Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection to Advance Notice Filing To Enhance NSCC's Margining Methodology as Applied to Family-Issued Securities of Certain NSCC Members, 61244-61246 [2015-25700]

Download as PDF 61244 Federal Register / Vol. 80, No. 196 / Friday, October 9, 2015 / Notices This announcement of the membership of the National Science Foundation’s Office of Inspector General and National Science Board Office Senior Executive Service Performance Review Board is made in compliance with 5 U.S.C. 4314(c)(4). ADDRESSES: Comments should be addressed to Division Director, Division of Human Resource Management, National Science Foundation, Room 315, 4201 Wilson Boulevard, Arlington, VA 22230. FOR FURTHER INFORMATION CONTACT: Dr. Judith S. Sunley at the above address or (703) 292–8180. SUPPLEMENTARY INFORMATION: The membership of the National Science Board’s Senior Executive Service Performance Review Board is as follows: Ruth David, Chair, Audit and Oversight Committee, National Science Board Joanne Tornow, Head, Office of Information and Resource Management, and Chief Human Capital Officer Plus two members to be selected from the IG community. SUMMARY: Dated: October 2, 2015. Judith S. Sunley, Division Director, Division of Human Resource Management. [FR Doc. 2015–25722 Filed 10–8–15; 8:45 am] BILLING CODE 7555–01–M SECURITIES AND EXCHANGE COMMISSION [Release No. 34–76075; File No. SR–NSCC– 2015–803] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection to Advance Notice Filing To Enhance NSCC’s Margining Methodology as Applied to Family-Issued Securities of Certain NSCC Members October 5, 2015. tkelley on DSK3SPTVN1PROD with NOTICES National Securities Clearing Corporation (‘‘NSCC’’) filed on August 14, 2015 with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–NSCC–2015–803 (‘‘Advance Notice’’) pursuant to Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Payment, Clearing and Settlement Supervision Act’’) 1 and Rule 19b– 1 12 U.S.C. 5465(e)(1). The Financial Stability Oversight Council designated NSCC a systemically important financial market utility on July 18, 2012. See Financial Stability Oversight Council 2012 Annual Report, Appendix A, https:// www.treasury.gov/initiatives/fsoc/Documents/ 2012%20Annual%20Report.pdf. Therefore, NSCC is required to comply with the Payment, Clearing VerDate Sep<11>2014 17:44 Oct 08, 2015 Jkt 238001 4(n)(1)(i) 2 under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) to change its margin charge with respect to a member’s positions in securities that are issued by such member or its affiliate (i.e., ‘‘family-issued securities’’) by excluding positions in these securities, when the member is on NSCC’s Watch List,3 from its volatility margining model. The Advance Notice was published for comment in the Federal Register on September 17, 2015.4 The Commission did not receive any comments on the Advance Notice. This publication serves as notice of no objection to the Advance Notice. I. Description of the Advance Notice As described by NSCC in the Advance Notice, NSCC has proposed to enhance its margin methodology as applied to the family-issued securities of its members that are on its Watch List 5 by excluding these securities from the volatility component, or ‘‘VaR’’ charge, and then charging an amount calculated by multiplying the absolute value of the long net unsettled positions in that member’s family-issued securities by a percentage that is no less than 40%. The haircut rate to be charged will be determined based on the member’s rating on the credit risk rating matrix and the type of family-issued security submitted to NSCC. Fixed income securities that are family-issued securities will be charged a haircut rate of no less than 80% for firms that are rated 6 or 7 on the credit risk rating matrix, and no less than 40% for firms that are rated 5 on the credit risk rating matrix; and equity securities that are and Settlement Supervision Act and file advance notices with the Commission. See 12 U.S.C. 5465(e). 2 17 CFR 240.19b–4(n)(1)(i). 3 As part of its ongoing monitoring of its membership, NSCC utilizes an internal credit risk rating matrix to rate its risk exposures to its members based on a scale from 1 (the strongest) to 7 (the weakest). Members that fall within the weakest three rating categories (i.e., 5, 6, and 7) are placed on NSCC’s ‘‘Watch List’’ and, as provided under NSCC’s Rules and Procedures (‘‘Rules’’), may be subject to enhanced surveillance or additional margin charges. See Section 4 of Rule 2B and Section I(B)(1) of Procedure XV of NSCC’s Rules, available at https://dtcc.com/∼/media/Files/ Downloads/legal/rules/nscc_rules.pdf. 4 See Securities Exchange Act Release No. 75899 (September 11, 2015), 80 FR 55883 (September 17, 2015) (File No. SR–NSCC–2015–803). NSCC also filed a proposed rule change with the Commission pursuant to Section 19(b)(1) of the Exchange Act and Rule 19b–4 thereunder, seeking approval of changes to its Rules necessary to implement the Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–4, respectively. This proposed rule change was published in the Federal Register on September 2, 2015. Securities Exchange Act Release No. 75768 (August 27, 2015), 80 FR 53219 (September 2, 2015) (SR–NSCC–2015–003). 5 See Section 4 of Rule 2B and Section I(B)(1) of Procedure XV of NSCC’s Rules, supra Note 3. PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 family-issued securities will be charged a haircut rate of 100% for firms that are rated 6 or 7 on the credit risk rating matrix, and no less than 50% for firms that are rated 5 on the credit risk rating matrix. NSCC will have the authority to adjust these haircut rates from time to time within these parameters as described in Procedure XV of NSCC’s Rules without filing a proposed rule change with the Commission pursuant to Section 19(b)(1) of the Exchange Act,6 and the rules thereunder, or an advance notice with the Commission pursuant to Section 806(e)(1) of the Payment, Clearing and Settlement Supervision Act,7 and the rules thereunder. As described by NSCC in the Advance Notice, NSCC, as a central counterparty (‘‘CCP’’), occupies an important role in the securities settlement system by interposing itself between counterparties to financial transactions and thereby reducing the risk faced by participants and contributing to global financial stability. The effectiveness of a CCP’s risk controls and the adequacy of its financial resources are critical to achieving these risk-reducing goals. In that context, NSCC continuously reviews its margining methodology in order to ensure the reliability of its margining in achieving the desired coverage. In order to be most effective, NSCC must take into consideration the risk characteristics specific to certain securities when margining those securities. Among the various risks that NSCC considers when evaluating the effectiveness of its margining methodology are its counterparty risks and identification and mitigation of ‘‘wrong-way’’ risk, particularly specific wrong-way risk, defined as the risk that an exposure to a counterparty is highly likely to increase when the creditworthiness of that counterparty deteriorates.8 NSCC has identified an exposure to wrong-way risk when it acts as a CCP to a member with respect to positions in securities that are issued by that member or that member’s affiliate. These positions are referred to as ‘‘family-issued securities.’’ In the event that a member with unsettled long positions in family-issued securities defaults, NSCC would close out those positions following a likely drop in the 6 15 U.S.C. 78s(b)(1). U.S.C. 5465(e)(1). 8 See Principles for financial market infrastructures, issued by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions 47 n.65 (April 2012), available at https://www.bis.org/publ/cpss101a.pdf. 7 12 E:\FR\FM\09OCN1.SGM 09OCN1 tkelley on DSK3SPTVN1PROD with NOTICES Federal Register / Vol. 80, No. 196 / Friday, October 9, 2015 / Notices credit-worthiness of the issuer, possibly resulting in a loss to NSCC. Therefore, the overall impact of NSCC’s proposal, as described above, on risks presented by NSCC will be to reduce NSCC’s exposure to this type of wrong-way risk by enhancing its margin methodology as applied to the familyissued securities of its members that are on its Watch List, and present a heightened credit risk to the clearing agency or have demonstrated higher risk related to their ability to meet settlement. NSCC believes a reduction in its exposures to wrong-way risk through a margining methodology that more effectively captures the risk characteristics of these positions will contribute to the goal of maintaining financial stability in the event of a member default and reduce systemic risk overall. Because NSCC members that are on its Watch List present a heightened credit risk to the clearing agency or have demonstrated higher risk related to their ability to meet settlement, NSCC believes that this charge will more effectively capture the risk characteristics of these positions and can help mitigate NSCC’s exposure to wrong-way risk. NSCC stated in the Advance Notice that it will continue to evaluate its exposures to wrong-way risk, specifically wrong-way risk presented by family-issued securities, including by reviewing the impact of expanding the application of the proposed margining methodology to the family-issued securities of those members that are not on the Watch List. NSCC is proposing to apply the enhanced margining methodology to the family-issued securities of members that are on the Watch List at this time because, as stated above, these members present a heightened credit risk to the clearing agency or have demonstrated higher risk related to their ability to meet settlement. As such, there is a clear and more urgent need to address NSCC’s exposure to wrong-way risk presented by these firms’ family-issued securities. However, any future change to the margining methodology as applied to the family-issued securities of members that are not on the Watch List would be subject to a separate proposed rule change pursuant to Section 19(b)(1) of the Exchange Act,9 and the rules thereunder and an advance notice pursuant to Section 806(e)(1) of the Payment, Clearing and Settlement Supervision Act,10 and the rules thereunder. 9 15 U.S.C. 78s(b)(1). U.S.C. 5465(e)(1). 10 12 VerDate Sep<11>2014 17:44 Oct 08, 2015 Jkt 238001 II. Discussion and Commission Findings Although the Payment, Clearing and Settlement Supervision Act does not specify a standard of review for an advance notice, the Commission believes that the stated purpose of the Payment, Clearing and Settlement Supervision Act is instructive.11 The stated purpose of the Payment, Clearing and Settlement Supervision Act is to mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for systemically important financial market utilities and strengthening the liquidity of systemically important financial market utilities.12 Section 805(a)(2) of the Payment, Clearing and Settlement Supervision Act 13 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 Payment, Clearing and Settlement Supervision Act 14 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 has adopted risk management standards under Section 805(a)(2) of the Payment, Clearing and Settlement Supervision Act (‘‘Clearing Agency Standards’’) and the Exchange Act.15 The Clearing Agency Standards became effective on January 2, 2013, and require registered clearing agencies 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.16 As such, it is appropriate for the 11 See 12 U.S.C. 5461(b). 12 Id. 13 12 U.S.C. 5464(a)(2). U.S.C. 5464(b). 15 17 CFR 240.17Ad–22. 16 The Clearing Agency Standards are substantially similar to the risk management standards established by the Board of Governors of the Federal Reserve System governing the operations of designated 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 45907 (August 2, 2012). 14 12 PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 61245 Commission to review advance notices against these Clearing Agency Standards, and the objectives and principles of these risk management standards as described in Section 805(b) of the Payment, Clearing and Settlement Supervision Act.17 The Commission believes the proposal in the Advance Notice is consistent with the objectives and principles described in Section 805(b) of the Payment, Clearing and Settlement Supervision Act,18 and the Clearing Agency Standards, in particular, Rule 17Ad–22(b)(1) 19 and Rule 17Ad– 22(b)(2) 20 under the Exchange Act, as described in detail below. Consistency with Section 805(b) of the Act. The objectives and principles of Section 805(b) of the Payment, Clearing and Settlement Supervision Act are to promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system.21 By enhancing the margin methodology applied to family-issued securities of members that are on NSCC’s Watch List, the proposal will assist NSCC in collecting margin that more accurately reflects NSCC’s exposure to a clearing member that clears family-issued securities and will assist NSCC in its continuous efforts to improve the reliability and effectiveness of its riskbased margining methodology by taking into account specific wrong-way risk. As such, the proposal will help NSCC, as a CCP, promote robust risk management, and thus contributing to the goal of maintaining financial stability in the event of a member default. Consistency with Rule 17Ad–22(b)(1). Rule 17Ad–22(b)(1) 22 under the Exchange Act requires a CCP, such as NSCC, to ‘‘establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . limit its exposures to potential losses from defaults by its participants under normal market conditions . . . .’’ NSCC faces specific wrong-way risk in all circumstances where a member submits family-issued securities to NSCC for clearance, including under normal market conditions. By enhancing the margin methodology applied to family-issued securities of NSCC’s members that are on its Watch List, the proposal will limit NSCC’s exposure to potential losses from the 17 12 U.S.C. 5464(b). 18 Id. 19 17 CFR 240.17Ad–22(b)(1). CFR 240.17Ad–22(b)(2). 21 12 U.S.C. 5464(b). 22 17 CFR 240.17Ad–22(b)(1). 20 17 E:\FR\FM\09OCN1.SGM 09OCN1 61246 Federal Register / Vol. 80, No. 196 / Friday, October 9, 2015 / Notices default of a member on NSCC’s Watch List with family-issued securities under normal market conditions. As such, the Commission believes that the proposal is consistent with Rule 17Ad–22(b)(1). Consistency with Rule 17Ad–22(b)(2). Rule 17Ad–22(b)(2) 23 under the Exchange Act requires a CCP, such as NSCC, to ‘‘establish, implement, maintain and enforce written policies and procedures reasonably designed to . . . [u]se margin requirements to limit its credit exposures to participants under normal market conditions and use risk-based models and parameters to set margin requirements . . . .’’ By enhancing the margin methodology applied to family-issued securities of NSCC’s members that are on its Watch List, the proposal will better account for and cover NSCC’s credit exposure to less creditworthy members. In addition, by taking into account specific wrongway risk arising from family-issued securities submitted to NSCC, the proposal is consistent with using risk based models and parameters to set margin requirements. As such, the Commission believes that the proposal is consistent with Rule 17Ad–22(b)(2). III. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(I) of the Payment, Clearing and Settlement Supervision Act,24 that the Commission does not object to Advance Notice and that NSCC is authorized to implement the proposal. By the Commission. Robert W. Errett, Deputy Secretary. [FR Doc. 2015–25700 Filed 10–8–15; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–76081; File No. 265–29] Equity Market Structure Advisory Committee Securities and Exchange Commission. ACTION: Notice of meeting. AGENCY: The Securities and Exchange Commission Equity Market Structure Advisory Committee is providing notice that it will hold a public meeting on Tuesday, October 27, 2015, in MultiPurpose Room LL–006 at the Commission’s headquarters, 100 F Street NE., Washington, DC The meeting will begin at 9:30 a.m. (EDT) and will tkelley on DSK3SPTVN1PROD with NOTICES SUMMARY: 23 17 24 12 CFR 240.17Ad–22(b)(2). U.S.C. 5465(e)(1)(I). VerDate Sep<11>2014 17:44 Oct 08, 2015 Jkt 238001 be open to the public, except for a period of approximately 60 minutes when the Committee will meet in an administrative work session during lunch. The public portions of the meeting will be webcast on the Commission’s Web site at www.sec.gov. Persons needing special accommodations to take part because of a disability should notify the contact person listed below. The public is invited to submit written statements to the Committee. The meeting will focus on Rule 610 of SEC Regulation NMS and the regulatory structure of trading venues. The public meeting will be held on Tuesday, October 27, 2015. Written statements should be received on or before October 22, 2015. ADDRESSES: The meeting will be held at the Commission’s headquarters, 100 F Street NE., Washington, DC. Written statements may be submitted by any of the following methods: Commission, 100 F Street NE., Washington, DC 20549–7010. SUPPLEMENTARY INFORMATION: In accordance with Section 10(a) of the Federal Advisory Committee Act, 5 U.S.C.–App. 1, and the regulations thereunder, Stephen Luparello, Designated Federal Officer of the Committee, has ordered publication of this notice. Dated: October 6, 2015. Brent J. Fields, Committee Management Officer. [FR Doc. 2015–25759 Filed 10–8–15; 8:45 am] BILLING CODE 8011–01–P DATES: Electronic Statements • Use the Commission’s Internet submission form (https://www.sec.gov/ rules/other.shtml); or • Send an email message to rulecomments@sec.gov. Please include File Number 265–29 on the subject line; or Paper Statements • Send paper statements in triplicate to Brent J. Fields, Federal Advisory Committee Management Officer, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File No. 265–29. This file number should be included on the subject line if email is used. To help us process and review your statement more efficiently, please use only one method. The Commission will post all statements on the Commission’s Internet Web site at SEC Web site at (https://www.sec.gov/ comments/265–29/265–29.shtml). Statements also will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Room 1580, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All statements received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: Arisa Tinaves Kettig, Special Counsel, at (202) 551–5676, Division of Trading and Markets, Securities and Exchange PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–76078: File No. SR–FINRA– 2015–020] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change, as Amended by Amendment No. 1, To Expand FINRA’s Alternative Trading System Transparency Initiative by Publishing OTC Equity Volume Executed Outside ATSs October 5, 2015. I. Introduction On June 23, 2015, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) 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 amend Rule 6110, Trading Otherwise than on an Exchange and 6610 regarding the OTC Reporting Facility to expand FINRA’s alternative trading system (‘‘ATS’’) transparency initiative. The changes would provide for publication of the remaining equity volume executed overthe-counter (‘‘OTC’’) by FINRA members, including activity in non-ATS electronic trading systems and internalized trades. The proposed rule change was published for comment in the Federal Register on July 9, 2015.3 The Commission received two comments on the proposal.4 FINRA 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 75356 (July 2, 2015), 80 FR 39463 (‘‘Notice’’). The Notice contains a detailed description of the proposal. 4 See letter from Kerry Baker Relf, Head of Content Acquisition and Rights Management, Thomson Reuters to Brent J. Fields, Secretary, Commission, dated July 20, 2015, (‘‘Thomson Reuters Letter’’) and letter from Theodore R. Lazo, Managing Director and Associate General Counsel, 2 17 E:\FR\FM\09OCN1.SGM 09OCN1

Agencies

[Federal Register Volume 80, Number 196 (Friday, October 9, 2015)]
[Notices]
[Pages 61244-61246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25700]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76075; File No. SR-NSCC-2015-803]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of No Objection to Advance Notice Filing To Enhance 
NSCC's Margining Methodology as Applied to Family-Issued Securities of 
Certain NSCC Members

October 5, 2015.
    National Securities Clearing Corporation (``NSCC'') filed on August 
14, 2015 with the Securities and Exchange Commission (``Commission'') 
advance notice SR-NSCC-2015-803 (``Advance Notice'') pursuant to 
Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision 
Act of 2010 (``Payment, Clearing and Settlement Supervision Act'') \1\ 
and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 
(``Exchange Act'') to change its margin charge with respect to a 
member's positions in securities that are issued by such member or its 
affiliate (i.e., ``family-issued securities'') by excluding positions 
in these securities, when the member is on NSCC's Watch List,\3\ from 
its volatility margining model. The Advance Notice was published for 
comment in the Federal Register on September 17, 2015.\4\ The 
Commission did not receive any comments on the Advance Notice. This 
publication serves as notice of no objection to the Advance Notice.
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight 
Council designated NSCC a systemically important financial market 
utility on July 18, 2012. See Financial Stability Oversight Council 
2012 Annual Report, Appendix A, https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, NSCC is 
required to comply with the Payment, Clearing and Settlement 
Supervision Act and file advance notices with the Commission. See 12 
U.S.C. 5465(e).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ As part of its ongoing monitoring of its membership, NSCC 
utilizes an internal credit risk rating matrix to rate its risk 
exposures to its members based on a scale from 1 (the strongest) to 
7 (the weakest). Members that fall within the weakest three rating 
categories (i.e., 5, 6, and 7) are placed on NSCC's ``Watch List'' 
and, as provided under NSCC's Rules and Procedures (``Rules''), may 
be subject to enhanced surveillance or additional margin charges. 
See Section 4 of Rule 2B and Section I(B)(1) of Procedure XV of 
NSCC's Rules, available at https://dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
    \4\ See Securities Exchange Act Release No. 75899 (September 11, 
2015), 80 FR 55883 (September 17, 2015) (File No. SR-NSCC-2015-803). 
NSCC also filed a proposed rule change with the Commission pursuant 
to Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder, 
seeking approval of changes to its Rules necessary to implement the 
Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, 
respectively. This proposed rule change was published in the Federal 
Register on September 2, 2015. Securities Exchange Act Release No. 
75768 (August 27, 2015), 80 FR 53219 (September 2, 2015) (SR-NSCC-
2015-003).
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I. Description of the Advance Notice

    As described by NSCC in the Advance Notice, NSCC has proposed to 
enhance its margin methodology as applied to the family-issued 
securities of its members that are on its Watch List \5\ by excluding 
these securities from the volatility component, or ``VaR'' charge, and 
then charging an amount calculated by multiplying the absolute value of 
the long net unsettled positions in that member's family-issued 
securities by a percentage that is no less than 40%. The haircut rate 
to be charged will be determined based on the member's rating on the 
credit risk rating matrix and the type of family-issued security 
submitted to NSCC. Fixed income securities that are family-issued 
securities will be charged a haircut rate of no less than 80% for firms 
that are rated 6 or 7 on the credit risk rating matrix, and no less 
than 40% for firms that are rated 5 on the credit risk rating matrix; 
and equity securities that are family-issued securities will be charged 
a haircut rate of 100% for firms that are rated 6 or 7 on the credit 
risk rating matrix, and no less than 50% for firms that are rated 5 on 
the credit risk rating matrix. NSCC will have the authority to adjust 
these haircut rates from time to time within these parameters as 
described in Procedure XV of NSCC's Rules without filing a proposed 
rule change with the Commission pursuant to Section 19(b)(1) of the 
Exchange Act,\6\ and the rules thereunder, or an advance notice with 
the Commission pursuant to Section 806(e)(1) of the Payment, Clearing 
and Settlement Supervision Act,\7\ and the rules thereunder.
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    \5\ See Section 4 of Rule 2B and Section I(B)(1) of Procedure XV 
of NSCC's Rules, supra Note 3.
    \6\ 15 U.S.C. 78s(b)(1).
    \7\ 12 U.S.C. 5465(e)(1).
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    As described by NSCC in the Advance Notice, NSCC, as a central 
counterparty (``CCP''), occupies an important role in the securities 
settlement system by interposing itself between counterparties to 
financial transactions and thereby reducing the risk faced by 
participants and contributing to global financial stability. The 
effectiveness of a CCP's risk controls and the adequacy of its 
financial resources are critical to achieving these risk-reducing 
goals. In that context, NSCC continuously reviews its margining 
methodology in order to ensure the reliability of its margining in 
achieving the desired coverage. In order to be most effective, NSCC 
must take into consideration the risk characteristics specific to 
certain securities when margining those securities.
    Among the various risks that NSCC considers when evaluating the 
effectiveness of its margining methodology are its counterparty risks 
and identification and mitigation of ``wrong-way'' risk, particularly 
specific wrong-way risk, defined as the risk that an exposure to a 
counterparty is highly likely to increase when the creditworthiness of 
that counterparty deteriorates.\8\ NSCC has identified an exposure to 
wrong-way risk when it acts as a CCP to a member with respect to 
positions in securities that are issued by that member or that member's 
affiliate. These positions are referred to as ``family-issued 
securities.'' In the event that a member with unsettled long positions 
in family-issued securities defaults, NSCC would close out those 
positions following a likely drop in the

[[Page 61245]]

credit-worthiness of the issuer, possibly resulting in a loss to NSCC.
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    \8\ See Principles for financial market infrastructures, issued 
by the Committee on Payment and Settlement Systems and the Technical 
Committee of the International Organization of Securities 
Commissions 47 n.65 (April 2012), available at https://www.bis.org/publ/cpss101a.pdf.
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    Therefore, the overall impact of NSCC's proposal, as described 
above, on risks presented by NSCC will be to reduce NSCC's exposure to 
this type of wrong-way risk by enhancing its margin methodology as 
applied to the family-issued securities of its members that are on its 
Watch List, and present a heightened credit risk to the clearing agency 
or have demonstrated higher risk related to their ability to meet 
settlement. NSCC believes a reduction in its exposures to wrong-way 
risk through a margining methodology that more effectively captures the 
risk characteristics of these positions will contribute to the goal of 
maintaining financial stability in the event of a member default and 
reduce systemic risk overall. Because NSCC members that are on its 
Watch List present a heightened credit risk to the clearing agency or 
have demonstrated higher risk related to their ability to meet 
settlement, NSCC believes that this charge will more effectively 
capture the risk characteristics of these positions and can help 
mitigate NSCC's exposure to wrong-way risk.
    NSCC stated in the Advance Notice that it will continue to evaluate 
its exposures to wrong-way risk, specifically wrong-way risk presented 
by family-issued securities, including by reviewing the impact of 
expanding the application of the proposed margining methodology to the 
family-issued securities of those members that are not on the Watch 
List. NSCC is proposing to apply the enhanced margining methodology to 
the family-issued securities of members that are on the Watch List at 
this time because, as stated above, these members present a heightened 
credit risk to the clearing agency or have demonstrated higher risk 
related to their ability to meet settlement. As such, there is a clear 
and more urgent need to address NSCC's exposure to wrong-way risk 
presented by these firms' family-issued securities. However, any future 
change to the margining methodology as applied to the family-issued 
securities of members that are not on the Watch List would be subject 
to a separate proposed rule change pursuant to Section 19(b)(1) of the 
Exchange Act,\9\ and the rules thereunder and an advance notice 
pursuant to Section 806(e)(1) of the Payment, Clearing and Settlement 
Supervision Act,\10\ and the rules thereunder.
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    \9\ 15 U.S.C. 78s(b)(1).
    \10\ 12 U.S.C. 5465(e)(1).
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II. Discussion and Commission Findings

    Although the Payment, Clearing and Settlement Supervision Act does 
not specify a standard of review for an advance notice, the Commission 
believes that the stated purpose of the Payment, Clearing and 
Settlement Supervision Act is instructive.\11\ The stated purpose of 
the Payment, Clearing and Settlement Supervision Act is to mitigate 
systemic risk in the financial system and promote financial stability 
by, among other things, promoting uniform risk management standards for 
systemically important financial market utilities and strengthening the 
liquidity of systemically important financial market utilities.\12\
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    \11\ See 12 U.S.C. 5461(b).
    \12\ Id.
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    Section 805(a)(2) of the Payment, Clearing and Settlement 
Supervision Act \13\ 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 Payment, 
Clearing and Settlement Supervision Act \14\ states that the objectives 
and principles for the risk management standards prescribed under 
Section 805(a) shall be to:
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    \13\ 12 U.S.C. 5464(a)(2).
    \14\ 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 has adopted risk management standards under Section 
805(a)(2) of the Payment, Clearing and Settlement Supervision Act 
(``Clearing Agency Standards'') and the Exchange Act.\15\ The Clearing 
Agency Standards became effective on January 2, 2013, and require 
registered clearing agencies 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.\16\ As such, it is 
appropriate for the Commission to review advance notices against these 
Clearing Agency Standards, and the objectives and principles of these 
risk management standards as described in Section 805(b) of the 
Payment, Clearing and Settlement Supervision Act.\17\
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    \15\ 17 CFR 240.17Ad-22.
    \16\ The Clearing Agency Standards are substantially similar to 
the risk management standards established by the Board of Governors 
of the Federal Reserve System governing the operations of designated 
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 45907 
(August 2, 2012).
    \17\ 12 U.S.C. 5464(b).
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    The Commission believes the proposal in the Advance Notice is 
consistent with the objectives and principles described in Section 
805(b) of the Payment, Clearing and Settlement Supervision Act,\18\ and 
the Clearing Agency Standards, in particular, Rule 17Ad-22(b)(1) \19\ 
and Rule 17Ad-22(b)(2) \20\ under the Exchange Act, as described in 
detail below.
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    \18\ Id.
    \19\ 17 CFR 240.17Ad-22(b)(1).
    \20\ 17 CFR 240.17Ad-22(b)(2).
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    Consistency with Section 805(b) of the Act. The objectives and 
principles of Section 805(b) of the Payment, Clearing and Settlement 
Supervision Act are to promote robust risk management, promote safety 
and soundness, reduce systemic risks, and support the stability of the 
broader financial system.\21\ By enhancing the margin methodology 
applied to family-issued securities of members that are on NSCC's Watch 
List, the proposal will assist NSCC in collecting margin that more 
accurately reflects NSCC's exposure to a clearing member that clears 
family-issued securities and will assist NSCC in its continuous efforts 
to improve the reliability and effectiveness of its risk-based 
margining methodology by taking into account specific wrong-way risk. 
As such, the proposal will help NSCC, as a CCP, promote robust risk 
management, and thus contributing to the goal of maintaining financial 
stability in the event of a member default.
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    \21\ 12 U.S.C. 5464(b).
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    Consistency with Rule 17Ad-22(b)(1). Rule 17Ad-22(b)(1) \22\ under 
the Exchange Act requires a CCP, such as NSCC, to ``establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to . . . limit its exposures to potential losses 
from defaults by its participants under normal market conditions . . . 
.'' NSCC faces specific wrong-way risk in all circumstances where a 
member submits family-issued securities to NSCC for clearance, 
including under normal market conditions. By enhancing the margin 
methodology applied to family-issued securities of NSCC's members that 
are on its Watch List, the proposal will limit NSCC's exposure to 
potential losses from the

[[Page 61246]]

default of a member on NSCC's Watch List with family-issued securities 
under normal market conditions. As such, the Commission believes that 
the proposal is consistent with Rule 17Ad-22(b)(1).
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    \22\ 17 CFR 240.17Ad-22(b)(1).
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    Consistency with Rule 17Ad-22(b)(2). Rule 17Ad-22(b)(2) \23\ under 
the Exchange Act requires a CCP, such as NSCC, to ``establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to . . . [u]se margin requirements to limit its 
credit exposures to participants under normal market conditions and use 
risk-based models and parameters to set margin requirements . . . .'' 
By enhancing the margin methodology applied to family-issued securities 
of NSCC's members that are on its Watch List, the proposal will better 
account for and cover NSCC's credit exposure to less creditworthy 
members. In addition, by taking into account specific wrong-way risk 
arising from family-issued securities submitted to NSCC, the proposal 
is consistent with using risk based models and parameters to set margin 
requirements. As such, the Commission believes that the proposal is 
consistent with Rule 17Ad-22(b)(2).
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    \23\ 17 CFR 240.17Ad-22(b)(2).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Payment, Clearing and Settlement Supervision Act,\24\ that the 
Commission does not object to Advance Notice and that NSCC is 
authorized to implement the proposal.
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    \24\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-25700 Filed 10-8-15; 8:45 am]
BILLING CODE 8011-01-P
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