Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Accelerate Its Trade Guaranty, Add New Clearing Fund Components, Enhance Its Intraday Risk Management, Provide for Loss Allocation of “Off-the-Market Transactions,” and Make Other Changes, 79071-79078 [2016-27154]
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Federal Register / Vol. 81, No. 218 / Thursday, November 10, 2016 / Notices
in MSRB Rulemaking. In accordance
with this policy, the Board has
evaluated the potential impacts on
competition of the proposed rule
change, including in comparison to
reasonable alternative regulatory
approaches, relative to the baseline. The
MSRB also considered other economic
impacts of the proposed rule change and
has addressed comments relevant to
these impacts in other sections of this
document. The MSRB does not believe
that the proposed rule change will
impose any additional burdens on
competition, relative to the baseline,
that are not necessary or appropriate in
furtherance of the purposes of the Act.
The MSRB notes that the proposed rule
change will apply equally to all
academic institutions who choose to
purchase the RTRS Academic Data
Product.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The MSRB received 13 comment
letters in response to the request for
comment that originally proposed the
RTRS Academic Data Product.11 As was
proposed in the Request for Comment,
the RTRS Academic Data Product would
have been made available for a fee of
$500 per calendar-year data set (with a
one-time initial set-up fee of $500).12
Only two of the commenters addressed
the proposed fees.13 Specifically, Harris
commented that academics should
either pay a reduced rate, when
compared to the fee charged to industry
participants and their various
organizations and consultants, or be
given access for free because, in his
opinion, academics are often not paid to
conduct their research while the public
obtains a benefit from the research being
conducted. ABFM stated that it believes
the fee is reasonable. The MSRB notes
that there is no occasion to provide the
RTRS Academic Data Product at a
discount, as it is available only to
academic institutions. Further, the
MSRB believes that the proposed fees,
which are substantially less than the
11 See MSRB Notice 2015–10 (July 16, 2015)
(‘‘Request for Comment’’).
12 The MSRB notes that the Request for Comment
proposed the availability of the RTRS Academic
Data Product in calendar-year data sets, but, as it
does with other data products and as described
above, the MSRB would make the RTRS Academic
Data Product available on a rolling basis in one-year
data sets.
13 See letters from: Robert Kravchuk, et al.,
Association for Budgeting and Financial
Management (‘‘ABFM’’), dated September 13, 2015;
and Lawrence Harris (‘‘Harris’’), Professor of
Finance and Business Economics, University of
Southern California, Marshall School of Business,
dated September 6, 2015.
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analogous fees for the historical
transaction data sets,14 are fair and
reasonable given the expenses incurred
to create and facilitate the product, and
that the fees would not overly burden
academic institutions.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change
has become effective pursuant to
Section 19(b)(3)(A) of the Act 15 and
paragraph (f) of Rule 19b–4
thereunder.16 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–
MSRB–2016–14 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File
Number SR–MSRB–2016–14. 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
14 The MSRB provides historical transaction data
in one-year data sets for $2,500 per year and charges
a one-time set-up fee of $2,000.
15 15 U.S.C. 78s(b)(3)(A).
16 17 CFR 240.19b–4(f).
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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 the
filing also will be available for
inspection and copying at the principal
office of the MSRB. 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–MSRB–
2016–14 and should be submitted on or
before December 1, 2016.
For the Commission, pursuant to delegated
authority.17
Brent J. Fields,
Secretary.
[FR Doc. 2016–27149 Filed 11–9–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–79245; File No. SR–NSCC–
2016–005)
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Proposed Rule Change To Accelerate
Its Trade Guaranty, Add New Clearing
Fund Components, Enhance Its
Intraday Risk Management, Provide for
Loss Allocation of ‘‘Off-the-Market
Transactions,’’ and Make Other
Changes
November 4, 2016
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 October
25, 2016, National Securities Clearing
Corporation (‘‘NSCC’’ or the
‘‘Corporation’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
primarily by the clearing agency.3 The
17 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 On October 25, 2016, NSCC filed this proposed
rule change as an advance notice (SR–NSCC–2016–
803) with the Commission pursuant to Section
806(e)(1) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010,
12 U.S.C. 5465(e)(1), and Rule 19b–4(n)(1)(i) of the
1 15
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Federal Register / Vol. 81, No. 218 / Thursday, November 10, 2016 / Notices
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change consists of
amendments to NSCC’s Rules &
Procedures (‘‘Rules’’) 4 in order to (i)
accelerate NSCC’s trade guaranty from
midnight of one day after trade date
(‘‘T+1’’) to the point of trade comparison
and validation for bilateral submissions
or to the point of trade validation for
locked-in submissions, (ii) add three
new components to the Clearing Fund
formula and eliminate the current
Specified Activity charge from the
Clearing Fund formula, (iii) amend
Procedure II to remove language that
permits NSCC to delay processing and
reporting for certain index receipt
transactions, (iv) enhance NSCC’s
current intraday mark-to-market margin
process and clarify the circumstances
and criteria for its intraday risk
management monitoring and intraday
collections of mark-to-market margin,
(v) introduce a new loss allocation
provision for any trades that fall within
the proposed definition of ‘‘Off-theMarket Transactions’’ and (vi) make a
technical change to Procedure XV to
remove the reference to ID Net
Subscribers, as described below.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
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1. Purpose
(i) Accelerate the NSCC Trade Guaranty
Pursuant to Addendum K of the
Rules, NSCC currently guarantees the
completion of trades that are cleared
and settled through NSCC’s Continuous
Act, 17 CFR 240.19b–4(n)(1)(i). A copy of the
advance notice is available at https://www.dtcc.com/
legal/sec-rule-filings.aspx.
4 Capitalized terms not defined herein are defined
in the Rules, available at https://dtcc.com/∼/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
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Net Settlement (‘‘CNS’’) 5 system (‘‘CNS
trades’’) and through its Balance Order
Accounting Operation 6 (‘‘Balance Order
trades’’) that have reached the later of
midnight of T+1 or midnight of the day
they are reported to Members.7 NSCC
proposes to amend its Rules in order to
guarantee the completion of CNS trades
and Balance Order trades upon
comparison and validation for bilateral
submissions to NSCC or upon validation
for locked-in submissions to NSCC.
Validation refers to the process whereby
NSCC validates a locked-in trade, or
compares and validates a bilateral trade,
to confirm such trade has sufficient and
correct information for clearance and
settlement processing. For purposes of
this description in the proposed rule
change, the process of comparing and
validating bilateral submissions and the
process for validating locked-in
submissions are collectively referred to
as ‘‘trade validation.’’
NSCC has previously shortened the
time at which its trade guaranty applied
to trades in response to processing
developments and risk management
considerations and to follow industry
settlement cycles.8 Since
implementation of the current trade
guaranty policy, the marketplace has
experienced significant change. The
proposed accelerated trade guaranty and
related proposed changes described
herein would benefit the industry by
mitigating counterparty risk and
enhancing counterparties’ ability to
assess that risk by having NSCC become
the central counterparty to CNS trades
and by applying the trade guaranty to
Balance Order trades at an earlier point
in the settlement cycle.
The transfer of counterparty credit
risk from Members to NSCC at an earlier
point in the settlement cycle facilitates
a shortened holding period of bilateral
credit risk for counterparties by
transferring the obligation onto NSCC,
which is better equipped to manage that
5 CNS
and its operation are described in Rule 11
and Procedure VII.
6 The Balance Order Accounting Operation is
described in Rule 5 and Procedure V. NSCC does
not become a counterparty to Balance Order trades,
but it does provide a trade guaranty to the receive
and deliver parties that remains effective through
close of business on the originally scheduled
settlement date.
7 Today, shortened process trades, such as sameday and next-day settling trades, are already
guaranteed upon comparison or trade recording
processing.
8 See Securities Exchange Act Release Nos. 44648
(August 2, 2001), 66 FR 42245 (August 10, 2001)
(SR–NSCC–2001–11); 35442 (March 3, 1995), 60 FR
13197 (March 10, 1995) (SR–NSCC–95–02); 35807
(June 5, 1995), 60 FR 31177 (June 13, 1995) (SR–
NSCC–95–03); and 27192 (August 29, 1989), 54 FR
37010 (approving SR–NSCC–87–04, SR–MCC–87–
03, and SR–SCCP–87–03 until December 31, 1990).
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counterparty credit risk, including
potential systemic impact, compared to
the counterparties themselves.
In order to implement this proposed
change, NSCC would amend Addendum
K of its Rules 9 to provide that CNS
trades and Balance Order trades would
be guaranteed by NSCC at the point of
trade validation.10
NSCC also proposes to clarify in
Addendum K 11 that the guaranty of
obligations arising out of the exercise or
assignment of options that are settled at
NSCC is not governed by Addendum
K 12 but by a separate arrangement
between NSCC and The Options
Clearing Corporation, as referred to in
Procedure III of the Rules.13
(ii) Proposed Enhancements to NSCC’s
Clearing Fund Formula
In conjunction with accelerating the
trade guaranty, NSCC would enhance its
Clearing Fund formula to address the
risks posed by the expanded trade
guaranty. Specifically, NSCC proposes
to amend Procedure XV 14 (Clearing
Fund Formula and Other Matters) to
include three new components: The
Margin Requirement Differential
(‘‘MRD’’), the Coverage Component and
the Intraday Backtesting Charge.
NSCC also proposes to add to
Procedure XV 15 a description of the
enhanced intraday mark-to-market
component of the Clearing Fund
formula that clarifies the circumstances
and criteria for the assessment of an
intraday mark-to-market call. In
addition, NSCC proposes to delete the
Specified Activity charge, a component
of the Clearing Fund formula that
mitigates shortened cycle risk (that is,
the risk of the trade guaranty attaching
prior to collection of daily Clearing
Fund). This charge would no longer be
necessary because the MRD would
mitigate those same risks.
A more detailed description of the
foregoing changes follows:
A. The Required Deposit and the
Accelerated Trade Guaranty
NSCC collects Required Deposits from
all Members as margin to protect NSCC
against losses in the event of a Member’s
default. The objective of the Required
Deposit is to mitigate potential losses to
NSCC associated with liquidation of the
Member’s portfolio if NSCC ceases to act
for a Member (hereinafter referred to as
9 Supra
note 4.
proposed accelerated trade guaranty would
not apply to items not currently guaranteed today.
11 Supra note 4.
12 Id.
13 Id.
14 Id.
15 Id.
10 The
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Federal Register / Vol. 81, No. 218 / Thursday, November 10, 2016 / Notices
a ‘‘default’’). NSCC determines Required
Deposit amounts using a risk-based
margin methodology that is intended to
capture market price risk. The
methodology uses historical market
moves to project or forecast the
potential gains or losses on the
liquidation of a defaulting Member’s
portfolio, assuming that a portfolio
would take three days to liquidate or
hedge in normal market conditions. The
projected liquidation gains or losses are
used to determine the Member’s
Required Deposit, which is calculated to
cover projected liquidation losses to be
at or above a 99 percent confidence
level (the ‘‘Coverage Target’’). The
aggregate of all Members’ Required
Deposits constitutes NSCC’s Clearing
Fund, which NSCC would be able to
access if a defaulting Member’s own
Required Deposit is insufficient to
satisfy losses to NSCC caused by the
liquidation of the Member’s portfolio.
NSCC calculates and collects
Required Deposits from Members daily.
Each Member’s daily Required Deposit
is calculated based on the end-of-day
positions from the prior day and is
generally collected by 10:00 a.m. ET.
NSCC’s current trade guaranty does not
generally attach to trades until midnight
of T+1, after Required Deposits
reflecting these trades have been
collected. Therefore, Members’ Required
Deposits are generally sufficient to cover
projected liquidation losses for
guaranteed trades. However, under the
accelerated trade guaranty proposal,
NSCC’s trade guaranty would attach to
current-day trades immediately upon
trade validation, before Required
Deposits reflecting these trades have
been collected (which NSCC refers to
herein as the ‘‘coverage gap’’).16
Therefore, Members’ Required Deposits
may not be sufficient to cover the
projected liquidation losses of trades
guaranteed by NSCC upon trade
validation, and NSCC, absent the
proposed Clearing Fund formula
enhancements, could incur a loss
associated with those trades if it ceases
to act for a Member.
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B. Addition of the MRD to the Clearing
Fund Formula
The MRD is designed to help mitigate
the risks posed to the Corporation by
day-over-day fluctuations in a Member’s
portfolio by forecasting future changes
in a Member’s portfolio based on a
historical look-back at each Member’s
portfolio over a given time period. A
16 The coverage gap is the period between the
time that NSCC would guarantee a trade and the
time that NSCC would collect additional margin to
cover such trade.
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Member’s portfolio may fluctuate
significantly from one trading day to the
next as the Member executes trades
throughout the day. Currently, daily
fluctuations in a Member’s portfolio
resulting from such trades do not pose
any additional or different risk to NSCC
because those trades are not guaranteed
by NSCC until a Required Deposit
reflecting such trades is collected by
NSCC. However, under the accelerated
trade guaranty proposal, trades would
be guaranteed by NSCC upon trade
validation and therefore may result in
large un-margined intraday portfolio
fluctuations during the coverage gap.
The MRD would increase Members’
Required Deposits by an amount
calculated to cover forecasted
fluctuations in Members’ portfolios,
based upon historical activity.
The MRD would be calculated and
charged on a daily basis as a part of each
Member’s Required Deposit and consists
of two components: The ‘‘MRD VaR’’
and the ‘‘MRD MTM.’’ The MRD VaR
looks at historical day-over-day positive
changes in the start of day (‘‘SOD’’)
volatility component of a Member’s
Required Deposit 17 (‘‘Volatility
Charge’’) over a 100-day look-back
period and would be calculated to equal
the exponentially weighted moving
average (‘‘EWMA’’) of such changes to
the Member’s Volatility Charge during
the look-back period. The MRD MTM
looks at historical day-over-day
increases to the SOD mark-to-market
component of a Member’s Required
Deposit 18 over a 100-day look-back
period and would be calculated to equal
the EWMA of such changes to the
Member’s SOD mark-to-market
component during the look-back period.
The MRD is calculated to equal the sum
of MRD VaR and MRD MTM times a
multiplier calibrated based on
backtesting results. NSCC has
determined that a 100-day look-back
period would provide it with a
sufficient time series to reflect current
market conditions.
By addressing the day-over-day
changes to each Member’s SOD
Volatility Charge and SOD mark-tomarket component, the MRD would
help mitigate the risks posed to the
Corporation by un-margined day-over17 The volatility component of the Clearing Fund
formula for CNS trades and Balance Order trades is
described in Procedure XV, Sections I.(A)(1)(a) and
I.(A)(2)(a), respectively.
18 The SOD mark-to-market component of the
Clearing Fund formula for CNS trades consists of
Regular Mark-to-Market and ID Net Mark-to-Market,
which are described in Procedure XV, Sections
I.(A)(1)(b) and I.(A)(1)(c), respectively. The SOD
mark-to-market component of the Clearing Fund
formula for Balance Order trades is described in
Procedure XV, Section I.(A)(2)(b).
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79073
day fluctuations to a Member’s portfolio
resulting from intraday trading activity
that would be guaranteed during the
coverage gap.
C. Addition of the Coverage Component
to the Clearing Fund Formula
The ‘‘Coverage Component’’ is
designed to mitigate the risks associated
with a Member’s Required Deposit being
insufficient to cover projected
liquidation losses to the Coverage Target
by adjusting a Member’s Required
Deposit towards the Coverage Target.
The Corporation would face increased
exposure to a Member’s un-margined
portfolio as a result of the proposed
accelerated trade guaranty and would
have an increased need to have each
Member’s Required Deposit meet the
Coverage Target. The Coverage
Component would supplement the MRD
by preemptively increasing a Member’s
Required Deposit in an amount
calculated to forecast potential
deficiencies in the margin coverage of a
Member’s guaranteed portfolio. The
preemptive nature of the Coverage
Component differentiates it from the
Regular Backtesting Charge and the
Intraday Backtesting Charge, both of
which are reactive measures to increase
the Member’s Required Deposit to above
the Coverage Target.
The Coverage Component would be
calculated and charged on a daily basis
as a part of each Member’s Required
Deposit. To calculate the Coverage
Component, NSCC would compare the
simulated liquidation profit and loss of
a Member’s portfolio, using the actual
positions in the Member’s portfolio and
the actual historical returns on the
security positions in the portfolio,
against the sum of each of the following
components of the Clearing Fund
formula: The Volatility Charge, the
MRD, the Illiquid Charge and the
Market Maker domination charge
(collectively, the ‘‘Market Risk
Components’’), to determine if there
were any deficiencies between the
amounts collected by these components
and the simulated profit and loss of the
Member’s portfolio that would have
been realized had it been liquidated
during a 100-day look-back period.
NSCC would then determine a daily
‘‘peak deficiency’’ amount for each
Member equal to the maximum
deficiency over a rolling 10 business
day period for the preceding 100 days.
The Coverage Component would be
calculated to equal the EWMA of the
peak deficiencies over the 100-day lookback period.
In working to bring each Member’s
Required Deposit towards the Coverage
Target by preemptively collecting an
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Federal Register / Vol. 81, No. 218 / Thursday, November 10, 2016 / Notices
amount designed to cover projected
liquidation profit and loss of a
Member’s portfolio, including the trades
guaranteed during the coverage gap,
NSCC would further mitigate the risks
posed to it by the proposed accelerated
trade guaranty.
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D. Addition of the Intraday Backtesting
Charge to the Clearing Fund Formula
NSCC employs daily backtesting to
determine the adequacy of each
Member’s Required Deposit. NSCC
compares the Required Deposit 19 for
each Member with the simulated
liquidation profit and loss using the
actual positions in the Member’s
portfolio and the actual historical
returns on the security positions in the
portfolio. NSCC investigates the cause(s)
of any backtesting deficiencies. As a
part of this investigation, NSCC pays
particular attention to Members with
backtesting deficiencies that bring the
results for that Member below the
Coverage Target to determine if there is
an identifiable cause of repeat
backtesting deficiencies. NSCC also
evaluates whether multiple Members
experience backtesting deficiencies for
the same underlying reason. Upon
implementation of the accelerated trade
guaranty, NSCC would employ a similar
backtesting process on an intraday basis
to determine the adequacy of each
Member’s Required Deposit. However,
instead of backtesting a Member’s
Required Deposit against the Member’s
SOD portfolio, NSCC would use
portfolios from two intraday time
slices.20
1. Calculation of the Intraday
Backtesting Charge
The objective of the Intraday
Backtesting Charge is to increase
Required Deposits for Members that are
likely to experience intraday backtesting
deficiencies on the basis described
above by an amount sufficient to
maintain such Member’s intraday
backtesting coverage above the Coverage
Target. Members that maintain
consistent end of day positions but have
a high level of intraday trading activity
pose risk to NSCC if they were to default
intraday.
Because the intraday trading activity
and size of the intraday backtesting
deficiencies vary among impacted
Members, NSCC must assess an Intraday
Backtesting Charge that is specific to
19 For backtesting comparisons, NSCC uses the
Required Deposit amount without regard to the
actual collateral posted by the Member.
20 Intraday time slices are subject to change based
upon market conditions and would include the
positions from SOD plus any additional positions
up to that time.
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17:46 Nov 09, 2016
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each impacted Member. To do so, NSCC
examines each impacted Member’s
historical intraday backtesting
deficiencies observed over the prior 12month period to identify the five largest
intraday backtesting deficiencies that
have occurred during that time. The
presumptive Intraday Backtesting
Charge amount would equal that
Member’s fifth largest historical
intraday backtesting deficiency, subject
to adjustment as further described
below. NSCC believes that applying an
additional margin charge equal to the
fifth largest historical intraday
backtesting deficiency to a Member’s
Required Deposit would have brought
the Member’s historically observed
intraday backtesting coverage above the
Coverage Target.21
The Intraday Backtesting Charge
would only be applicable to those
Members whose overall 12-month
trailing intraday backtesting coverage
falls below the Coverage Target.
Although the fifth largest historical
backtesting deficiency for a Member
would be used as the Intraday
Backtesting Charge in most cases, NSCC
would retain discretion to adjust the
charge amount based on other
circumstances that might be relevant for
assessing whether an impacted Member
is likely to experience future backtesting
deficiencies and the estimated size of
such deficiencies. Examples of relevant
circumstances that could be considered
by NSCC in calculating the final,
applicable Intraday Backtesting Charge
amount include material differences
among the Member’s five largest
intraday backtesting deficiencies
observed over the prior 12-month
period, variability in the net settlement
activity after the collection of the
Member’s Required Deposit and
observed market price volatility in
excess of the Member’s historical
Volatility Charge. Based on NSCC’s
assessment of the impact of these
circumstances on the likelihood, and
estimated size, of future intraday
backtesting deficiencies for a Member,
NSCC may, in its discretion, adjust the
Intraday Backtesting Charge for such
Member in an amount that NSCC
determines to be more appropriate for
maintaining such Member’s intraday
backtesting results above the Coverage
Target.
21 Intraday backtesting would include 500
observations per year (twice per day over 250
observation days). Each occurrence of a backtesting
deficiency would reduce a Member’s overall
backtesting coverage by 0.2 percent (1 exception/
500 observations). Accordingly, an Intraday
Backtesting Charge equal to the fifth largest
backtesting deficiency would have brought
backtesting coverage up to 99.2 percent.
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The resulting Intraday Backtesting
Charge would be added to the Required
Deposit for such Member and would be
imposed on a daily basis for a onemonth period.
In order to differentiate the
Backtesting Charge assessed on the start
of the day portfolio from the Backtesting
Charge assessed on an intraday basis,
NSCC would amend the Rules by
adding a defined term ‘‘Regular
Backtesting Charge’’ to Procedure XV,
Section I.(B)(3).22
2. Communication With Members and
Imposition of the Intraday Backtesting
Charge
If NSCC determines that an Intraday
Backtesting Charge should apply to a
Member who was not assessed an
Intraday Backtesting Charge during the
immediately preceding month or that
the Intraday Backtesting Charge applied
to a Member during the previous month
should be increased, NSCC would notify
the Member on or around the 25th
calendar day of the month prior to the
assessment of the Intraday Backtesting
Charge or prior to the increase to the
Intraday Backtesting Charge, as
applicable, if not earlier.
NSCC would impose the Intraday
Backtesting Charge as an additional
charge applied to each impacted
Member’s Required Deposit on a daily
basis for a one-month period and would
review each applied Intraday
Backtesting Charge each month. If an
impacted Member’s trailing 12-month
intraday backtesting coverage exceeds
the Coverage Target (without taking into
account historically imposed Intraday
Backtesting Charges), the Intraday
Backtesting Charge would be removed.
E. Removal of the Specified Activity
Charge From the Clearing Fund Formula
Currently, NSCC collects a Specified
Activity charge, which is designed to
cover the risk posed to NSCC by
transactions that settle on a shortened
cycle.23 Such transactions pose an
increased risk to NSCC because these
trades settle on a shortened settlement
cycle and may be guaranteed by NSCC
prior to the collection of margin on
them. The Specified Activity charge
currently mitigates this risk by
increasing the Required Deposit for a
Member in relation to the number of
Specified Activity trades submitted by
the Member to NSCC over a 100-day
look-back period. However, the risk
posed to NSCC by Specified Activity
22 Supra
note 4.
of these trades can include next day
settling trades, same day settling trades, cash trades
or sellers’ options.
23 Examples
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would no longer be unique to such trade
activity—the proposed accelerated trade
guaranty would result in a similar risk
to NSCC. The addition of the MRD and
Coverage Components to the Clearing
Fund formula would mitigate the risks
posed by trades guaranteed by NSCC
prior to the collection of margin on
those trades. As a result, NSCC proposes
to eliminate the Specified Activity
charge because imposing a separate
Specified Activity charge would no
longer be necessary once the MRD and
Coverage Components are added to the
Clearing Fund formula.
F. Enhanced Intraday Mark-to-Market
Margining
NSCC proposes to enhance its current
intraday margining to further mitigate
the intraday coverage gap risk that may
be introduced to the Corporation as a
result of the proposed accelerated trade
guaranty. By way of background, NSCC
currently collects a SOD mark-to-market
margin, which is designed to mitigate
the risk arising out of the value change
between the contract/settlement value of
a Member’s open positions and the
current market value, as part of its
Clearing Fund formula. A Member’s
SOD mark-to-market margin is
calculated and collected as part of a
Member’s daily Required Deposit based
on the Member’s prior end-of-day
positions. The SOD mark-to-market
component of the daily Required
Deposit is calculated to cover a
Member’s exposure due to market
moves and/or trading and settlement
activity by bringing the portfolio of open
positions up to the current market
value. However, because the SOD markto-market component is calculated only
once daily using the prior end-of-day
positions and prices, it will not cover a
Member’s exposure arising out of any
intraday changes to position and market
value in a Member’s portfolio.
Accordingly, NSCC currently collects
intraday mark-to-market margin from
Members to cover additional risk
exposure arising out of intraday position
and market value changes to the
Member’s portfolio if the additional
risks are sufficiently large to warrant the
collection of an intraday margin.
NSCC has determined that it is not
necessary to collect intraday margin
from every Member that experiences an
intraday mark-to-market change because
the Volatility Charge already collected
as part of Members’ daily Required
Deposits is calculated to cover projected
changes in the contract/settlement value
of a Member’s portfolio and likely cover
intraday changes to a Member’s
portfolio. However, in certain instances,
Members may have intraday mark-to-
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market changes that are significant
enough that NSCC is exposed to an
increased risk of loss as a result of such
Member’s intraday activities. In
particular, NSCC measures each
Member’s intraday mark-to-market
exposure against the Volatility Charge.
NSCC collects an intraday mark-tomarket amount from any Member that
has an intraday mark-to-market
exposure that meets or exceeds a
threshold percentage as compared to the
Member’s Volatility Charge. NSCC
believes that such Members pose an
increased risk of loss to the Corporation
because the coverage provided by the
Volatility Charge, which is designed to
cover estimated losses to a portfolio
over a specified time period, would be
exhausted by an intraday mark-tomarket exposure so large that the
Member’s Required Deposit would
potentially be unable to absorb further
intraday losses to the Member’s
portfolio.
In order to further mitigate the risk
posed to NSCC by the proposed
accelerated trade guaranty, NSCC is
proposing to enhance its collection of
intraday mark-to-market margin. NSCC
would impose the intraday mark-tomarket margin amount at a lower
threshold. Currently, NSCC makes an
intraday mark-to-market margin call if a
Member’s intraday mark-to-market
exposure meets or exceeds 100 percent
of such Member’s Volatility Charge;
however, such threshold may be
reduced by NSCC during volatile market
conditions. With this proposal, NSCC
would make an intraday margin call if
a Member’s intraday mark-to-market
exposure meets or exceeds 80 percent of
such Member’s Volatility Charge, where
such threshold may still be reduced by
NSCC during volatile market conditions.
This proposed change would serve to
collect intraday margin earlier and more
proactively preserve the coverage
provided by a Member’s Volatility
Charge and Required Deposit.
In addition, NSCC would monitor
intraday changes to Member’s mark-tomarket exposure at regular intervals to
further mitigate the risk posed to NSCC
by the accelerated trade guaranty. By
doing so, NSCC would be able to make
intraday margin calls more frequently to
those Members whose intraday mark-tomarket exposures exceed the Volatility
Charge threshold. Enhancing the
collection of the intraday mark-tomarket amount so that it occurs earlier
and more frequently would allow NSCC
to reduce the amount of uncovered risk
during the coverage gap and would
therefore further mitigate the risk posed
to the Corporation by the accelerated
trade guaranty.
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NSCC proposes to amend Procedure
XV to include a description of the
enhanced intraday mark-to-market
margin charge that clarifies the
circumstances and criteria for the
assessment of an intraday mark-tomarket call. This would ensure that
Members are aware that the Corporation
regularly monitors and considers
intraday mark-to-market as part of its
regular Clearing Fund formula.
G. Adjustments to the Calculation of the
Excess Capital Premium Component
The Excess Capital Premium 24 is
designed to address spikes in a
Member’s Required Deposit based upon
any one day of activity. It is not
designed to provide additional Required
Deposits over an extended period of
time. Currently, the Excess Capital
Premium for a Member is calculated
based upon the Member’s Clearing Fund
Required Deposit and the Member’s
excess net capital. With the addition of
the MRD and the Coverage Component,
NSCC proposes to exclude these charges
from the calculation of the Excess
Capital Premium. The MRD and the
Coverage Component all utilize a
historical look-back period, which
accounts for the risk of such activity
well after the relevant trades have
settled. Risks related to such trades
would be reflected in increased amounts
assessed for these components over the
subsequent time periods. If these
components are included in the
calculation of the Excess Capital
Premium, especially during periods
following an increase in activity, then
the increased MRD and Coverage
Component could lead to more frequent
Excess Capital Premium charges over an
extended period of time. This is not the
intended purpose of the Excess Capital
Premium and could place an
unnecessary burden on Members.
(iii) Proposed Changes to Procedure II
(Trade Comparison and Recording
Service)
Next day settling index receipts may
be guaranteed prior to the collection of
margin reflecting such trades and thus
carry a very similar risk as Specified
Activity trades described above. More
specifically, because these trades are
settled on the day after they are received
and validated by NSCC, NSCC currently
attaches its guaranty to them at the time
of validation, prior to the collection of
a Required Deposit that reflects such
trades. Unlike the risk from Specified
24 The Excess Capital Premium is a charge
imposed on a Member when the Member’s Required
Deposit exceeds its excess net capital, as described
in Procedure XV.
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Activity trades, which is mitigated by
the Specified Activity charge, the risk
for next day settling index receipts is
currently mitigated by permitting NSCC
to delay the processing and reporting of
these trades if a Member’s Required
Deposit is not paid on time. However,
like the risk associated with Specified
Activity, under the proposed rule
change, this risk would generally be
mitigated by the addition of the MRD
and the Coverage Component.
Therefore, NSCC proposes to amend
Procedure II 25 (Trade Comparison and
Recording Service) to remove the
language that permits NSCC to delay the
processing and reporting of next day
settling index receipts until the
applicable margin on these transactions
is paid.
(iv) Loss Allocation Provision for Offthe-Market Transactions
NSCC proposes to introduce a new
loss allocation provision for any trades
that fall within the proposed definition
of ‘‘Off-the-Market Transactions’’ in
order to limit NSCC’s exposure to
certain trades that have a price that
differs significantly from the prevailing
market price for the underlying security
at the time the trade is executed. This
provision would apply in the event that
NSCC ceases to act for a Member that
engaged in Off-the-Market Transactions
and only to the extent that NSCC incurs
a net loss in the liquidation of such
Transactions.26
NSCC would define ‘‘Off-the-Market
Transactions’’ as either a single
transaction or a series of transactions
settled within the same cycle with
greater than $1 million in gross
proceeds and either higher or lower
than the most recently observed market
price by a percentage amount based on
market conditions and factors that
impact trading behavior of the
underlying security, including
volatility, liquidity and other
characteristics of such security.
The proposed rule change would
establish the loss allocation for Off-theMarket Transactions. NSCC would
allocate any losses to NSCC resulting
from the liquidation of any guaranteed,
25 Supra
note 4.
net loss on liquidation of the Off-the-Market
Transaction means that the loss on liquidation of
the Member’s portfolio exceeds the collected
Required Deposit of the Member and such loss is
attributed to the Off-the-Market Transaction. Such
loss would be allocated directly and entirely to the
Member that submitted the Off-the-Market
Transaction, or on whose behalf the Off-the-Market
Transaction was submitted, to NSCC; however, no
allocation would be made if such Member has
satisfied all applicable intraday mark-to-market
margin charges assessed by NSCC with respect to
the Off-the-Market Transaction.
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open Off-the-Market Transaction of a
defaulted Member directly and entirely
to the surviving counterparty to that
transaction. Losses would be allocated
to counterparties in proportion to their
specific Off-the-Market Transaction gain
and would be allocated only to the
extent of NSCC’s loss; however, no
allocation shall be made if the defaulted
Member has satisfied all requisite
intraday mark-to-market margin
assessed by NSCC with respect to the
Off-the-Market Transaction.27
This proposed change would allow
NSCC to mitigate the risk of loss
associated with guaranteeing these Offthe-Market Transactions. The proposal
recognizes that applying the accelerated
trade guaranty to transactions whose
price significantly differs from the most
recently observed market price could
inappropriately increase the loss that
NSCC may incur if a Member that has
engaged in Off-the-Market Transactions
defaults and its open, guaranteed
positions are liquidated. Members not
involved in Off-the-Market
Transactions, or not involved in Off-theMarket Transactions that result in losses
to NSCC, would not be included in this
process. This exclusion would apply
only to losses that are attributable to
Off-the-Market Transactions and would
not exclude Members from other
obligations that may result from any loss
or liabilities incurred by NSCC from a
Member default.
In order to implement this proposed
change, NSCC would amend Rule 4 28
(Clearing Fund) to provide that, if a loss
or liability of NSCC is determined by
NSCC to arise in connection with the
liquidation of any Off-the-Market
Transactions, such loss or liability
would be allocated directly to the
surviving counterparty to the Off-theMarket Transaction that submitted the
transaction to NSCC for clearing. NSCC
would also amend Rule 1 29 (Definitions
and Descriptions) to include a definition
of Off-the-Market Transactions.
(v) Technical Proposed Rule Change
NSCC is proposing a change to
Procedure XV 30 to clarify the
calculation of the Regular Mark-toMarket component for CNS transactions.
NSCC’s historical and current policy for
the calculation of any mark-to-market
component of the Clearing Fund
calculation for CNS trades and Balance
27 A Member’s Off-the-Market Transaction that
has been marked to market is, by definition, no
longer an Off-the-Market Transaction when the
mark-to-market component of the Member’s
Required Deposit is satisfied.
28 Supra note 4.
29 Id.
30 Id.
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Order trades is that where a credit is
derived from a Member’s mark-tomarket calculation, the value of the
calculation is adjusted to zero. When
NSCC implemented the ID Net service,31
a provision was added to Procedure
XV 32 that explicitly stated this policy as
it relates to CNS transactions of
subscribers to the ID Net service. This
change inadvertently created an
implication that the calculation of
Regular Mark-to-Market credit for
Members who were not ID Net
Subscribers would not be set to zero.
NSCC is proposing to revise the
applicable provision to remove the
reference to ID Net Subscribers.
(vi) Member Outreach
Over the past several years, NSCC has
conducted outreach with its Members
with respect to impact on their Clearing
Fund Required Deposits as a result of
this proposal. This includes the
publication of the 2013 whitepaper,
‘‘Enhancing Risk Management:
Important Upcoming Changes From
NSCC’’, as well as individual impact
studies provided to each Member
showing the anticipated impact on the
Member’s Clearing Fund Required
Deposit based on their historical
portfolios.
Implementation Timeframe
Pending Commission approval,
Members would be advised of the
implementation date of this proposal
through issuance of an NSCC Important
Notice. NSCC expects to run the
proposed changes in a test environment
for a parallel period of at least three
months prior to implementation. Details
and dates regarding such test period
would be communicated to Members
through an NSCC Important Notice.
2. Statutory Basis
Section 17A(b)(3)(F) of the Act
requires, in part, that NSCC’s Rules be
designed to promote the prompt and
accurate clearance and settlement of
securities transactions, to assure the
safeguarding of securities and funds
which are in the custody and control of
NSCC or for which it is responsible and
to protect investors and the public
interest.33
The proposal to accelerate the time
that NSCC’s trade guaranty attaches to
trades submitted to it for clearing has
been designed to promote the prompt
and accurate clearance and settlement of
31 NSCC’s ID Net service is defined further in
Rule 65. Rules, supra note 4. See Securities
Exchange Act Release No. 57901 (June 2, 2008), 73
FR 32373 (June 6, 2008) (SR–NSCC–2007–14).
32 Supra note 4.
33 15 U.S.C. 78q–1(b)(3)(F).
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securities transactions in furtherance of
the Act. Specifically, NSCC would
provide a trade guaranty to CNS trades
and Balance Order trades at an earlier
point in the settlement cycle. The
proposed accelerated guaranty would
mitigate counterparty risk and would
enhance Members’ ability to assess that
risk by having NSCC become the central
counterparty to CNS trades and by
applying the trade guaranty to Balance
Order trades at an earlier point in the
settlement cycle. Therefore, NSCC
believes the proposed accelerated
guaranty promotes the prompt and
accurate clearance and settlement of
securities transactions, consistent with
Section 17A(b)(3)(F) of the Act.34
The proposed rule changes to (i) add
the new components to the Clearing
Fund formula, (ii) enhance the intraday
mark-to-market margin process and (iii)
remove provisions regarding the
Specified Activity charge and the
provisions that permit NSCC to delay
processing and reporting for certain
index receipt transactions (all as
described in detail above) have been
designed to assure the safeguarding of
securities and funds in the custody and
control of NSCC or for which it is
responsible in furtherance of the Act.
Specifically, the proposals in (i) and (ii)
would allow NSCC to appropriately
collect additional margin to mitigate the
exposure presented to NSCC by the
accelerated trade guaranty, providing
NSCC with the ability to safeguard the
funds and securities for which it is
responsible by enabling it to collect
adequate collateral to cover its
additional exposures. By enhancing the
Clearing Fund formula, the proposals in
(i) and (ii) would also reduce the risk of
loss mutualization to Members because
the enhanced margin collected from
each Member would help NSCC limit its
exposure to potential losses from
defaults by its participants under
normal market conditions and minimize
potential losses to NSCC and its nondefaulting Members. The proposed rule
changes in (iii) would eliminate
provisions that would no longer be
needed to mitigate risk because the risk
they currently address would be
addressed by the new components
proposed to be introduced to the
Clearing Fund formula, as discussed in
detail above. Therefore, NSCC believes
the proposed rule changes in (i), (ii) and
(iii) assures the safeguarding of
securities and funds which are in the
custody and control of NSCC or for
which it is responsible, consistent with
Section 17A(b)(3)(F) of the Act.35
The proposed rule change to
introduce a new loss allocation
provision for any trades that fall within
the proposed definition of Off-theMarket Transactions would help NSCC
to limit its exposure to certain trades
that have a price that differs
significantly from the most recently
observed market price for the
underlying security. Therefore, the
reduction of NSCC’s exposure to Offthe-Market Transactions would assist
NSCC in responding to a Member
default and would minimize potential
losses to NSCC and its non-defaulting
Members. As such, this proposed rule
change is designed to assure the
safeguarding of securities and funds that
are in the custody and control of NSCC
or for which it is responsible, consistent
with Section 17A(b)(3)(F) of the Act.36
Also, the proposed technical change
to the calculation of the Regular Markto-Market component for CNS
transactions would provide additional
clarity to NSCC Members and would
ensure the Rules accurately reflect that
Regular Mark-to-Market credit for all
NSCC Members would be set to zero.
Therefore, NSCC believes the proposed
technical change would protect
investors and the public interest,
consistent with the requirements of
Section 17A(b)(3)(F) of the Act.37
NSCC believes that the proposal is
also consistent with Rules 17Ad–
22(b)(1) and (b)(2), promulgated under
the Act. Rule 17Ad–22(b)(1) requires
NSCC to establish, implement, maintain
and enforce written policies and
procedures reasonably designed to
measure its credit exposures to its
participants at least once a day and limit
its exposures to potential losses from
defaults by its participants under
normal market conditions so that the
operations of NSCC would not be
disrupted and non-defaulting
participants would not be exposed to
losses that they cannot anticipate or
control.38 NSCC’s proposal to expand its
current intraday margin collection to
include (a) the collection of intraday
mark-to-market margin at a lower
threshold and (b) the collection of the
Intraday Backtesting Charge would
further enhance its intraday monitoring
and its ability to measure credit
exposures at least once a day. The
proposal to enhance the amount of
margin collected from each Member
would help NSCC to limit its exposure
to potential losses from defaults by its
participants under normal market
conditions and reduce risk of loss
36 Id.
34 Id.
37 Id.
35 Id.
38 17
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79077
mutualization to the NSCC membership.
Similarly, the proposal to introduce a
new loss allocation provision for Offthe-Market Transactions would also
help NSCC to limit its exposure to
potential losses from defaults by its
participants under normal market
conditions. Therefore, NSCC believes
the proposals are consistent with the
requirements of Rule 17Ad–22(b)(1),
promulgated under the Act, cited above.
Rule 17Ad–22(b)(2) requires NSCC to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to ‘‘use margin
requirements to limit its credit
exposures to participants under normal
market conditions and use risk-based
models and parameters to set margin
requirements.’’ 39 The proposal to add
the MRD, the Coverage Component and
the Intraday Backtesting Charge to the
Clearing Fund formula and to collect
intraday mark-to-market margin at a
lower threshold in order to mitigate the
exposure presented to NSCC by the
accelerated trade guaranty would enable
NSCC to enhance its margin
requirements to better limit its credit
exposures to participants under normal
market conditions. Therefore, NSCC
believes the proposed changes are
consistent with the requirements of Rule
17Ad–22(b)(2), promulgated under the
Act, cited above.
The proposed changes to NSCC’s
Clearing Fund formula and the intraday
margin process are also designed to be
consistent with Rules 17Ad–22(e)(4)
and (e)(6) of the Act, which were
recently adopted by the Commission.40
Rule 17Ad–22(e)(4) will require NSCC
to establish, implement, maintain and
enforce written policies and procedures
reasonably designed to effectively
identify, measure, monitor, and manage
its credit exposures to participants and
those exposures arising from its
payment, clearing, and settlement
processes.41 NSCC’s proposal to expand
its current intraday margin collection to
include (a) the collection of intraday
mark-to-market margin at a lower
threshold and (b) the collection of the
Intraday Backtesting Charge would
enhance its ability to identify, measure,
39 17
CFR 240.17Ad–22(b)(2).
Commission adopted amendments to Rule
17Ad–22, including the addition of new section
17Ad–22(e), on September 28, 2016. See Securities
Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7–03–14).
The amendments to Rule 17Ad–22 become effective
on December 12, 2016. Id. NSCC is a ‘‘covered
clearing agency’’ as defined in Rule 17Ad–22(a)(5)
and must comply with new section (e) of Rule
17Ad–22 by April 11, 2017. Id.
41 See Securities Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786 (October 13,
2016) (S7–03–14).
40 The
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monitor and manage its credit exposures
to participants. The proposal to enhance
the amount of margin NSCC collected
from each Member and to introduce a
new loss allocation provision for Offthe-Market Transactions would further
help NSCC to manage its credit
exposures to participants and those
exposures arising from its payment,
clearing, and settlement processes.
Therefore, NSCC believes these
proposals are consistent with the
requirements of Rule 17Ad–22(e)(4),
promulgated under the Act, cited above.
Rule 17Ad–22(e)(6) will require NSCC
to establish, implement, maintain and
enforce written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that is monitored by management on an
ongoing basis and regularly reviewed,
tested, and verified.42 The proposal to
add the MRD, the Coverage Component
and the Intraday Backtesting Charge to
the Clearing Fund formula and to collect
intraday mark-to-market margin at a
lower threshold would help NSCC to
cover its credit exposures to its
participants by establishing a risk-based
margin system that is monitored by
management on an ongoing basis and
regularly reviewed, tested, and verified.
Therefore, NSCC believes this proposal
is consistent with the requirements of
Rule 17Ad–22(e)(6), promulgated under
the Act, cited above.
(B) Clearing Agency’s Statement on
Burden on Competition
NSCC does not believe that the
proposed rule changes associated with
the acceleration of NSCC’s guaranty
would impose any burden on
competition but, because these
proposed changes would pose
additional risks to NSCC, NSCC has also
proposed to (i) add the new components
to the NSCC Clearing Fund formula and
(ii) enhance the intraday mark-to-market
margin process; however, NSCC does
not believe these proposed rule changes
would impose any burden on
competition that is not necessary and
appropriate 43 because the additional
margin charges assessed on Members
are needed to limit the additional
exposure to NSCC of potential losses
from defaults by Members as a result of
guaranteeing trades at an earlier point in
the settlement cycle and are
commensurate with the risk presented
by the trades Members submitted to
NSCC for clearing.
Additionally, NSCC has proposed to
introduce a new loss allocation
42 Id.
43 15
provision for any trades that fall within
the proposed definition of Off-theMarket Transactions; however, NSCC
also does not believe that this proposed
change would impose any burden on
competition that is not necessary or
appropriate 44 because the new loss
allocation provision would allow NSCC
to mitigate the risk of loss associated
with guaranteeing the Off-the-Market
Transactions and would apply to
Members in proportion to their specific
Off-the-Market Transaction gain and
only to the extent of NSCC’s loss.
Based on the foregoing, NSCC does
not believe the proposed rule changes
would impose any burden on
competition that is not necessary and
appropriate.45
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
NSCC has not received any written
comments relating to this proposed rule
change. NSCC will notify the
Commission of any written comments it
receives.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
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:
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NSCC–2016–005 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File
Number SR–NSCC–2016–005. 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 the
filing also will be available for
inspection and copying at the principal
office of NSCC and on DTCC’s Web site
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NSCC–
2016–005 and should be submitted on
or before December 1, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.46
Brent J. Fields,
Secretary.
[FR Doc. 2016–27154 Filed 11–9–16; 8:45 am]
BILLING CODE 8011–01–P
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
44 Id.
U.S.C. 78q–1(b)(3)(I).
VerDate Sep<11>2014
17:46 Nov 09, 2016
45 Id.
Jkt 241001
PO 00000
Frm 00112
46 17
Fmt 4703
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E:\FR\FM\10NON1.SGM
CFR 200.30–3(a)(12).
10NON1
]]>Agencies
[Federal Register Volume 81, Number 218 (Thursday, November 10, 2016)]
[Notices]
[Pages 79071-79078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27154]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-79245; File No. SR-NSCC-2016-005)
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change To Accelerate Its
Trade Guaranty, Add New Clearing Fund Components, Enhance Its Intraday
Risk Management, Provide for Loss Allocation of ``Off-the-Market
Transactions,'' and Make Other Changes
November 4, 2016
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 October 25, 2016, National Securities Clearing Corporation (``NSCC''
or the ``Corporation'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared primarily by
the clearing agency.\3\ The
[[Page 79072]]
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On October 25, 2016, NSCC filed this proposed rule change as
an advance notice (SR-NSCC-2016-803) with the Commission pursuant to
Section 806(e)(1) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act entitled the Payment, Clearing, and Settlement
Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b-
4(n)(1)(i) of the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of the
advance notice is available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to NSCC's Rules &
Procedures (``Rules'') \4\ in order to (i) accelerate NSCC's trade
guaranty from midnight of one day after trade date (``T+1'') to the
point of trade comparison and validation for bilateral submissions or
to the point of trade validation for locked-in submissions, (ii) add
three new components to the Clearing Fund formula and eliminate the
current Specified Activity charge from the Clearing Fund formula, (iii)
amend Procedure II to remove language that permits NSCC to delay
processing and reporting for certain index receipt transactions, (iv)
enhance NSCC's current intraday mark-to-market margin process and
clarify the circumstances and criteria for its intraday risk management
monitoring and intraday collections of mark-to-market margin, (v)
introduce a new loss allocation provision for any trades that fall
within the proposed definition of ``Off-the-Market Transactions'' and
(vi) make a technical change to Procedure XV to remove the reference to
ID Net Subscribers, as described below.
---------------------------------------------------------------------------
\4\ Capitalized terms not defined herein are defined in the
Rules, available at https://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
(i) Accelerate the NSCC Trade Guaranty
Pursuant to Addendum K of the Rules, NSCC currently guarantees the
completion of trades that are cleared and settled through NSCC's
Continuous Net Settlement (``CNS'') \5\ system (``CNS trades'') and
through its Balance Order Accounting Operation \6\ (``Balance Order
trades'') that have reached the later of midnight of T+1 or midnight of
the day they are reported to Members.\7\ NSCC proposes to amend its
Rules in order to guarantee the completion of CNS trades and Balance
Order trades upon comparison and validation for bilateral submissions
to NSCC or upon validation for locked-in submissions to NSCC.
Validation refers to the process whereby NSCC validates a locked-in
trade, or compares and validates a bilateral trade, to confirm such
trade has sufficient and correct information for clearance and
settlement processing. For purposes of this description in the proposed
rule change, the process of comparing and validating bilateral
submissions and the process for validating locked-in submissions are
collectively referred to as ``trade validation.''
---------------------------------------------------------------------------
\5\ CNS and its operation are described in Rule 11 and Procedure
VII.
\6\ The Balance Order Accounting Operation is described in Rule
5 and Procedure V. NSCC does not become a counterparty to Balance
Order trades, but it does provide a trade guaranty to the receive
and deliver parties that remains effective through close of business
on the originally scheduled settlement date.
\7\ Today, shortened process trades, such as same-day and next-
day settling trades, are already guaranteed upon comparison or trade
recording processing.
---------------------------------------------------------------------------
NSCC has previously shortened the time at which its trade guaranty
applied to trades in response to processing developments and risk
management considerations and to follow industry settlement cycles.\8\
Since implementation of the current trade guaranty policy, the
marketplace has experienced significant change. The proposed
accelerated trade guaranty and related proposed changes described
herein would benefit the industry by mitigating counterparty risk and
enhancing counterparties' ability to assess that risk by having NSCC
become the central counterparty to CNS trades and by applying the trade
guaranty to Balance Order trades at an earlier point in the settlement
cycle.
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release Nos. 44648 (August 2,
2001), 66 FR 42245 (August 10, 2001) (SR-NSCC-2001-11); 35442 (March
3, 1995), 60 FR 13197 (March 10, 1995) (SR-NSCC-95-02); 35807 (June
5, 1995), 60 FR 31177 (June 13, 1995) (SR-NSCC-95-03); and 27192
(August 29, 1989), 54 FR 37010 (approving SR-NSCC-87-04, SR-MCC-87-
03, and SR-SCCP-87-03 until December 31, 1990).
---------------------------------------------------------------------------
The transfer of counterparty credit risk from Members to NSCC at an
earlier point in the settlement cycle facilitates a shortened holding
period of bilateral credit risk for counterparties by transferring the
obligation onto NSCC, which is better equipped to manage that
counterparty credit risk, including potential systemic impact, compared
to the counterparties themselves.
In order to implement this proposed change, NSCC would amend
Addendum K of its Rules \9\ to provide that CNS trades and Balance
Order trades would be guaranteed by NSCC at the point of trade
validation.\10\
---------------------------------------------------------------------------
\9\ Supra note 4.
\10\ The proposed accelerated trade guaranty would not apply to
items not currently guaranteed today.
---------------------------------------------------------------------------
NSCC also proposes to clarify in Addendum K \11\ that the guaranty
of obligations arising out of the exercise or assignment of options
that are settled at NSCC is not governed by Addendum K \12\ but by a
separate arrangement between NSCC and The Options Clearing Corporation,
as referred to in Procedure III of the Rules.\13\
---------------------------------------------------------------------------
\11\ Supra note 4.
\12\ Id.
\13\ Id.
---------------------------------------------------------------------------
(ii) Proposed Enhancements to NSCC's Clearing Fund Formula
In conjunction with accelerating the trade guaranty, NSCC would
enhance its Clearing Fund formula to address the risks posed by the
expanded trade guaranty. Specifically, NSCC proposes to amend Procedure
XV \14\ (Clearing Fund Formula and Other Matters) to include three new
components: The Margin Requirement Differential (``MRD''), the Coverage
Component and the Intraday Backtesting Charge.
---------------------------------------------------------------------------
\14\ Id.
---------------------------------------------------------------------------
NSCC also proposes to add to Procedure XV \15\ a description of the
enhanced intraday mark-to-market component of the Clearing Fund formula
that clarifies the circumstances and criteria for the assessment of an
intraday mark-to-market call. In addition, NSCC proposes to delete the
Specified Activity charge, a component of the Clearing Fund formula
that mitigates shortened cycle risk (that is, the risk of the trade
guaranty attaching prior to collection of daily Clearing Fund). This
charge would no longer be necessary because the MRD would mitigate
those same risks.
---------------------------------------------------------------------------
\15\ Id.
---------------------------------------------------------------------------
A more detailed description of the foregoing changes follows:
A. The Required Deposit and the Accelerated Trade Guaranty
NSCC collects Required Deposits from all Members as margin to
protect NSCC against losses in the event of a Member's default. The
objective of the Required Deposit is to mitigate potential losses to
NSCC associated with liquidation of the Member's portfolio if NSCC
ceases to act for a Member (hereinafter referred to as
[[Page 79073]]
a ``default''). NSCC determines Required Deposit amounts using a risk-
based margin methodology that is intended to capture market price risk.
The methodology uses historical market moves to project or forecast the
potential gains or losses on the liquidation of a defaulting Member's
portfolio, assuming that a portfolio would take three days to liquidate
or hedge in normal market conditions. The projected liquidation gains
or losses are used to determine the Member's Required Deposit, which is
calculated to cover projected liquidation losses to be at or above a 99
percent confidence level (the ``Coverage Target''). The aggregate of
all Members' Required Deposits constitutes NSCC's Clearing Fund, which
NSCC would be able to access if a defaulting Member's own Required
Deposit is insufficient to satisfy losses to NSCC caused by the
liquidation of the Member's portfolio.
NSCC calculates and collects Required Deposits from Members daily.
Each Member's daily Required Deposit is calculated based on the end-of-
day positions from the prior day and is generally collected by 10:00
a.m. ET. NSCC's current trade guaranty does not generally attach to
trades until midnight of T+1, after Required Deposits reflecting these
trades have been collected. Therefore, Members' Required Deposits are
generally sufficient to cover projected liquidation losses for
guaranteed trades. However, under the accelerated trade guaranty
proposal, NSCC's trade guaranty would attach to current-day trades
immediately upon trade validation, before Required Deposits reflecting
these trades have been collected (which NSCC refers to herein as the
``coverage gap'').\16\ Therefore, Members' Required Deposits may not be
sufficient to cover the projected liquidation losses of trades
guaranteed by NSCC upon trade validation, and NSCC, absent the proposed
Clearing Fund formula enhancements, could incur a loss associated with
those trades if it ceases to act for a Member.
---------------------------------------------------------------------------
\16\ The coverage gap is the period between the time that NSCC
would guarantee a trade and the time that NSCC would collect
additional margin to cover such trade.
---------------------------------------------------------------------------
B. Addition of the MRD to the Clearing Fund Formula
The MRD is designed to help mitigate the risks posed to the
Corporation by day-over-day fluctuations in a Member's portfolio by
forecasting future changes in a Member's portfolio based on a
historical look-back at each Member's portfolio over a given time
period. A Member's portfolio may fluctuate significantly from one
trading day to the next as the Member executes trades throughout the
day. Currently, daily fluctuations in a Member's portfolio resulting
from such trades do not pose any additional or different risk to NSCC
because those trades are not guaranteed by NSCC until a Required
Deposit reflecting such trades is collected by NSCC. However, under the
accelerated trade guaranty proposal, trades would be guaranteed by NSCC
upon trade validation and therefore may result in large un-margined
intraday portfolio fluctuations during the coverage gap. The MRD would
increase Members' Required Deposits by an amount calculated to cover
forecasted fluctuations in Members' portfolios, based upon historical
activity.
The MRD would be calculated and charged on a daily basis as a part
of each Member's Required Deposit and consists of two components: The
``MRD VaR'' and the ``MRD MTM.'' The MRD VaR looks at historical day-
over-day positive changes in the start of day (``SOD'') volatility
component of a Member's Required Deposit \17\ (``Volatility Charge'')
over a 100-day look-back period and would be calculated to equal the
exponentially weighted moving average (``EWMA'') of such changes to the
Member's Volatility Charge during the look-back period. The MRD MTM
looks at historical day-over-day increases to the SOD mark-to-market
component of a Member's Required Deposit \18\ over a 100-day look-back
period and would be calculated to equal the EWMA of such changes to the
Member's SOD mark-to-market component during the look-back period. The
MRD is calculated to equal the sum of MRD VaR and MRD MTM times a
multiplier calibrated based on backtesting results. NSCC has determined
that a 100-day look-back period would provide it with a sufficient time
series to reflect current market conditions.
---------------------------------------------------------------------------
\17\ The volatility component of the Clearing Fund formula for
CNS trades and Balance Order trades is described in Procedure XV,
Sections I.(A)(1)(a) and I.(A)(2)(a), respectively.
\18\ The SOD mark-to-market component of the Clearing Fund
formula for CNS trades consists of Regular Mark-to-Market and ID Net
Mark-to-Market, which are described in Procedure XV, Sections
I.(A)(1)(b) and I.(A)(1)(c), respectively. The SOD mark-to-market
component of the Clearing Fund formula for Balance Order trades is
described in Procedure XV, Section I.(A)(2)(b).
---------------------------------------------------------------------------
By addressing the day-over-day changes to each Member's SOD
Volatility Charge and SOD mark-to-market component, the MRD would help
mitigate the risks posed to the Corporation by un-margined day-over-day
fluctuations to a Member's portfolio resulting from intraday trading
activity that would be guaranteed during the coverage gap.
C. Addition of the Coverage Component to the Clearing Fund Formula
The ``Coverage Component'' is designed to mitigate the risks
associated with a Member's Required Deposit being insufficient to cover
projected liquidation losses to the Coverage Target by adjusting a
Member's Required Deposit towards the Coverage Target. The Corporation
would face increased exposure to a Member's un-margined portfolio as a
result of the proposed accelerated trade guaranty and would have an
increased need to have each Member's Required Deposit meet the Coverage
Target. The Coverage Component would supplement the MRD by preemptively
increasing a Member's Required Deposit in an amount calculated to
forecast potential deficiencies in the margin coverage of a Member's
guaranteed portfolio. The preemptive nature of the Coverage Component
differentiates it from the Regular Backtesting Charge and the Intraday
Backtesting Charge, both of which are reactive measures to increase the
Member's Required Deposit to above the Coverage Target.
The Coverage Component would be calculated and charged on a daily
basis as a part of each Member's Required Deposit. To calculate the
Coverage Component, NSCC would compare the simulated liquidation profit
and loss of a Member's portfolio, using the actual positions in the
Member's portfolio and the actual historical returns on the security
positions in the portfolio, against the sum of each of the following
components of the Clearing Fund formula: The Volatility Charge, the
MRD, the Illiquid Charge and the Market Maker domination charge
(collectively, the ``Market Risk Components''), to determine if there
were any deficiencies between the amounts collected by these components
and the simulated profit and loss of the Member's portfolio that would
have been realized had it been liquidated during a 100-day look-back
period. NSCC would then determine a daily ``peak deficiency'' amount
for each Member equal to the maximum deficiency over a rolling 10
business day period for the preceding 100 days. The Coverage Component
would be calculated to equal the EWMA of the peak deficiencies over the
100-day look-back period.
In working to bring each Member's Required Deposit towards the
Coverage Target by preemptively collecting an
[[Page 79074]]
amount designed to cover projected liquidation profit and loss of a
Member's portfolio, including the trades guaranteed during the coverage
gap, NSCC would further mitigate the risks posed to it by the proposed
accelerated trade guaranty.
D. Addition of the Intraday Backtesting Charge to the Clearing Fund
Formula
NSCC employs daily backtesting to determine the adequacy of each
Member's Required Deposit. NSCC compares the Required Deposit \19\ for
each Member with the simulated liquidation profit and loss using the
actual positions in the Member's portfolio and the actual historical
returns on the security positions in the portfolio. NSCC investigates
the cause(s) of any backtesting deficiencies. As a part of this
investigation, NSCC pays particular attention to Members with
backtesting deficiencies that bring the results for that Member below
the Coverage Target to determine if there is an identifiable cause of
repeat backtesting deficiencies. NSCC also evaluates whether multiple
Members experience backtesting deficiencies for the same underlying
reason. Upon implementation of the accelerated trade guaranty, NSCC
would employ a similar backtesting process on an intraday basis to
determine the adequacy of each Member's Required Deposit. However,
instead of backtesting a Member's Required Deposit against the Member's
SOD portfolio, NSCC would use portfolios from two intraday time
slices.\20\
---------------------------------------------------------------------------
\19\ For backtesting comparisons, NSCC uses the Required Deposit
amount without regard to the actual collateral posted by the Member.
\20\ Intraday time slices are subject to change based upon
market conditions and would include the positions from SOD plus any
additional positions up to that time.
---------------------------------------------------------------------------
1. Calculation of the Intraday Backtesting Charge
The objective of the Intraday Backtesting Charge is to increase
Required Deposits for Members that are likely to experience intraday
backtesting deficiencies on the basis described above by an amount
sufficient to maintain such Member's intraday backtesting coverage
above the Coverage Target. Members that maintain consistent end of day
positions but have a high level of intraday trading activity pose risk
to NSCC if they were to default intraday.
Because the intraday trading activity and size of the intraday
backtesting deficiencies vary among impacted Members, NSCC must assess
an Intraday Backtesting Charge that is specific to each impacted
Member. To do so, NSCC examines each impacted Member's historical
intraday backtesting deficiencies observed over the prior 12-month
period to identify the five largest intraday backtesting deficiencies
that have occurred during that time. The presumptive Intraday
Backtesting Charge amount would equal that Member's fifth largest
historical intraday backtesting deficiency, subject to adjustment as
further described below. NSCC believes that applying an additional
margin charge equal to the fifth largest historical intraday
backtesting deficiency to a Member's Required Deposit would have
brought the Member's historically observed intraday backtesting
coverage above the Coverage Target.\21\
---------------------------------------------------------------------------
\21\ Intraday backtesting would include 500 observations per
year (twice per day over 250 observation days). Each occurrence of a
backtesting deficiency would reduce a Member's overall backtesting
coverage by 0.2 percent (1 exception/500 observations). Accordingly,
an Intraday Backtesting Charge equal to the fifth largest
backtesting deficiency would have brought backtesting coverage up to
99.2 percent.
---------------------------------------------------------------------------
The Intraday Backtesting Charge would only be applicable to those
Members whose overall 12-month trailing intraday backtesting coverage
falls below the Coverage Target.
Although the fifth largest historical backtesting deficiency for a
Member would be used as the Intraday Backtesting Charge in most cases,
NSCC would retain discretion to adjust the charge amount based on other
circumstances that might be relevant for assessing whether an impacted
Member is likely to experience future backtesting deficiencies and the
estimated size of such deficiencies. Examples of relevant circumstances
that could be considered by NSCC in calculating the final, applicable
Intraday Backtesting Charge amount include material differences among
the Member's five largest intraday backtesting deficiencies observed
over the prior 12-month period, variability in the net settlement
activity after the collection of the Member's Required Deposit and
observed market price volatility in excess of the Member's historical
Volatility Charge. Based on NSCC's assessment of the impact of these
circumstances on the likelihood, and estimated size, of future intraday
backtesting deficiencies for a Member, NSCC may, in its discretion,
adjust the Intraday Backtesting Charge for such Member in an amount
that NSCC determines to be more appropriate for maintaining such
Member's intraday backtesting results above the Coverage Target.
The resulting Intraday Backtesting Charge would be added to the
Required Deposit for such Member and would be imposed on a daily basis
for a one-month period.
In order to differentiate the Backtesting Charge assessed on the
start of the day portfolio from the Backtesting Charge assessed on an
intraday basis, NSCC would amend the Rules by adding a defined term
``Regular Backtesting Charge'' to Procedure XV, Section I.(B)(3).\22\
---------------------------------------------------------------------------
\22\ Supra note 4.
---------------------------------------------------------------------------
2. Communication With Members and Imposition of the Intraday
Backtesting Charge
If NSCC determines that an Intraday Backtesting Charge should apply
to a Member who was not assessed an Intraday Backtesting Charge during
the immediately preceding month or that the Intraday Backtesting Charge
applied to a Member during the previous month should be increased, NSCC
would notify the Member on or around the 25th calendar day of the month
prior to the assessment of the Intraday Backtesting Charge or prior to
the increase to the Intraday Backtesting Charge, as applicable, if not
earlier.
NSCC would impose the Intraday Backtesting Charge as an additional
charge applied to each impacted Member's Required Deposit on a daily
basis for a one-month period and would review each applied Intraday
Backtesting Charge each month. If an impacted Member's trailing 12-
month intraday backtesting coverage exceeds the Coverage Target
(without taking into account historically imposed Intraday Backtesting
Charges), the Intraday Backtesting Charge would be removed.
E. Removal of the Specified Activity Charge From the Clearing Fund
Formula
Currently, NSCC collects a Specified Activity charge, which is
designed to cover the risk posed to NSCC by transactions that settle on
a shortened cycle.\23\ Such transactions pose an increased risk to NSCC
because these trades settle on a shortened settlement cycle and may be
guaranteed by NSCC prior to the collection of margin on them. The
Specified Activity charge currently mitigates this risk by increasing
the Required Deposit for a Member in relation to the number of
Specified Activity trades submitted by the Member to NSCC over a 100-
day look-back period. However, the risk posed to NSCC by Specified
Activity
[[Page 79075]]
would no longer be unique to such trade activity--the proposed
accelerated trade guaranty would result in a similar risk to NSCC. The
addition of the MRD and Coverage Components to the Clearing Fund
formula would mitigate the risks posed by trades guaranteed by NSCC
prior to the collection of margin on those trades. As a result, NSCC
proposes to eliminate the Specified Activity charge because imposing a
separate Specified Activity charge would no longer be necessary once
the MRD and Coverage Components are added to the Clearing Fund formula.
---------------------------------------------------------------------------
\23\ Examples of these trades can include next day settling
trades, same day settling trades, cash trades or sellers' options.
---------------------------------------------------------------------------
F. Enhanced Intraday Mark-to-Market Margining
NSCC proposes to enhance its current intraday margining to further
mitigate the intraday coverage gap risk that may be introduced to the
Corporation as a result of the proposed accelerated trade guaranty. By
way of background, NSCC currently collects a SOD mark-to-market margin,
which is designed to mitigate the risk arising out of the value change
between the contract/settlement value of a Member's open positions and
the current market value, as part of its Clearing Fund formula. A
Member's SOD mark-to-market margin is calculated and collected as part
of a Member's daily Required Deposit based on the Member's prior end-
of-day positions. The SOD mark-to-market component of the daily
Required Deposit is calculated to cover a Member's exposure due to
market moves and/or trading and settlement activity by bringing the
portfolio of open positions up to the current market value. However,
because the SOD mark-to-market component is calculated only once daily
using the prior end-of-day positions and prices, it will not cover a
Member's exposure arising out of any intraday changes to position and
market value in a Member's portfolio. Accordingly, NSCC currently
collects intraday mark-to-market margin from Members to cover
additional risk exposure arising out of intraday position and market
value changes to the Member's portfolio if the additional risks are
sufficiently large to warrant the collection of an intraday margin.
NSCC has determined that it is not necessary to collect intraday
margin from every Member that experiences an intraday mark-to-market
change because the Volatility Charge already collected as part of
Members' daily Required Deposits is calculated to cover projected
changes in the contract/settlement value of a Member's portfolio and
likely cover intraday changes to a Member's portfolio. However, in
certain instances, Members may have intraday mark-to-market changes
that are significant enough that NSCC is exposed to an increased risk
of loss as a result of such Member's intraday activities. In
particular, NSCC measures each Member's intraday mark-to-market
exposure against the Volatility Charge. NSCC collects an intraday mark-
to-market amount from any Member that has an intraday mark-to-market
exposure that meets or exceeds a threshold percentage as compared to
the Member's Volatility Charge. NSCC believes that such Members pose an
increased risk of loss to the Corporation because the coverage provided
by the Volatility Charge, which is designed to cover estimated losses
to a portfolio over a specified time period, would be exhausted by an
intraday mark-to-market exposure so large that the Member's Required
Deposit would potentially be unable to absorb further intraday losses
to the Member's portfolio.
In order to further mitigate the risk posed to NSCC by the proposed
accelerated trade guaranty, NSCC is proposing to enhance its collection
of intraday mark-to-market margin. NSCC would impose the intraday mark-
to-market margin amount at a lower threshold. Currently, NSCC makes an
intraday mark-to-market margin call if a Member's intraday mark-to-
market exposure meets or exceeds 100 percent of such Member's
Volatility Charge; however, such threshold may be reduced by NSCC
during volatile market conditions. With this proposal, NSCC would make
an intraday margin call if a Member's intraday mark-to-market exposure
meets or exceeds 80 percent of such Member's Volatility Charge, where
such threshold may still be reduced by NSCC during volatile market
conditions. This proposed change would serve to collect intraday margin
earlier and more proactively preserve the coverage provided by a
Member's Volatility Charge and Required Deposit.
In addition, NSCC would monitor intraday changes to Member's mark-
to-market exposure at regular intervals to further mitigate the risk
posed to NSCC by the accelerated trade guaranty. By doing so, NSCC
would be able to make intraday margin calls more frequently to those
Members whose intraday mark-to-market exposures exceed the Volatility
Charge threshold. Enhancing the collection of the intraday mark-to-
market amount so that it occurs earlier and more frequently would allow
NSCC to reduce the amount of uncovered risk during the coverage gap and
would therefore further mitigate the risk posed to the Corporation by
the accelerated trade guaranty.
NSCC proposes to amend Procedure XV to include a description of the
enhanced intraday mark-to-market margin charge that clarifies the
circumstances and criteria for the assessment of an intraday mark-to-
market call. This would ensure that Members are aware that the
Corporation regularly monitors and considers intraday mark-to-market as
part of its regular Clearing Fund formula.
G. Adjustments to the Calculation of the Excess Capital Premium
Component
The Excess Capital Premium \24\ is designed to address spikes in a
Member's Required Deposit based upon any one day of activity. It is not
designed to provide additional Required Deposits over an extended
period of time. Currently, the Excess Capital Premium for a Member is
calculated based upon the Member's Clearing Fund Required Deposit and
the Member's excess net capital. With the addition of the MRD and the
Coverage Component, NSCC proposes to exclude these charges from the
calculation of the Excess Capital Premium. The MRD and the Coverage
Component all utilize a historical look-back period, which accounts for
the risk of such activity well after the relevant trades have settled.
Risks related to such trades would be reflected in increased amounts
assessed for these components over the subsequent time periods. If
these components are included in the calculation of the Excess Capital
Premium, especially during periods following an increase in activity,
then the increased MRD and Coverage Component could lead to more
frequent Excess Capital Premium charges over an extended period of
time. This is not the intended purpose of the Excess Capital Premium
and could place an unnecessary burden on Members.
---------------------------------------------------------------------------
\24\ The Excess Capital Premium is a charge imposed on a Member
when the Member's Required Deposit exceeds its excess net capital,
as described in Procedure XV.
---------------------------------------------------------------------------
(iii) Proposed Changes to Procedure II (Trade Comparison and Recording
Service)
Next day settling index receipts may be guaranteed prior to the
collection of margin reflecting such trades and thus carry a very
similar risk as Specified Activity trades described above. More
specifically, because these trades are settled on the day after they
are received and validated by NSCC, NSCC currently attaches its
guaranty to them at the time of validation, prior to the collection of
a Required Deposit that reflects such trades. Unlike the risk from
Specified
[[Page 79076]]
Activity trades, which is mitigated by the Specified Activity charge,
the risk for next day settling index receipts is currently mitigated by
permitting NSCC to delay the processing and reporting of these trades
if a Member's Required Deposit is not paid on time. However, like the
risk associated with Specified Activity, under the proposed rule
change, this risk would generally be mitigated by the addition of the
MRD and the Coverage Component. Therefore, NSCC proposes to amend
Procedure II \25\ (Trade Comparison and Recording Service) to remove
the language that permits NSCC to delay the processing and reporting of
next day settling index receipts until the applicable margin on these
transactions is paid.
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\25\ Supra note 4.
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(iv) Loss Allocation Provision for Off-the-Market Transactions
NSCC proposes to introduce a new loss allocation provision for any
trades that fall within the proposed definition of ``Off-the-Market
Transactions'' in order to limit NSCC's exposure to certain trades that
have a price that differs significantly from the prevailing market
price for the underlying security at the time the trade is executed.
This provision would apply in the event that NSCC ceases to act for a
Member that engaged in Off-the-Market Transactions and only to the
extent that NSCC incurs a net loss in the liquidation of such
Transactions.\26\
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\26\ A net loss on liquidation of the Off-the-Market Transaction
means that the loss on liquidation of the Member's portfolio exceeds
the collected Required Deposit of the Member and such loss is
attributed to the Off-the-Market Transaction. Such loss would be
allocated directly and entirely to the Member that submitted the
Off-the-Market Transaction, or on whose behalf the Off-the-Market
Transaction was submitted, to NSCC; however, no allocation would be
made if such Member has satisfied all applicable intraday mark-to-
market margin charges assessed by NSCC with respect to the Off-the-
Market Transaction.
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NSCC would define ``Off-the-Market Transactions'' as either a
single transaction or a series of transactions settled within the same
cycle with greater than $1 million in gross proceeds and either higher
or lower than the most recently observed market price by a percentage
amount based on market conditions and factors that impact trading
behavior of the underlying security, including volatility, liquidity
and other characteristics of such security.
The proposed rule change would establish the loss allocation for
Off-the-Market Transactions. NSCC would allocate any losses to NSCC
resulting from the liquidation of any guaranteed, open Off-the-Market
Transaction of a defaulted Member directly and entirely to the
surviving counterparty to that transaction. Losses would be allocated
to counterparties in proportion to their specific Off-the-Market
Transaction gain and would be allocated only to the extent of NSCC's
loss; however, no allocation shall be made if the defaulted Member has
satisfied all requisite intraday mark-to-market margin assessed by NSCC
with respect to the Off-the-Market Transaction.\27\
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\27\ A Member's Off-the-Market Transaction that has been marked
to market is, by definition, no longer an Off-the-Market Transaction
when the mark-to-market component of the Member's Required Deposit
is satisfied.
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This proposed change would allow NSCC to mitigate the risk of loss
associated with guaranteeing these Off-the-Market Transactions. The
proposal recognizes that applying the accelerated trade guaranty to
transactions whose price significantly differs from the most recently
observed market price could inappropriately increase the loss that NSCC
may incur if a Member that has engaged in Off-the-Market Transactions
defaults and its open, guaranteed positions are liquidated. Members not
involved in Off-the-Market Transactions, or not involved in Off-the-
Market Transactions that result in losses to NSCC, would not be
included in this process. This exclusion would apply only to losses
that are attributable to Off-the-Market Transactions and would not
exclude Members from other obligations that may result from any loss or
liabilities incurred by NSCC from a Member default.
In order to implement this proposed change, NSCC would amend Rule 4
\28\ (Clearing Fund) to provide that, if a loss or liability of NSCC is
determined by NSCC to arise in connection with the liquidation of any
Off-the-Market Transactions, such loss or liability would be allocated
directly to the surviving counterparty to the Off-the-Market
Transaction that submitted the transaction to NSCC for clearing. NSCC
would also amend Rule 1 \29\ (Definitions and Descriptions) to include
a definition of Off-the-Market Transactions.
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\28\ Supra note 4.
\29\ Id.
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(v) Technical Proposed Rule Change
NSCC is proposing a change to Procedure XV \30\ to clarify the
calculation of the Regular Mark-to-Market component for CNS
transactions. NSCC's historical and current policy for the calculation
of any mark-to-market component of the Clearing Fund calculation for
CNS trades and Balance Order trades is that where a credit is derived
from a Member's mark-to-market calculation, the value of the
calculation is adjusted to zero. When NSCC implemented the ID Net
service,\31\ a provision was added to Procedure XV \32\ that explicitly
stated this policy as it relates to CNS transactions of subscribers to
the ID Net service. This change inadvertently created an implication
that the calculation of Regular Mark-to-Market credit for Members who
were not ID Net Subscribers would not be set to zero. NSCC is proposing
to revise the applicable provision to remove the reference to ID Net
Subscribers.
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\30\ Id.
\31\ NSCC's ID Net service is defined further in Rule 65. Rules,
supra note 4. See Securities Exchange Act Release No. 57901 (June 2,
2008), 73 FR 32373 (June 6, 2008) (SR-NSCC-2007-14).
\32\ Supra note 4.
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(vi) Member Outreach
Over the past several years, NSCC has conducted outreach with its
Members with respect to impact on their Clearing Fund Required Deposits
as a result of this proposal. This includes the publication of the 2013
whitepaper, ``Enhancing Risk Management: Important Upcoming Changes
From NSCC'', as well as individual impact studies provided to each
Member showing the anticipated impact on the Member's Clearing Fund
Required Deposit based on their historical portfolios.
Implementation Timeframe
Pending Commission approval, Members would be advised of the
implementation date of this proposal through issuance of an NSCC
Important Notice. NSCC expects to run the proposed changes in a test
environment for a parallel period of at least three months prior to
implementation. Details and dates regarding such test period would be
communicated to Members through an NSCC Important Notice.
2. Statutory Basis
Section 17A(b)(3)(F) of the Act requires, in part, that NSCC's
Rules be designed to promote the prompt and accurate clearance and
settlement of securities transactions, to assure the safeguarding of
securities and funds which are in the custody and control of NSCC or
for which it is responsible and to protect investors and the public
interest.\33\
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\33\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposal to accelerate the time that NSCC's trade guaranty
attaches to trades submitted to it for clearing has been designed to
promote the prompt and accurate clearance and settlement of
[[Page 79077]]
securities transactions in furtherance of the Act. Specifically, NSCC
would provide a trade guaranty to CNS trades and Balance Order trades
at an earlier point in the settlement cycle. The proposed accelerated
guaranty would mitigate counterparty risk and would enhance Members'
ability to assess that risk by having NSCC become the central
counterparty to CNS trades and by applying the trade guaranty to
Balance Order trades at an earlier point in the settlement cycle.
Therefore, NSCC believes the proposed accelerated guaranty promotes the
prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\34\
---------------------------------------------------------------------------
\34\ Id.
---------------------------------------------------------------------------
The proposed rule changes to (i) add the new components to the
Clearing Fund formula, (ii) enhance the intraday mark-to-market margin
process and (iii) remove provisions regarding the Specified Activity
charge and the provisions that permit NSCC to delay processing and
reporting for certain index receipt transactions (all as described in
detail above) have been designed to assure the safeguarding of
securities and funds in the custody and control of NSCC or for which it
is responsible in furtherance of the Act. Specifically, the proposals
in (i) and (ii) would allow NSCC to appropriately collect additional
margin to mitigate the exposure presented to NSCC by the accelerated
trade guaranty, providing NSCC with the ability to safeguard the funds
and securities for which it is responsible by enabling it to collect
adequate collateral to cover its additional exposures. By enhancing the
Clearing Fund formula, the proposals in (i) and (ii) would also reduce
the risk of loss mutualization to Members because the enhanced margin
collected from each Member would help NSCC limit its exposure to
potential losses from defaults by its participants under normal market
conditions and minimize potential losses to NSCC and its non-defaulting
Members. The proposed rule changes in (iii) would eliminate provisions
that would no longer be needed to mitigate risk because the risk they
currently address would be addressed by the new components proposed to
be introduced to the Clearing Fund formula, as discussed in detail
above. Therefore, NSCC believes the proposed rule changes in (i), (ii)
and (iii) assures the safeguarding of securities and funds which are in
the custody and control of NSCC or for which it is responsible,
consistent with Section 17A(b)(3)(F) of the Act.\35\
---------------------------------------------------------------------------
\35\ Id.
---------------------------------------------------------------------------
The proposed rule change to introduce a new loss allocation
provision for any trades that fall within the proposed definition of
Off-the-Market Transactions would help NSCC to limit its exposure to
certain trades that have a price that differs significantly from the
most recently observed market price for the underlying security.
Therefore, the reduction of NSCC's exposure to Off-the-Market
Transactions would assist NSCC in responding to a Member default and
would minimize potential losses to NSCC and its non-defaulting Members.
As such, this proposed rule change is designed to assure the
safeguarding of securities and funds that are in the custody and
control of NSCC or for which it is responsible, consistent with Section
17A(b)(3)(F) of the Act.\36\
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\36\ Id.
---------------------------------------------------------------------------
Also, the proposed technical change to the calculation of the
Regular Mark-to-Market component for CNS transactions would provide
additional clarity to NSCC Members and would ensure the Rules
accurately reflect that Regular Mark-to-Market credit for all NSCC
Members would be set to zero. Therefore, NSCC believes the proposed
technical change would protect investors and the public interest,
consistent with the requirements of Section 17A(b)(3)(F) of the
Act.\37\
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\37\ Id.
---------------------------------------------------------------------------
NSCC believes that the proposal is also consistent with Rules 17Ad-
22(b)(1) and (b)(2), promulgated under the Act. Rule 17Ad-22(b)(1)
requires NSCC to establish, implement, maintain and enforce written
policies and procedures reasonably designed to measure its credit
exposures to its participants at least once a day and limit its
exposures to potential losses from defaults by its participants under
normal market conditions so that the operations of NSCC would not be
disrupted and non-defaulting participants would not be exposed to
losses that they cannot anticipate or control.\38\ NSCC's proposal to
expand its current intraday margin collection to include (a) the
collection of intraday mark-to-market margin at a lower threshold and
(b) the collection of the Intraday Backtesting Charge would further
enhance its intraday monitoring and its ability to measure credit
exposures at least once a day. The proposal to enhance the amount of
margin collected from each Member would help NSCC to limit its exposure
to potential losses from defaults by its participants under normal
market conditions and reduce risk of loss mutualization to the NSCC
membership. Similarly, the proposal to introduce a new loss allocation
provision for Off-the-Market Transactions would also help NSCC to limit
its exposure to potential losses from defaults by its participants
under normal market conditions. Therefore, NSCC believes the proposals
are consistent with the requirements of Rule 17Ad-22(b)(1), promulgated
under the Act, cited above.
---------------------------------------------------------------------------
\38\ 17 CFR 240.17Ad-22(b)(1).
---------------------------------------------------------------------------
Rule 17Ad-22(b)(2) requires NSCC to establish, implement, maintain
and enforce written policies and procedures reasonably designed to
``use margin requirements to limit its credit exposures to participants
under normal market conditions and use risk-based models and parameters
to set margin requirements.'' \39\ The proposal to add the MRD, the
Coverage Component and the Intraday Backtesting Charge to the Clearing
Fund formula and to collect intraday mark-to-market margin at a lower
threshold in order to mitigate the exposure presented to NSCC by the
accelerated trade guaranty would enable NSCC to enhance its margin
requirements to better limit its credit exposures to participants under
normal market conditions. Therefore, NSCC believes the proposed changes
are consistent with the requirements of Rule 17Ad-22(b)(2), promulgated
under the Act, cited above.
---------------------------------------------------------------------------
\39\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------
The proposed changes to NSCC's Clearing Fund formula and the
intraday margin process are also designed to be consistent with Rules
17Ad-22(e)(4) and (e)(6) of the Act, which were recently adopted by the
Commission.\40\ Rule 17Ad-22(e)(4) will require NSCC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to effectively identify, measure, monitor, and
manage its credit exposures to participants and those exposures arising
from its payment, clearing, and settlement processes.\41\ NSCC's
proposal to expand its current intraday margin collection to include
(a) the collection of intraday mark-to-market margin at a lower
threshold and (b) the collection of the Intraday Backtesting Charge
would enhance its ability to identify, measure,
[[Page 79078]]
monitor and manage its credit exposures to participants. The proposal
to enhance the amount of margin NSCC collected from each Member and to
introduce a new loss allocation provision for Off-the-Market
Transactions would further help NSCC to manage its credit exposures to
participants and those exposures arising from its payment, clearing,
and settlement processes. Therefore, NSCC believes these proposals are
consistent with the requirements of Rule 17Ad-22(e)(4), promulgated
under the Act, cited above.
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\40\ The Commission adopted amendments to Rule 17Ad-22,
including the addition of new section 17Ad-22(e), on September 28,
2016. See Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14). The amendments to
Rule 17Ad-22 become effective on December 12, 2016. Id. NSCC is a
``covered clearing agency'' as defined in Rule 17Ad-22(a)(5) and
must comply with new section (e) of Rule 17Ad-22 by April 11, 2017.
Id.
\41\ See Securities Exchange Act Release No. 78961 (September
28, 2016), 81 FR 70786 (October 13, 2016) (S7-03-14).
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Rule 17Ad-22(e)(6) will require NSCC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to cover its credit exposures to its participants by
establishing a risk-based margin system that is monitored by management
on an ongoing basis and regularly reviewed, tested, and verified.\42\
The proposal to add the MRD, the Coverage Component and the Intraday
Backtesting Charge to the Clearing Fund formula and to collect intraday
mark-to-market margin at a lower threshold would help NSCC to cover its
credit exposures to its participants by establishing a risk-based
margin system that is monitored by management on an ongoing basis and
regularly reviewed, tested, and verified. Therefore, NSCC believes this
proposal is consistent with the requirements of Rule 17Ad-22(e)(6),
promulgated under the Act, cited above.
---------------------------------------------------------------------------
\42\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
NSCC does not believe that the proposed rule changes associated
with the acceleration of NSCC's guaranty would impose any burden on
competition but, because these proposed changes would pose additional
risks to NSCC, NSCC has also proposed to (i) add the new components to
the NSCC Clearing Fund formula and (ii) enhance the intraday mark-to-
market margin process; however, NSCC does not believe these proposed
rule changes would impose any burden on competition that is not
necessary and appropriate \43\ because the additional margin charges
assessed on Members are needed to limit the additional exposure to NSCC
of potential losses from defaults by Members as a result of
guaranteeing trades at an earlier point in the settlement cycle and are
commensurate with the risk presented by the trades Members submitted to
NSCC for clearing.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
Additionally, NSCC has proposed to introduce a new loss allocation
provision for any trades that fall within the proposed definition of
Off-the-Market Transactions; however, NSCC also does not believe that
this proposed change would impose any burden on competition that is not
necessary or appropriate \44\ because the new loss allocation provision
would allow NSCC to mitigate the risk of loss associated with
guaranteeing the Off-the-Market Transactions and would apply to Members
in proportion to their specific Off-the-Market Transaction gain and
only to the extent of NSCC's loss.
---------------------------------------------------------------------------
\44\ Id.
---------------------------------------------------------------------------
Based on the foregoing, NSCC does not believe the proposed rule
changes would impose any burden on competition that is not necessary
and appropriate.\45\
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\45\ Id.
---------------------------------------------------------------------------
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
NSCC has not received any written comments relating to this
proposed rule change. NSCC will notify the Commission of any written
comments it receives.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NSCC-2016-005 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-NSCC-2016-005. 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 the filing also will be available
for inspection and copying at the principal office of NSCC and on
DTCC's Web site (https://dtcc.com/legal/sec-rule-filings.aspx). All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NSCC-2016-005 and should be
submitted on or before December 1, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
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\46\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-27154 Filed 11-9-16; 8:45 am]
BILLING CODE 8011-01-P
