Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of a Proposed Rule Change To Expand the Application of the Family-Issued Securities Charge, 35563-35566 [2017-15993]

Download as PDF Federal Register / Vol. 82, No. 145 / Monday, July 31, 2017 / Notices G. Terms of Access to Transaction Reports Not applicable. By the Commission. Brent J. Fields, Secretary. H. Identification of Marketplace of Execution Not applicable. [FR Doc. 2017–16000 Filed 7–28–17; 8:45 am] III. Solicitation of Comments The Commission seeks general comments on the Amendments. Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed Amendments are consistent with the Act. Comments may be submitted by any of the following methods: SECURITIES AND EXCHANGE COMMISSION BILLING CODE 8011–01–P sradovich on DSKBCFCHB2PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CTA/CQ–2017–03 on the subject line. Paper Comments • Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–CTA/CQ–2017–03. 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 Web site (http://www.sec.gov/rules/ sro.shtml). Copies of the submission, all written statements with respect to the proposed Amendments that are filed with the Commission, and all written communications relating to the proposed Amendments 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 Web site viewing and printing at the principal office of the Plans. 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–CTA/ CQ–2017–03 and should be submitted on or before August 21, 2017. VerDate Sep<11>2014 17:38 Jul 28, 2017 Jkt 241001 [Release No. 34–81203; File No. SR–NSCC– 2017–010] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of a Proposed Rule Change To Expand the Application of the Family-Issued Securities Charge July 25, 2017. 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 July 10, 2017, National Securities Clearing Corporation (‘‘NSCC’’) 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 by the clearing agency.3 The 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 change consists of amendments to the NSCC Rules and Procedures (‘‘Rules’’) 4 in order to (i) expand the application of NSCC’s existing family-issued securities charge 5 to apply to all Members, as described below, and (ii) include a definition of ‘‘Family-Issued Security’’ as a security that was issued by a Member or by an affiliate of that Member, as described in greater detail below. U.S.C. 78s(b)(1). CFR 240.19b–4. 3 On July 10, 2017, NSCC filed this proposed rule change as an advance notice (SR–NSCC–2017–804) 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 http://www.dtcc.com/ legal/sec-rule-filings.aspx. 4 Terms not defined herein are defined in the Rules, available at www.dtcc.com/∼/media/Files/ Downloads/legal/rules/nscc_rules.pdf. 5 The family-issued securities charge is currently described in Procedure XV, Section I.(B)(1) of the Rules, supra note 4. PO 00000 1 15 2 17 Frm 00057 Fmt 4703 Sfmt 4703 35563 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 Currently, in calculating its Members’ required deposits to the Clearing Fund, NSCC excludes positions in FamilyIssued Securities of certain Members from its parametric volatility Clearing Fund component (‘‘VaR Charge’’), and instead charges an amount calculated by multiplying the absolute value of the long, net unsettled positions in that Member’s Family-Issued Securities by a percentage that is no less than 40 percent (‘‘FIS Charge’’). The FIS Charge is currently only applied to Members that are rated 5, 6, or 7 on the Credit Risk Rating Matrix (‘‘CRRM’’). The proposed change would expand the application of the FIS Charge to the positions in Family-Issued Securities of all Members to help NSCC cover the specific wrong-way risk posed by Family-Issued Securities, as described further below.6 Therefore, NSCC is proposing to amend (i) Rule 1 (Definitions and Descriptions) to add a definition of ‘‘Family-Issued Security,’’ and (ii) Procedure XV (Clearing Fund Formula and Other Matters) to expand the application of the FIS Charge to all Members by moving the description of FIS Charge from Section I.(B)(1) to Sections I.(A)(1) and I.(A)(2) in order to make clear that the FIS Charge would be included as a component of the Clearing Fund formula calculated for all Members. As a central counterparty, NSCC occupies an important role in the securities settlement system by interposing itself between counterparties to financial transactions and thereby reducing the risk faced by participants and contributing to global financial stability. The effectiveness of a central counterparty’s risk controls and the adequacy of its financial resources 6 Members that do not trade in Family-Issued Securities would not be subject to the FIS Charge. E:\FR\FM\31JYN1.SGM 31JYN1 35564 Federal Register / Vol. 82, No. 145 / Monday, July 31, 2017 / Notices sradovich on DSKBCFCHB2PROD with NOTICES are critical to achieving these riskreducing goals. In that context, NSCC continuously reviews its margining methodology in order to ensure the reliability of its margining in achieving the desired coverage. In order to be most effective, NSCC must take into consideration the risk characteristics specific to certain securities when margining those securities. Among the various risks that NSCC considers when evaluating the effectiveness of its margining methodology are its counterparty risks and identification and mitigation of ‘‘wrong-way’’ risk, particularly specific wrong-way risk, defined as the risk that an exposure to a counterparty is highly likely to increase when the creditworthiness of that counterparty deteriorates.7 NSCC has identified an exposure to specific wrong-way risk when it acts as central counterparty to a Member with respect to positions in Family-Issued Securities. In the event that a Member with unsettled long positions in Family-Issued Securities defaults, NSCC would close out those positions following a likely drop in the credit-worthiness of the issuer, possibly resulting in a loss to NSCC. In 2015, NSCC proposed to address its exposure to specific wrong-way risk in two ways.8 First, NSCC proposed to apply the FIS Charge to its Members that are rated a 5, 6, or 7 on the CRRM (i.e., Members on the Watch List).9 Today, following implementation of the FIS Phase 1 Rule Change, the FIS Charge is applied by excluding positions in Family-Issued Securities of those Members from NSCC’s VaR Charge, and instead charging an amount calculated by multiplying the absolute value of the long net unsettled positions in that Member’s Family-Issued Securities by a percentage.10 That percentage is no less 7 See Principles for financial market infrastructures, issued by the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions 47 n.65 (April 2012), available at http://www.bis.org/publ/cpss101a.pdf. 8 See Securities Exchange Act Release No. 76077 (October 5, 2015), 80 FR 61256 (October 9, 2015), (SR–NSCC–2015–003) (‘‘FIS Phase 1 Rule Change’’). 9 As part of its ongoing monitoring of its membership, NSCC utilizes the CRRM to rate its risk exposures to its Members based on a scale from 1 (the strongest) to 7 (the weakest). Members that fall within the higher risk rating categories (i.e., 5, 6, and 7) are placed on NSCC’s ‘‘Watch List,’’ and may be subject to enhanced surveillance or additional margin charges, as permitted under the Rules. See Rule 2B, Section 4 and Procedure XV, Section I.(B)(1) of the Rules, supra note 4. See also Securities Exchange Act Release No. 80734 (May 19, 2017), 82 FR 24174 (May 25, 2017), (SR–DTC– 2017–002, SR–FICC–2017–006, SR–NSCC–2017– 002) (approving proposed changes to the CRRM methodology). 10 Procedure XV (Clearing Fund Formula and Other Matters), Section I.(B)(1), supra note 4. VerDate Sep<11>2014 17:38 Jul 28, 2017 Jkt 241001 than 40 percent and up to 100 percent, and is determined by NSCC based on the Member’s rating on the CRRM and on the type of Family-Issued Securities submitted to NSCC. As such, under Procedure XV (1) fixed income securities that are Family-Issued Securities are charged a haircut rate of no less than 80 percent for Members that are rated 6 or 7 on the CRRM, and no less than 40 percent for Members rated 5 on the CRRM; and (2) equity securities that are Family-Issued Securities are charged a haircut rate of 100 percent for Members that are rated 6 or 7 on the CRRM, and no less than 50 percent for Members that are rated 5 on the CRRM. Members that have a rating on the CRRM of 1 through 4 are not currently subject to the FIS Charge. As stated above, Family-Issued Securities present NSCC with specific wrong-way risk such that, in the event that a Member with unsettled long positions in Family-Issued Securities defaults, NSCC would close out those positions following a likely drop in the credit-worthiness of the issuer, possibly resulting in a loss to NSCC. Therefore, the FIS Charge is applied to the unsettled long positions in FamilyIssued Securities, which are the positions that NSCC would close out following a Member default, as opposed to the short positions in net unsettled securities. The haircut rates were calibrated based on historical corporate issue recovery rate data, and address the risk that the Family-Issued Securities of a Member would be devalued in the event of that Member’s default. The FIS Charge is currently applied only to Members on the Watch List because these Members present a heightened credit risk to NSCC or have demonstrated higher risk related to their ability to meet settlement, and, as such, at the time the FIS Phase 1 Rule Change was proposed, NSCC believed there was a clear and more urgent need to address NSCC’s exposure to specific wrong-way risk presented by these Members’ positions in Family-Issued Securities. Second, NSCC proposed to further evaluate its exposure to wrong-way risk presented by positions in Family-Issued Securities by reviewing the impact of expanding the application of the FIS Charge to positions in Family-Issued Securities of all Members.11 Following its evaluation, NSCC has determined that the risk characteristics to be considered when margining FamilyIssued Securities extend beyond Members’ creditworthiness. More specifically, exposure to specific wrongway risk is based on the correlation to PO 00000 11 FIS Phase 1 Rule Change, supra note 8. Frm 00058 Fmt 4703 Sfmt 4703 the default of the issuer Member, and NSCC may face this risk with respect to positions in Family-Issued Securities of all of its Members, not only those Members on the Watch List. As such, in order to more effectively mitigate its exposure to specific wrong-way risk, NSCC is proposing to apply the FIS Charge to positions in Family-Issued Securities of all Members. In order to implement this proposal, NSCC would amend Procedure XV to move the FIS Charge from Section I.(B)(1), where it is currently described as an additional deposit for Members on surveillance, to Sections I.(A)(1) and (2), to include the FIS Charge as a component of the Clearing Fund formula that is calculated for each Member.12 Under the proposed change, the calculation of the FIS Charge would not change as applied to Members that are rated 5, 6, or 7 on the CRRM. NSCC is proposing to revise the description of the FIS Charge to include Members that are rated 1 through 4 on the CRRM.13 Specifically, NSCC is proposing to amend the description of the FIS Charge in Procedure XV such that (1) fixedincome securities that are Family-Issued Securities would be charged a haircut rate of no less than 80 percent for Members that are rated 6 or 7 on the CRRM, and no less than 40 percent for Members that are rated 1 through 5 on the CRRM; and (2) equities that are Family-Issued Securities would be charged a haircut rate of 100 percent for Members rated 6 or 7 on the CRRM, and no less than 50 percent for Members that are rated 1 through 5 on the CRRM. The proposed change would also amend NSCC Rule 1 (Definitions and Descriptions) to include a definition of Family-Issued Securities in order to provide more clarity to the Rules. Under the proposed change, ‘‘Family-Issued Security’’ would be defined as a security that was issued by a Member or an affiliate of that Member. 2. Statutory Basis NSCC believes that the proposed change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a registered clearing agency. In particular, NSCC believes that the proposed change is consistent with Section 17A(b)(3)(F) of the Act,14 and Rules 17Ad–22(e)(4)(i), and (6)(i) and 12 Procedure XV, Sections I.(A)(1) and (2) and I.(B), supra note 4. 13 Members that are not rated on the CRRM are not subject to the FIS Charge and would not be subject to the FIS Charge under the proposed change. 14 15 U.S.C. 78q–1(b)(3)(F). E:\FR\FM\31JYN1.SGM 31JYN1 sradovich on DSKBCFCHB2PROD with NOTICES Federal Register / Vol. 82, No. 145 / Monday, July 31, 2017 / Notices (v),15 each promulgated under the Act, for the reasons described below. Section 17A(b)(3)(F) of the Act requires, in part, that the Rules be designed to promote the prompt and accurate clearance and settlement of securities transactions and to protect investors and the public interest.16 By enhancing the margin methodology applied to Family-Issued Securities of all Members, the proposal will assist NSCC in collecting margin that more accurately reflects NSCC’s exposure to a Member that clears Family-Issued Securities and will assist NSCC in its continuous efforts to improve the reliability and effectiveness of its riskbased margining methodology by taking into account specific wrong-way risk. As such, the proposal will help NSCC, as a central counterparty, promote robust risk management, and thus promote the prompt and accurate clearance and settlement of securities transactions, as well as, in general, protect investors and the public interest, consistent with the requirements of Section 17A(b)(3)(F) of the Act. Rule 17Ad–22(e)(4)(i) under the Act requires, in part, that each covered clearing agency 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 arising from its payment, clearing, and settlement processes, including by maintaining sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.17 The specific wrong-way risk presented by Family-Issued Securities is the risk that, in the event that a Member with unsettled long positions in FamilyIssued Securities defaults, NSCC would close out those positions following a likely drop in the credit-worthiness of the issuer, possibly resulting in a loss to NSCC. The haircut rates of the FIS Charge more accurately reflect this risk because they were calibrated based on historical corporate issue recovery rate data, and, therefore, address the risk that the Family-Issued Securities of a Member would be devalued in the event of that Member’s default. In this way, NSCC has determined that the margining methodology used in calculating the FIS Charge more accurately reflects the risk characteristics of Family-Issued Securities than applying its VaR Charge, and would permit NSCC to more accurately identify, measure, monitor and manage its credit exposures to those Members with positions in FamilyIssued Securities. Further, by expanding the application of the FIS Charge to all Members, the proposed change would assist NSCC in collecting and maintaining financial resources that reflect its credit exposures to those Members. Therefore, NSCC believes the proposed change is consistent with Rule 17Ad–22(e)(4)(i). Rule 17Ad–22(e)(6)(i) under the Act requires, in part, that each covered clearing agency that provides central counterparty services 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, at a minimum, considers, and produces margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market.18 Rule 17Ad–22(e)(6)(v) under the Act requires, in part, that each covered clearing agency that provides central counterparty services 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, at a minimum, uses an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products.19 As stated above, Family-Issued Securities present NSCC with specific wrong-way risk that, in the event that a Member with unsettled long positions in Family-Issued Securities defaults, NSCC would close out those positions following a likely drop in the creditworthiness of the issuer, possibly resulting in a loss to NSCC. Therefore, the haircut rates were calibrated based on historical corporate issue recovery rate data, and address the risk that the Family-Issued Securities of a Member would be devalued in the event of that Member’s default, and would more accurately reflect the risk characteristics of Family-Issued Securities than applying its VaR Charge. In this way, the proposal would assist NSCC in maintaining a risk-based margin system that considers, and produces margin levels commensurate with, the risks and particular attributes of Family-Issued Securities. Additionally, NSCC believes application of the FIS Charge to positions in Family-Issued Securities of all Members is an appropriate method for measuring its credit exposures, 15 17 CFR 240.17Ad–22(e)(4) and (e)(6). U.S.C. 78q–1(b)(3)(F). 17 17 CFR 240.17Ad–22(e)(4)(i). 16 15 VerDate Sep<11>2014 17:38 Jul 28, 2017 Jkt 241001 18 17 19 17 PO 00000 CFR 240.17Ad–22(e)(6)(i). CFR 240.17Ad–22(e)(6)(v). Frm 00059 Fmt 4703 Sfmt 4703 35565 because the FIS Charge accounts for the risk factors presented by these securities, i.e. the risk that these securities would be devalued in the event of a Member default. Therefore, NSCC believes the proposed change is consistent with Rule 17Ad–22(e)(6)(i) and (v). (B) Clearing Agency’s Statement on Burden on Competition By expanding the application of the FIS Charge to all Members, and, therefore, increasing the amount of margin that Members may be charged under the Rules, the proposed change may impose a burden on competition. However, because the FIS Charge would be imposed on all Members on an individualized basis in an amount reasonably calculated to mitigate the risks posed to NSCC by those Members’ positions in Family-Issued Securities, NSCC does not believe any burden on competition imposed by the proposed change would be significant. Further, NSCC believes that any burden on competition imposed by the proposed change would be both necessary and appropriate in furtherance of the Act.20 The proposal to expand the application of the FIS Charge to positions in Family-Issued Securities of all Members is necessary for NSCC to limit its credit exposures posed by these securities. Additionally, by permitting NSCC to calculate and collect margin that more accurately reflects the risk characteristics of these securities, the proposed change would assist NSCC in limiting its potential losses from defaults by Members. As stated, the FIS Charge would be imposed on Members on an individualized basis in an amount reasonably calculated to mitigate the risks posed to NSCC by those Members’ positions in Family-Issued Securities. In this way, NSCC believes the proposed change would promote the prompt and accurate clearance and settlement of securities transactions and protect investors and the public interest. As such, NSCC believes any burden on competition imposed by the expansion of the application of the FIS Charge to all Members would be necessary and appropriate in furtherance of the Act. (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others NSCC has not received or solicited any written comments relating to this proposal. NSCC will notify the 20 15 E:\FR\FM\31JYN1.SGM U.S.C. 78q–1(b)(3)(I). 31JYN1 35566 Federal Register / Vol. 82, No. 145 / Monday, July 31, 2017 / Notices Commission of any written comments received by NSCC. 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. 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: sradovich on DSKBCFCHB2PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NSCC–2017–010 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–2017–010. 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 (http://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 VerDate Sep<11>2014 17:38 Jul 28, 2017 Jkt 241001 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 (http://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– 2017–010 and should be submitted on or before August 21, 2017. II. Description of the Proposal, as Modified by Amendment No. 2 The Exchange proposes to delete the entirety of current MRX Rule 701 and replace the current Exchange opening process with an opening process reflected in proposed MRX Rules 701 and 715(t).4 The new opening process is similar to the process used by Phlx,5 as well as the new opening process recently adopted by ISE Gemini, LLC (‘‘ISE Gemini’’) 6 and Nasdaq ISE, LLC (‘‘ISE’’).7 The Exchange’s current and proposed opening processes are described below.8 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.21 Eduardo A. Aleman, Assistant Secretary. A. Current Exchange Opening Process Currently, a Primary Market Maker (‘‘PMM’’) on MRX initiates the ‘‘trading rotation’’ in a specified options class.9 The Exchange may direct that one or more trading rotations be employed on any business day to aid in producing a fair and orderly market.10 For each rotation, except as the Exchange may direct, rotations are conducted in the order and manner the PMM determines to be appropriate under the circumstances.11 The PMM, with the approval of the Exchange, has the authority to determine the rotation order and manner or deviate from the rotation procedures.12 Such authority may be exercised before and during a trading rotation.13 Additionally, two or more trading rotations may be employed simultaneously, if the PMM, with the approval of the Exchange, so determines.14 [FR Doc. 2017–15993 Filed 7–28–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81205; File No. SR–MRX– 2017–01] Self-Regulatory Organizations; Nasdaq MRX, LLC; Order Approving Proposed Rule Change, as Modified by Amendment No. 2, To Amend the Exchange Opening Process July 25, 2017. I. Introduction On May 31, 2017, Nasdaq MRX, LLC (‘‘MRX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change to amend the Exchange’s opening process. On June 14, 2017, the Exchange filed Amendment No. 1 to the proposal. On June 14, 2017, the Exchange withdrew Amendment No. 1 and filed Amendment No. 2 to the proposal, which replaced and superseded the original filing in its entirety. The proposed rule change, as modified by Amendment No. 2, was published for comment in the Federal Register on June 20, 2017.3 The Commission received no comment letters on the proposed rule change. This order approves the proposed rule change, as modified by Amendment No. 2. CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 80937 (June 15, 2017), 82 FR 28113 (‘‘Notice’’). PO 00000 21 17 1 15 Frm 00060 Fmt 4703 Sfmt 4703 4 The Exchange represents that this proposed rule change is being made in connection with a technology migration to a Nasdaq, Inc. (‘‘Nasdaq’’) supported architecture called INET which is utilized on The NASDAQ Options Market LLC, NASDAQ PHLX LLC (‘‘Phlx’’) and NASDAQ BX, Inc. See id. 5 See Phlx Rule 1017. See also Securities Exchange Act Release No. 79274 (November 9, 2016), 81 FR 80694 (November 16, 2016) (SR–Phlx– 2016–79). 6 See ISE Gemini Rules 701 and 715(t). See also Securities Exchange Act Release No. 10952 (February 10, 2017), 82 FR 10952 (February 16, 2017) (SR–ISEGemini–2016–18). 7 See ISE Rules 701 and 715(t). See also Securities Exchange Act Release No. 80225 (March 13, 2017), 82 FR 14243 (March 17, 2017) (SR–ISE–2017–02). 8 In connection with the new opening process, the Exchange proposes to adopt a new ‘‘Definitions’’ section in proposed Rule 701(a), similar to Phlx Rule 1017(a), to define several terms that are used throughout the opening rule. Proposed Rule 701(a) will define: ABBO, ‘‘market for the underlying security,’’ Opening Price, Opening Process, Potential Opening Price, Pre-Market BBO, Quality Opening Market, Valid Width Quote, and Zero Bid Market. For definitions of these terms, see Notice supra note 3 at 28114. 9 See MRX Rule 701(a). 10 See MRX Rule 701(a)(1). 11 See MRX Rule 701(a)(2). 12 See MRX Rule 701(a)(3). 13 See MRX Rule 701(a)(3). 14 See MRX Rule 701(a)(4). E:\FR\FM\31JYN1.SGM 31JYN1

Agencies

[Federal Register Volume 82, Number 145 (Monday, July 31, 2017)]
[Notices]
[Pages 35563-35566]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-15993]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81203; File No. SR-NSCC-2017-010]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of a Proposed Rule Change To Expand the 
Application of the Family-Issued Securities Charge

July 25, 2017.
    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 July 10, 2017, National Securities Clearing Corporation (``NSCC'') 
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 by the clearing agency.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On July 10, 2017, NSCC filed this proposed rule change as an 
advance notice (SR-NSCC-2017-804) 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 http://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed change consists of amendments to the NSCC Rules and 
Procedures (``Rules'') \4\ in order to (i) expand the application of 
NSCC's existing family-issued securities charge \5\ to apply to all 
Members, as described below, and (ii) include a definition of ``Family-
Issued Security'' as a security that was issued by a Member or by an 
affiliate of that Member, as described in greater detail below.
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    \4\ Terms not defined herein are defined in the Rules, available 
at www.dtcc.com/~/media/Files/Downloads/legal/rules/nscc_rules.pdf.
    \5\ The family-issued securities charge is currently described 
in Procedure XV, Section I.(B)(1) of the Rules, supra note 4.
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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
    Currently, in calculating its Members' required deposits to the 
Clearing Fund, NSCC excludes positions in Family-Issued Securities of 
certain Members from its parametric volatility Clearing Fund component 
(``VaR Charge''), and instead charges an amount calculated by 
multiplying the absolute value of the long, net unsettled positions in 
that Member's Family-Issued Securities by a percentage that is no less 
than 40 percent (``FIS Charge''). The FIS Charge is currently only 
applied to Members that are rated 5, 6, or 7 on the Credit Risk Rating 
Matrix (``CRRM''). The proposed change would expand the application of 
the FIS Charge to the positions in Family-Issued Securities of all 
Members to help NSCC cover the specific wrong-way risk posed by Family-
Issued Securities, as described further below.\6\ Therefore, NSCC is 
proposing to amend (i) Rule 1 (Definitions and Descriptions) to add a 
definition of ``Family-Issued Security,'' and (ii) Procedure XV 
(Clearing Fund Formula and Other Matters) to expand the application of 
the FIS Charge to all Members by moving the description of FIS Charge 
from Section I.(B)(1) to Sections I.(A)(1) and I.(A)(2) in order to 
make clear that the FIS Charge would be included as a component of the 
Clearing Fund formula calculated for all Members.
---------------------------------------------------------------------------

    \6\ Members that do not trade in Family-Issued Securities would 
not be subject to the FIS Charge.
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    As a central counterparty, NSCC occupies an important role in the 
securities settlement system by interposing itself between 
counterparties to financial transactions and thereby reducing the risk 
faced by participants and contributing to global financial stability. 
The effectiveness of a central counterparty's risk controls and the 
adequacy of its financial resources

[[Page 35564]]

are critical to achieving these risk-reducing goals. In that context, 
NSCC continuously reviews its margining methodology in order to ensure 
the reliability of its margining in achieving the desired coverage. In 
order to be most effective, NSCC must take into consideration the risk 
characteristics specific to certain securities when margining those 
securities.
    Among the various risks that NSCC considers when evaluating the 
effectiveness of its margining methodology are its counterparty risks 
and identification and mitigation of ``wrong-way'' risk, particularly 
specific wrong-way risk, defined as the risk that an exposure to a 
counterparty is highly likely to increase when the creditworthiness of 
that counterparty deteriorates.\7\ NSCC has identified an exposure to 
specific wrong-way risk when it acts as central counterparty to a 
Member with respect to positions in Family-Issued Securities. In the 
event that a Member with unsettled long positions in Family-Issued 
Securities defaults, NSCC would close out those positions following a 
likely drop in the credit-worthiness of the issuer, possibly resulting 
in a loss to NSCC.
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    \7\ See Principles for financial market infrastructures, issued 
by the Committee on Payment and Settlement Systems and the Technical 
Committee of the International Organization of Securities 
Commissions 47 n.65 (April 2012), available at http://www.bis.org/publ/cpss101a.pdf.
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    In 2015, NSCC proposed to address its exposure to specific wrong-
way risk in two ways.\8\ First, NSCC proposed to apply the FIS Charge 
to its Members that are rated a 5, 6, or 7 on the CRRM (i.e., Members 
on the Watch List).\9\ Today, following implementation of the FIS Phase 
1 Rule Change, the FIS Charge is applied by excluding positions in 
Family-Issued Securities of those Members from NSCC's VaR Charge, and 
instead charging an amount calculated by multiplying the absolute value 
of the long net unsettled positions in that Member's Family-Issued 
Securities by a percentage.\10\ That percentage is no less than 40 
percent and up to 100 percent, and is determined by NSCC based on the 
Member's rating on the CRRM and on the type of Family-Issued Securities 
submitted to NSCC. As such, under Procedure XV (1) fixed income 
securities that are Family-Issued Securities are charged a haircut rate 
of no less than 80 percent for Members that are rated 6 or 7 on the 
CRRM, and no less than 40 percent for Members rated 5 on the CRRM; and 
(2) equity securities that are Family-Issued Securities are charged a 
haircut rate of 100 percent for Members that are rated 6 or 7 on the 
CRRM, and no less than 50 percent for Members that are rated 5 on the 
CRRM. Members that have a rating on the CRRM of 1 through 4 are not 
currently subject to the FIS Charge. As stated above, Family-Issued 
Securities present NSCC with specific wrong-way risk such that, in the 
event that a Member with unsettled long positions in Family-Issued 
Securities defaults, NSCC would close out those positions following a 
likely drop in the credit-worthiness of the issuer, possibly resulting 
in a loss to NSCC. Therefore, the FIS Charge is applied to the 
unsettled long positions in Family-Issued Securities, which are the 
positions that NSCC would close out following a Member default, as 
opposed to the short positions in net unsettled securities. The haircut 
rates were calibrated based on historical corporate issue recovery rate 
data, and address the risk that the Family-Issued Securities of a 
Member would be devalued in the event of that Member's default.
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    \8\ See Securities Exchange Act Release No. 76077 (October 5, 
2015), 80 FR 61256 (October 9, 2015), (SR-NSCC-2015-003) (``FIS 
Phase 1 Rule Change'').
    \9\ As part of its ongoing monitoring of its membership, NSCC 
utilizes the CRRM to rate its risk exposures to its Members based on 
a scale from 1 (the strongest) to 7 (the weakest). Members that fall 
within the higher risk rating categories (i.e., 5, 6, and 7) are 
placed on NSCC's ``Watch List,'' and may be subject to enhanced 
surveillance or additional margin charges, as permitted under the 
Rules. See Rule 2B, Section 4 and Procedure XV, Section I.(B)(1) of 
the Rules, supra note 4. See also Securities Exchange Act Release 
No. 80734 (May 19, 2017), 82 FR 24174 (May 25, 2017), (SR-DTC-2017-
002, SR-FICC-2017-006, SR-NSCC-2017-002) (approving proposed changes 
to the CRRM methodology).
    \10\ Procedure XV (Clearing Fund Formula and Other Matters), 
Section I.(B)(1), supra note 4.
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    The FIS Charge is currently applied only to Members on the Watch 
List because these Members present a heightened credit risk to NSCC or 
have demonstrated higher risk related to their ability to meet 
settlement, and, as such, at the time the FIS Phase 1 Rule Change was 
proposed, NSCC believed there was a clear and more urgent need to 
address NSCC's exposure to specific wrong-way risk presented by these 
Members' positions in Family-Issued Securities.
    Second, NSCC proposed to further evaluate its exposure to wrong-way 
risk presented by positions in Family-Issued Securities by reviewing 
the impact of expanding the application of the FIS Charge to positions 
in Family-Issued Securities of all Members.\11\ Following its 
evaluation, NSCC has determined that the risk characteristics to be 
considered when margining Family-Issued Securities extend beyond 
Members' creditworthiness. More specifically, exposure to specific 
wrong-way risk is based on the correlation to the default of the issuer 
Member, and NSCC may face this risk with respect to positions in 
Family-Issued Securities of all of its Members, not only those Members 
on the Watch List. As such, in order to more effectively mitigate its 
exposure to specific wrong-way risk, NSCC is proposing to apply the FIS 
Charge to positions in Family-Issued Securities of all Members.
---------------------------------------------------------------------------

    \11\ FIS Phase 1 Rule Change, supra note 8.
---------------------------------------------------------------------------

    In order to implement this proposal, NSCC would amend Procedure XV 
to move the FIS Charge from Section I.(B)(1), where it is currently 
described as an additional deposit for Members on surveillance, to 
Sections I.(A)(1) and (2), to include the FIS Charge as a component of 
the Clearing Fund formula that is calculated for each Member.\12\ Under 
the proposed change, the calculation of the FIS Charge would not change 
as applied to Members that are rated 5, 6, or 7 on the CRRM. NSCC is 
proposing to revise the description of the FIS Charge to include 
Members that are rated 1 through 4 on the CRRM.\13\ Specifically, NSCC 
is proposing to amend the description of the FIS Charge in Procedure XV 
such that (1) fixed-income securities that are Family-Issued Securities 
would be charged a haircut rate of no less than 80 percent for Members 
that are rated 6 or 7 on the CRRM, and no less than 40 percent for 
Members that are rated 1 through 5 on the CRRM; and (2) equities that 
are Family-Issued Securities would be charged a haircut rate of 100 
percent for Members rated 6 or 7 on the CRRM, and no less than 50 
percent for Members that are rated 1 through 5 on the CRRM.
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    \12\ Procedure XV, Sections I.(A)(1) and (2) and I.(B), supra 
note 4.
    \13\ Members that are not rated on the CRRM are not subject to 
the FIS Charge and would not be subject to the FIS Charge under the 
proposed change.
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    The proposed change would also amend NSCC Rule 1 (Definitions and 
Descriptions) to include a definition of Family-Issued Securities in 
order to provide more clarity to the Rules. Under the proposed change, 
``Family-Issued Security'' would be defined as a security that was 
issued by a Member or an affiliate of that Member.
2. Statutory Basis
    NSCC believes that the proposed change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. In particular, NSCC 
believes that the proposed change is consistent with Section 
17A(b)(3)(F) of the Act,\14\ and Rules 17Ad-22(e)(4)(i), and (6)(i) and

[[Page 35565]]

(v),\15\ each promulgated under the Act, for the reasons described 
below.
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ 17 CFR 240.17Ad-22(e)(4) and (e)(6).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules 
be designed to promote the prompt and accurate clearance and settlement 
of securities transactions and to protect investors and the public 
interest.\16\ By enhancing the margin methodology applied to Family-
Issued Securities of all Members, the proposal will assist NSCC in 
collecting margin that more accurately reflects NSCC's exposure to a 
Member that clears Family-Issued Securities and will assist NSCC in its 
continuous efforts to improve the reliability and effectiveness of its 
risk-based margining methodology by taking into account specific wrong-
way risk. As such, the proposal will help NSCC, as a central 
counterparty, promote robust risk management, and thus promote the 
prompt and accurate clearance and settlement of securities 
transactions, as well as, in general, protect investors and the public 
interest, consistent with the requirements of Section 17A(b)(3)(F) of 
the Act.
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(i) under the Act requires, in part, that each 
covered clearing agency 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 arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence.\17\ The specific wrong-way risk presented by 
Family-Issued Securities is the risk that, in the event that a Member 
with unsettled long positions in Family-Issued Securities defaults, 
NSCC would close out those positions following a likely drop in the 
credit-worthiness of the issuer, possibly resulting in a loss to NSCC. 
The haircut rates of the FIS Charge more accurately reflect this risk 
because they were calibrated based on historical corporate issue 
recovery rate data, and, therefore, address the risk that the Family-
Issued Securities of a Member would be devalued in the event of that 
Member's default. In this way, NSCC has determined that the margining 
methodology used in calculating the FIS Charge more accurately reflects 
the risk characteristics of Family-Issued Securities than applying its 
VaR Charge, and would permit NSCC to more accurately identify, measure, 
monitor and manage its credit exposures to those Members with positions 
in Family-Issued Securities. Further, by expanding the application of 
the FIS Charge to all Members, the proposed change would assist NSCC in 
collecting and maintaining financial resources that reflect its credit 
exposures to those Members. Therefore, NSCC believes the proposed 
change is consistent with Rule 17Ad-22(e)(4)(i).
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    \17\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act requires, in part, that each 
covered clearing agency that provides central counterparty services 
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, at a 
minimum, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market.\18\ Rule 17Ad-22(e)(6)(v) under the Act requires, in part, 
that each covered clearing agency that provides central counterparty 
services 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, at a 
minimum, uses an appropriate method for measuring credit exposure that 
accounts for relevant product risk factors and portfolio effects across 
products.\19\
---------------------------------------------------------------------------

    \18\ 17 CFR 240.17Ad-22(e)(6)(i).
    \19\ 17 CFR 240.17Ad-22(e)(6)(v).
---------------------------------------------------------------------------

    As stated above, Family-Issued Securities present NSCC with 
specific wrong-way risk that, in the event that a Member with unsettled 
long positions in Family-Issued Securities defaults, NSCC would close 
out those positions following a likely drop in the credit-worthiness of 
the issuer, possibly resulting in a loss to NSCC. Therefore, the 
haircut rates were calibrated based on historical corporate issue 
recovery rate data, and address the risk that the Family-Issued 
Securities of a Member would be devalued in the event of that Member's 
default, and would more accurately reflect the risk characteristics of 
Family-Issued Securities than applying its VaR Charge. In this way, the 
proposal would assist NSCC in maintaining a risk-based margin system 
that considers, and produces margin levels commensurate with, the risks 
and particular attributes of Family-Issued Securities. Additionally, 
NSCC believes application of the FIS Charge to positions in Family-
Issued Securities of all Members is an appropriate method for measuring 
its credit exposures, because the FIS Charge accounts for the risk 
factors presented by these securities, i.e. the risk that these 
securities would be devalued in the event of a Member default. 
Therefore, NSCC believes the proposed change is consistent with Rule 
17Ad-22(e)(6)(i) and (v).

(B) Clearing Agency's Statement on Burden on Competition

    By expanding the application of the FIS Charge to all Members, and, 
therefore, increasing the amount of margin that Members may be charged 
under the Rules, the proposed change may impose a burden on 
competition. However, because the FIS Charge would be imposed on all 
Members on an individualized basis in an amount reasonably calculated 
to mitigate the risks posed to NSCC by those Members' positions in 
Family-Issued Securities, NSCC does not believe any burden on 
competition imposed by the proposed change would be significant.
    Further, NSCC believes that any burden on competition imposed by 
the proposed change would be both necessary and appropriate in 
furtherance of the Act.\20\ The proposal to expand the application of 
the FIS Charge to positions in Family-Issued Securities of all Members 
is necessary for NSCC to limit its credit exposures posed by these 
securities. Additionally, by permitting NSCC to calculate and collect 
margin that more accurately reflects the risk characteristics of these 
securities, the proposed change would assist NSCC in limiting its 
potential losses from defaults by Members. As stated, the FIS Charge 
would be imposed on Members on an individualized basis in an amount 
reasonably calculated to mitigate the risks posed to NSCC by those 
Members' positions in Family-Issued Securities. In this way, NSCC 
believes the proposed change would promote the prompt and accurate 
clearance and settlement of securities transactions and protect 
investors and the public interest. As such, NSCC believes any burden on 
competition imposed by the expansion of the application of the FIS 
Charge to all Members would be necessary and appropriate in furtherance 
of the Act.
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    \20\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    NSCC has not received or solicited any written comments relating to 
this proposal. NSCC will notify the

[[Page 35566]]

Commission of any written comments received by NSCC.

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.

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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NSCC-2017-010 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-2017-010. 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 (http://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 (http://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-2017-010 and should be 
submitted on or before August 21, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-15993 Filed 7-28-17; 8:45 am]
BILLING CODE 8011-01-P