Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Enhance National Securities Clearing Corporation's Haircut-Based Volatility Charge Applicable to Municipal Bonds, 149-154 [2019-28276]
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Federal Register / Vol. 85, No. 1 / Thursday, January 2, 2020 / Notices
be submitted to OMB within 30 days of
this notice.
[FR Doc. 2019–28311 Filed 12–31–19; 8:45 am]
BILLING CODE 7590–01–P
Dated: December 27, 2019.
J. Matthew DeLesDernier,
Assistant Secretary.
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SECURITIES AND EXCHANGE
COMMISSION
[FR Doc. 2019–28317 Filed 12–31–19; 8:45 am]
Submission for OMB Review;
Comment Request
BILLING CODE 8011–01–P
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
SECURITIES AND EXCHANGE
COMMISSION
Extension:
Rules 17Ad–22—Standards for Clearing
Agencies; SEC File No. 270–646, OMB
Control No. 3235–0695
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(‘‘PRA’’) (44 U.S.C. 3501 et seq.), the
Securities and Exchange Commission
(‘‘Commission’’) has submitted to the
Office of Management and Budget
(‘‘OMB’’) a request for approval of
extension of the previously approved
collection of information provided for in
Rule 17Ad–22 (17 CFR 240.17Ad–22)
under the Securities Exchange Act of
1934 (‘‘Exchange Act’’) (15 U.S.C. 78a et
seq.).
Rule 17Ad–22 was adopted to
strengthen the substantive regulation of
clearing agencies, promote the safe and
reliable operation of covered clearing
agencies, and improve efficiency,
transparency, and access to covered
clearing agencies.1 The total estimated
annual burden of Rule 17Ad–22 is 8,091
hours, and the total estimated annual
cost is $13,397,120.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
under the PRA unless it displays a
currently valid OMB control number.
The public may view background
documentation for this information
collection at the following website:
www.reginfo.gov. Comments should be
directed to: (i) Desk Officer for the
Securities and Exchange Commission,
Office of Information and Regulatory
Affairs, Office of Management and
Budget, Room 10102, New Executive
Office Building, Washington, DC 20503,
or by sending an email to:
Lindsay.M.Abate@omb.eop.gov ; and (ii)
Charles Riddle, Acting Director/Chief
Information Officer, Securities and
Exchange Commission, c/o Cynthia
Roscoe, 100 F Street NE, Washington,
DC 20549, or by sending an email to:
PRA_Mailbox@sec.gov. Comments must
1 See 17 CFR 240.17Ad–22; see also Exchange Act
Release No. 34–68080 (Oct. 22, 2012), 77 FR 66219,
66225–26 (Nov. 2, 2012).
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Proposed Collection; Comment
Request
Extension:
Regulation D Rule 504(b)(3)—Felons and
Other Bad Actors Disclosure Statement;
SEC File No. 270–798, OMB Control No.
3235–0746
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
Regulation D Rule 504(b)(3) provides
that no exemption under Rule 504 shall
be available for the securities of any
issuer if such issuer would be subject to
disqualification under Rule 506(d) of
Regulation D on or after January 20,
2017; provided that disclosure of prior
‘‘bad actor’’ events shall be required in
accordance with Rule 506(e) of
Regulation D. Rule 504(b)(3) requires
the issuer in a Rule 504 offering to
furnish to each purchaser, a reasonable
time prior to sale, a written description
of any disqualifying events that
occurred before effectiveness of the
amendments to Rule 504 (i.e., before
January 20, 2017) and within the time
periods described in the list of
disqualification events set forth in Rule
506(d)(1) of Regulation D, for the issuer
or any other ‘‘covered person’’
associated with the offering.
Approximately 800 issuers relying on
Rule 504 of Regulation D will spend on
average one additional hour to conduct
a factual inquiry to determine whether
any covered persons had a disqualifying
event that occurred before the effective
date of the amendments for a total of
800 hours. In addition, approximately
eight issuers (or approximately 1% of
800 issuers) will spend ten hours to
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149
prepare a disclosure statement
describing matters that would have
triggered disqualification under Rule
504(b)(3) of Regulation D had they
occurred on or after the effective date of
the amendments (January 20, 2017) for
total burden 80 hours (8 issuers × 10
hours per response).
For Purposes of the PRA, we estimate
the total paperwork burden for all
affected Rule 504 issuers to comply with
Rule 504(b)(3) requirements would be
approximately 808 issuers and a total of
880 burden hours.
Written comments are invited on: (a)
Whether this proposed collection of
information is necessary for the
performance of the functions of the
agency, including whether the
information will have practical utility;
(b) the accuracy of the agency’s estimate
of the burden imposed by the collection
of information; (c) ways to enhance the
quality, utility, and clarity of the
information collected; and (d) ways to
minimize the burden of the collection of
information on respondents, including
through the use of automated collection
techniques or other forms of information
technology. Consideration will be given
to comments and suggestions submitted
in writing within 60 days of this
publication.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
control number.
Please direct your written comment to
Charles Riddle, Acting Director/Chief
Information Officer, Securities and
Exchange Commission, c/o Cynthia
Roscoe, 100 F Street NE, Washington,
DC 20549 or send an email to: PRA_
Mailbox@sec.gov.
Dated: December 27, 2019.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019–28318 Filed 12–31–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–87858; File No. SR–NSCC–
2019–004]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Proposed Rule Change To Enhance
National Securities Clearing
Corporation’s Haircut-Based Volatility
Charge Applicable to Municipal Bonds
December 26, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
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Federal Register / Vol. 85, No. 1 / Thursday, January 2, 2020 / Notices
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
13, 2019, 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 rule change consists of
amendments to NSCC’s Rules &
Procedures (‘‘Rules’’) 4 in order to
enhance NSCC’s haircut-based volatility
charge applicable to municipal bonds
(the ‘‘Bond Haircut’’). References to the
Bond Haircut in this document refer
only to that charge as applied to
municipal bonds. The proposed changes
are described in greater detail 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
1. Purpose
NSCC is proposing a number of
enhancements to NSCC’s Bond Haircut,
as described in greater detail below.
The Required Fund Deposit and the
Bond Haircut
As part of its market risk management
strategy, NSCC manages its credit
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 On December 13, 2019, NSCC filed this
proposed rule change as an advance notice (SR–
NSCC–2019–801) with the Commission pursuant to
Section 806(e)(1) of Title VIII 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) under 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.
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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exposure to Members by determining
the appropriate Required Fund Deposit
for each Member and monitoring its
sufficiency, as provided for in the
Rules.5 The Required Fund Deposit
serves as each Member’s margin. The
objective of a Member’s Required Fund
Deposit is to mitigate potential losses to
NSCC associated with liquidation of the
Member’s portfolio in the event NSCC
ceases to act for that Member
(hereinafter referred to as a ‘‘default’’).6
The aggregate of all Members’ Required
Fund Deposits, together with certain
other deposits required under the Rules,
constitute the Clearing Fund of NSCC,
which it would access should a
defaulting Member’s own Required
Fund Deposit be insufficient to satisfy
losses to NSCC caused by the
liquidation of that Member’s portfolio.
Pursuant to the Rules, each Member’s
Required Fund Deposit amount consists
of a number of applicable components,
each of which is calculated to address
specific risks faced by NSCC, as
identified within Procedure XV.7
Generally, the largest component of
Members’ Required Fund Deposits is the
volatility component. The volatility
component is designed to calculate the
amount of money that could be lost on
a portfolio over a given period of time
assumed necessary to liquidate the
portfolio, within a 99% confidence
level.
NSCC has two methodologies for
calculating the volatility component.
For the majority of Net Unsettled
Positions,8 NSCC calculates the
volatility component as the greater of (1)
the larger of two separate calculations
that utilize a parametric Value at Risk
(‘‘VaR’’) model, (2) a gap risk measure
calculation based on the largest nonindex position in a portfolio that
5 See Rule 4 (Clearing Fund) and Procedure XV
(Clearing Fund Formula and Other Matters) of the
Rules (‘‘Procedure XV’’), supra note 4. NSCC’s
market risk management strategy is designed to
comply with Rule 17Ad–22(e)(4) under the Act,
where these risks are referred to as ‘‘credit risks.’’
17 CFR 240.17Ad–22(e)(4).
6 The Rules identify when NSCC may cease to act
for a Member and the types of actions NSCC may
take. For example, NSCC may suspend a firm’s
membership with NSCC or prohibit or limit a
Member’s access to NSCC’s services in the event
that Member defaults on a financial or other
obligation to NSCC. See Rule 46 (Restrictions on
Access to Services) of the Rules, supra note 4.
7 Procedure XV, supra note 4.
8 ‘‘Net Unsettled Positions’’ and ‘‘Net Balance
Order Unsettled Positions’’ refer to net positions
that have not yet passed their settlement date, or
did not settle on their settlement date, and are
referred to collectively in this filing as Net
Unsettled Positions. NSCC does not take into
account any offsets, such as inventory held at other
clearing agencies, when determining Net Unsettled
Positions for the purpose of calculating the
volatility component. See Procedure XV, supra note
4.
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exceeds a concentration threshold, and
(3) a portfolio margin floor calculation
based on the market values of the long
and short positions in the portfolio
(‘‘VaR Charge’’).9 Pursuant to Sections
I(A)(1)(a)(ii) and I(A)(2)(a)(ii) of
Procedure XV, certain positions in
certain classes of securities, including
municipal bonds, are excluded from the
calculation of the VaR Charge and are
instead charged a haircut-based
volatility component that is calculated
by multiplying the absolute value of
such positions by a percentage
designated by NSCC which shall not be
less than 2%.10
Existing Municipal Bond Haircut
Methodology
The existing methodology for
calculating the Bond Haircut is
described in Sections I(A)(1)(a)(iii)(B)
and I(A)(2)(a)(iii)(B) of Procedure XV.11
In order to determine the current Bond
Haircut, municipal bonds are
categorized into tenor-based groups (i.e.,
based on remaining time to maturity)
and separately categorized by municipal
sector. Sections I(A)(1)(a)(iii)(B) and
I(A)(2)(a)(iii)(B) of Procedure XV
provide that NSCC shall establish a
percentage applicable to each tenorbased group and pursuant to those
sections NSCC has established a
percentage (which is not less than 2%)
for each tenor-based group which is
used to calculate the haircut-based
charge applicable to that group.12 For
municipal bonds rated higher than
BBB+, NSCC has established a tenorbased haircut for each tenor-based
group. For example, a municipal bond
rated above BBB+ with 3 years to
maturity and $10MM short position,
will be subject to the 2–5 years tenorbased group haircut (5%) which will be
applied to the absolute market value of
the positions resulting in $500K haircutbased charge.
Sections I(A)(1)(a)(iii)(B) and
I(A)(2)(a)(iii)(B) of Procedure XV
provide that NSCC shall assign each
municipal sector a risk factor.13 For
municipal bonds rated lower than a predetermined threshold, which shall be no
lower than BBB+, and non-rated
municipal bonds, NSCC has established
a percentage based on a sector-based
risk factor which is also applied to the
tenor-based haircut. For example, a
municipal bond in the healthcare sector,
9 Sections I(A)(1)(a)(i) and I(A)(2)(a)(i) of
Procedure XV, supra note 4.
10 Sections I(A)(1)(a)(ii) and I(A)(2)(a)(ii) of
Procedure XV, supra note 4.
11 Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of
Procedure XV, supra note 4.
12 Id.
13 Id.
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rated BBB+ or lower with 3 years to
maturity and $10MM short position,
will be subject to the 2–5 years tenorbased group haircut (5%) multiplied by
the sector-based factor (1.2), resulting in
6% haircut-based charge of $600K. This
additional sector-based risk factor is
added because variable risk factors exist
between municipal sectors based on the
various industries in which the bonds
are issued and the source of repayment
for the bonds. For instance, general
obligation bonds are typically backed by
the taxing power of their issuer and
repaid from general taxes whereas
transportation or healthcare-related
bonds may be repaid from funds from a
specific project based on the revenues of
the project. Such risk factor is based on
the sector index’s spread to a
benchmark index.14 NSCC uses a
vendor to match bonds to particular
sectors. If a municipal bond does not fit
within any particular sector, the highest
sector-based risk factor is applied to
such municipal bond. Currently, the
highest sector-based risk factor is 2.6
used for bonds in the housing sector.
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Enhancements to Municipal Bond
Haircut Methodology
NSCC regularly assesses its market
and liquidity risks, as such risks are
related to its margining methodologies,
to evaluate whether margin levels are
commensurate with the particular risk
attributes of each relevant product,
portfolio, and market. In connection
with such regular reviews, NSCC has
determined based on impact studies
that, under current market conditions,
the current margin levels with respect to
municipal bonds using the current
methodology exceed the levels
necessary to offset the risks with respect
to these securities. Based on impact
studies, NSCC has determined that
changes to its current methodology for
municipal bonds would result in margin
levels that are lower and more
commensurate with the risk attributes of
those securities. In particular, as
described below, NSCC is proposing to
replace the municipal sector-based risk
factor for lower rated municipal bonds
with a percentage derived using the
historical returns of applicable
benchmark indices.
NSCC is proposing the following
enhancements to the methodology used
for calculating the Bond Haircut.
First, NSCC is proposing to recalibrate the Bond Haircut not less
frequently than annually. Sections
14 The ‘‘spread’’ is the difference in the yield
curve of the sector index to the yield curve of a
benchmark index which is indicative of the added
risk presented by the sector.
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I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of
Procedure XV currently provide that
each municipal sector is assigned a risk
factor no less frequently than
annually.15 As discussed above and
below, the enhanced methodology for
calculating Bond Haircuts would no
longer include the straight risk factor by
sector. The re-calibration of the Bond
Haircut not less frequently than
annually would replace the assignment
of a straight risk factor no less
frequently than annually. NSCC believes
that the periodic re-calibration would
help ensure that NSCC is reviewing the
Bond Haircut with enough regularity to
ensure that the margin levels are
commensurate with the particular risk
attributes of municipal bonds.
While the proposed rule change
would provide that NSCC would recalibrate not less frequently than
annually, NSCC would initially recalibrate the Bond Haircut on a
quarterly basis. NSCC could change how
often it recalibrates from time to time
based on its regular review of margining
methodologies; provided, that it would
recalibrate not less frequently than
annually pursuant to the proposed rule
change. Changes to the frequency of
calibration would be subject to NSCC’s
risk management practices which would
require, among other things, approval by
the DTCC Model Risk Governance
Committee (‘‘MRGC’’).16
Second, municipal bonds would be
grouped into tenor-based groups and by
credit rating, and municipal bonds that
are rated BBB+ or lower, or that are not
rated, would also be separately
categorized by municipal sector. NSCC
would then establish a percentage
haircut for each group based on the (1)
the historical returns of applicable
benchmark indices, such as tenor-based
indices (i.e., based on time to maturity),
municipal bond sector-based indices,
and high-yield indices; (2) a predetermined look-back period, which
shall not be shorter than 10 years; and
15 Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of
Procedure XV, supra note 4.
16 See Securities Exchange Act Release No. 81485
(August 25, 2017), 82 FR 41433 (August 31, 2017)
(File No. SR–NSCC–2017–008) (describes the
adoption of the Clearing Agency Model Risk
Management Framework (‘‘Model Risk Management
Framework’’) of NSCC which sets forth the model
risk management practices of NSCC) and Securities
Exchange Act Release No. 84458 (October 19, 2018),
83 FR 53925 (October 25, 2018) (File No. SR–
NSCC–2018–009) (amends the Model Risk
Management Framework). The Model Risk
Management Framework describes the model
management practices adopted by NSCC, which
have been designed to assist NSCC in identifying,
measuring, monitoring, and managing the risks
associated with the design, development,
implementation, use, and validation of ‘‘models’’
which would include the methodology for the Bond
Haircut. Id.
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151
(3) a pre-determined calibration
percentile, which shall not be less than
99%.
For municipal bonds that are rated
higher than BBB+, NSCC is proposing to
use a tenor-based index (i.e., based on
time to maturity) as the applicable
benchmark index. While the proposed
rule change would provide that NSCC
would base such percentage for bonds
that are rated higher than BBB+ on
historical returns of applicable
benchmark indices, such as tenor-based
indices (i.e., based on time to maturity),
municipal bond sector-based indices,
and high-yield indices; NSCC would
initially base the percentage derived
from a benchmark municipal tenorbased index over a 3-day price return
from the index. NSCC could change
which applicable benchmark indices it
uses and the applicable period for the
price return used in the calculation from
time to time based on its regular review
of margining methodologies. Changes to
the frequency of calibration would be
subject to NSCC’s risk management
practices which would require, among
other things, approval by the MRGC.17
For municipal bonds that are rated
BBB+ or lower, or are not rated, NSCC
is proposing to use a percentage derived
from the maximum of the applicable
tenor-based index, municipal bond
sector-based indices and a high-yield
index. Rather than multiply the tenorbased haircut by a straight risk factor for
each municipal sector, as is done under
the current methodology, the Bond
Haircut for these lower rated or nonrated municipal bonds would be
determined by using the maximum
percent derived from either the
applicable tenor-based index, the
municipal bond sector-based indices or
a high yield index. The enhancement
would account for risks represented by
the tenor, sector and high-yield
characteristics that may be presented by
these municipal bonds by using the
maximum percent that is derived from
either a tenor-based index, sector-based
indices or a high yield index, rather
than addressing these risks by
multiplying the percent derived from a
tenor-based index by a straight sectorbased risk factor. Based on analysis of
the impact studies, NSCC believes that
the use of a risk factor based on the
tenor-based index, municipal bond
sector-based indices and a high-yield
index would result in lower margins
with respect to these securities that are
sufficient to offset the risks with respect
to these securities.
While the proposed rule change
would provide that NSCC would base
17 See
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Federal Register / Vol. 85, No. 1 / Thursday, January 2, 2020 / Notices
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such percentage on historical returns of
applicable benchmark indices, such as
tenor-based indices (i.e., based on time
to maturity), municipal bond sectorbased indices, and high-yield indices;
NSCC would initially base the
percentage derived from a tenor-based
index, municipal bond sector-based
indices and a high-yield index over a 3day price return from the indices. NSCC
could change which applicable
benchmark indices it uses and the
applicable period for the price return
used in the calculation from time to
time based on its regular review of
margining methodologies in accordance
with its risk management practices
which would require, among other
things, approval by the MRGC.18
In extraordinary circumstances, a
certain municipality or issuer may
present unique risks beyond the
calibrated tenor, sector and high-yield
factors. For example, the market price
risk for issues of a municipality facing
technical default following a natural
disaster may not be fully captured due
to the liquidity profile of municipal
securities. Therefore, NSCC would
reserve the right to apply the highest
haircut of all municipal bonds to a
specific issuer in such instances. NSCC
would apply the highest haircut in
accordance with its risk management
practices, including approval by an
officer of NSCC in the risk management
department, following a review of the
circumstances facing the municipality
and a finding that the market price
movement raises risks that are not
accounted for by the Bond Haircut
methodology.
Finally, the recalibration of the Bond
Haircut would apply a pre-determined
look-back period. NSCC would initially
apply a look-back period of a 10-year
rolling window plus a one calendar year
‘‘worst case scenario’’ stress period.
NSCC believes this look-back period is
appropriate because it would capture
relevant data and is adequate to cover
enough market activity, while not
diluting the ‘‘tail’’ with an abundance of
data.19
While the proposed rule change
would provide that NSCC would apply
a pre-determined look-back period,
which shall not be shorter than 10 years,
NSCC would initially apply a look-back
period of a 10-year rolling window plus
a one calendar year ‘‘worst case
18 See
note 16.
believes that a 10-year window with a
one-year stress period is typically long enough to
capture at least two recent market cycles. NSCC
believes that data over a longer period will ‘‘flatten’’
out the results because recent volatile periods will
be offset by non-volatile periods, making the more
recent volatility appear less significant.
19 NSCC
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scenario’’ stress period. NSCC could
change the look-back period from time
to time based on its regular review of
margining methodologies in accordance
with its risk management practices
which would require, among other
things, approval by the MRGC.20
Proposed Rule Changes to Procedure XV
In order to implement the proposed
enhancements to the Bond Haircut
methodology described above, Sections
I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of
Procedure XV would be revised to
provide that: (i) Municipal bonds would
be grouped by both ‘‘remaining time to
maturity’’ and credit rating, and
municipal bonds that are BBB+ or
lower, or that are not rated, would be
separately categorized by municipal
sector, (ii) NSCC would establish the
Bond Haircut percentages no less
frequently than annually, (iii) the Bond
Haircut percentage to be applied to
municipal bonds would apply to each
grouping of municipal bonds and (iv)
the Bond Haircut percentage to be
applied to municipal bonds would be
based on (1) the historical returns of
applicable benchmark indices, such as
tenor-based indices (i.e., based on time
to maturity), municipal bond sectorbased indices, and high-yield indices;
(2) a pre-determined look-back period;
and (3) a pre-determined calibration
percentile, which shall not be less than
99%. In addition, Sections
I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of
Procedure XV would be revised to
remove the references to the municipal
sector factor and the current application
of the municipal sector factor in the last
four sentences in Sections
I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of
Procedure XV. A sentence would also be
added to Sections I(A)(1)(a)(iii)(B) and
I(A)(2)(a)(iii)(B) of Procedure XV to
provide that in extraordinary
circumstances where NSCC determines
that a certain municipality or issuer of
municipal bonds presents unique risks
that are not captured by the grouping set
forth in those subsections, NSCC may,
in its discretion, apply the highest
percentage being applied to any
municipal bond group pursuant to those
subsections to municipal bonds issued
by such municipality or issuer.
2. Statutory Basis
NSCC believes that the proposed
changes described above are 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 changes are consistent
with Section 17A(b)(3)(F) of the Act,21
and Rules 17Ad–22(e)(4)(i), (e)(6)(i) and
(e)(6)(v), each promulgated under the
Act,22 for the reasons described below.
Section 17A(b)(3)(F) of the Act 23
requires that the Rules be designed to,
among other things, assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible. NSCC believes the
proposed changes are designed to assure
the safeguarding of securities and funds
which are in its custody or control or for
which it is responsible because they are
designed to enable NSCC to more
accurately calculate the necessary
margin relating to Net Unsettled
Positions in municipal bonds while
continuing to limit its exposure to
Members in the event of a Member
default.
NSCC believes that the proposed
changes to (i) re-calibrate the Bond
Haircut no less frequently than
annually, (ii) apply a risk factor based
on multiple benchmark indices for
lower rated or non-rated municipal
bonds rather than a straight sector-based
risk factor, (iii) calibrate the percent to
a pre-determined percentile that would
not be less than 99% level and (iv)
apply a pre-determined look-back
period, would help ensure that the
margin levels with respect to municipal
bonds would be commensurate with the
particular risk attributes of municipal
bonds. Backtesting results conducted by
NSCC have shown that the current
methodology for calculating the Bond
Haircut, using a straight municipal
sector factor by sector, at times, results
in coverage of 100%. NSCC has
determined based on impact studies
that, under current market conditions,
the current margin levels with respect to
municipal bonds using the current
methodology exceed the levels
necessary to offset the risks with respect
to these securities. Backtesting results
conducted by NSCC indicated that using
the highest percentage from applicable
benchmark indices in the enhanced
methodology rather than the straight
municipal sector factor as in the current
methodology would result in the
desired margin coverages to offset risk
while reducing the average Required
Fund Deposit for Members. In addition,
by reserving the right to apply the
highest risk factor in certain
circumstances, NSCC would be
protected from extraordinary
circumstances where NSCC determines
that the percentage to be applied to a
21 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(4)(i), (e)(6)(i), (e)(6)(v).
23 15 U.S.C. 78q–1(b)(3)(F).
22 17
20 See
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particular grouping of municipal bonds
does not fully capture the risks
represented by that municipality or
issuer. In this way, the haircut-based
volatility charge for Net Unsettled
Positions in municipal bonds would be
calculated to help enable NSCC to
collect margin at levels that better
reflect the risk presented by these Net
Unsettled Positions to help NSCC limit
its exposure to Members.
The Clearing Fund is composed of
Members’ Required Fund Deposits that
include the volatility component and is
a key tool that NSCC uses to mitigate
potential losses to NSCC associated with
liquidating a Member’s portfolio in the
event of Member default. Therefore,
NSCC believes that each of the proposed
changes listed above would help enable
NSCC to more accurately calculate the
necessary margin relating to Net
Unsettled Positions in municipal bonds
while continuing to limit its exposure to
Members such that, in the event of
Member default, NSCC’s operations
would not be disrupted and nondefaulting Members would not be
exposed to losses they cannot anticipate
or control. In this way, the proposed
rules are designed to assure the
safeguarding of securities and funds
which are in the custody or control of
NSCC or for which it is responsible and
therefore consistent with Section
17A(b)(3)(F) of the Act.24
Rule 17Ad–22(e)(4)(i) under the Act 25
requires that NSCC 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.
As described above, NSCC believes
that the proposed changes would help
enable it to better identify, measure,
monitor, and, through the collection of
Members’ Required Fund Deposits,
manage its credit exposures to Members
by maintaining sufficient resources to
cover those credit exposures fully with
a high degree of confidence. More
specifically, the proposed changes to the
methodology for Bond Haircuts to apply
a risk factor based on multiple
benchmark indices for lower rated or
non-rated municipal bonds rather than
a straight risk factor by sector would
help allow NSCC to more accurately
identify the credit exposure relating to
24 Id.
25 17
Net Unsettled Positions in municipal
bonds for purposes of applying an
appropriate margin charge and to help
provide NSCC with a more effective
measure of the risks that may be
presented to NSCC by positions in the
securities. The proposed changes to (i)
re-calibrate the Bond Haircut no less
frequently than annually, (ii) calibrate
the percent to a pre-determined
percentile that would not be less than
99% level, and (iii) apply a predetermined look-back period would
enable NSCC to apply the proposed
enhanced methodology discussed above
and to better monitor its credit exposure
relating to Net Unsettled Positions in
municipal bonds. By providing that
NSCC would be required to re-calibrate
the Bond Haircut no less frequently than
annually, the proposed rule change
would help ensure that NSCC would
periodically review the Bond Haircut to
ensure that it continued to accurately
reflect the risks presented by municipal
bonds. Finally, by reserving the right to
apply the highest group factor in
extraordinary circumstances, NSCC
would help protect itself in
circumstances where the assigned factor
does not adequately account for risks
presented by extraordinary events, such
as natural disasters.
Based on backtesting results in which
the proposed methodology was applied,
NSCC believes that the proposed
changes would help allow it to collect
Required Fund Deposits that are more
accurate to offset the risks presented by
municipal bonds and provide a better
method of managing risks presented by
those securities. Therefore, NSCC
believes that the proposed changes
would help enhance NSCC’s ability to
effectively identify, measure, monitor
and manage its credit exposures and
would help enhance its ability to
maintain sufficient financial resources
to cover its credit exposure to each
participant fully with a high degree of
confidence. As such, NSCC believes the
proposed changes are consistent with
Rule 17Ad–22(e)(4)(i) under the Act.26
Rule 17Ad–22(e)(6)(i) under the Act 27
requires that NSCC 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.
26 Id.
CFR 240.17Ad–22(e)(4)(i).
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The Required Fund Deposit is made
up of risk-based components (as margin)
that are calculated and assessed daily to
limit NSCC’s credit exposures to
Members. NSCC is proposing changes
that are designed to more effectively
address risk characteristics of Net
Unsettled Positions in municipal bonds
by capturing risks more accurately by
applying multiple indices. Rather than
multiply the tenor-based haircut for
lower rated bonds by a straight risk
factor for each municipal sector, the
Bond Haircut for lower rated or nonrated municipal bonds would be
determined by using the maximum
percent derived from either the tenorbased index, the municipal bond sectorbased indices or a high yield index.
Based on backtesting results, NSCC
believes that deriving the percent using
a maximum of the indices more
accurately captures the risk of such
municipal bonds that may be presented
by tenor, sector and the higher yield of
these securities compared to the present
use of a straight sector-based risk factor.
Based on such results, NSCC believes
that these changes would help enable
NSCC to produce margin levels that are
more commensurate with the particular
risk attributes of these securities. These
proposed changes are designed to assist
NSCC in maintaining a risk-based
margin system that considers, and
produces margin levels commensurate
with, the risks and particular attributes
of portfolios relating to municipal
bonds, including risks and attributes
related to tenor, municipal sector and
higher yields. Therefore, NSCC believes
the proposed change is consistent with
Rule 17Ad–22(e)(6)(i) under the Act.28
Rule 17Ad–22(e)(6)(v) under the
Act 29 requires that NSCC 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. NSCC is proposing to enhance
the Bond Haircut because NSCC
believes that the proposed methodology
would help provide NSCC with a more
effective measure of the credit exposure
presented by municipal bonds. In
particular, as described above, NSCC
believes that the enhancements would
result in a more effective measure of the
tenor, sector and higher yield risks
presented by municipal bonds that are
rated BBB+ or lower, or are not rated.
28 Id.
CFR 240.17Ad–22(e)(6)(i).
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Federal Register / Vol. 85, No. 1 / Thursday, January 2, 2020 / Notices
Therefore, NSCC believes the proposed
change is consistent with Rule 17Ad–
22(e)(6)(v) under the Act.30
Comments may be submitted by any of
the following methods:
(B) Clearing Agency’s Statement on
Burden on Competition
• 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–2019–004 on the subject line.
NSCC does not believe that the
proposed changes to the Bond Haircut
would have an adverse impact, or
impose any burden, on competition.
Based on impact studies, NSCC believes
that the proposed changes to the Bond
Haircut would result in a reduction in
the Required Fund Deposit with respect
to every Member with Net Unsettled
Positions in municipal bonds. NSCC
believes that this impact would promote
competition for Members that have Net
Unsettled Positions in municipal bonds
by reducing the amount of the Required
Fund Deposit for such Members while
continuing to appropriately limit
NSCC’s exposure to Members in the
event of a Member default. In addition,
NSCC does not believe that the
proposed rule changes would
disproportionally impact any Members.
(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
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.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
lotter on DSKBCFDHB2PROD with NOTICES
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.
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
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–2019–004. 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 website (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 website 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 website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NSCC–
2019–004 and should be submitted on
or before January 23, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
J. Matthew DeLesDernier,
Assistant Secretary.
[Release No. 34–87860; File No. SR–NYSE–
2019–071]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Order Granting Accelerated
Approval of a Proposed Rule Change
To Add Certain Recently Adopted
Trading Rules To the List of Minor Rule
Violations in Rule 9217
December 26, 2019.
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 December
16, 2019, the New York Stock Exchange
LLC (‘‘NYSE’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons and
approving the proposal on an
accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to add certain
recently adopted trading rules to the list
of minor rule violations in Rule 9217.
The proposed rule change is available
on the Exchange’s website at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
[FR Doc. 2019–28276 Filed 12–31–19; 8:45 am]
BILLING CODE 8011–01–P
1 15
30 17
CFR 240.17Ad–22(e)(6)(v).
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]]>Agencies
[Federal Register Volume 85, Number 1 (Thursday, January 2, 2020)]
[Notices]
[Pages 149-154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-28276]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87858; File No. SR-NSCC-2019-004]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change To Enhance
National Securities Clearing Corporation's Haircut-Based Volatility
Charge Applicable to Municipal Bonds
December 26, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 150]]
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 13, 2019, 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On December 13, 2019, NSCC filed this proposed rule change
as an advance notice (SR-NSCC-2019-801) with the Commission pursuant
to Section 806(e)(1) of Title VIII 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) under 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 enhance NSCC's haircut-based
volatility charge applicable to municipal bonds (the ``Bond Haircut'').
References to the Bond Haircut in this document refer only to that
charge as applied to municipal bonds. The proposed changes are
described in greater detail 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
NSCC is proposing a number of enhancements to NSCC's Bond Haircut,
as described in greater detail below.
The Required Fund Deposit and the Bond Haircut
As part of its market risk management strategy, NSCC manages its
credit exposure to Members by determining the appropriate Required Fund
Deposit for each Member and monitoring its sufficiency, as provided for
in the Rules.\5\ The Required Fund Deposit serves as each Member's
margin. The objective of a Member's Required Fund Deposit is to
mitigate potential losses to NSCC associated with liquidation of the
Member's portfolio in the event NSCC ceases to act for that Member
(hereinafter referred to as a ``default'').\6\ The aggregate of all
Members' Required Fund Deposits, together with certain other deposits
required under the Rules, constitute the Clearing Fund of NSCC, which
it would access should a defaulting Member's own Required Fund Deposit
be insufficient to satisfy losses to NSCC caused by the liquidation of
that Member's portfolio.
---------------------------------------------------------------------------
\5\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules (``Procedure XV''), supra
note 4. NSCC's market risk management strategy is designed to comply
with Rule 17Ad-22(e)(4) under the Act, where these risks are
referred to as ``credit risks.'' 17 CFR 240.17Ad-22(e)(4).
\6\ The Rules identify when NSCC may cease to act for a Member
and the types of actions NSCC may take. For example, NSCC may
suspend a firm's membership with NSCC or prohibit or limit a
Member's access to NSCC's services in the event that Member defaults
on a financial or other obligation to NSCC. See Rule 46
(Restrictions on Access to Services) of the Rules, supra note 4.
---------------------------------------------------------------------------
Pursuant to the Rules, each Member's Required Fund Deposit amount
consists of a number of applicable components, each of which is
calculated to address specific risks faced by NSCC, as identified
within Procedure XV.\7\ Generally, the largest component of Members'
Required Fund Deposits is the volatility component. The volatility
component is designed to calculate the amount of money that could be
lost on a portfolio over a given period of time assumed necessary to
liquidate the portfolio, within a 99% confidence level.
---------------------------------------------------------------------------
\7\ Procedure XV, supra note 4.
---------------------------------------------------------------------------
NSCC has two methodologies for calculating the volatility
component. For the majority of Net Unsettled Positions,\8\ NSCC
calculates the volatility component as the greater of (1) the larger of
two separate calculations that utilize a parametric Value at Risk
(``VaR'') model, (2) a gap risk measure calculation based on the
largest non-index position in a portfolio that exceeds a concentration
threshold, and (3) a portfolio margin floor calculation based on the
market values of the long and short positions in the portfolio (``VaR
Charge'').\9\ Pursuant to Sections I(A)(1)(a)(ii) and I(A)(2)(a)(ii) of
Procedure XV, certain positions in certain classes of securities,
including municipal bonds, are excluded from the calculation of the VaR
Charge and are instead charged a haircut-based volatility component
that is calculated by multiplying the absolute value of such positions
by a percentage designated by NSCC which shall not be less than 2%.\10\
---------------------------------------------------------------------------
\8\ ``Net Unsettled Positions'' and ``Net Balance Order
Unsettled Positions'' refer to net positions that have not yet
passed their settlement date, or did not settle on their settlement
date, and are referred to collectively in this filing as Net
Unsettled Positions. NSCC does not take into account any offsets,
such as inventory held at other clearing agencies, when determining
Net Unsettled Positions for the purpose of calculating the
volatility component. See Procedure XV, supra note 4.
\9\ Sections I(A)(1)(a)(i) and I(A)(2)(a)(i) of Procedure XV,
supra note 4.
\10\ Sections I(A)(1)(a)(ii) and I(A)(2)(a)(ii) of Procedure XV,
supra note 4.
---------------------------------------------------------------------------
Existing Municipal Bond Haircut Methodology
The existing methodology for calculating the Bond Haircut is
described in Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of
Procedure XV.\11\ In order to determine the current Bond Haircut,
municipal bonds are categorized into tenor-based groups (i.e., based on
remaining time to maturity) and separately categorized by municipal
sector. Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of Procedure
XV provide that NSCC shall establish a percentage applicable to each
tenor-based group and pursuant to those sections NSCC has established a
percentage (which is not less than 2%) for each tenor-based group which
is used to calculate the haircut-based charge applicable to that
group.\12\ For municipal bonds rated higher than BBB+, NSCC has
established a tenor-based haircut for each tenor-based group. For
example, a municipal bond rated above BBB+ with 3 years to maturity and
$10MM short position, will be subject to the 2-5 years tenor-based
group haircut (5%) which will be applied to the absolute market value
of the positions resulting in $500K haircut-based charge.
---------------------------------------------------------------------------
\11\ Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of
Procedure XV, supra note 4.
\12\ Id.
---------------------------------------------------------------------------
Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of Procedure XV
provide that NSCC shall assign each municipal sector a risk factor.\13\
For municipal bonds rated lower than a pre-determined threshold, which
shall be no lower than BBB+, and non-rated municipal bonds, NSCC has
established a percentage based on a sector-based risk factor which is
also applied to the tenor-based haircut. For example, a municipal bond
in the healthcare sector,
[[Page 151]]
rated BBB+ or lower with 3 years to maturity and $10MM short position,
will be subject to the 2-5 years tenor-based group haircut (5%)
multiplied by the sector-based factor (1.2), resulting in 6% haircut-
based charge of $600K. This additional sector-based risk factor is
added because variable risk factors exist between municipal sectors
based on the various industries in which the bonds are issued and the
source of repayment for the bonds. For instance, general obligation
bonds are typically backed by the taxing power of their issuer and
repaid from general taxes whereas transportation or healthcare-related
bonds may be repaid from funds from a specific project based on the
revenues of the project. Such risk factor is based on the sector
index's spread to a benchmark index.\14\ NSCC uses a vendor to match
bonds to particular sectors. If a municipal bond does not fit within
any particular sector, the highest sector-based risk factor is applied
to such municipal bond. Currently, the highest sector-based risk factor
is 2.6 used for bonds in the housing sector.
---------------------------------------------------------------------------
\13\ Id.
\14\ The ``spread'' is the difference in the yield curve of the
sector index to the yield curve of a benchmark index which is
indicative of the added risk presented by the sector.
---------------------------------------------------------------------------
Enhancements to Municipal Bond Haircut Methodology
NSCC regularly assesses its market and liquidity risks, as such
risks are related to its margining methodologies, to evaluate whether
margin levels are commensurate with the particular risk attributes of
each relevant product, portfolio, and market. In connection with such
regular reviews, NSCC has determined based on impact studies that,
under current market conditions, the current margin levels with respect
to municipal bonds using the current methodology exceed the levels
necessary to offset the risks with respect to these securities. Based
on impact studies, NSCC has determined that changes to its current
methodology for municipal bonds would result in margin levels that are
lower and more commensurate with the risk attributes of those
securities. In particular, as described below, NSCC is proposing to
replace the municipal sector-based risk factor for lower rated
municipal bonds with a percentage derived using the historical returns
of applicable benchmark indices.
NSCC is proposing the following enhancements to the methodology
used for calculating the Bond Haircut.
First, NSCC is proposing to re-calibrate the Bond Haircut not less
frequently than annually. Sections I(A)(1)(a)(iii)(B) and
I(A)(2)(a)(iii)(B) of Procedure XV currently provide that each
municipal sector is assigned a risk factor no less frequently than
annually.\15\ As discussed above and below, the enhanced methodology
for calculating Bond Haircuts would no longer include the straight risk
factor by sector. The re-calibration of the Bond Haircut not less
frequently than annually would replace the assignment of a straight
risk factor no less frequently than annually. NSCC believes that the
periodic re-calibration would help ensure that NSCC is reviewing the
Bond Haircut with enough regularity to ensure that the margin levels
are commensurate with the particular risk attributes of municipal
bonds.
---------------------------------------------------------------------------
\15\ Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of
Procedure XV, supra note 4.
---------------------------------------------------------------------------
While the proposed rule change would provide that NSCC would re-
calibrate not less frequently than annually, NSCC would initially re-
calibrate the Bond Haircut on a quarterly basis. NSCC could change how
often it recalibrates from time to time based on its regular review of
margining methodologies; provided, that it would recalibrate not less
frequently than annually pursuant to the proposed rule change. Changes
to the frequency of calibration would be subject to NSCC's risk
management practices which would require, among other things, approval
by the DTCC Model Risk Governance Committee (``MRGC'').\16\
---------------------------------------------------------------------------
\16\ See Securities Exchange Act Release No. 81485 (August 25,
2017), 82 FR 41433 (August 31, 2017) (File No. SR-NSCC-2017-008)
(describes the adoption of the Clearing Agency Model Risk Management
Framework (``Model Risk Management Framework'') of NSCC which sets
forth the model risk management practices of NSCC) and Securities
Exchange Act Release No. 84458 (October 19, 2018), 83 FR 53925
(October 25, 2018) (File No. SR-NSCC-2018-009) (amends the Model
Risk Management Framework). The Model Risk Management Framework
describes the model management practices adopted by NSCC, which have
been designed to assist NSCC in identifying, measuring, monitoring,
and managing the risks associated with the design, development,
implementation, use, and validation of ``models'' which would
include the methodology for the Bond Haircut. Id.
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Second, municipal bonds would be grouped into tenor-based groups
and by credit rating, and municipal bonds that are rated BBB+ or lower,
or that are not rated, would also be separately categorized by
municipal sector. NSCC would then establish a percentage haircut for
each group based on the (1) the historical returns of applicable
benchmark indices, such as tenor-based indices (i.e., based on time to
maturity), municipal bond sector-based indices, and high-yield indices;
(2) a pre-determined look-back period, which shall not be shorter than
10 years; and (3) a pre-determined calibration percentile, which shall
not be less than 99%.
For municipal bonds that are rated higher than BBB+, NSCC is
proposing to use a tenor-based index (i.e., based on time to maturity)
as the applicable benchmark index. While the proposed rule change would
provide that NSCC would base such percentage for bonds that are rated
higher than BBB+ on historical returns of applicable benchmark indices,
such as tenor-based indices (i.e., based on time to maturity),
municipal bond sector-based indices, and high-yield indices; NSCC would
initially base the percentage derived from a benchmark municipal tenor-
based index over a 3-day price return from the index. NSCC could change
which applicable benchmark indices it uses and the applicable period
for the price return used in the calculation from time to time based on
its regular review of margining methodologies. Changes to the frequency
of calibration would be subject to NSCC's risk management practices
which would require, among other things, approval by the MRGC.\17\
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\17\ See note 16.
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For municipal bonds that are rated BBB+ or lower, or are not rated,
NSCC is proposing to use a percentage derived from the maximum of the
applicable tenor-based index, municipal bond sector-based indices and a
high-yield index. Rather than multiply the tenor-based haircut by a
straight risk factor for each municipal sector, as is done under the
current methodology, the Bond Haircut for these lower rated or non-
rated municipal bonds would be determined by using the maximum percent
derived from either the applicable tenor-based index, the municipal
bond sector-based indices or a high yield index. The enhancement would
account for risks represented by the tenor, sector and high-yield
characteristics that may be presented by these municipal bonds by using
the maximum percent that is derived from either a tenor-based index,
sector-based indices or a high yield index, rather than addressing
these risks by multiplying the percent derived from a tenor-based index
by a straight sector-based risk factor. Based on analysis of the impact
studies, NSCC believes that the use of a risk factor based on the
tenor-based index, municipal bond sector-based indices and a high-yield
index would result in lower margins with respect to these securities
that are sufficient to offset the risks with respect to these
securities.
While the proposed rule change would provide that NSCC would base
[[Page 152]]
such percentage on historical returns of applicable benchmark indices,
such as tenor-based indices (i.e., based on time to maturity),
municipal bond sector-based indices, and high-yield indices; NSCC would
initially base the percentage derived from a tenor-based index,
municipal bond sector-based indices and a high-yield index over a 3-day
price return from the indices. NSCC could change which applicable
benchmark indices it uses and the applicable period for the price
return used in the calculation from time to time based on its regular
review of margining methodologies in accordance with its risk
management practices which would require, among other things, approval
by the MRGC.\18\
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\18\ See note 16.
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In extraordinary circumstances, a certain municipality or issuer
may present unique risks beyond the calibrated tenor, sector and high-
yield factors. For example, the market price risk for issues of a
municipality facing technical default following a natural disaster may
not be fully captured due to the liquidity profile of municipal
securities. Therefore, NSCC would reserve the right to apply the
highest haircut of all municipal bonds to a specific issuer in such
instances. NSCC would apply the highest haircut in accordance with its
risk management practices, including approval by an officer of NSCC in
the risk management department, following a review of the circumstances
facing the municipality and a finding that the market price movement
raises risks that are not accounted for by the Bond Haircut
methodology.
Finally, the recalibration of the Bond Haircut would apply a pre-
determined look-back period. NSCC would initially apply a look-back
period of a 10-year rolling window plus a one calendar year ``worst
case scenario'' stress period. NSCC believes this look-back period is
appropriate because it would capture relevant data and is adequate to
cover enough market activity, while not diluting the ``tail'' with an
abundance of data.\19\
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\19\ NSCC believes that a 10-year window with a one-year stress
period is typically long enough to capture at least two recent
market cycles. NSCC believes that data over a longer period will
``flatten'' out the results because recent volatile periods will be
offset by non-volatile periods, making the more recent volatility
appear less significant.
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While the proposed rule change would provide that NSCC would apply
a pre-determined look-back period, which shall not be shorter than 10
years, NSCC would initially apply a look-back period of a 10-year
rolling window plus a one calendar year ``worst case scenario'' stress
period. NSCC could change the look-back period from time to time based
on its regular review of margining methodologies in accordance with its
risk management practices which would require, among other things,
approval by the MRGC.\20\
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\20\ See note 16.
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Proposed Rule Changes to Procedure XV
In order to implement the proposed enhancements to the Bond Haircut
methodology described above, Sections I(A)(1)(a)(iii)(B) and
I(A)(2)(a)(iii)(B) of Procedure XV would be revised to provide that:
(i) Municipal bonds would be grouped by both ``remaining time to
maturity'' and credit rating, and municipal bonds that are BBB+ or
lower, or that are not rated, would be separately categorized by
municipal sector, (ii) NSCC would establish the Bond Haircut
percentages no less frequently than annually, (iii) the Bond Haircut
percentage to be applied to municipal bonds would apply to each
grouping of municipal bonds and (iv) the Bond Haircut percentage to be
applied to municipal bonds would be based on (1) the historical returns
of applicable benchmark indices, such as tenor-based indices (i.e.,
based on time to maturity), municipal bond sector-based indices, and
high-yield indices; (2) a pre-determined look-back period; and (3) a
pre-determined calibration percentile, which shall not be less than
99%. In addition, Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of
Procedure XV would be revised to remove the references to the municipal
sector factor and the current application of the municipal sector
factor in the last four sentences in Sections I(A)(1)(a)(iii)(B) and
I(A)(2)(a)(iii)(B) of Procedure XV. A sentence would also be added to
Sections I(A)(1)(a)(iii)(B) and I(A)(2)(a)(iii)(B) of Procedure XV to
provide that in extraordinary circumstances where NSCC determines that
a certain municipality or issuer of municipal bonds presents unique
risks that are not captured by the grouping set forth in those
subsections, NSCC may, in its discretion, apply the highest percentage
being applied to any municipal bond group pursuant to those subsections
to municipal bonds issued by such municipality or issuer.
2. Statutory Basis
NSCC believes that the proposed changes described above are
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 changes are consistent with
Section 17A(b)(3)(F) of the Act,\21\ and Rules 17Ad-22(e)(4)(i),
(e)(6)(i) and (e)(6)(v), each promulgated under the Act,\22\ for the
reasons described below.
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\21\ 15 U.S.C. 78q-1(b)(3)(F).
\22\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), (e)(6)(v).
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Section 17A(b)(3)(F) of the Act \23\ requires that the Rules be
designed to, among other things, assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible. NSCC believes the proposed changes are
designed to assure the safeguarding of securities and funds which are
in its custody or control or for which it is responsible because they
are designed to enable NSCC to more accurately calculate the necessary
margin relating to Net Unsettled Positions in municipal bonds while
continuing to limit its exposure to Members in the event of a Member
default.
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\23\ 15 U.S.C. 78q-1(b)(3)(F).
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NSCC believes that the proposed changes to (i) re-calibrate the
Bond Haircut no less frequently than annually, (ii) apply a risk factor
based on multiple benchmark indices for lower rated or non-rated
municipal bonds rather than a straight sector-based risk factor, (iii)
calibrate the percent to a pre-determined percentile that would not be
less than 99% level and (iv) apply a pre-determined look-back period,
would help ensure that the margin levels with respect to municipal
bonds would be commensurate with the particular risk attributes of
municipal bonds. Backtesting results conducted by NSCC have shown that
the current methodology for calculating the Bond Haircut, using a
straight municipal sector factor by sector, at times, results in
coverage of 100%. NSCC has determined based on impact studies that,
under current market conditions, the current margin levels with respect
to municipal bonds using the current methodology exceed the levels
necessary to offset the risks with respect to these securities.
Backtesting results conducted by NSCC indicated that using the highest
percentage from applicable benchmark indices in the enhanced
methodology rather than the straight municipal sector factor as in the
current methodology would result in the desired margin coverages to
offset risk while reducing the average Required Fund Deposit for
Members. In addition, by reserving the right to apply the highest risk
factor in certain circumstances, NSCC would be protected from
extraordinary circumstances where NSCC determines that the percentage
to be applied to a
[[Page 153]]
particular grouping of municipal bonds does not fully capture the risks
represented by that municipality or issuer. In this way, the haircut-
based volatility charge for Net Unsettled Positions in municipal bonds
would be calculated to help enable NSCC to collect margin at levels
that better reflect the risk presented by these Net Unsettled Positions
to help NSCC limit its exposure to Members.
The Clearing Fund is composed of Members' Required Fund Deposits
that include the volatility component and is a key tool that NSCC uses
to mitigate potential losses to NSCC associated with liquidating a
Member's portfolio in the event of Member default. Therefore, NSCC
believes that each of the proposed changes listed above would help
enable NSCC to more accurately calculate the necessary margin relating
to Net Unsettled Positions in municipal bonds while continuing to limit
its exposure to Members such that, in the event of Member default,
NSCC's operations would not be disrupted and non-defaulting Members
would not be exposed to losses they cannot anticipate or control. In
this way, the proposed rules are designed to assure the safeguarding of
securities and funds which are in the custody or control of NSCC or for
which it is responsible and therefore consistent with Section
17A(b)(3)(F) of the Act.\24\
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\24\ Id.
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Rule 17Ad-22(e)(4)(i) under the Act \25\ requires that NSCC
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.
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\25\ 17 CFR 240.17Ad-22(e)(4)(i).
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As described above, NSCC believes that the proposed changes would
help enable it to better identify, measure, monitor, and, through the
collection of Members' Required Fund Deposits, manage its credit
exposures to Members by maintaining sufficient resources to cover those
credit exposures fully with a high degree of confidence. More
specifically, the proposed changes to the methodology for Bond Haircuts
to apply a risk factor based on multiple benchmark indices for lower
rated or non-rated municipal bonds rather than a straight risk factor
by sector would help allow NSCC to more accurately identify the credit
exposure relating to Net Unsettled Positions in municipal bonds for
purposes of applying an appropriate margin charge and to help provide
NSCC with a more effective measure of the risks that may be presented
to NSCC by positions in the securities. The proposed changes to (i) re-
calibrate the Bond Haircut no less frequently than annually, (ii)
calibrate the percent to a pre-determined percentile that would not be
less than 99% level, and (iii) apply a pre-determined look-back period
would enable NSCC to apply the proposed enhanced methodology discussed
above and to better monitor its credit exposure relating to Net
Unsettled Positions in municipal bonds. By providing that NSCC would be
required to re-calibrate the Bond Haircut no less frequently than
annually, the proposed rule change would help ensure that NSCC would
periodically review the Bond Haircut to ensure that it continued to
accurately reflect the risks presented by municipal bonds. Finally, by
reserving the right to apply the highest group factor in extraordinary
circumstances, NSCC would help protect itself in circumstances where
the assigned factor does not adequately account for risks presented by
extraordinary events, such as natural disasters.
Based on backtesting results in which the proposed methodology was
applied, NSCC believes that the proposed changes would help allow it to
collect Required Fund Deposits that are more accurate to offset the
risks presented by municipal bonds and provide a better method of
managing risks presented by those securities. Therefore, NSCC believes
that the proposed changes would help enhance NSCC's ability to
effectively identify, measure, monitor and manage its credit exposures
and would help enhance its ability to maintain sufficient financial
resources to cover its credit exposure to each participant fully with a
high degree of confidence. As such, NSCC believes the proposed changes
are consistent with Rule 17Ad-22(e)(4)(i) under the Act.\26\
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\26\ Id.
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Rule 17Ad-22(e)(6)(i) under the Act \27\ requires that NSCC
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.
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\27\ 17 CFR 240.17Ad-22(e)(6)(i).
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The Required Fund Deposit is made up of risk-based components (as
margin) that are calculated and assessed daily to limit NSCC's credit
exposures to Members. NSCC is proposing changes that are designed to
more effectively address risk characteristics of Net Unsettled
Positions in municipal bonds by capturing risks more accurately by
applying multiple indices. Rather than multiply the tenor-based haircut
for lower rated bonds by a straight risk factor for each municipal
sector, the Bond Haircut for lower rated or non-rated municipal bonds
would be determined by using the maximum percent derived from either
the tenor-based index, the municipal bond sector-based indices or a
high yield index. Based on backtesting results, NSCC believes that
deriving the percent using a maximum of the indices more accurately
captures the risk of such municipal bonds that may be presented by
tenor, sector and the higher yield of these securities compared to the
present use of a straight sector-based risk factor. Based on such
results, NSCC believes that these changes would help enable NSCC to
produce margin levels that are more commensurate with the particular
risk attributes of these securities. These proposed changes are
designed to assist NSCC in maintaining a risk-based margin system that
considers, and produces margin levels commensurate with, the risks and
particular attributes of portfolios relating to municipal bonds,
including risks and attributes related to tenor, municipal sector and
higher yields. Therefore, NSCC believes the proposed change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\28\
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\28\ Id.
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Rule 17Ad-22(e)(6)(v) under the Act \29\ requires that NSCC
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. NSCC is proposing to enhance the Bond Haircut because NSCC
believes that the proposed methodology would help provide NSCC with a
more effective measure of the credit exposure presented by municipal
bonds. In particular, as described above, NSCC believes that the
enhancements would result in a more effective measure of the tenor,
sector and higher yield risks presented by municipal bonds that are
rated BBB+ or lower, or are not rated.
[[Page 154]]
Therefore, NSCC believes the proposed change is consistent with Rule
17Ad-22(e)(6)(v) under the Act.\30\
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\29\ 17 CFR 240.17Ad-22(e)(6)(v).
\30\ 17 CFR 240.17Ad-22(e)(6)(v).
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(B) Clearing Agency's Statement on Burden on Competition
NSCC does not believe that the proposed changes to the Bond Haircut
would have an adverse impact, or impose any burden, on competition.
Based on impact studies, NSCC believes that the proposed changes to the
Bond Haircut would result in a reduction in the Required Fund Deposit
with respect to every Member with Net Unsettled Positions in municipal
bonds. NSCC believes that this impact would promote competition for
Members that have Net Unsettled Positions in municipal bonds by
reducing the amount of the Required Fund Deposit for such Members while
continuing to appropriately limit NSCC's exposure to Members in the
event of a Member default. In addition, NSCC does not believe that the
proposed rule changes would disproportionally impact any Members.
(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 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.
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 [email protected]. Please include
File Number SR-NSCC-2019-004 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-2019-004. 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 website (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 website 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 website
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NSCC-2019-004 and should be submitted on
or before January 23, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-28276 Filed 12-31-19; 8:45 am]
BILLING CODE 8011-01-P
