Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change to Enhance NSCC's Margining Methodology as Applied to Family-Issued Securities of Certain NSCC Members, 61256-61258 [2015-25702]
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Federal Register / Vol. 80, No. 196 / Friday, October 9, 2015 / Notices
draw additional volume to the
Exchange. As stated above, the
Exchange notes that it operates in a
highly competitive market in which
market participants can readily direct
order flow to competing venues if the
deem fee structures to be unreasonable
or excessive. The proposed changes are
generally intended to enhance the
rebates for liquidity added to the
Exchange, which is intended to draw
additional liquidity to the Exchange.
The Exchange does not believe the
proposed tiers would burden
intramarket competition as they would
apply to all Members uniformly.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
Members or other interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 12 and paragraph (f) of Rule
19b–4 thereunder.13 At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BATS–2015–82 on the subject line.
tkelley on DSK3SPTVN1PROD with NOTICES
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
12 15
13 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
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17:44 Oct 08, 2015
All submissions should refer to File
Number SR–BATS–2015–82. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–BATS–
2015–82, and should be submitted on or
before October 30, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Robert W. Errett,
Deputy Secretary.
I. Description of the Proposed Rule
Change
The following is a description of the
proposed rule change, as provided by
NSCC:
The proposed rule change consists of
amendments to NSCC’s Rules in order
to enhance NSCC’s margining
methodology as applied to family-issued
securities of NSCC Members 5 that are
placed on NSCC’s ‘‘Watch List’’, i.e.,
those Members who present a
heightened credit risk to NSCC or have
demonstrated higher risk related to their
ability to meet settlement, as more fully
described below.
Background
As a central counterparty, NSCC
occupies an important role in the
securities settlement system by
interposing itself between
counterparties to financial transactions
and thereby reducing the risk faced by
participants and contributing to global
[FR Doc. 2015–25697 Filed 10–8–15; 8:45 am]
1 15
BILLING CODE 8011–01–P
[Release No. 34–76077; File No. SR–NSCC–
2015–003]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Order Approving
Proposed Rule Change to Enhance
NSCC’s Margining Methodology as
Applied to Family-Issued Securities of
Certain NSCC Members
October 5, 2015.
On August 14, 2015, National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
PO 00000
CFR 200.30–3(a)(12).
Frm 00102
Fmt 4703
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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. 75768
(August 27, 2015), 80 FR 53219 (September 2, 2015)
(SR–NSCC–2015–003). NSCC also filed an advance
notice with the Commission seeking approval of
changes to its Rules necessary to implement the
proposed rule change. This advance notice was
published in the Federal Register on September 17,
2015. Securities Exchange Act Release No. 75899
(September 11, 2015), 80 FR 55883 (September 17,
2015) (File No. SR–NSCC–2015–803).
5 Terms not defined herein are defined in the
Rules, available at https://dtcc.com/∼/media/Files/
Downloads/legal/rules/nscc_rules.pdf.
2 17
SECURITIES AND EXCHANGE
COMMISSION
14 17
Jkt 238001
proposed rule change SR–NSCC–2015–
003 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
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 proposed rule
change was published for comment in
the Federal Register on September 2,
2015.4 The Commission did not receive
comment letters regarding the proposed
change. For the reasons discussed
below, the Commission is granting
approval of the proposed rule change.
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tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 80, No. 196 / Friday, October 9, 2015 / Notices
financial stability. The effectiveness of a
central counterparty’s risk controls and
the adequacy of its financial resources
are critical to achieving these riskreducing 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.6 NSCC has identified an
exposure to wrong-way risk when it acts
as central counterparty 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 familyissued securities defaults, NSCC would
close out those positions following a
likely drop in the credit-worthiness of
the issuer, possibly resulting in a loss to
NSCC.
NSCC has proposed to address its
exposure to this type of wrong-way risk
in two steps. First, NSCC has proposed
in this filing to enhance its margin
methodology as applied to the familyissued securities of its Members that are
on its Watch List 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
6 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.
VerDate Sep<11>2014
17:44 Oct 08, 2015
Jkt 238001
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 Act,7 and the
rules thereunder, or an advance notice
with the Commission pursuant to
Section 806(e)(1) of the Clearing
Supervision Act,8 and the rules
thereunder.
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.
Second, NSCC 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 has proposed 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 Act,9 and the rules thereunder, and
an advance notice pursuant to Section
806(e)(1) of the Clearing Supervision
Act,10 and the rules thereunder.
Implementation
The effective date of the proposed
rule change will be announced via a
NSCC Important Notice. NSCC expects
to run these changes in a test
environment for a three month parallel
period prior to implementation. Details
and dates regarding this test will be
communicated to Members through an
NSCC Important Notice. As stated
above, NSCC will conduct additional
analysis of its exposure to wrong-way
risk, and, following implementation of
this proposed rule change, will engage
in outreach to its membership when
evaluating whether to expand the
application of the proposed enhanced
margining methodology to Members not
on its Watch List.
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 11
directs the Commission to approve a
proposed rule change of a selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Act and
rules and regulations thereunder
applicable to such organization. The
Commission believes the proposal is
consistent with Section 17A(b)(3)(F) of
the Act,12 and Rule 17Ad–22(b)(1) 13
and Rule 17Ad–22(b)(2) 14 under the
Act, as described in detail below.
Consistency with Section 17A(b)(3)(F)
of the Act. Section 17A(b)(3)(F) of the
Act requires, among other things, that
the rules of a clearing agency be
designed to promote the prompt and
accurate clearance and settlement of
securities transactions, as well as, in
general, protect investors and the public
interest.15 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 wrongway risk. As such, the proposal will
help NSCC, as a central counterparty,
promote robust risk management, and
thus promoting the prompt and accurate
clearance and settlement of securities
transactions, as well as, in general,
protecting investors and the public
interest.
Consistency with Rule 17Ad–22(b)(1).
Rule 17Ad–22(b)(1) 16 under the Act
requires a CCP, such as NSCC, to
11 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
13 17 CFR 240.17Ad–22(b)(1).
14 17 CFR 240.17Ad–22(b)(2).
15 15 U.S.C. 78q–1(b)(3)(F).
16 17 CFR 240.17Ad–22(b)(1).
12 15
7 15
U.S.C. 78s(b)(1).
U.S.C. 5465(e)(1).
9 15 U.S.C. 78s(b)(1).
10 12 U.S.C. 5465(e)(1).
8 12
PO 00000
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Federal Register / Vol. 80, No. 196 / Friday, October 9, 2015 / Notices
‘‘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 familyissued securities of NSCC’s members
that are on its Watch List, the proposal
will limit NSCC’s exposure to potential
losses from the 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) 17 under the 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 familyissued 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).
IV. Conclusion
tkelley on DSK3SPTVN1PROD with NOTICES
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the
Act 18 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that
proposed rule change SR–NSCC–2015–
003 be, and hereby is, APPROVED.19
17 17
CFR 240.17Ad–22(b)(2).
U.S.C. 78q–1.
19 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
18 15
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17:44 Oct 08, 2015
Jkt 238001
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015–25702 Filed 10–8–15; 8:45 a.m.]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–76072; File No. SR–NYSE–
2015–43]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Amending Its
Price List To Change the Monthly Fees
for the Use of Certain Ports
October 5, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 23, 2015, New York Stock
Exchange LLC (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend its
Price List to change the monthly fees for
the use of certain ports. The Exchange
proposes to implement the fee change
effective October 1, 2015. The text of the
proposed rule change is available on the
Exchange’s Web site at www.nyse.com,
at the principal office of the Exchange,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend its
Price List to change the monthly fees for
the use of certain ports.3 The Exchange
proposes to implement the fee changes
on October 1, 2015.
The Exchange currently makes ports
available that provide connectivity to
the Exchange’s trading systems (i.e.,
ports for entry of orders and/or quotes
(‘‘order/quote entry ports’’)) and charges
$200 per port per month for users of 1–
5 ports, and $500 per port per month for
users of 6 or more ports. The Exchange
also currently makes ports available for
drop copies and charges $500 per port
per month.4
3 The Exchange has a Common Customer Gateway
(‘‘CCG’’) that accesses the equity trading systems
that it shares with its affiliates, NYSE MKT LLC
(‘‘NYSE MKT’’) and NYSE Arca, Inc. (‘‘NYSE
Arca’’), and all ports connect to the CCG. See, e.g.,
Securities Exchange Act Release No. 64542 (May
25, 2011), 76 FR 31659 (June 1, 2011) (SR–NYSE–
2011–13). All NYSE member organizations are also
NYSE MKT member organizations and, accordingly,
a member organization utilizes its ports for activity
on both NYSE and/or NYSE MKT and is charged
port fees based on the total number of ports
connected to the CCG, whether the ports are used
to quote and trade on NYSE, NYSE MKT, and/or
both, because those trading systems are integrated.
See Supplementary Material .10 to Rule 2. The
NYSE Arca trading platform is not integrated in the
same manner. Therefore, it does not share its ports
with NYSE or NYSE MKT.
4 Only one fee per drop copy port applies, even
if receiving drop copies from multiple order/quote
entry ports. In addition, the Price List provides that
(i) users of the Exchange’s Risk Management
Gateway service (‘‘RMG’’) are not charged for order/
quote entry ports if such ports are designated as
being used for RMG purposes, and (ii) Designated
Market Makers (‘‘DMMs’’) are not charged for order/
quote entry ports that connect to the Exchange via
the DMM Gateway. See Securities Exchange Act
Release No. 68229 (November 14, 2012), 77 FR
69688 (November 20, 2012) (SR–NYSE–2012–60).
Two methods are available to DMMs to connect to
the Exchange: DMM Gateway and CCG. Only DMMs
may connect to the DMM Gateway and only when
acting in their capacity as a DMM. DMMs are
required to use the DMM Gateway for certain DMMspecific functions that relate to the DMM’s role on
the Exchange and the obligations attendant
therewith, which are not applicable to other market
participants on the Exchange. By contrast, nonDMMs as well as DMMs may use the CCG. Use of
the CCG by a DMM is optional, and a DMM that
connects to the Exchange via CCG can use the
relevant order/quote entry port for orders and
quotes both in its capacity as a DMM and for orders
and quotes in other securities. Because DMMs are
required to utilize DMM Gateway, but not CCG, to
fulfill their functions as DMMs, DMMs are not
charged for order/quote entry ports that connect to
the Exchange via the DMM Gateway. However,
DMMs, like other market participants, are charged
for order/entry ports that connect to the Exchange
via the CCG.
E:\FR\FM\09OCN1.SGM
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]]>Agencies
[Federal Register Volume 80, Number 196 (Friday, October 9, 2015)]
[Notices]
[Pages 61256-61258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25702]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76077; File No. SR-NSCC-2015-003]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change to Enhance NSCC's
Margining Methodology as Applied to Family-Issued Securities of Certain
NSCC Members
October 5, 2015.
On August 14, 2015, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2015-003 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder,\2\ 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 proposed rule change
was published for comment in the Federal Register on September 2,
2015.\4\ The Commission did not receive comment letters regarding the
proposed change. For the reasons discussed below, the Commission is
granting approval of the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\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. 75768 (August 27,
2015), 80 FR 53219 (September 2, 2015) (SR-NSCC-2015-003). NSCC also
filed an advance notice with the Commission seeking approval of
changes to its Rules necessary to implement the proposed rule
change. This advance notice was published in the Federal Register on
September 17, 2015. Securities Exchange Act Release No. 75899
(September 11, 2015), 80 FR 55883 (September 17, 2015) (File No. SR-
NSCC-2015-803).
---------------------------------------------------------------------------
I. Description of the Proposed Rule Change
The following is a description of the proposed rule change, as
provided by NSCC:
The proposed rule change consists of amendments to NSCC's Rules in
order to enhance NSCC's margining methodology as applied to family-
issued securities of NSCC Members \5\ that are placed on NSCC's ``Watch
List'', i.e., those Members who present a heightened credit risk to
NSCC or have demonstrated higher risk related to their ability to meet
settlement, as more fully described below.
---------------------------------------------------------------------------
\5\ Terms not defined herein are defined in the Rules, available
at https://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.
---------------------------------------------------------------------------
Background
As a central counterparty, NSCC occupies an important role in the
securities settlement system by interposing itself between
counterparties to financial transactions and thereby reducing the risk
faced by participants and contributing to global
[[Page 61257]]
financial stability. The effectiveness of a central counterparty'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.\6\ NSCC has identified an exposure to
wrong-way risk when it acts as central counterparty 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 credit-worthiness of the
issuer, possibly resulting in a loss to NSCC.
---------------------------------------------------------------------------
\6\ 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.
---------------------------------------------------------------------------
NSCC has proposed to address its exposure to this type of wrong-way
risk in two steps. First, NSCC has proposed in this filing to enhance
its margin methodology as applied to the family-issued securities of
its Members that are on its Watch List 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 Act,\7\ and the
rules thereunder, or an advance notice with the Commission pursuant to
Section 806(e)(1) of the Clearing Supervision Act,\8\ and the rules
thereunder.
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\7\ 15 U.S.C. 78s(b)(1).
\8\ 12 U.S.C. 5465(e)(1).
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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.
Second, NSCC 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 has
proposed 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 Act,\9\ and the rules thereunder, and an
advance notice pursuant to Section 806(e)(1) of the Clearing
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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Implementation
The effective date of the proposed rule change will be announced
via a NSCC Important Notice. NSCC expects to run these changes in a
test environment for a three month parallel period prior to
implementation. Details and dates regarding this test will be
communicated to Members through an NSCC Important Notice. As stated
above, NSCC will conduct additional analysis of its exposure to wrong-
way risk, and, following implementation of this proposed rule change,
will engage in outreach to its membership when evaluating whether to
expand the application of the proposed enhanced margining methodology
to Members not on its Watch List.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \11\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. The Commission believes the proposal is
consistent with Section 17A(b)(3)(F) of the Act,\12\ and Rule 17Ad-
22(b)(1) \13\ and Rule 17Ad-22(b)(2) \14\ under the Act, as described
in detail below.
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\11\ 15 U.S.C. 78s(b)(2)(C).
\12\ 15 U.S.C. 78q-1(b)(3)(F).
\13\ 17 CFR 240.17Ad-22(b)(1).
\14\ 17 CFR 240.17Ad-22(b)(2).
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Consistency with Section 17A(b)(3)(F) of the Act. Section
17A(b)(3)(F) of the Act requires, among other things, that the rules of
a clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions, as well as, in
general, protect investors and the public interest.\15\ 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 central counterparty, promote robust risk management, and thus
promoting the prompt and accurate clearance and settlement of
securities transactions, as well as, in general, protecting investors
and the public interest.
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\15\ 15 U.S.C. 78q-1(b)(3)(F).
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Consistency with Rule 17Ad-22(b)(1). Rule 17Ad-22(b)(1) \16\ under
the Act requires a CCP, such as NSCC, to
[[Page 61258]]
``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 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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\16\ 17 CFR 240.17Ad-22(b)(1).
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Consistency with Rule 17Ad-22(b)(2). Rule 17Ad-22(b)(2) \17\ under
the 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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\17\ 17 CFR 240.17Ad-22(b)(2).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \18\ and the
rules and regulations thereunder.
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\18\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that proposed rule change SR-NSCC-2015-003 be, and hereby is,
APPROVED.\19\
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\19\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-25702 Filed 10-8-15; 8:45 a.m.]
BILLING CODE 8011-01-P
