSCC
as a result of Clearing Members’ own 99
trading activity, the Special SLD
funding obligation is not an unexpected
cost for which the Clearing Member is
incapable of controlling. Second, the
Special SLD funding obligation applies
only in the case where a Clearing
Member presents a liquidity need that
surpasses the then-current total
available liquidity resources, based on a
two-year look-back period of the
Clearing Member’s trading activity.
These liquidity resources include the
Clearing Fund and the Credit Facility,
and historically these liquidity
resources have provided NSCC with
adequate liquidity resources a
substantial portion of the time. While
the Commission believes the Final SLD
97 See
12 U.S.C. 5462(9).
NSCC Letter II.
99 For these purposes, a Clearing Members’ own
trading activity includes trading activity from all
clients of the Clearing Member.
98 See
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Proposal is important for NSCC to
ensure that it has a mechanism to
maintain adequate liquidity resources at
all times, the Commission also expects
based on the representations of NSCC
that a Special SLD funding obligation
will be required in only a small number
of cases and from a select few Clearing
Members with trading activity that is
substantial enough to create a liquidity
need above NSCC’s total liquidity
resources. Finally, the Commission
notes that the Final SLD Proposal would
enable a Clearing Member to avoid a
Special SLD funding obligation by
either managing its own trading activity
to avoid such an obligation or using the
Prefund Deposit, which would likely
avoid a Call Deposit that would enable
NSCC to hold the deposited funds for 90
days, so that the Clearing Member has
options other than termination of
membership available to it to manage its
potential liquidity funding obligation.
For the reasons stated above, the
Commission believes that the Final SLD
Proposal is: (i) Consistent with
Commission regulations and risk
management standards in Section 805(b)
of the Clearing Supervision Act because
it promotes robust risk management and
improves safety and soundness at
NSCC, while reducing systemic risks to
the financial system more generally and
(ii) consistent with Rule 17Ad–22 (b)(3)
because it provides NSCC with a
mechanism to maintain sufficient
financial resources to withstand, at a
minimum, a default by the Clearing
Member to which NSCC has the largest
exposure.
VI. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act,100 that the
Commission does not object to the
proposed rule change described in the
Advance Notice (File No. SR–NSCC–
2013–802) and that NSCC be and hereby
is authorized to implement the
proposed rule change as of the date of
this notice or the date of the ‘‘Order
Approving Proposed Rule Change, 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–2013–02, whichever is later.
By the Commission.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–29498 Filed 12–10–13; 8:45 am]
BILLING CODE 8011–01–P
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–70993; File No. SR–
NYSEArca–2013–101]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Granting Approval of
Proposed Rule Change To List and
Trade Shares of the WisdomTree
Bloomberg U.S. Dollar Bullish Fund,
WisdomTree Bloomberg U.S. Dollar
Bearish Fund, and the WisdomTree
Commodity Currency Bearish Fund
Under NYSE Arca Equities Rule 8.600
December 5, 2013.
I. Introduction
On September 26, 2013, NYSE Arca,
Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares
(‘‘Shares’’) of WisdomTree Bloomberg
U.S. Dollar Bullish Fund, WisdomTree
Bloomberg U.S. Dollar Bearish Fund,
and the WisdomTree Commodity
Currency Bearish Fund of the
WisdomTree Trust. The proposed rule
change was published for comment in
the Federal Register on October 22,
2013.3 The Commission received no
comments on the proposal. This order
grants approval of the proposed rule
change.
II. Description of the Proposed Rule
Change
The Exchange proposes to list and
trade the Shares of the WisdomTree
Bloomberg U.S. Dollar Bullish Fund
(‘‘DI Bull Fund’’), WisdomTree
Bloomberg U.S. Dollar Bearish Fund
(‘‘DI Bear Fund,’’ and together with the
DI Bull Fund, collectively, ‘‘DI Funds’’),
and the WisdomTree Commodity
Currency Bearish Fund (‘‘CC Bear
Fund’’) 4 under NYSE Arca Equities
Rule 8.600, which governs the listing
and trading of Managed Fund Shares on
the Exchange. The Shares will be
offered by the WisdomTree Trust
(‘‘Trust’’), a Delaware statutory trust
registered with the Commission as an
investment company.5
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 70624
(October 8, 2013), 78 FR 62751 (‘‘Notice’’).
4 The DI Funds and the CC Bear Fund are also
individually referred to as ‘‘Fund’’ and collectively
referred to as ‘‘Funds.’’
5 The Trust has filed a registration statement on
Form N–1A (‘‘Registration Statement’’) with the
Commission on behalf of each of the Funds. See
Post-Effective Amendment No. 216 (DI Bull Fund),
No. 217 (DI Bear Fund), and No. 218 (CC Bear
2 17
E:\FR\FM\11DEN1.SGM
11DEN1
]]>Agencies
[Federal Register Volume 78, Number 238 (Wednesday, December 11, 2013)]
[Notices]
[Pages 75400-75406]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29498]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71000; File No. SR-NSCC-2013-802]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of No Objection To Advance Notice Filing, 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 806(e) of Title VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act''),\1\ entitled the Payment, Clearing, and Settlement Supervision
Act of 2010 (``Clearing Supervision Act'' or ``Title VIII'') and Rule
19b-4(n) of the Securities Exchange Act of 1934 (``Exchange Act''),\2\
advance notice SR-NSCC-2013-802 (``Advance Notice'') to institute
supplemental liquidity deposits to NSCC's Clearing Fund designed to
increase liquidity resources to meet NSCC's liquidity needs (``SLD
Proposal'').\3\
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4.
\3\ NSCC also filed the SLD Proposal contained in the Advance
Notice as proposed rule change SR-NSCC-2013-02 (``Proposed Rule
Change''). Release No. 34-69313 (Apr. 4, 2013), 78 FR 21487 (Apr.
10, 2013). On April 19, 2013, NSCC filed with the Commission
Amendment No. 1 to the Proposed Rule Change. Release No. 34-69620
(May 22, 2013), 78 FR 32292 (May 29, 2013). On June 11, 2013, NSCC
filed with the Commission Amendment No. 2 to the Proposed Rule
Change, as previously modified by Amendment No. 1. Release No. 34-
69951 (Jul. 9, 2013), 78 FR 42140 (Jul. 15, 2013). On October 7,
2013, NSCC filed Amendment No. 3 to the Proposed Rule Change, as
previously modified by Amendment Nos. 1 and 2. Release No. 34-70688
(Oct. 15, 2013), 78 FR 62846 (Oct. 22, 2013). On December 5, 2013,
the Commission issued an Order Approving the 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. Release No. 34-
70999.
---------------------------------------------------------------------------
On April 19, 2013, NSCC filed with the Commission Amendment No. 1
to the Advance Notice.\4\ On May 1, 2013, the Commission published
notice of the Advance Notice, as modified by Amendment No. 1, for
comment in the Federal Register.\5\ On May 24, 2013, the Commission
published notice of its extension of its review period of the Advance
Notice, as modified by Amendment No. 1.\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\
---------------------------------------------------------------------------
\4\ NSCC filed Amendment No. 1 to the Advance Notice and
Proposed Rule Change 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. 34-69451 (Apr.
25, 2013), 78 FR 25496 (May 1, 2013) (``Notice'') and see Exhibit 2
to File No. SR-NSCC-2013-802, http://www.sec.gov/rules/sro/nscc/2013/34-69451-ex2.pdf.
\5\ See Notice, 78 FR 25496.
\6\ Release No. 34-69605 (May 20, 2013), 78 FR 31616 (May 24,
2013) (``Notice of Amendment No. 1'').
\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 Advance Notice, as previously modified by Amendment No. 1
(``Amended SLD Proposal''), which the Commission published for comment
in the Federal Register on July 15, 2013.\8\ The Commission received
nine comment letters to Amendment No. 2.\9\
---------------------------------------------------------------------------
\8\ Release No. 34-69954 (Jul. 9, 2013), 78 FR 42127 (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'').
---------------------------------------------------------------------------
[[Page 75401]]
On October 4, 2013, NSCC filed Amendment No. 3 to the Advance
Notice (``Final SLD Proposal''), as previously modified by Amendment
Nos. 1 and 2, which the Commission published for comment on October 15,
2013.\10\ The Commission received two comment letters to the Final SLD
Proposal (i.e., Amendment No. 3).\11\
---------------------------------------------------------------------------
\10\ Release No. 34-70689 (Oct. 15, 2013), 78 FR 62893 (Oct. 22,
2013) (``Notice of Amendment No. 3'').
\11\ 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'').
---------------------------------------------------------------------------
This publication serves as notice of no objection to the Advance
Notice, as modified by Amendment Nos. 1, 2, and 3.
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) \12\ and a
long-standing NSCC policy.
---------------------------------------------------------------------------
\12\ 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'').\13\
---------------------------------------------------------------------------
\13\ See Notice, 78 FR at 25496.
---------------------------------------------------------------------------
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'').\14\ Special SLD could only
be satisfied with cash.\15\
---------------------------------------------------------------------------
\14\ Id. at 25498.
\15\ 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.\16\
---------------------------------------------------------------------------
\16\ See Notice of Amendment No. 2, 78 FR 42127.
---------------------------------------------------------------------------
On October 4 and 7, 2013, in response to further comments received,
NSCC filed the Final SLD Proposal.\17\ Among other things, the Final
SLD Proposal eliminated the Regular SLD funding obligation.
---------------------------------------------------------------------------
\17\ NSCC filed the Amendment No. 3 to the Proposed Rule Change
on October 7, 2013, three days after the Final Advance Notice.
---------------------------------------------------------------------------
III. Description of the Final SLD Proposal
The Final SLD Proposal would add Rule 4A to NSCC's Rules and
Procedures \18\ 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.
---------------------------------------------------------------------------
\18\ See Exhibit 5 to File No. SR-NSCC-2013-802, http://www.sec.gov/rules/sro/nscc/2013/34-70689-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 \19\
from eight commenters,\20\ including the NFS Letter.\21\ Commenters
include bank affiliated and non-bank affiliated NSCC members, as well
as one industry trade group, SIFMA.\22\ NSCC also submitted two
responses to comment letters received.\23\ The Commission has reviewed
and taken into full consideration all of the comments received.
---------------------------------------------------------------------------
\19\ Since the SLD Proposal was filed as both the Proposed Rule
Change and the Advance Notice, the Commission considered all public
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.
\20\ See Comments to the Advance Notice (File No. SR-NSCC-2013-
802), http://sec.gov/comments/sr-nscc-2013-802/nscc2013802.shtml and
the Proposed Rule Change (File No. SR-NSCC-2013-02), http://sec.gov/comments/sr-nscc-2013-02/nscc201302.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.
\21\ See NFS Letter.
\22\ See Comments Received, supra note 20.
\23\ 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
[[Page 75402]]
withstand a default by a Clearing Member (i.e., Cover One).\24\ One
commenter, who previously supported approval of the Amended SLD
Proposal, supports approval of the Final SLD Proposal.\25\ The
remaining seven commenters oppose the original SLD Proposal and the
Amended SLD Proposal, as discussed in more detail below.\26\ One of
those seven commenters submitted the sole comment letter in opposition
to the Final SLD Proposal.\27\
---------------------------------------------------------------------------
\24\ 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.
\25\ See Fidelity Letter II, Fidelity Letter III.
\26\ 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.
\27\ 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.\28\ 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.'' \29\ 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.''
\30\ Another commenter notes that ``NSCC should have the resources it
needs to be a source of strength for the national clearing and
settlement system. . . .'' \31\ 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.'' \32\
---------------------------------------------------------------------------
\28\ See supra note 24.
\29\ See SIFMA Letter II.
\30\ Id.
\31\ See Charles Schwab Letter III, Charles Schwab Letter V.
\32\ 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.\33\ 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.\34\
---------------------------------------------------------------------------
\33\ 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.
\34\ 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.
---------------------------------------------------------------------------
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.\35\ 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; \36\ (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; \37\ (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; \38\ and (4) perceived mechanical flaws with the application
of the Regular SLD funding obligation.\39\
---------------------------------------------------------------------------
\35\ 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.
\36\ See, e.g., ITG Letter I, ITG Letter II, Citadel Letter III.
\37\ 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.
\38\ 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.
\39\ 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.\40\ Four commenters argued that the SLD
Proposal is arbitrary and capricious because it applies to no more than
30 Clearing Members.\41\ Six
[[Page 75403]]
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.\42\ One
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.\43\
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.\44\ 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.\45\
---------------------------------------------------------------------------
\40\ 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.
\41\ 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.
\42\ 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.
\43\ See ITG Letter II.
\44\ See Citadel Letter III, ITG Letter II, ConvergEx Letter I,
ConvergEx Letter II.
\45\ 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,\46\ 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.\47\ 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.\48\ 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.\49\
---------------------------------------------------------------------------
\46\ See Notice of Amendment No. 3, 78 FR at 62894-95.
\47\ Id. at 62894.
\48\ NSCC Letter I.
\49\ See NSCC Letter I.
---------------------------------------------------------------------------
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.\50\
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.\51\ 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.\52\ 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.\53\ 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.\54\
---------------------------------------------------------------------------
\50\ See Notice of Amendment No. 3, 78 FR at 62895.
\51\ See Notice, 78 FR at 25498.
\52\ See NSCC Letter I.
\53\ Id.
\54\ 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.\55\ 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.\56\ Five commenters
argued the SLD Proposal lacked sufficient Clearing Member input prior
to submitting the proposal.\57\ Three commenters argued that the SLD
Proposal did not meet the standard required for an advance notice
filing because it did not discuss expected effects on risks to NSCC's
Clearing Members or NSCC's management of those risks.\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\
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\55\ 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.
\56\ See Citadel Letter II, Citadel Letter III, SIFMA Letter II,
SIFMA Letter III, ITG Letter II, ITG Letter III, ConvergEx Letter
II.
\57\ See Citadel Letter III, Charles Schwab Letter I, ITG Letter
I, ITG Letter II, Knight Capital Letter, Deutsche Bank Letter.
\58\ See Citadel Letter II, Charles Schwab Letter II, Charles
Schwab Letter III, ConvergEx Letter II.
\59\ See Deutsche Bank Letter, Charles Schwab Letter II, Charles
Schwab Letter 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 62893.
\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.
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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
[[Page 75404]]
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 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\
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\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 62893 (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 42127, Notice of Amendment No. 3, 78 FR 62893.
\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 42127. 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. 2, 78 FR 42127; Notice of
Amendment No. 3, 78 FR 62893. See also NSCC Letter I, NSCC Letter
II.
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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 Advance
Notice and subsequent amendments were published for comment three
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.
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\72\ See NSCC Letter I.
\73\ See Notice of Amendment No. 2, 78 FR 42127; Notice of
Amendment No. 3, 78 FR 62893. See also NSCC Letter II.
\74\ DTCC Important Notice a7706, Creation of DTCC Clearing
Agency Liquidity Council and Nomination Process (Sep. 18, 2013),
http://dtcc.com/downloads/legal/imp_notices/2013/nscc/a7706.pdf.
\75\ See NSCC Letter II. See also Notice of Amendment No. 2, 78
FR 42127, Notice of Amendment No. 3, 78 FR 62893.
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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,\78\ 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.\79\ 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.\80\ 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.\81\
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\76\ See Notice of Amendment No. 2, 78 FR 42127; Notice of
Amendment No. 3, 78 FR 62893. See also NSCC Letter II.
\77\ Financial Stability Oversight Council (``FSOC'') 2012
Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf (``FSOC Designation'').
\78\ See 12 U.S.C. 5462(9).
\79\ 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.
\80\ See NSCC Letter II.
\81\ Id. See also discussion below noting that any cash deposit
is driven by the Clearing Member's own trading activity.
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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.\82\ 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.'' \83\
Moreover, the commenter believes that ``NSCC has addressed the area of
greatest [m]ember concern in removing provisions of the
[[Page 75405]]
[SLD] Proposal that collectively deal with the imposition of the
Regular [SLD].'' \84\ 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.\85\
NSCC did not submit a response to comments received after submission of
the Final SLD Proposal.
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\82\ See ITG Letter III, Fidelity Letter III.
\83\ See Fidelity Letter III.
\84\ Id.
\85\ See ITG Letter III.
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V. Discussion and Commission Findings
Although Title VIII does not specify a standard of review for an
advance notice, the purpose of Title VIII is instructive.\86\ The
stated purpose of Title VIII is to mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for and
strengthening the liquidity of systemically-important financial market
utilities.\87\
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\86\ 12 U.S.C. 5461(b).
\87\ Id. See also FSOC Designation, supra note 77.
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Section 805(a)(2) of the Clearing Supervision Act \88\ authorizes
the Commission to prescribe risk management standards for the payment,
clearing, and settlement activities of designated clearing entities and
financial institutions engaged in designated activities for which it is
the supervisory agency or the appropriate financial regulator. Section
805(b) of the Clearing Supervision Act \89\ states that the objectives
and principles for the risk management standards prescribed under
Section 805(a) shall be to:
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\88\ 12 U.S.C. 5464(a)(2).
\89\ 12 U.S.C. 5464(b).
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promote robust risk management;
promote safety and soundness;
reduce systemic risks; and
support the stability of the broader financial system.
The Commission adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act on October 22, 2012,
(``Clearing Agency Standards'').\90\ The Clearing Agency Standards
became effective on January 2, 2013, and require clearing agencies that
perform central counterparty services to establish, implement,
maintain, and enforce written policies and procedures that are
reasonably designed to meet certain minimum requirements for their
operations and risk management practices on an ongoing basis.\91\ As
such, it is appropriate for the Commission to review advance notices
against these risk management standards that the Commission promulgated
under Section 805(a) and the objectives and principles of these risk
management standards as described in Section 805(b). Commission Rule
17Ad-22(b)(3), adopted as part of the Clearing Agency Standards,
requires a central counterparty to establish, implement, maintain and
enforce written policies and procedures reasonably designed to maintain
sufficient financial resources to withstand, at a minimum, a default by
the participant family to which it has the largest exposure in extreme
but plausible market conditions.\92\
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\90\ Release No. 34-68080 (Oct. 22, 2012), 77 FR 66219 (Nov. 2,
2012).
\91\ The Clearing Agency Standards are substantially similar to
the risk management standards established by the Board of Governors
governing the operations of systemically-important financial market
utilities that are not clearing entities and financial institutions
engaged in designated activities for which the Commission or the
Commodity Futures Trading Commission is the Supervisory Agency. See
Financial Market Utilities, 77 FR 49507 (Aug. 2, 2012).
\92\ 17 CFR 240.17Ad-22(b)(3).
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After carefully considering the Final SLD Proposal and the comments
received \93\ on the SLD Proposal and NSCC responses thereto, the
Commission finds that NSCC has demonstrated that its Final SLD Proposal
is in furtherance of the objectives and principles of Title VIII and
the risk management standards prescribed thereunder by the Commission
and accordingly it is appropriate for the Commission to issue a no-
objection to the Final SLD Proposal.
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\93\ In its assessment of this advance notice of the Final SLD
Proposal, the Commission assessed whether the issues raised by the
commenters relate to the level or nature of risks presented by the
Final SLD Proposal. Comments received that relate to issues that do
not relate to the Final SLD Proposal's effect on the level or nature
of risks presented by NSCC are not considered within the context of
his Notice of No Objection to the Advance Notice under Title VIII;
rather, they are considered within an analysis of the Final SLD
Proposal's consistency with the Exchange Act and applicable rules
and regulations thereunder, which the Commission has done in the
Order Approving the 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. See supra note 3.
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The Commission recognizes that some commenters did not support
certain aspects of the SLD Proposal. However, the Commission believes
that the Final SLD Proposal eliminated most of the aspects of the SLD
Proposal which concerns were raised, and no comments convinced the
Commission that the Final SLD Proposal was not consistent with Title
VIII. The Commission believes that, overall, the increased liquidity
resources available to NSCC as a result of the Final SLD Proposal: (i)
Will improve financial safety at NSCC by increasing its ability meet
its liquidity needs; (ii) reduce systemic risks and support the
stability of the broader financial system; and (iii) accordingly is
reasonably designed to ensure NSCC maintains sufficient financial
resources to withstand, at a minimum, a default by the participant
family to which it has the largest exposure in extreme but plausible
market conditions. The Commission's analysis of the comments applicable
to the Final SLD Proposal and the Final SLD Proposal's consistency with
Title VIII of the Dodd-Frank Act and risk management standards
prescribed thereunder by the Commission 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 submitted the SLD Proposal,\94\
that the SLD Proposal did not adequately address items required by
Title VIII,\95\ and that NSCC did not demonstrate a specific need for
additional liquidity in connection with the SLD Proposal.\96\ The
Commission believes that the Final SLD Proposal is consistent with
Title VIII. NSCC made substantial revisions to the SLD Proposal
directly responsive to comments raised during the comment period, the
creation of the CALC to continue the dialogue between NSCC and Clearing
Members regarding liquidity generally, and a more robust description of
the SLD Proposal and its potential effects on the competition between
Clearing Members. The Commission notes the stated intention of the CALC
to revisit and further impose NSCC's practices with respect to
liquidity risk management as also being relevant in this respect.
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\94\ See Citadel Letter III, Charles Schwab Letter I, ITG Letter
I, ITG Letter II, Knight Capital Letter, Deutsche Bank Letter,
Fidelity Letter I.
\95\ See Citadel Letter II, Charles Schwab Letter II, Charles
Schwab Letter III, ConvergEx Letter II.
\96\ See Citadel Letter II, Citadel Letter III, SIFMA Letter II,
SIFMA Letter III, ITG Letter II, ITG Letter III, ConvergEx 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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The Commission notes that all commenters supported NSCC's objective
of maintaining sufficient financial resources to withstand a default by
a Clearing Member and acknowledged that NSCC must have sufficient
liquidity for these purposes. The Commission agrees with commenters and
with NSCC that the maintenance of sufficient liquidity resources at
NSCC is of
[[Page 75406]]
paramount importance to promote safety and soundness and support the
broader stability of the financial system. This is underscored by
NSCC's designation as a systemically-important financial market utility
for which a failure or disruption of its operations would create or
increase risk of significant credit or liquidity problems spreading
among financial institutions or markets and thereby threaten the
stability of the financial system of the U.S.\97\
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\97\ See 12 U.S.C. 5462(9).
---------------------------------------------------------------------------
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.\98\ 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.
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\98\ See NSCC Letter II.
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The Commission takes specific note of comments arguing that
implementation of the SLD Proposal could result in an increase of
systemic risk by concentrating clearing services into fewer firms if
Clearing Members opt to terminate their NSCC membership instead of
meeting a Special SLD funding obligation. The Commission has carefully
considered those comments, but does not believe a risk of increased
concentration is a significant risk under the Final SLD Proposal for
several reasons. First, since a Special SLD funding obligation is
correlated directly to the liquidity need presented to NSCC as a result
of Clearing Members' own \99\ trading activity, the Special SLD funding
obligation is not an unexpected cost for which the Clearing Member is
incapable of controlling. Second, the Special SLD funding obligation
applies only in the case where a Clearing Member presents a liquidity
need that surpasses the then-current total available liquidity
resources, based on a two-year look-back period of the Clearing
Member's trading activity. These liquidity resources include the
Clearing Fund and the Credit Facility, and historically these liquidity
resources have provided NSCC with adequate liquidity resources a
substantial portion of the time. While the Commission believes the
Final SLD Proposal is important for NSCC to ensure that it has a
mechanism to maintain adequate liquidity resources at all times, the
Commission also expects based on the representations of NSCC that a
Special SLD funding obligation will be required in only a small number
of cases and from a select few Clearing Members with trading activity
that is substantial enough to create a liquidity need above NSCC's
total liquidity resources. Finally, the Commission notes that the Final
SLD Proposal would enable a Clearing Member to avoid a Special SLD
funding obligation by either managing its own trading activity to avoid
such an obligation or using the Prefund Deposit, which would likely
avoid a Call Deposit that would enable NSCC to hold the deposited funds
for 90 days, so that the Clearing Member has options other than
termination of membership available to it to manage its potential
liquidity funding obligation.
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\99\ For these purposes, a Clearing Members' own trading
activity includes trading activity from all clients of the Clearing
Member.
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For the reasons stated above, the Commission believes that the
Final SLD Proposal is: (i) Consistent with Commission regulations and
risk management standards in Section 805(b) of the Clearing Supervision
Act because it promotes robust risk management and improves safety and
soundness at NSCC, while reducing systemic risks to the financial
system more generally and (ii) consistent with Rule 17Ad-22 (b)(3)
because it provides NSCC with a mechanism to maintain sufficient
financial resources to withstand, at a minimum, a default by the
Clearing Member to which NSCC has the largest exposure.
VI. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act,\100\ that the Commission does not object to
the proposed rule change described in the Advance Notice (File No. SR-
NSCC-2013-802) and that NSCC be and hereby is authorized to implement
the proposed rule change as of the date of this notice or the date of
the ``Order Approving Proposed Rule Change, 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-2013-02, whichever is later.
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\100\ 12 U.S.C. 5465(e)(1)(I).
By the Commission.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-29498 Filed 12-10-13; 8:45 am]
BILLING CODE 8011-01-P
