Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change to Enhance the Calculation of the Family-Issued Securities Charge, 8964-8968 [2020-03092]
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Federal Register / Vol. 85, No. 32 / Tuesday, February 18, 2020 / Notices
(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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2020–08 on the subject line.
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• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2020–08. 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 the Exchange. 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–NYSEArca–2020–08, and
should be submitted on or before March
10, 2020.
17:48 Feb 14, 2020
[FR Doc. 2020–03097 Filed 2–14–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88163; File No. SR–NSCC–
2020–002]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Proposed Rule Change to Enhance the
Calculation of the Family-Issued
Securities Charge
February 11, 2020.
Paper Comments
VerDate Sep<11>2014
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
J. Matthew DeLesDernier,
Assistant Secretary.
Jkt 250001
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 January
28, 2020, 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
modifications to NSCC’s Rules and
Procedures (‘‘Rules’’) 4 in order to
enhance the calculation of NSCC’s
existing charge applied to long positions
in Family-Issued Securities 5 (‘‘FIS
Charge’’) by using the same haircut
percentages for all Members and no
longer using Members’ ratings on the
Credit Risk Rating Matrix (‘‘CRRM’’) 6 in
34 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 On January 28, 2020, NSCC filed this proposed
rule change as an advance notice (SR–NSCC–2020–
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 Terms not defined herein are defined in the
Rules, available at www.dtcc.com/∼/media/Files/
Downloads/legal/rules/nscc_rules.pdf.
5 A Family-Issued Security is defined in Rule 1
(Definitions and Descriptions) of the Rules as ‘‘a
security that was issued by a Member or an affiliate
of that Member.’’ Supra note 4.
6 See Rule 1 and Section 4 of Rule 2B of the Rules,
supra note 4. See also Securities Exchange Act
1 15
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calculating this charge, as described
below.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
NSCC is proposing to modify the
Rules to enhance the calculation of the
FIS Charge by using the same haircut
percentages for all Members and no
longer using Members’ ratings on the
CRRM in calculating this charge. By
using the same haircut percentages to
calculate the FIS Charge for all
Members, NSCC believes this proposed
enhancement would better mitigate the
specific wrong-way risk posed by long
positions in Family-Issued Securities
that the charge was designed to address,
as described below.
Background
As a central counterparty, NSCC
occupies an important role in the
securities settlement system by
interposing itself between
counterparties to financial transactions,
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
are critical to achieving these riskreducing goals. As part of its market risk
management strategy, NSCC manages its
credit exposure to Members by
determining the appropriate Required
Fund Deposits to the Clearing Fund and
monitoring its sufficiency, as provided
for in the Rules.7 The Required Fund
Deposit serves as each Member’s
margin.
Release Nos. 80734 (May 19, 2017), 82 FR 24177
(May 25, 2017) (SR–DTC–2017–002, SR–FICC–
2017–006, SR–NSCC–2017–002); and 80731 (May
19, 2017), 82 FR 24174 (May 25, 2017) (SR–DTC–
2017–801, SR–FICC–2017–804, SR–NSCC–2017–
801).
7 See Rule 4 (Clearing Fund) and Procedure XV
(Clearing Fund Formula and Other Matters) of the
Rules, supra note 4.
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The objective of a Member’s Required
Fund Deposit is to mitigate potential
losses to NSCC associated with
liquidating a Member’s portfolio in the
event NSCC ceases to act for that
Member (hereinafter referred to as a
‘‘default’’).8 The aggregate of all
Members’ Required Fund Deposits
constitutes the Clearing Fund of NSCC.9
NSCC may access its Clearing Fund
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.10
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 of the
Rules.11 NSCC regularly assesses the
market, liquidity and other risks that its
margining methodologies are designed
to mitigate to evaluate whether margin
levels are commensurate with the
particular risk attributes of each relevant
product, portfolio, and market.
Among the various risks that NSCC
considers when evaluating the
effectiveness of its margining
methodology are its counterparty risks,
including wrong-way risk. In particular,
NSCC seeks to identify and mitigate its
exposures to specific wrong-way risk,
which is defined as the risk that an
exposure to a counterparty is highly
likely to increase when the
creditworthiness of that counterparty
deteriorates.12 NSCC has identified
exposure to specific wrong-way risk
when it acts as central counterparty to
a Member with long positions in
Family-Issued Securities. In the event a
Member with long positions in FamilyIssued 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.
In order to address this exposure to
specific wrong-way risk, NSCC
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8 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.
9 See Rule 4 (Clearing Fund) of the Rules, supra
note 4.
10 Id.
11 Supra note 4.
12 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, pg. 47 n.65 (April 2012),
available at https://www.bis.org/publ/cpss101a.pdf.
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17:48 Feb 14, 2020
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implemented the FIS Charge in 2015.13
The FIS Charge is applied to a Member’s
long positions in Family-Issued
Securities, which are the positions
NSCC would need to sell into the
market following a Member default.14
When the FIS Charge was initially
implemented, it was only applied to
Members that were placed on the Watch
List based on the CRRM rating.15 As part
of its ongoing monitoring of its
membership, NSCC utilizes the internal
CRRM to evaluate its credit risk
exposures to its Members based on a
scale from strongest to weakest.16
Members that fall within the higher risk
rating categories are considered on
NSCC’s Watch List and may be subject
to enhanced surveillance or additional
margin charges, as permitted under the
Rules.17 Therefore, the FIS Charge was
applied only to Members on the Watch
List based on the reasoning that these
Members present a heightened credit
risk to NSCC or have demonstrated
higher risk related to their ability to
meet settlement. However, in the Initial
FIS Filing, 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.18
Following that evaluation, NSCC
implemented the current methodology
for calculating the FIS Charge, which
expanded the application of the charge
to all Members, but continues to take
into account Members’ ratings on the
CRRM in calculating the applicable
charge.19 Therefore, under the current
methodology, in calculating its
Members’ Required Fund Deposits,
NSCC first excludes long positions in
Family-Issued Securities of Members
from the applicable volatility charge,
and instead charges an amount
calculated by multiplying the absolute
value of the long Net Unsettled
Positions (as such term is defined in
Procedure XV of the Rules) in that
13 See Securities Exchange Act Release No. 76077
(October 5, 2015), 80 FR 61256 (October 9, 2015)
(SR–NSCC–2015–003) (‘‘Initial FIS Filing’’).
14 Short positions in Family-Issued Securities are
not subject to the FIS Charge and are subject to the
applicable volatility charge, as provided for under
the Rules. See Sections I.(A)(1)(a)(iv) and
I.(A)(2)(a)(iv) of Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules, supra note
4.
15 See supra note 13.
16 See supra note 6.
17 Id.
18 Supra note 13, at 61257.
19 See Securities Exchange Act Release Nos.
81550 (September 7, 2017), 82 FR 43061 (September
13, 2017) (SR–NSCC–2017–010); and 81545
(September 7, 2017), 82 FR 43054 (September 13,
2017) (SR–NSCC–2017–804).
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8965
Member’s Family-Issued Securities by a
percentage that is no less than 40
percent.20 The percentage that is used in
calculating the FIS Charge depends on
a Member’s rating on the CRRM. Under
Procedure XV of the Rules, long Net
Unsettled Positions in (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
that are rated 1 through 5 on the CRRM;
and (2) equity securities that are FamilyIssued 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 1 through 5 on the CRRM.21 The
haircut rates used in the FIS Charge as
applied to positions in fixed income
securities 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.
Proposed Change
NSCC is now proposing to enhance
the methodology for calculating the FIS
Charge by using the higher applicable
percentage for all Members, and no
longer using a Member’s CRRM rating in
the calculation.
Since implementation of the current
calculation, NSCC has continued to
monitor its exposure to specific wrongway risk and determined that the risk
characteristics to be considered when
margining Family-Issued Securities
extend beyond Members’
creditworthiness as measured through
the CRRM. More specifically, NSCC
believes it may be exposed to specific
wrong-way risk despite a Members’
rating on the CRRM, and NSCC can
better mitigate its exposure to this risk
by calculating the FIS Charge without
considering Members’ CRRM ratings.
While the current methodology
appropriately assumes that Members
with a higher rating on the CRRM
present a heightened credit risk to NSCC
or have demonstrated higher risk related
to their ability to meet settlement, NSCC
believes this approach does not take
into account the risk that a firm may
default due to unanticipated causes
(referred to as a ‘‘jump-to-default’’
scenario) not captured by the CRRM
rating. The CRRM rating necessarily
relies on historical data as a predictor of
future risks. Jump-to-default scenarios
20 See Sections I.(A)(1)(a)(iv) and I.(A)(2)(a)(iv) of
Procedure XV (Clearing Fund Formula and Other
Matters) of the Rules, supra note 4.
21 Id.
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are triggered by unanticipated causes
that could not be predicted based on
historical trends or data, for example
fraud or other bad acts by management.
The proposed change is designed to
improve NSCC’s ability to cover the
specific wrong-way risk posed by long
positions in Family-Issued Securities by
applying the higher applicable
percentage in calculating the FIS Charge
for all Members.
In order to implement this proposal,
NSCC would amend Sections
I.(A)(1)(a)(iv) and I.(A)(2)(a)(iv) of
Procedure XV of the Rules, which
describe the methodology for
calculating the FIS Charge, and provide
that (1) fixed income securities that are
Family-Issued Securities shall be
charged a haircut rate of no less than 80
percent; and (2) equity securities that
are Family-Issued Securities shall be
charged a haircut rate of 100 percent.
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 covered clearing agency. In particular,
NSCC believes that the proposed change
is consistent with Section 17A(b)(3)(F)
of the Act,22 and Rules 17Ad–
22(e)(4)(i),23 and (e)(6)(i) and (v),24 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.25 The
proposed change would enhance the
margin methodology applied to long
positions in Family-Issued Securities by
using the higher applicable percentage
for all Members, rather than considering
Members’ CRRM ratings in the
calculation. The proposal would
improve NSCC’s ability to mitigate
specific wrong-way risk exposures in a
jump-to-default scenario and, in this
way, would assist NSCC in collecting
margin that more accurately reflects
NSCC’s exposure to a Member that
clears Family-Issued Securities. The
proposal would also 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 would help
NSCC, as a central counterparty,
promote robust risk management, and
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(4)(i).
24 17 CFR 240.17Ad–22(e)(6)(i) and (v).
25 15 U.S.C. 78q–1(b)(3)(F).
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.26
Rule 17Ad–22(e)(4)(i) under the Act
requires 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.27 The
specific wrong-way risk presented by
Family-Issued Securities is the risk that,
in the event 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 used in
calculating the FIS Charge as applied to
positions in fixed income securities
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. The proposal to apply
the higher haircuts to all Members
would assist NSCC in addressing
specific wrong-way risk exposures in a
jump-to-default scenario. By addressing
this additional risk exposure, NSCC
believes the proposal would allow it to
calculate the FIS Charge in a way that
more accurately reflects the risk
characteristics of Family-Issued
Securities. The proposal would,
therefore, permit NSCC to more
accurately identify, measure, monitor
and manage its credit exposures to
Members with long positions in FamilyIssued Securities, and 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).28
Rule 17Ad–22(e)(6)(i) under the Act
requires 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.29 Rule 17Ad–22(e)(6)(v) under
the Act requires 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.30
As stated above, long positions in
Family-Issued Securities present NSCC
with exposure to specific wrong-way
risk that, in the event a Member with
these positions 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 used in the
current methodology would continue to
be used in the proposed methodology
and as applied to positions in fixed
income securities 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. Therefore, the
calculation of the charge would
continue to reflect the risk
characteristics of Family-Issued
Securities. As described above, the
proposed change to apply the higher
haircut rates to all Members would
improve NSCC’s ability to mitigate its
exposure to specific wrong-way risk in
a jump-to-default scenario. 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 long positions in
Family-Issued Securities. Additionally,
NSCC believes the proposed
enhancement to the methodology for
calculating the FIS Charge is an
appropriate method for measuring its
credit exposures to its Members,
because the FIS Charge would continue
to account 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).31
22 15
23 17
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26 Id.
27 17
29 17
CFR 240.17Ad–22(e)(4)(i).
28 Id.
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CFR 240.17Ad–22(e)(6)(i).
CFR 240.17Ad–22(e)(6)(v).
31 17 CFR 240.17Ad–22(e)(6)(i) and (v).
30 17
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(B) Clearing Agency’s Statement on
Burden on Competition
By enhancing the methodology for
calculating the FIS Charge, and,
therefore, increasing the amount of
margin that Members may be charged
under the Rules, the proposed change
may impose a burden on competition.
More specifically, those Members that
are currently rated 1–5 on the CRRM
would be subject to an increased FIS
Charge relative to the current applicable
FIS Charge. However, Members’ ratings
on the CRRM are re-evaluated
periodically and change from time to
time. Therefore, all Members could have
become subject to the higher FIS Charge
at any time under the current
methodology if their CRRM rating was
increased to a 6 or 7 following a
periodic reevaluation of their rating.
Similarly, the volume of Net Unsettled
Positions in Family-Issued Securities in
a Member’s portfolio could change
periodically. The proposed
enhancement to the calculation of the
FIS Charge would be imposed on all
Members on an individualized basis,
based on the positions in their cleared
portfolio, in an amount reasonably
calculated to mitigate the risks posed to
NSCC by those positions. Therefore,
Members that present similar Net
Unsettled Positions would have similar
impacts on their Required Fund
Deposits, and, as such, 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 NSCC’s efforts to mitigate
its risk exposures and meet the
requirements of the Act,32 as described
in this filing and further below.
NSCC believes that the above
described burden on competition that
may be created by the proposed changes
would be necessary in furtherance of the
purposes of the Act, specifically Section
17A(b)(3)(F) of the Act,33 because, as
described above, the Rules must be
designed to promote the prompt and
accurate clearance and settlement of
securities transactions and to protect
investors and the public interest.
NSCC also believes the proposed
change would be necessary in order to
support NSCC’s compliance with Rules
17Ad–22(e)(4)(i), and (e)(6)(i) and (v),34
each promulgated under the Act, which
require NSCC to establish, implement,
maintain and enforce written policies
32 15
U.S.C. 78q–1(b)(3)(I).
U.S.C. 78q–1(b)(3)(F).
34 17 CFR 240.17Ad–22(e)(4) and (e)(6).
33 15
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and procedures reasonably designed to
(x) 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; (y) 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; and (z) 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. As described above, NSCC
believes implementing the proposed
enhancements to the FIS Charge would
improve the risk-based methodology
that NSCC employs to measure market
price risk and would better limit NSCC’s
credit exposures to Members, consistent
with these requirements.
NSCC believes that the above
described burden on competition that
could be created by the proposed
changes would be appropriate in
furtherance of the purposes of the Act,
because such changes have been
designed to promote the prompt and
accurate clearance and settlement of
securities transactions and to protect
investors and the public interest, as
described in detail above.
The proposed rule change would use
the higher applicable haircut percentage
in calculating the FIS Charge for all
Members. These haircut percentages as
applied to positions in fixed income
securities were calibrated to address the
risk that the Family-Issued Securities of
a Member would be devalued in the
event of that Member’s default.
Therefore, the proposed FIS Charge
would better address NSCC’s exposures
to specific wrong-way risk with respect
to all Members’ positions in FamilyIssued Securities, particularly in jumpto-default scenarios. By mitigating
specific wrong-way risk for NSCC, the
proposed change would also mitigate
risk for Members, because lowering the
risk profile for NSCC would in turn
lower the risk exposure that Members
may have with respect to NSCC in its
role as a central counterparty. Further,
NSCC believes that any burden on
competition that may be imposed by
this proposal would be appropriate in
furtherance of the purposes of the Act,
because it is designed to meet NSCC’s
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8967
risk management goals and its
regulatory obligations.
(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 rule-comments@
sec.gov. Please include File Number SR–
NSCC–2020–002 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–2020–002. 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
E:\FR\FM\18FEN1.SGM
18FEN1
8968
Federal Register / Vol. 85, No. 32 / Tuesday, February 18, 2020 / Notices
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–
2020–002 and should be submitted on
or before March 10, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.35
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–03092 Filed 2–14–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88161; File No. SR–BOX–
2020–03]
Self-Regulatory Organizations; BOX
Exchange LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the Fee
Schedule on the BOX Options Market
LLC Facility To Establish BOX
Connectivity Fees for Participants and
Non-Participants Who Connect to the
BOX Network
lotter on DSKBCFDHB2PROD with NOTICES
February 11, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on January
29, 2020, BOX Exchange LLC (the
‘‘Exchange’’) 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
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
prepared by the Exchange. The
Exchange filed the proposed rule change
pursuant to Section 19(b)(3)(A)(ii) of the
Act,3 and Rule 19b–4(f)(2) thereunder,4
which renders the proposal effective
upon filing with the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is filing with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
to amend the Fee Schedule regarding
connectivity to BOX in order to provide
greater detail and clarity concerning
BOX’s costs, as they pertain to expenses
for network connectivity services, on
the BOX Options Market LLC (‘‘BOX’’)
options facility. The text of the
proposed rule change is available from
the principal office of the Exchange, at
the Commission’s Public Reference
Room and also on the Exchange’s
internet website at https://
boxexchange.com.
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
Exchange 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
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange is refiling its proposal
to amend the Fee Schedule regarding
connectivity to BOX in order to provide
greater detail and clarity concerning
BOX’s costs, as they pertain to expenses
for network connectivity services. The
Exchange is now presenting more
connectivity cost details that correspond
with income statement expense line
items to provide greater transparency
into its actual costs associated with
providing network connectivity
services. The Exchange believes that its
proposed fees are fair and reasonable
35 17
1 15
VerDate Sep<11>2014
17:48 Feb 14, 2020
3 15
4 17
Jkt 250001
PO 00000
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
Frm 00164
Fmt 4703
Sfmt 4703
because they will permit recovery of
less than all of the Exchange’s costs for
providing connectivity and will not
result in excessive pricing or
supracompetitive profit, when
comparing the Exchange’s total annual
expense associated with providing the
network connectivity services versus the
total projected annual revenue the
Exchange projects to collect for
providing the network connectivity
services.
The Exchange proposes to amend
Section VI. (Technology Fees) of the
BOX Fee Schedule to establish BOX
Connectivity Fees for Participants and
non-Participants who connect to the
BOX network. Connectivity fees will be
based upon the amount of bandwidth
that will be used by the Participant or
non-Participant. Further, BOX
Participants or non-Participants
connected as of the last trading day of
each calendar month will be charged the
applicable Connectivity Fee for that
month. The Connectivity Fees will be as
follows:
Connection type
Non-10 Gb Connection ...
10 Gb Connection ..........
Monthly fees
(per connection)
$1,000
5,000
The Exchange also proposes to amend
certain language and numbering in
Section VI.A to reflect the changes
discussed above. Specifically, the
Exchange proposes to add the title
‘‘Third Party Connectivity Fees’’ under
Section VI.A. Further, the Exchange
proposes to add Section VI.A.2, which
details the proposed BOX Connectivity
Fees discussed above. Finally the
Exchange is proposing to remove
Section VI.C. High Speed Vendor Feed
(‘‘HSVF’’), and reclassify the HSVF as a
Port Fee.
The Exchange initially filed the
proposed fees on July 19, 2018,
designating the proposed fees effective
July 1, 2018. The first proposed rule
change was published for comment in
the Federal Register on August 2, 2018.5
The Commission received one comment
letter on the proposal.6 The proposed
fees remained in effect until they were
temporarily suspended pursuant to a
suspension order (the ‘‘Suspension
Order’’) issued by the Division of
Trading and Markets, which also
instituted proceedings to determine
whether to approve or disapprove the
5 See Securities Exchange Act Release No. 83728
(July 27, 2018), 83 FR 37853 (August 2, 2018) (SR–
BOX–2018–24).
6 See Letter from Tyler Gellasch, Executive
Director, The Healthy Markets Association, to Brent
J. Fields, Secretary, Commission, dated August 23,
2018 (‘‘Healthy Markets Letter’’).
E:\FR\FM\18FEN1.SGM
18FEN1
]]>Agencies
[Federal Register Volume 85, Number 32 (Tuesday, February 18, 2020)]
[Notices]
[Pages 8964-8968]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03092]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88163; File No. SR-NSCC-2020-002]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change to Enhance the
Calculation of the Family-Issued Securities Charge
February 11, 2020.
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 January 28, 2020, 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 January 28, 2020, NSCC filed this proposed rule change as
an advance notice (SR-NSCC-2020-801) 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 modifications to NSCC's Rules
and Procedures (``Rules'') \4\ in order to enhance the calculation of
NSCC's existing charge applied to long positions in Family-Issued
Securities \5\ (``FIS Charge'') by using the same haircut percentages
for all Members and no longer using Members' ratings on the Credit Risk
Rating Matrix (``CRRM'') \6\ in calculating this charge, as described
below.
---------------------------------------------------------------------------
\4\ Terms not defined herein are defined in the Rules, available
at www.dtcc.com/~/media/Files/Downloads/legal/rules/nscc_rules.pdf.
\5\ A Family-Issued Security is defined in Rule 1 (Definitions
and Descriptions) of the Rules as ``a security that was issued by a
Member or an affiliate of that Member.'' Supra note 4.
\6\ See Rule 1 and Section 4 of Rule 2B of the Rules, supra note
4. See also Securities Exchange Act Release Nos. 80734 (May 19,
2017), 82 FR 24177 (May 25, 2017) (SR-DTC-2017-002, SR-FICC-2017-
006, SR-NSCC-2017-002); and 80731 (May 19, 2017), 82 FR 24174 (May
25, 2017) (SR-DTC-2017-801, SR-FICC-2017-804, SR-NSCC-2017-801).
---------------------------------------------------------------------------
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 to modify the Rules to enhance the calculation of
the FIS Charge by using the same haircut percentages for all Members
and no longer using Members' ratings on the CRRM in calculating this
charge. By using the same haircut percentages to calculate the FIS
Charge for all Members, NSCC believes this proposed enhancement would
better mitigate the specific wrong-way risk posed by long positions in
Family-Issued Securities that the charge was designed to address, as
described below.
Background
As a central counterparty, NSCC occupies an important role in the
securities settlement system by interposing itself between
counterparties to financial transactions, 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 are critical to achieving these
risk-reducing goals. As part of its market risk management strategy,
NSCC manages its credit exposure to Members by determining the
appropriate Required Fund Deposits to the Clearing Fund and monitoring
its sufficiency, as provided for in the Rules.\7\ The Required Fund
Deposit serves as each Member's margin.
---------------------------------------------------------------------------
\7\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules, supra note 4.
---------------------------------------------------------------------------
[[Page 8965]]
The objective of a Member's Required Fund Deposit is to mitigate
potential losses to NSCC associated with liquidating a Member's
portfolio in the event NSCC ceases to act for that Member (hereinafter
referred to as a ``default'').\8\ The aggregate of all Members'
Required Fund Deposits constitutes the Clearing Fund of NSCC.\9\ NSCC
may access its Clearing Fund 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.\10\
---------------------------------------------------------------------------
\8\ 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.
\9\ See Rule 4 (Clearing Fund) of the Rules, supra note 4.
\10\ Id.
---------------------------------------------------------------------------
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 of the Rules.\11\ NSCC regularly assesses the
market, liquidity and other risks that its margining methodologies are
designed to mitigate to evaluate whether margin levels are commensurate
with the particular risk attributes of each relevant product,
portfolio, and market.
---------------------------------------------------------------------------
\11\ Supra note 4.
---------------------------------------------------------------------------
Among the various risks that NSCC considers when evaluating the
effectiveness of its margining methodology are its counterparty risks,
including wrong-way risk. In particular, NSCC seeks to identify and
mitigate its exposures to specific wrong-way risk, which is defined as
the risk that an exposure to a counterparty is highly likely to
increase when the creditworthiness of that counterparty
deteriorates.\12\ NSCC has identified exposure to specific wrong-way
risk when it acts as central counterparty to a Member with long
positions in Family-Issued Securities. In the event a Member with 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.
---------------------------------------------------------------------------
\12\ 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, pg. 47 n.65 (April 2012), available at https://www.bis.org/publ/cpss101a.pdf.
---------------------------------------------------------------------------
In order to address this exposure to specific wrong-way risk, NSCC
implemented the FIS Charge in 2015.\13\ The FIS Charge is applied to a
Member's long positions in Family-Issued Securities, which are the
positions NSCC would need to sell into the market following a Member
default.\14\
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 76077 (October 5,
2015), 80 FR 61256 (October 9, 2015) (SR-NSCC-2015-003) (``Initial
FIS Filing'').
\14\ Short positions in Family-Issued Securities are not subject
to the FIS Charge and are subject to the applicable volatility
charge, as provided for under the Rules. See Sections
I.(A)(1)(a)(iv) and I.(A)(2)(a)(iv) of Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules, supra note 4.
---------------------------------------------------------------------------
When the FIS Charge was initially implemented, it was only applied
to Members that were placed on the Watch List based on the CRRM
rating.\15\ As part of its ongoing monitoring of its membership, NSCC
utilizes the internal CRRM to evaluate its credit risk exposures to its
Members based on a scale from strongest to weakest.\16\ Members that
fall within the higher risk rating categories are considered on NSCC's
Watch List and may be subject to enhanced surveillance or additional
margin charges, as permitted under the Rules.\17\ Therefore, the FIS
Charge was applied only to Members on the Watch List based on the
reasoning that these Members present a heightened credit risk to NSCC
or have demonstrated higher risk related to their ability to meet
settlement. However, in the Initial FIS Filing, 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.\18\
---------------------------------------------------------------------------
\15\ See supra note 13.
\16\ See supra note 6.
\17\ Id.
\18\ Supra note 13, at 61257.
---------------------------------------------------------------------------
Following that evaluation, NSCC implemented the current methodology
for calculating the FIS Charge, which expanded the application of the
charge to all Members, but continues to take into account Members'
ratings on the CRRM in calculating the applicable charge.\19\
Therefore, under the current methodology, in calculating its Members'
Required Fund Deposits, NSCC first excludes long positions in Family-
Issued Securities of Members from the applicable volatility charge, and
instead charges an amount calculated by multiplying the absolute value
of the long Net Unsettled Positions (as such term is defined in
Procedure XV of the Rules) in that Member's Family-Issued Securities by
a percentage that is no less than 40 percent.\20\ The percentage that
is used in calculating the FIS Charge depends on a Member's rating on
the CRRM. Under Procedure XV of the Rules, long Net Unsettled Positions
in (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 that
are rated 1 through 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 1 through 5 on the CRRM.\21\ The haircut
rates used in the FIS Charge as applied to positions in fixed income
securities 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.
---------------------------------------------------------------------------
\19\ See Securities Exchange Act Release Nos. 81550 (September
7, 2017), 82 FR 43061 (September 13, 2017) (SR-NSCC-2017-010); and
81545 (September 7, 2017), 82 FR 43054 (September 13, 2017) (SR-
NSCC-2017-804).
\20\ See Sections I.(A)(1)(a)(iv) and I.(A)(2)(a)(iv) of
Procedure XV (Clearing Fund Formula and Other Matters) of the Rules,
supra note 4.
\21\ Id.
---------------------------------------------------------------------------
Proposed Change
NSCC is now proposing to enhance the methodology for calculating
the FIS Charge by using the higher applicable percentage for all
Members, and no longer using a Member's CRRM rating in the calculation.
Since implementation of the current calculation, NSCC has continued
to monitor its exposure to specific wrong-way risk and determined that
the risk characteristics to be considered when margining Family-Issued
Securities extend beyond Members' creditworthiness as measured through
the CRRM. More specifically, NSCC believes it may be exposed to
specific wrong-way risk despite a Members' rating on the CRRM, and NSCC
can better mitigate its exposure to this risk by calculating the FIS
Charge without considering Members' CRRM ratings. While the current
methodology appropriately assumes that Members with a higher rating on
the CRRM present a heightened credit risk to NSCC or have demonstrated
higher risk related to their ability to meet settlement, NSCC believes
this approach does not take into account the risk that a firm may
default due to unanticipated causes (referred to as a ``jump-to-
default'' scenario) not captured by the CRRM rating. The CRRM rating
necessarily relies on historical data as a predictor of future risks.
Jump-to-default scenarios
[[Page 8966]]
are triggered by unanticipated causes that could not be predicted based
on historical trends or data, for example fraud or other bad acts by
management. The proposed change is designed to improve NSCC's ability
to cover the specific wrong-way risk posed by long positions in Family-
Issued Securities by applying the higher applicable percentage in
calculating the FIS Charge for all Members.
In order to implement this proposal, NSCC would amend Sections
I.(A)(1)(a)(iv) and I.(A)(2)(a)(iv) of Procedure XV of the Rules, which
describe the methodology for calculating the FIS Charge, and provide
that (1) fixed income securities that are Family-Issued Securities
shall be charged a haircut rate of no less than 80 percent; and (2)
equity securities that are Family-Issued Securities shall be charged a
haircut rate of 100 percent.
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 covered clearing agency. In particular, NSCC believes
that the proposed change is consistent with Section 17A(b)(3)(F) of the
Act,\22\ and Rules 17Ad-22(e)(4)(i),\23\ and (e)(6)(i) and (v),\24\
each promulgated under the Act, for the reasons described below.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78q-1(b)(3)(F).
\23\ 17 CFR 240.17Ad-22(e)(4)(i).
\24\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
---------------------------------------------------------------------------
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.\25\ The proposed change would enhance the margin methodology
applied to long positions in Family-Issued Securities by using the
higher applicable percentage for all Members, rather than considering
Members' CRRM ratings in the calculation. The proposal would improve
NSCC's ability to mitigate specific wrong-way risk exposures in a jump-
to-default scenario and, in this way, would assist NSCC in collecting
margin that more accurately reflects NSCC's exposure to a Member that
clears Family-Issued Securities. The proposal would also 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 would 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.\26\
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78q-1(b)(3)(F).
\26\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(i) under the Act requires 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.\27\ The specific wrong-way risk presented by Family-Issued
Securities is the risk that, in the event 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 used in
calculating the FIS Charge as applied to positions in fixed income
securities 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. The proposal to apply the higher haircuts to all Members would
assist NSCC in addressing specific wrong-way risk exposures in a jump-
to-default scenario. By addressing this additional risk exposure, NSCC
believes the proposal would allow it to calculate the FIS Charge in a
way that more accurately reflects the risk characteristics of Family-
Issued Securities. The proposal would, therefore, permit NSCC to more
accurately identify, measure, monitor and manage its credit exposures
to Members with long positions in Family-Issued Securities, and 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).\28\
---------------------------------------------------------------------------
\27\ 17 CFR 240.17Ad-22(e)(4)(i).
\28\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(i) under the Act requires 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.\29\ Rule 17Ad-22(e)(6)(v) under the Act requires 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.\30\
---------------------------------------------------------------------------
\29\ 17 CFR 240.17Ad-22(e)(6)(i).
\30\ 17 CFR 240.17Ad-22(e)(6)(v).
---------------------------------------------------------------------------
As stated above, long positions in Family-Issued Securities present
NSCC with exposure to specific wrong-way risk that, in the event a
Member with these positions 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 used in
the current methodology would continue to be used in the proposed
methodology and as applied to positions in fixed income securities 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. Therefore, the
calculation of the charge would continue to reflect the risk
characteristics of Family-Issued Securities. As described above, the
proposed change to apply the higher haircut rates to all Members would
improve NSCC's ability to mitigate its exposure to specific wrong-way
risk in a jump-to-default scenario. 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 long positions in Family-Issued Securities. Additionally,
NSCC believes the proposed enhancement to the methodology for
calculating the FIS Charge is an appropriate method for measuring its
credit exposures to its Members, because the FIS Charge would continue
to account 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).\31\
---------------------------------------------------------------------------
\31\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
---------------------------------------------------------------------------
[[Page 8967]]
(B) Clearing Agency's Statement on Burden on Competition
By enhancing the methodology for calculating the FIS Charge, and,
therefore, increasing the amount of margin that Members may be charged
under the Rules, the proposed change may impose a burden on
competition. More specifically, those Members that are currently rated
1-5 on the CRRM would be subject to an increased FIS Charge relative to
the current applicable FIS Charge. However, Members' ratings on the
CRRM are re-evaluated periodically and change from time to time.
Therefore, all Members could have become subject to the higher FIS
Charge at any time under the current methodology if their CRRM rating
was increased to a 6 or 7 following a periodic reevaluation of their
rating. Similarly, the volume of Net Unsettled Positions in Family-
Issued Securities in a Member's portfolio could change periodically.
The proposed enhancement to the calculation of the FIS Charge would be
imposed on all Members on an individualized basis, based on the
positions in their cleared portfolio, in an amount reasonably
calculated to mitigate the risks posed to NSCC by those positions.
Therefore, Members that present similar Net Unsettled Positions would
have similar impacts on their Required Fund Deposits, and, as such,
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 NSCC's efforts to mitigate its risk exposures and meet
the requirements of the Act,\32\ as described in this filing and
further below.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
NSCC believes that the above described burden on competition that
may be created by the proposed changes would be necessary in
furtherance of the purposes of the Act, specifically Section
17A(b)(3)(F) of the Act,\33\ because, as described above, the Rules
must be designed to promote the prompt and accurate clearance and
settlement of securities transactions and to protect investors and the
public interest.
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\33\ 15 U.S.C. 78q-1(b)(3)(F).
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NSCC also believes the proposed change would be necessary in order
to support NSCC's compliance with Rules 17Ad-22(e)(4)(i), and (e)(6)(i)
and (v),\34\ each promulgated under the Act, which require NSCC to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to (x) 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;
(y) 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; and (z) 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. As described above, NSCC believes
implementing the proposed enhancements to the FIS Charge would improve
the risk-based methodology that NSCC employs to measure market price
risk and would better limit NSCC's credit exposures to Members,
consistent with these requirements.
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\34\ 17 CFR 240.17Ad-22(e)(4) and (e)(6).
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NSCC believes that the above described burden on competition that
could be created by the proposed changes would be appropriate in
furtherance of the purposes of the Act, because such changes have been
designed to promote the prompt and accurate clearance and settlement of
securities transactions and to protect investors and the public
interest, as described in detail above.
The proposed rule change would use the higher applicable haircut
percentage in calculating the FIS Charge for all Members. These haircut
percentages as applied to positions in fixed income securities were
calibrated to address the risk that the Family-Issued Securities of a
Member would be devalued in the event of that Member's default.
Therefore, the proposed FIS Charge would better address NSCC's
exposures to specific wrong-way risk with respect to all Members'
positions in Family-Issued Securities, particularly in jump-to-default
scenarios. By mitigating specific wrong-way risk for NSCC, the proposed
change would also mitigate risk for Members, because lowering the risk
profile for NSCC would in turn lower the risk exposure that Members may
have with respect to NSCC in its role as a central counterparty.
Further, NSCC believes that any burden on competition that may be
imposed by this proposal would be appropriate in furtherance of the
purposes of the Act, because it is designed to meet NSCC's risk
management goals and its regulatory obligations.
(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-2020-002 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-2020-002. 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
[[Page 8968]]
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-2020-002 and should be submitted on
or before March 10, 2020.
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\35\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-03092 Filed 2-14-20; 8:45 am]
BILLING CODE 8011-01-P
