Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection To Advance Notice To Enhance the Calculation of the Family-Issued Securities Charge, 17929-17932 [2020-06598]

Download as PDF 17929 Federal Register / Vol. 85, No. 62 / Tuesday, March 31, 2020 / Notices Who? Monthly Customer-Specific Reporting (upon request): Self-routing broker-dealers ..... Broker-dealers that outsource routing (white-labeling). What? Current requirement Exemption Detailed customer-specific order handling disclosures for NMS stock orders submitted on a not held basis. ....................................................... Data collection began Jan. 1, 2020; first report (covering January) was due Feb. 25, 2020. None. Data collection begins Apr. 1, 2020; first report (covering April) due May 27, 2020. Data collection begins June 1, 2020; first report (covering June) due July 29, 2020 for customer requests made on or before July 17. * This requires disclosure of material aspects of broker-dealer’s relationship with routing venues, which includes the details of any arrangement with a venue where the level of execution quality is negotiated for an increase or decrease in payment for order flow. See Adopting Release at 58376, n. 397. Accordingly, it is ordered, pursuant to Rule 606(c) of Regulation NMS under the Exchange Act,14 that: (1) Broker-dealers are exempt from the requirement to provide the public report of held order data for the first quarter of 2020 required by Rule 606(a) until May 29, 2020. (2) Broker-dealers engaged in outsourced routing activity are exempt from the requirement to start collecting the Rule 606(b)(3) data until June 1, 2020 for such activity. For customer requests that are made on or before July 17, 2020, a broker-dealer is exempt from the requirement to provide a Rule 606(b)(3) report for outsourced routing activity covering June 2020 data until July 29, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.15 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–06621 Filed 3–30–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–88476; File No. SR– PEARL–2020–03] Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Designation of Longer Period for Commission Action on Proposed Rule Change To Adopt Rules Governing the Trading of Equity Securities jbell on DSKJLSW7X2PROD with NOTICES March 25, 2020. On January 24, 2020, MIAX PEARL, LLC (‘‘MIAX PEARL’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt rules governing the trading of equity securities. The proposed rule change was published for comment in the Federal Register on February 12, 2020.3 The Commission has received no comment letters on the proposed rule change. Section 19(b)(2) of the Act 4 provides that within 45 days of the publication of notice of the filing of a proposed rule change, or within such longer period up to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which the self-regulatory organization consents, the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The 45th day for this filing is March 28, 2020. The Commission is extending the 45day time period for Commission action on the proposed rule change. The Commission finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the proposed rule change. Accordingly, pursuant to Section 19(b)(2)(A)(ii)(I) of the Act 5 and for the reasons stated above, the Commission designates May 12, 2020, as the date by which the Commission shall either approve, disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change (File No. SR–PEARL–2020–03). CFR 242.606(c). CFR 200.30–3(a)(69). 1 15 U.S.C. 78s(b)(1). 15 17 VerDate Sep<11>2014 19:01 Mar 30, 2020 Jkt 250001 [FR Doc. 2020–06610 Filed 3–30–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–88469; File No. SR–NSCC– 2020–801] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection To Advance Notice To Enhance the Calculation of the Family-Issued Securities Charge March 25, 2020. On January 28, 2020, National Securities Clearing Corporation (‘‘NSCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–NSCC–2020–801 (‘‘Advance Notice’’) pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, entitled Payment, Clearing and Settlement Supervision Act of 2010 (‘‘Clearing Supervision Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 3 to amend the calculation of NSCC’s existing margin charge applied to long positions in Family-Issued Securities 4 to address certain risk presented by these positions. The Advance Notice was published for public comment in the 6 17 CFR 200.30–3(a)(31). U.S.C. 5465(e)(1). 2 17 CFR 240.19b–4(n)(1)(i). 3 15 U.S.C. 78a et seq. 4 Terms not defined herein are defined in NSCC’s Rules and Procedures (‘‘Rules’’), available at http:// www.dtcc.com/∼/media/Files/Downloads/legal/ rules/nscc_rules.pdf. 1 12 2 17 CFR 240.19b–4. Securities Exchange Act Release No. 88132 (February 6, 2020), 85 FR 8053. 4 15 U.S.C. 78s(b)(2). 5 15 U.S.C. 78s(b)(2)(A)(ii)(I). 3 See 14 17 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.6 J. Matthew DeLesDernier, Assistant Secretary. PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 E:\FR\FM\31MRN1.SGM 31MRN1 17930 Federal Register / Vol. 85, No. 62 / Tuesday, March 31, 2020 / Notices Federal Register on February 27, 2020,5 and the Commission has received no comments regarding the changes proposed in the Advance Notice.6 This publication serves as notice of no objection to the Advance Notice. I. The Advance Notice jbell on DSKJLSW7X2PROD with NOTICES A. Background NSCC provides clearing, settlement, risk management, central counterparty services, and a guarantee of completion for virtually all broker-to-broker trades involving equity securities, corporate and municipal debt securities, and certain other securities. NSCC manages its credit exposure to its Members by determining an appropriate Required Fund Deposit for each Member, which serves as each Member’s margin.7 The aggregate of all NSCC Members’ Required Fund Deposits (together with certain other deposits required under the Rules) constitutes NSCC’s Clearing Fund, which NSCC would access should a Member default and that Member’s Required Fund Deposit, upon liquidation, is insufficient to satisfy NSCC’s losses. Each Member’s Required Fund Deposit consists of a number of applicable components, each of which is calculated to address specific risks faced by NSCC.8 NSCC states that it 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.9 Such risks include risks introduced by its 5 Securities Exchange Act Release No. 88267 (Feb. 24, 2020), 85 FR 11437 (Feb. 27, 2020) (SR–NSCC– 2020–801) (‘‘Notice of Filing’’). On January 28, 2020, NSCC also filed a related proposed rule change (SR–NSCC–2020–002) with the Commission pursuant to Section 19(b)(1) of the Exchange Act and Rule 19b–4 thereunder (‘‘Proposed Rule Change’’). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b– 4, respectively. In the Proposed Rule Change, which was published in the Federal Register on February 18, 2020, NSCC seeks approval of proposed changes to its rules necessary to implement the Advance Notice. Securities Exchange Act Release No. 88163 (Feb. 11, 2020), 85 FR 8964 (Feb. 18, 2020). The comment period for the related Proposed Rule Change filing closed on March 10, 2020. 6 Since the proposal contained in the Advance Notice was also filed as a proposed rule change, all public comments received on the proposal are considered regardless of whether the comments are submitted on the Proposed Rule Change or the Advance Notice. 7 Terms not defined herein are defined in NSCC’s Rules and Procedures (‘‘Rules’’), available at http:// www.dtcc.com/∼/media/Files/Downloads/legal/ rules/nscc_rules.pdf. See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund Formula and Other Matters) of the Rules. 8 Id. 9 See Notice of Filing supra note 5, at 85 FR 11437. VerDate Sep<11>2014 19:01 Mar 30, 2020 Jkt 250001 counterparties or Members. In particular, NSCC seeks to identify and mitigate its exposures to specific wrongway risk (‘‘SWWR’’), which is the risk that an exposure to a counterparty is highly likely to increase when the creditworthiness of that counterparty deteriorates. Such risk would arise when NSCC acts as central counterparty to a Member with unsettled long positions in securities that were issued by a Member or an affiliate of that Member (‘‘Family-Issued Securities’’). If that Member defaults, NSCC would seek to cover its losses by closing out the unsettled Family-Issued Securities long positions. However, because the Member default would also likely lead to a drop in the creditworthiness of the Member and, therefore, the value of the Family-Issued Securities, NSCC would likely not be able to completely cover its losses in closing out those positions. In order to address this particular form of SWWR, NSCC imposes a charge on all Members with unsettled long positions in their own Family-Issued Securities, called the FIS Charge, which is calculated by multiplying the value of the net unsettled long positions in Family-Issued Securities by a certain percentage (‘‘Haircut Rate’’). Currently, the Haircut Rate applied in the FIS Charge calculation is based on a Member’s rating category on NSCC’s Credit Risk Rating Matrix (‘‘CRRM’’), which ranges from 1 to 7. NSCC utilizes the CRRM to evaluate its credit risk exposure to each Member; a higher CRRM rating represents a higher credit risk (i.e., a greater risk of defaulting on settlement obligations) and may cause a Member to be subject to enhanced surveillance or additional margin requirements.10 Currently, the applicable Haircut Rate for the FIS Charge depends on a Member’s rating on the CRRM. Specifically, for Members that are rated 6 or 7 on the CRRM, the applicable Haircut Rate for net unsettled long positions in Family-Issued Securities shall be (1) at least 80 percent for fixed income securities, and (2) 100 percent for equity securities. For Members that are rated 1 through 5 on the CRRM, the applicable Haircut Rate shall be (1) at least 40 percent for fixed income 10 See Rule 1 and Section 4 of Rule 2B of the Rules, supra note 8. 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). PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 securities, and (2) at least 50 percent for equity securities.11 B. Proposed Changes to FIS Charge In the Advance Notice, NSCC is proposing to revise the calculation of the FIS Charge to use the same Haircut Rate for all Members regardless of their CRRM rating category. Under the proposal, net unsettled long positions in (1) fixed income securities that are Family-Issued Securities are charged a Haircut Rate of no less than 80 percent, and (2) equity securities that are FamilyIssued Securities are charged a Haircut Rate of 100 percent. NSCC states that it may still be exposed to SWWR despite applying different Haircut Rates based on a Member’s rating on the CRRM, and it can better mitigate its exposure to this risk by calculating the FIS Charge without considering Members’ CRRM rating categories.12 According to NSCC, while the current methodology appropriately assumes that Members with a higher rating category on the CRRM present a heightened credit risk to NSCC or have demonstrated higher risk related to their ability to meet settlement, this methodology does not account for the risk that a Member may default due to unanticipated causes (referred to as a ‘‘jump-to-default’’ scenario) not captured by the CRRM.13 This is because the CRRM relies on historical data as a predictor of future risks,14 whereas jump-to-default scenarios are triggered by unanticipated causes that could not be predicted based on historical trends or data (e.g., instances of fraud or other bad actions by a Member’s management). Therefore, NSCC represents that the proposed change is designed to cover SWWR arising from potential jump-to-default scenarios by applying the higher applicable Haircut Rate in calculating the FIS Charge for all Members.15 The practical outcome of this proposed change is that for all Family Issued Securities, NSCC would apply a haircut equivalent to the current Haircut Rate for Members that are rated 6 or 7 on the CRRM regardless of whether a Member is rated at a 6 or 7. 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. 11 See Procedure XV (Clearing Fund Formula and Other Matters) of the Rules, supra note 7. 12 See Notice of Filing supra note 5, at 85 FR 11438. 13 See id. 14 See id. 15 See id. E:\FR\FM\31MRN1.SGM 31MRN1 Federal Register / Vol. 85, No. 62 / Tuesday, March 31, 2020 / Notices II. Discussion and Commission Findings Although the Clearing Supervision Act does not specify a standard of review for an advance notice, the stated purpose of the Clearing Supervision Act is instructive: to mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for SIFMUs and strengthening the liquidity of SIFMUs.16 Section 805(a)(2) of the Clearing Supervision Act authorizes the Commission to prescribe regulations containing risk management standards for the payment, clearing, and settlement activities of designated clearing entities engaged in designated activities for which the Commission is the supervisory agency.17 Section 805(b) of the Clearing Supervision Act provides the following objectives and principles for the Commission’s risk management standards prescribed under Section 805(a):18 • To promote robust risk management; • to promote safety and soundness; • to reduce systemic risks; and • to support the stability of the broader financial system. Section 805(c) provides, in addition, that the Commission’s risk management standards may address such areas as risk management and default policies and procedures, among others areas.19 The Commission has adopted risk management standards under Section 805(a)(2) of the Clearing Supervision Act and Section 17A of the Exchange Act (the ‘‘Clearing Agency Rules’’).20 The Clearing Agency Rules require, among other things, each covered clearing agency to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for its operations and risk management practices on an ongoing basis.21 As such, it is appropriate for the Commission to review advance notices against the Clearing Agency Rules and the objectives and principles of these risk management standards as described in Section 805(b) of the Clearing 16 See 12 U.S.C. 5461(b). U.S.C. 5464(a)(2). 18 12 U.S.C. 5464(b). 19 12 U.S.C. 5464(c). 20 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7–08–11). See also Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7–03–14) (‘‘Covered Clearing Agency Standards’’). NSCC is a ‘‘covered clearing agency’’ as defined in Rule 17Ad–22(a)(5). 21 Id. jbell on DSKJLSW7X2PROD with NOTICES 17 12 VerDate Sep<11>2014 19:01 Mar 30, 2020 Jkt 250001 Supervision Act. As discussed below, the Commission believes the proposal in the Advance Notice is consistent with the objectives and principles described in Section 805(b) of the Clearing Supervision Act,22 and in Rules 17Ad– 22(e)(4)(i) 23 and (e)(6)(i) and (v) 24 of the Clearing Agency Rules. A. Consistency With Section 805(b) of the Clearing Supervision Act For the reasons discussed immediately below, the Commission believes that the Advance Notice is consistent with the stated objectives and principles of Section 805(b) of the Clearing Supervision Act.25 Specifically, as discussed below, the Commission believes that the changes proposed in the Advance Notice are consistent with promoting robust risk management, promoting safety and soundness, reducing systemic risks, and supporting the broader financial system.26 First, the Commission believes that the proposal is consistent with promoting robust risk management. NSCC faces SWWR when it acts as central counterparty to a Member with long positions in FIS. Although NSCC’s current margin methodology addresses SWWR through imposition of the FIS Charge, it does not address SWWR associated with a jump-to-default scenario. As described above, the proposal would address SWWR associated with a jump-to-default scenario by using the higher applicable Haircut Rate for all Members concerning their net unsettled long positions in Family-Issued Securities, regardless of the Members’ CRRM rating category. As such, the proposal would address a risk not captured currently under NSCC’s margin methodology and provide for more comprehensive risk management of NSCC’s risks, consistent with the promotion of robust risk management. Second, the Commission believes that the proposal is consistent with the promotion of safety and soundness at NSCC. The collection of additional margin, by applying the higher applicable Haircut Rate in calculating the FIS Charge for all Members, would better enable NSCC to manage the potential losses arising out of a Member default. Holding additional resources to address such losses would promote NSCC’s safety and soundness. Finally, the Commission believes that the proposal is consistent with reducing 22 12 U.S.C. 5464(b). CFR 240.17Ad–22(e)(4)(i). 24 17 CFR 240.17Ad–22(e)(6)(i) and (v). 25 12 U.S.C. 5464(a)(2) and (b). 26 12 U.S.C. 5464(b). 23 17 PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 17931 systemic risk and supporting the broader financial system. As discussed above, NSCC proposes to collect additional margin to collateralize exposures to SWWR associated with a jump-to-default scenario, which could reduce the probability that NSCC would mutualize a loss stemming from the close-out of a defaulted Member with net unsettled long positions in FamilyIssued Securities. While unavoidable under certain circumstances, reducing the probability of loss mutualization during periods of market stress could lessen the transmission of financial risks arising from a Member default to nondefaulting Members, their customers, and the broader market. Further, NSCC maintaining additional margin could further reduce the potential that NSCC would need to call for additional resources from Members in times of market stress. The Commission believes, therefore, that the proposal would be consistent with reducing systemic risk and supporting the stability of the broader financial system. Accordingly, and for the reasons stated above, the Commission believes the changes proposed in the Advance Notice are consistent with Section 805(b) of the Clearing Supervision Act. B. Consistency With Rule 17Ad– 22(e)(4)(i) 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 As described above, NSCC is exposed to SWWR where it acts as central counterparty for its Members’ transactions in Family-Issued Securities. Applying the same higher Haircut Rate to all Members with net long unsettled positions in Family-Issued Securities, regardless of their rating on the CRRM, would help further mitigate NSCC’s SWWR exposures, especially in a jumpto-default scenario. Therefore, applying the same Haircut Rate in the FIS charge calculation is designed to help NSCC collect sufficient financial resources to help cover its credit exposures, with a high degree of confidence, to those Members seeking to clear and settle transactions in Family-Issued Securities. Therefore, the Commission believes the 27 17 E:\FR\FM\31MRN1.SGM CFR 240.17Ad–22(e)(4)(i). 31MRN1 17932 Federal Register / Vol. 85, No. 62 / Tuesday, March 31, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES proposed change is consistent with Rule 17Ad–22(e)(4)(i).28 C. Consistency With Rule 17Ad– 22(e)(6)(i) and (v) 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 described above, NSCC faces SWWR in jump-to-default scenarios where it acts as central counterparty to Member transactions in Family-Issued Securities. This risk is present regardless of a Member’s rating on the CRRM. However, the current methodology assumes that Members with a higher rating on the CRRM present a heightened credit risk to NSCC and applies a higher Haircut Rate to such Members. This distinction does not take into account the SWWR that would manifest in a jump-to-default scenario. As such, NSCC proposes to apply the same higher Haircut Rate to all Members. This proposal would improve NSCC’s ability to mitigate its exposure to SWWR in a jump-to-default scenario, thereby helping NSCC to maintain a risk-based margin system that considers, and produces margin levels commensurate with, the risks and particular attributes of net unsettled long positions in Family-Issued Securities. Therefore, the Commission believes that the proposal would be consistent with Rule 17Ad–22(e)(6)(i).31 Additionally, because the enhanced FIS Charge would be a component of the margin that NSCC collects from its Members to help cover NSCC credit exposure to the Members, and because the charge would be based on different product risk factors with respect to equity and fixed-income securities, it would be part of an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products, as described above. Therefore, the Commission believes the proposed change is consistent with Rule 17Ad– 22(e)(6)(v).32 III. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(I) of the Clearing Supervision Act, that the Commission does not object to Advance Notice (SR– NSCC–2020–801) and that NSCC is authorized to implement the proposal as of the date of this notice or the date of an order by the Commission approving proposed rule change SR–NSCC–2020– 002, whichever is later. By the Commission. J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–06598 Filed 3–30–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–88473; File No. SR–Phlx– 92020–14] Self-Regulatory Organizations; Nasdaq PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Options 3, Section 8, Openings in Options March 25, 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 March 24, 2020, Nasdaq PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Phlx Rules at Options 3, Section 8, titled ‘‘Openings in Options.’’ 28 Id. 29 17 32 17 30 17 CFR 240.17Ad–22(e)(6)(i). CFR 240.17Ad–22(e)(6)(v). 31 17 CFR 240.17Ad–22(e)(6)(i). 1 15 VerDate Sep<11>2014 19:01 Mar 30, 2020 CFR 240.17Ad–22(e)(6)(v). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. Jkt 250001 PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 The text of the proposed rule change is available on the Exchange’s website at http://nasdaqphlx.cchwallstreet.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 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 proposes to amend Phlx Rules at Options 3, Section 8, titled ‘‘Openings in Options.’’ The Exchange proposes to rename this rule ‘‘Options Opening Process.’’ Specifically, the Exchange is proposing to amend the definition of ‘‘market for the underlying security’’ within Options 3, Section 8(a)(ii). Today Options 3, Section 8(a)(ii) describes ‘‘market for the underlying security’’ as ‘‘. . .either the primary listing market or the primary volume market (defined as the market with the most liquidity in that underlying security for the previous two calendar months), as determined by the Exchange by underlying and announced to the membership on the Exchange’s website.’’ The Exchange proposes to amend this definition by replacing the term ‘‘primary volume market’’ with ‘‘an alternative market designated by the primary market.’’ The Exchange anticipates that an alternative market would be necessary if the primary listing market were impaired.3 In the event that a primary market is impaired and utilizes its designated alternative market, the Exchange would utilize that market as the underlying.4 The 3 The Exchange notes that the primary listing market and the primary volume market as defined in Phlx’s Rules could be the same market and therefore an alternative market is not available under the current Rule. 4 For example, in the event that the New York Stock Exchange LLC was unable to open because of an issue with its market and it designated NYSE E:\FR\FM\31MRN1.SGM 31MRN1

Agencies

[Federal Register Volume 85, Number 62 (Tuesday, March 31, 2020)]
[Notices]
[Pages 17929-17932]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06598]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88469; File No. SR-NSCC-2020-801]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of No Objection To Advance Notice To Enhance the 
Calculation of the Family-Issued Securities Charge

March 25, 2020.
    On January 28, 2020, National Securities Clearing Corporation 
(``NSCC'') filed with the Securities and Exchange Commission 
(``Commission'') advance notice SR-NSCC-2020-801 (``Advance Notice'') 
pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, entitled Payment, Clearing 
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'') 
\1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 
1934 (``Exchange Act'') \3\ to amend the calculation of NSCC's existing 
margin charge applied to long positions in Family-Issued Securities \4\ 
to address certain risk presented by these positions. The Advance 
Notice was published for public comment in the

[[Page 17930]]

Federal Register on February 27, 2020,\5\ and the Commission has 
received no comments regarding the changes proposed in the Advance 
Notice.\6\ This publication serves as notice of no objection to the 
Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ 15 U.S.C. 78a et seq.
    \4\ Terms not defined herein are defined in NSCC's Rules and 
Procedures (``Rules''), available at http://www.dtcc.com/~/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
    \5\ Securities Exchange Act Release No. 88267 (Feb. 24, 2020), 
85 FR 11437 (Feb. 27, 2020) (SR-NSCC-2020-801) (``Notice of 
Filing''). On January 28, 2020, NSCC also filed a related proposed 
rule change (SR-NSCC-2020-002) with the Commission pursuant to 
Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder 
(``Proposed Rule Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-
4, respectively. In the Proposed Rule Change, which was published in 
the Federal Register on February 18, 2020, NSCC seeks approval of 
proposed changes to its rules necessary to implement the Advance 
Notice. Securities Exchange Act Release No. 88163 (Feb. 11, 2020), 
85 FR 8964 (Feb. 18, 2020). The comment period for the related 
Proposed Rule Change filing closed on March 10, 2020.
    \6\ Since the proposal contained in the Advance Notice was also 
filed as a proposed rule change, all public comments received on the 
proposal are considered regardless of whether the comments are 
submitted on the Proposed Rule Change or the Advance Notice.
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I. The Advance Notice

A. Background

    NSCC provides clearing, settlement, risk management, central 
counterparty services, and a guarantee of completion for virtually all 
broker-to-broker trades involving equity securities, corporate and 
municipal debt securities, and certain other securities. NSCC manages 
its credit exposure to its Members by determining an appropriate 
Required Fund Deposit for each Member, which serves as each Member's 
margin.\7\ The aggregate of all NSCC Members' Required Fund Deposits 
(together with certain other deposits required under the Rules) 
constitutes NSCC's Clearing Fund, which NSCC would access should a 
Member default and that Member's Required Fund Deposit, upon 
liquidation, is insufficient to satisfy NSCC's losses.
---------------------------------------------------------------------------

    \7\ Terms not defined herein are defined in NSCC's Rules and 
Procedures (``Rules''), available at http://www.dtcc.com/~/media/
Files/Downloads/legal/rules/nscc_rules.pdf. See Rule 4 (Clearing 
Fund) and Procedure XV (Clearing Fund Formula and Other Matters) of 
the Rules.
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    Each Member's Required Fund Deposit consists of a number of 
applicable components, each of which is calculated to address specific 
risks faced by NSCC.\8\ NSCC states that it 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.\9\ Such risks include risks introduced by its 
counterparties or Members. In particular, NSCC seeks to identify and 
mitigate its exposures to specific wrong-way risk (``SWWR''), which is 
the risk that an exposure to a counterparty is highly likely to 
increase when the creditworthiness of that counterparty deteriorates. 
Such risk would arise when NSCC acts as central counterparty to a 
Member with unsettled long positions in securities that were issued by 
a Member or an affiliate of that Member (``Family-Issued Securities''). 
If that Member defaults, NSCC would seek to cover its losses by closing 
out the unsettled Family-Issued Securities long positions. However, 
because the Member default would also likely lead to a drop in the 
creditworthiness of the Member and, therefore, the value of the Family-
Issued Securities, NSCC would likely not be able to completely cover 
its losses in closing out those positions.
---------------------------------------------------------------------------

    \8\ Id.
    \9\ See Notice of Filing supra note 5, at 85 FR 11437.
---------------------------------------------------------------------------

    In order to address this particular form of SWWR, NSCC imposes a 
charge on all Members with unsettled long positions in their own 
Family-Issued Securities, called the FIS Charge, which is calculated by 
multiplying the value of the net unsettled long positions in Family-
Issued Securities by a certain percentage (``Haircut Rate''). 
Currently, the Haircut Rate applied in the FIS Charge calculation is 
based on a Member's rating category on NSCC's Credit Risk Rating Matrix 
(``CRRM''), which ranges from 1 to 7. NSCC utilizes the CRRM to 
evaluate its credit risk exposure to each Member; a higher CRRM rating 
represents a higher credit risk (i.e., a greater risk of defaulting on 
settlement obligations) and may cause a Member to be subject to 
enhanced surveillance or additional margin requirements.\10\
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    \10\ See Rule 1 and Section 4 of Rule 2B of the Rules, supra 
note 8. 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).
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    Currently, the applicable Haircut Rate for the FIS Charge depends 
on a Member's rating on the CRRM. Specifically, for Members that are 
rated 6 or 7 on the CRRM, the applicable Haircut Rate for net unsettled 
long positions in Family-Issued Securities shall be (1) at least 80 
percent for fixed income securities, and (2) 100 percent for equity 
securities. For Members that are rated 1 through 5 on the CRRM, the 
applicable Haircut Rate shall be (1) at least 40 percent for fixed 
income securities, and (2) at least 50 percent for equity 
securities.\11\
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    \11\ See Procedure XV (Clearing Fund Formula and Other Matters) 
of the Rules, supra note 7.
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B. Proposed Changes to FIS Charge

    In the Advance Notice, NSCC is proposing to revise the calculation 
of the FIS Charge to use the same Haircut Rate for all Members 
regardless of their CRRM rating category. Under the proposal, net 
unsettled long positions in (1) fixed income securities that are 
Family-Issued Securities are charged a Haircut Rate of no less than 80 
percent, and (2) equity securities that are Family-Issued Securities 
are charged a Haircut Rate of 100 percent.
    NSCC states that it may still be exposed to SWWR despite applying 
different Haircut Rates based on a Member's rating on the CRRM, and it 
can better mitigate its exposure to this risk by calculating the FIS 
Charge without considering Members' CRRM rating categories.\12\ 
According to NSCC, while the current methodology appropriately assumes 
that Members with a higher rating category on the CRRM present a 
heightened credit risk to NSCC or have demonstrated higher risk related 
to their ability to meet settlement, this methodology does not account 
for the risk that a Member may default due to unanticipated causes 
(referred to as a ``jump-to-default'' scenario) not captured by the 
CRRM.\13\ This is because the CRRM relies on historical data as a 
predictor of future risks,\14\ whereas jump-to-default scenarios are 
triggered by unanticipated causes that could not be predicted based on 
historical trends or data (e.g., instances of fraud or other bad 
actions by a Member's management). Therefore, NSCC represents that the 
proposed change is designed to cover SWWR arising from potential jump-
to-default scenarios by applying the higher applicable Haircut Rate in 
calculating the FIS Charge for all Members.\15\
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    \12\ See Notice of Filing supra note 5, at 85 FR 11438.
    \13\ See id.
    \14\ See id.
    \15\ See id.
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    The practical outcome of this proposed change is that for all 
Family Issued Securities, NSCC would apply a haircut equivalent to the 
current Haircut Rate for Members that are rated 6 or 7 on the CRRM 
regardless of whether a Member is rated at a 6 or 7. 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.

[[Page 17931]]

II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the stated purpose of the Clearing 
Supervision Act is instructive: to mitigate systemic risk in the 
financial system and promote financial stability by, among other 
things, promoting uniform risk management standards for SIFMUs and 
strengthening the liquidity of SIFMUs.\16\
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    \16\ See 12 U.S.C. 5461(b).
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    Section 805(a)(2) of the Clearing Supervision Act authorizes the 
Commission to prescribe regulations containing risk management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency.\17\ Section 805(b) of the 
Clearing Supervision Act provides the following objectives and 
principles for the Commission's risk management standards prescribed 
under Section 805(a):\18\
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    \17\ 12 U.S.C. 5464(a)(2).
    \18\ 12 U.S.C. 5464(b).
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     To promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and
     to support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk 
management standards may address such areas as risk management and 
default policies and procedures, among others areas.\19\
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    \19\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act and Section 17A of the 
Exchange Act (the ``Clearing Agency Rules'').\20\ The Clearing Agency 
Rules require, among other things, each covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures that are reasonably designed to meet certain minimum 
requirements for its operations and risk management practices on an 
ongoing basis.\21\ As such, it is appropriate for the Commission to 
review advance notices against the Clearing Agency Rules and the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Clearing Supervision Act. As 
discussed below, the Commission believes the proposal in the Advance 
Notice is consistent with the objectives and principles described in 
Section 805(b) of the Clearing Supervision Act,\22\ and in Rules 17Ad-
22(e)(4)(i) \23\ and (e)(6)(i) and (v) \24\ of the Clearing Agency 
Rules.
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    \20\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11). 
See also Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing 
Agency Standards''). NSCC is a ``covered clearing agency'' as 
defined in Rule 17Ad-22(a)(5).
    \21\ Id.
    \22\ 12 U.S.C. 5464(b).
    \23\ 17 CFR 240.17Ad-22(e)(4)(i).
    \24\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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A. Consistency With Section 805(b) of the Clearing Supervision Act

    For the reasons discussed immediately below, the Commission 
believes that the Advance Notice is consistent with the stated 
objectives and principles of Section 805(b) of the Clearing Supervision 
Act.\25\ Specifically, as discussed below, the Commission believes that 
the changes proposed in the Advance Notice are consistent with 
promoting robust risk management, promoting safety and soundness, 
reducing systemic risks, and supporting the broader financial 
system.\26\
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    \25\ 12 U.S.C. 5464(a)(2) and (b).
    \26\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    First, the Commission believes that the proposal is consistent with 
promoting robust risk management. NSCC faces SWWR when it acts as 
central counterparty to a Member with long positions in FIS. Although 
NSCC's current margin methodology addresses SWWR through imposition of 
the FIS Charge, it does not address SWWR associated with a jump-to-
default scenario. As described above, the proposal would address SWWR 
associated with a jump-to-default scenario by using the higher 
applicable Haircut Rate for all Members concerning their net unsettled 
long positions in Family-Issued Securities, regardless of the Members' 
CRRM rating category. As such, the proposal would address a risk not 
captured currently under NSCC's margin methodology and provide for more 
comprehensive risk management of NSCC's risks, consistent with the 
promotion of robust risk management.
    Second, the Commission believes that the proposal is consistent 
with the promotion of safety and soundness at NSCC. The collection of 
additional margin, by applying the higher applicable Haircut Rate in 
calculating the FIS Charge for all Members, would better enable NSCC to 
manage the potential losses arising out of a Member default. Holding 
additional resources to address such losses would promote NSCC's safety 
and soundness.
    Finally, the Commission believes that the proposal is consistent 
with reducing systemic risk and supporting the broader financial 
system. As discussed above, NSCC proposes to collect additional margin 
to collateralize exposures to SWWR associated with a jump-to-default 
scenario, which could reduce the probability that NSCC would mutualize 
a loss stemming from the close-out of a defaulted Member with net 
unsettled long positions in Family-Issued Securities. While unavoidable 
under certain circumstances, reducing the probability of loss 
mutualization during periods of market stress could lessen the 
transmission of financial risks arising from a Member default to non-
defaulting Members, their customers, and the broader market. Further, 
NSCC maintaining additional margin could further reduce the potential 
that NSCC would need to call for additional resources from Members in 
times of market stress. The Commission believes, therefore, that the 
proposal would be consistent with reducing systemic risk and supporting 
the stability of the broader financial system. Accordingly, and for the 
reasons stated above, the Commission believes the changes proposed in 
the Advance Notice are consistent with Section 805(b) of the Clearing 
Supervision Act.

B. Consistency With Rule 17Ad-22(e)(4)(i)

    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\
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    \27\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above, NSCC is exposed to SWWR where it acts as 
central counterparty for its Members' transactions in Family-Issued 
Securities. Applying the same higher Haircut Rate to all Members with 
net long unsettled positions in Family-Issued Securities, regardless of 
their rating on the CRRM, would help further mitigate NSCC's SWWR 
exposures, especially in a jump-to-default scenario. Therefore, 
applying the same Haircut Rate in the FIS charge calculation is 
designed to help NSCC collect sufficient financial resources to help 
cover its credit exposures, with a high degree of confidence, to those 
Members seeking to clear and settle transactions in Family-Issued 
Securities. Therefore, the Commission believes the

[[Page 17932]]

proposed change is consistent with Rule 17Ad-22(e)(4)(i).\28\
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    \28\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(i) and (v)

    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).
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    As described above, NSCC faces SWWR in jump-to-default scenarios 
where it acts as central counterparty to Member transactions in Family-
Issued Securities. This risk is present regardless of a Member's rating 
on the CRRM. However, the current methodology assumes that Members with 
a higher rating on the CRRM present a heightened credit risk to NSCC 
and applies a higher Haircut Rate to such Members. This distinction 
does not take into account the SWWR that would manifest in a jump-to-
default scenario. As such, NSCC proposes to apply the same higher 
Haircut Rate to all Members. This proposal would improve NSCC's ability 
to mitigate its exposure to SWWR in a jump-to-default scenario, thereby 
helping NSCC to maintain a risk-based margin system that considers, and 
produces margin levels commensurate with, the risks and particular 
attributes of net unsettled long positions in Family-Issued Securities. 
Therefore, the Commission believes that the proposal would be 
consistent with Rule 17Ad-22(e)(6)(i).\31\
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    \31\ 17 CFR 240.17Ad-22(e)(6)(i).
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    Additionally, because the enhanced FIS Charge would be a component 
of the margin that NSCC collects from its Members to help cover NSCC 
credit exposure to the Members, and because the charge would be based 
on different product risk factors with respect to equity and fixed-
income securities, it would be part of an appropriate method for 
measuring credit exposure that accounts for relevant product risk 
factors and portfolio effects across products, as described above. 
Therefore, the Commission believes the proposed change is consistent 
with Rule 17Ad-22(e)(6)(v).\32\
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    \32\ 17 CFR 240.17Ad-22(e)(6)(v).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act, that the Commission does not object to 
Advance Notice (SR-NSCC-2020-801) and that NSCC is authorized to 
implement the proposal as of the date of this notice or the date of an 
order by the Commission approving proposed rule change SR-NSCC-2020-
002, whichever is later.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-06598 Filed 3-30-20; 8:45 am]
BILLING CODE 8011-01-P