Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Enhance National Securities Clearing Corporation's Haircut-Based Volatility Charge Applicable to Illiquid Securities and UITs and Make Certain Other Changes to Procedure XV, 17910-17921 [2020-06617]
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Federal Register / Vol. 85, No. 62 / Tuesday, March 31, 2020 / Notices
exemptive relief granted by the
Commission. The Exchange further
notes that it does not currently list any
series of Managed Portfolio Shares, so
there is no immediate impact of
implementing such functionality. For
these reasons, the Commission believes
that waiver of the 30-day operative
delay is consistent with the protection
of investors and the public interest.
Accordingly, the Commission waives
the 30-day operative delay and
designates the proposed rule change
operative upon filing.14
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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–CboeBZX–2020–028 and
should be submitted on or before April
21, 2020.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
J. Matthew DeLesDernier,
Assistant Secretary.
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–
CboeBZX–2020–028 on the subject line.
SECURITIES AND EXCHANGE
COMMISSION
Paper Comments
• 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–CboeBZX–2020–028. 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
14 For purposes only of waiving the 30-day
operative delay, the Commission has also
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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[FR Doc. 2020–06613 Filed 3–30–20; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–88474; File No. SR–NSCC–
2020–003]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Proposed Rule Change To Enhance
National Securities Clearing
Corporation’s Haircut-Based Volatility
Charge Applicable to Illiquid Securities
and UITs and Make Certain Other
Changes to Procedure XV
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 16,
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
15 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 On March 16, 2020, NSCC filed this proposed
rule change as an advance notice (SR–NSCC–2020–
802) 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–
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 &
Procedures (‘‘Rules’’) 4 in order to
enhance the calculation of certain
components of the Clearing Fund
formula. First, the proposed rule change
would clarify and enhance the
methodology for identifying securities
as illiquid for purposes of determining
the applicable calculation of the
volatility component of the Clearing
Fund formula, and would revise the
definition of ‘‘Illiquid Security’’ in the
Rules to reflect these changes.5 Second,
the proposed rule change would
enhance the calculation of the haircutbased volatility component of the
Clearing Fund formula that is applied to
positions in (1) Illiquid Securities
(which include securities that are priced
at less than a penny (‘‘sub-penny
securities’’) and initial public offerings
(‘‘IPOs’’)), and (2) unit investment trusts
(‘‘UITs’’). Third, the proposed rule
change would eliminate the existing
Illiquid Charge, as the risk it was
designed to address would be addressed
by the other enhancements being
proposed. Finally, NSCC would make
certain changes to Section I.(A) of
Procedure XV (Clearing Fund Formula
and Other Matters) of the Rules
(‘‘Procedure XV’’) 6 for greater
transparency. Each of these proposed
changes are described in greater detail
below.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
1 15
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4(n)(1)(i) under the Act, 17 CFR 240.19b–4(n)(1)(i).
A copy of the advance notice is available at https://
www.dtcc.com/legal/sec-rule-filings.aspx.
4 Capitalized terms not defined herein are defined
in the Rules, available at https://dtcc.com/∼/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
5 See Rule 1 (Definitions and Descriptions). Id.
6 Procedure XV, supra note 4.
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(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
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1. Purpose
NSCC is proposing a number of
enhancements to its methodology for
calculations of certain components of
the Clearing Fund. First, NSCC is
proposing to (1) clarify and improve the
transparency and use of the term
‘‘Illiquid Security’’ for purposes of
determining the applicable calculation
of the volatility component of the
Clearing Fund formula to Net Unsettled
Positions in those securities, and (2)
enhance the methodology used in this
term by including additional criteria.7
Specifically, certain criteria relating to
listing national securities exchanges
would continue to be utilized and
would be enhanced and described with
greater clarity and transparency under
the proposed changes. In addition,
NSCC would (i) add securities’ market
capitalization and a median illiquidity
ratio, as described in greater detail
below, as additional measurements of
liquidity and (ii) remove the references
to OTC Bulletin Board and OTC Link
issue. NSCC would revise the definition
of ‘‘Illiquid Security’’ in the Rules to
reflect these enhancements.
Second, NSCC would enhance the
calculation of the haircut-based
volatility component of the Clearing
Fund methodology for Net Unsettled
Positions in securities whose volatility
is less amenable to statistical analysis
and securities whose volatility is
amenable to generally accepted
statistical analysis only in a complex
manner. Currently, NSCC uses a fixed
percentage in the calculation of charges
for Net Unsettled Positions in each of
these securities.8 NSCC would modify
these calculations by adding two
specific categories for Illiquid Securities
(as newly defined pursuant to the
proposed changes) and UITs. For
Illiquid Securities, NSCC would apply a
percentage that is based on the
applicable security’s price level and for
both Illiquid Securities and UITs, NSCC
would recalculate the applicable
percentages applied to such securities at
least annually. NSCC would retain the
7 ‘‘Net Unsettled Positions’’ and ‘‘Net Balance
Order Unsettled Positions’’ refer to net positions
that have not yet passed their settlement date, or
did not settle on their settlement date, and are
referred to collectively in this filing as Net
Unsettled Positions. NSCC does not take into
account any offsets, such as inventory held at other
clearing agencies, when determining Net Unsettled
Positions for the purpose of calculating the
volatility component. See Procedure XV, supra note
4.
8 See Section I.(A)(1)(a)(ii) and Section
I.(A)(2)(a)(ii) of Procedure XV, supra note 4.
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existing general categories for securities
whose volatility is less amenable to
statistical analysis and securities whose
volatility is amenable to generally
accepted statistical analysis only in a
complex manner for securities that fall
within those descriptions but that are
not Illiquid Securities or UITs, and
would continue to apply a fixed
percentage to such securities.
Third, NSCC would eliminate the
existing Illiquid Charge. The Illiquid
Charge was designed to cover the risk
that NSCC may be unable to easily
liquidate Net Unsettled Positions in
Illiquid Securities in the event of a
Member default due to the securities’
lack of marketability and other
characteristics. This risk would be
addressed by the enhanced criteria for
identifying Illiquid Securities, and the
enhanced calculation of the applicable
haircut-based volatility charge proposed
by this filing. Therefore, NSCC believes
the Illiquid Charge would no longer be
needed to address these risks. In
connection with this proposed change,
NSCC would also remove the definition
of ‘‘Illiquid Position’’ from the Rules, as
this term is only used in connection
with the calculation of the Illiquid
Charge.
Finally, NSCC would provide greater
detail to describe the treatment of Net
Unsettled Positions in corporate and
municipal bonds and long Net Unsettled
Positions in Family-Issued Securities in
Section I.(A) of Procedure XV for greater
transparency.
Each of the proposed changes is
described in more detail below.
(i) Overview of the Required Fund
Deposit and NSCC’s Clearing Fund
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.9 The Required Fund Deposit
serves as each Member’s margin. The
objective of a Member’s Required Fund
Deposit includes mitigation of potential
losses to NSCC associated with
liquidation of the Member’s portfolio in
the event NSCC ceases to act for that
Member (hereinafter referred to as a
‘‘default’’).10 The aggregate of all
9 See Rule 4 (Clearing Fund) and Procedure XV
(Clearing Fund Formula and Other Matters), supra
note 4. NSCC’s market risk management strategy is
designed to comply with Rules 17Ad–22(e)(4) and
(e)(6) under the Securities Exchange Act of 1934,
where these risks are referred to as ‘‘credit risks.’’
17 CFR 240.17Ad–22(e)(4) and (e)(6).
10 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
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Members’ Required Fund Deposits,
together with certain other deposits
required under the Rules, constitutes
the Clearing Fund of NSCC, which it
would access, among other instances,
should a defaulting Member’s own
Required Fund Deposit be insufficient
to satisfy losses to NSCC caused by the
liquidation of that Member’s portfolio.
Pursuant to the Rules, each Member’s
Required Fund Deposit amount consists
of a number of applicable components,
each of which is calculated to address
specific risks faced by NSCC, as
identified within Procedure XV.11
Generally, the largest component of
Members’ Required Fund Deposits is the
volatility component. The volatility
component is designed to calculate the
amount of money that could be lost on
a portfolio over a given period of time
assumed necessary to liquidate the
portfolio, within a 99% confidence
level.
NSCC has two methodologies for
calculating the volatility component.
For the majority of Net Unsettled
Positions, NSCC calculates the volatility
component as the greater of (1) the
larger of two separate calculations that
utilize a parametric Value at Risk
(‘‘VaR’’) model, (2) a gap risk measure
calculation based on the concentration
threshold of the largest non-index
position in a portfolio, and (3) a
portfolio margin floor calculation based
on the market values of the long and
short positions in the portfolio (‘‘VaR
Charge’’).12 Pursuant to Sections
I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of
Procedure XV, certain Net Unsettled
Positions are excluded from the
calculation of the VaR Charge and are
instead charged a haircut-based
volatility component that is calculated
by multiplying the absolute value of the
position by a percent determined by
NSCC that is (i) not less than 10% for
securities whose volatility is less
amenable to statistical analysis and (ii)
not less than 2% for securities whose
volatility is amenable to generally
accepted statistical analysis only in a
complex manner.13 Generally, certain
equity securities, including Illiquid
Securities, fall within the first category
as securities whose volatility is less
amenable to statistical analysis and
fixed-income securities, including UITs,
fall within the second category as
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.
11 See Procedure XV, supra note 4.
12 See Sections I.(A)(1)(a)(i) and I.(A)(2)(a)(i) of
Procedure XV, supra note 4.
13 Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of
Procedure XV, supra note 4.
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securities whose volatility is amenable
to generally accepted statistical analysis
only in a complex manner.14 The
securities that fall within either one of
these categories tend to exhibit
unpredictable illiquid characteristics,
such as low trading volumes or
infrequent trading. Because the VaR
Charge is a model-based calculation,
which generally relies on predictability,
this charge may be less reliable for
measuring market risk of securities that
exhibit unpredictable illiquid
characteristics.15 Therefore, NSCC
believes that the haircut-based volatility
charge is a more appropriate measure of
volatility for Net Unsettled Positions in
these securities.
In addition to charging a haircutbased volatility component rather than
a VaR Charge for certain Illiquid
Securities, Members’ Required Fund
Deposits may also include an Illiquid
Charge, which is calculated as described
in Sections I.(A)(1)(h) and I.(A)(2)(f) of
Procedure XV.16 The Illiquid Charge is
a component of the Clearing Fund that
may be assessed with respect to
‘‘Illiquid Positions,’’ which are Net
Unsettled Positions in ‘‘Illiquid
Securities’’ that exceed applicable
volume thresholds, as described in the
definition of Illiquid Position in Rule 1
of the Rules.17 The Illiquid Charge is
designed to mitigate the risk that NSCC
may face when liquidating Net
Unsettled Positions in these securities
following a Member default.
Currently, an Illiquid Security is
defined in the Rules as ‘‘a security,
other than a family-issued security as
defined in Procedure XV, that either (i)
is not traded on or subject to the rules
of a national securities exchange
registered under [the Act]; or (ii) is an
OTC Bulletin Board 18 or OTC Link
issue.’’ 19
14 UITs are redeemable securities, or units, issued
by investment companies that offer fixed security
portfolios for a defined period of time.
15 More specifically, the model that is used to
calculate the VaR Charge relies on assumptions that
are based on historic observations of a security’s
price. Such assumptions are not reliable predictors
of price for securities that exhibit illiquid
characteristics, which generally have low trading
volumes or are infrequently traded.
16 Sections I.(A)(1)(h) and I.(A)(2)(f) of Procedure
XV, supra note 4.
17 Rule 1, supra note 4.
18 The OTC Bulletin Board is an interdealer
quotation system that is used by subscribing
members of the Financial Industry Regulatory
Authority (‘‘FINRA’’) to reflect market making
interest in eligible securities (as defined in FINRA’s
Rules). See https://www.finra.org/industry/otcbb/otcbulletin-board-otcbb.
19 OTC Link is an electronic inter-dealer
quotation system that displays quotes from brokerdealers for many over-the-counter securities. See
https://www.otcmarkets.com.
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NSCC regularly assesses its market
and credit risks, as such risks are related
to its margining methodologies, to
evaluate whether margin levels are
commensurate with the particular risk
attributes of each relevant product,
portfolio, and market.20 The proposed
changes described below are a result of
NSCC’s regular review of the
effectiveness of its margining
methodology.
(ii) Proposed Enhancements to the
Definition of Illiquid Security
NSCC is proposing to revise the Rules
to (1) enhance certain existing criteria
used in the definition of Illiquid
Security for purposes of determining the
applicable calculation of the volatility
component; (2) remove certain criteria
that would become unnecessary
following the proposed enhancements;
(3) enhance the definition by
introducing additional criteria; and (4)
repurpose the enhanced definition of
Illiquid Security to use with respect to
the calculation of the volatility
component, as described below. NSCC
believes that the proposed changes
would provide Members with improved
clarity and transparency into the
methodology used to apply this
definition. The proposed change would
also provide NSCC with additional
measures of a security’s liquidity to
improve its ability to apply margin that
reflects the risk characteristics of that
security.
Following the implementation of the
proposed enhancements to this
definition, as described below, the
definition of Illiquid Security in Rule 1
of the Rules would be a security that: (i)
Is not listed on a specified securities
exchange (defined below) as determined
on a daily basis; (ii) is listed on a
specified securities exchange and, as
determined on a monthly basis, (a)(I) its
market capitalization is considered a
micro-capitalization (as described
below) as of the last business day of the
prior month or (II) it is an American
depositary receipt (‘‘ADR’’); and (b) the
median of its calculated illiquidity ratio
(defined below) of the prior six months
exceeds a threshold that would be
determined by NSCC on a monthly basis
and is based on the 99th percentile of
the illiquidity ratio of non-microcapitalization common stocks 21 over
20 See
17 CFR 240.17Ad–22(e)(6)(i), (e)(6)(vi).
that are exchange-traded products
(‘‘ETPs’’) or ADRs would not be included when
calculating the illiquidity ratio threshold. ETPs are
not included when calculating the illiquidity ratio
threshold because the underlying common stocks
that comprise the indexes of equity ETPs are
included in the calculation. ADRs are not included
when calculating the illiquidity ratio threshold
21 Securities
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the prior six months; or (iii) is listed on
a specified securities exchange, and, as
determined on a monthly basis, has
fewer than 31 business days of trading
history over the past 153 business days
on such exchange. As discussed above,
because the VaR Charge is a modelbased calculation, which generally
relies on predictability, the VaR Charge
may be less reliable for measuring
market risk of securities that exhibit
unpredictable illiquid characteristics.22
Each of the types of securities that
would be in the definition of Illiquid
Security are securities that tend to
exhibit unpredictable illiquid
characteristics including limited trading
volumes or infrequent trading.
For purposes of this definition a
‘‘specified securities exchange’’ would
be a national securities exchange that
has established listing services and is
covered by industry pricing and data
vendors.23 Initially, NSCC would define
micro-capitalization as capitalization of
less than $300 million. Consistent with
generally prevailing views, NSCC
believes that given the lack of public
information and limited trading
volumes, securities with capitalization
below this threshold tend to involve
higher risks and exhibit illiquid
characteristics.24 NSCC may adjust this
definition from time to time as
appropriate in order to continue to
reflect a threshold that captures
securities with capitalization that would
indicate that the securities exhibit
illiquid characteristics. Changes to the
micro-capitalization threshold would be
subject to NSCC’s model risk
management governance procedures set
forth in the Clearing Agency Model Risk
Management Framework (‘‘Model Risk
Management Framework’’).25 NSCC
because the market capitalization of ADRs may be
difficult to calculate because each ADR often
converts to different number of shares of a local
security. In addition, if NSCC is unable to retrieve
data to calculate the illiquidity ratio for the median
illiquidity ratio for a security on any day, NSCC
would use a default value for that day for purposes
of the calculation for the security (i.e., the security
would essentially be treated as illiquid for that day).
22 See supra note 15.
23 The exchanges that would initially be specified
securities exchanges are: New York Stock Exchange
LLC, NYSE American LLC, NYSE Arca, Inc., The
Nasdaq Stock Market and Cboe BZX Exchange, Inc.
24 See, e.g., https://www.sec.gov/reportspubs/
investor-publications/investorpubsmicrocap
stockhtm.html.
25 See Securities Exchange Act Release No. 81485
(August 25, 2017), 82 FR 41433 (August 31, 2017)
(File No. SR–NSCC–2017–008) (describes the
adoption of the Model Risk Management
Framework of NSCC which sets forth the model risk
management practices of NSCC) and Securities
Exchange Act Release No. 84458 (October 19, 2018),
83 FR 53925 (October 25, 2018) (File No. SR–
NSCC–2018–009) (amends the Model Risk
Management Framework). The Model Risk
Management Framework describes the model
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would notify Members of changes to the
micro-capitalization threshold by
important notice. For purposes of the
definition of Illiquid Security, the
‘‘illiquidity ratio’’ of a security on any
day would be equal to (i) the price
return of such security on such day
(based on the natural logarithm of the
ratio between the closing price of the
stock on such day to the closing price
of the stock on the prior trading day)
divided by (ii) the average daily trading
amount 26 of such security over the prior
20 business days.27
a. Enhancements to the Existing Criteria
in the Definition of Illiquid Security
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NSCC is proposing to enhance
existing criteria in the definition of
Illiquid Security as set forth below.
In the current definition, an Illiquid
Security is a security that is ‘‘either (i)
not traded or subject to the rules of a
national securities exchange registered
under the Securities Exchange Act of
1934, as amended; or (ii) is an OTC
Bulletin Board or OTC Link issue.’’ 28
On a daily basis, NSCC receives from
third party vendors data relating to
securities processed through NSCC
which indicates the exchanges, if any,
on which each security is listed. If a
security is not listed on of one of the
national securities exchanges covered
by the third party vendors, then,
currently, NSCC would consider that
security an Illiquid Security for the
purpose of calculating the Illiquid
Charge.29 Based on historic
performances, NSCC believes the
national securities exchanges that the
vendors cover for this purpose are
appropriate for determining if a security
exhibits characteristics of liquidity
because such exchanges have
established listing services and are
management practices adopted by NSCC, which
have been designed to assist NSCC in identifying,
measuring, monitoring, and managing the risks
associated with the design, development,
implementation, use, and validation of ‘‘models’’
which would include the methodology for
determining the volatility component of the
Clearing Fund. Id.
26 The daily trading amount equals the daily
trading volume multiplied by the end-of-day price.
27 NSCC believes that the 20-business day period
is sufficient to reflect recent market activity for the
security.
28 See Rule 1, supra, note 4.
29 The exchanges that have established listing
services that the vendors cover for this purpose are:
New York Stock Exchange LLC, NYSE American
LLC, NYSE Arca, Inc., The Nasdaq Stock Market
and Cboe BZX Exchange, Inc. Members’ Clearing
Fund Summary reports, available through the DTCC
Risk Portal, identify securities within their portfolio
by the ticker symbol and whether those securities
are considered Illiquid Securities for purposes of
the calculation of the Illiquid Charge. This
information provides Members with insight into the
basis for their margin calculations.
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covered by industry pricing and data
vendors. NSCC believes that such
exchanges tend to list securities that
exhibit liquid characteristics such as
having more available public
information, larger trading volumes and
higher capitalization. NSCC continues
to believe this analysis is appropriate for
identifying securities that exhibit
illiquid characteristics, and would
retain and enhance this criterion in the
definition in the Rules by specifying
that it uses the specified securities
exchanges that have established listing
services and that are covered by
industry pricing and data vendors and
providing that it would determine on a
daily basis whether securities are
subject to the rules of a specified
securities exchange.
NSCC would use the same process for
determining whether a security is an
Illiquid Security based on if such
security is listed on a national security
exchange and would enhance the
definition to reflect the process that will
be used. NSCC would change ‘‘national
securities exchange registered under the
Securities Exchange Act of 1934, as
amended’’ to ‘‘specified securities
exchange’’ in the definition of Illiquid
Security and add a defined term for
‘‘specified securities exchange’’, which
would be a national securities exchange
that has established listing services and
is covered by industry pricing and data
vendors.
As a further enhancement, NSCC is
proposing to replace the phrase ‘‘not
traded on or subject to the rules of’’ with
‘‘not listed on’’ to more accurately
describe the process that NSCC and its
vendors use to determine if a security is
on a national securities exchange. In
addition, determining whether a
security is listed on an exchange is more
definitive and more reliably verifiable
than determining whether a security is
traded on or subject to the rules of a
securities exchange. NSCC is also
proposing to remove references to the
OTC Bulletin Board and OTC Link
issues in the definition of Illiquid
Security. NSCC believes that the
definition as revised pursuant to this
rule change would capture securities
listed on the OTC Bulletin Board and
OTC Link and the reference to such
platforms is unnecessary.
NSCC is also proposing to remove the
phrase ‘‘other than a family issued
security as defined in Procedure XV’’
from the definition of Illiquid Security
because family issued security is not
defined in Procedure XV and, given the
new proposed use of the definition of
Illiquid Security together with other
proposed changes, it is not necessary to
exclude Family-Issued Securities from
PO 00000
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17913
the definition. The current defined term
‘‘Illiquid Security’’ is only used in the
defined term ‘‘Illiquid Position’’ and in
sections relating to the Illiquid Charge
which would be removed pursuant to
the proposed changes as described
herein. The phrase ‘‘other than a family
issued security as defined in Procedure
XV’’ was intended to ensure that long
Net Unsettled Positions in FamilyIssued Securities are excluded from the
Illiquid Charge.30 Currently, short Net
Unsettled Positions in Family-Issued
Securities whose volatility is less
amenable to statistical analysis are
subject to the haircut set forth in
Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii)
of Procedure XV. In addition, short Net
Unsettled Positions in Family-Issued
Securities that are Illiquid Positions are
currently subject to the Illiquid
Charge.31 Long Net Unsettled Positions
in Family Issued Securities are not
subject to the haircut set forth Sections
I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of
Procedure XV nor to the Illiquid Charge.
As described below, following the
proposed rule change, the defined term
Illiquid Security would be repurposed
to be used in Sections I.(A)(1)(a)(ii) and
I.(A)(2)(a)(ii) of Procedure XV which
sections would apply to certain short
Net Unsettled Positions in FamilyIssued Securities.32 As is the case
30 Long Net Unsettled Positions in Family-Issued
Securities are not subject to the Illiquid Charge
because the risk that long Net Unsettled Positions
in Family-Issued Securities raise, wrong way risk,
is separately provided for by a separate charge for
such securities. See Section I.(A)(1)(a)(iv) and
Section I.(A)(2)(a)(iv), supra note 4. Wrong way risk
is a risk that an exposure to a counterparty is highly
likely to increase when the creditworthiness of that
counterparty deteriorates. 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. Short Net Unsettled Positions in
Family-Issued Securities do not present the same
wrong way risk as long Net Unsettled Positions in
Family-Issued Securities. See note 29 below.
31 The defined term ‘‘Illiquid Security’’ currently
excludes ‘‘a family issued security as defined in
Procedure XV’’, however, family issued security is
not defined in Procedure XV. The defined term
Illiquid Security was added to the Rules in 2017.
See Securities Exchange Act Release No. 80260
(March 16, 2017), 82 FR 14781 (March 22, 2017)
(File No. SR–NSCC–2017–001). When the defined
term was added, the section where family issued
securities was defined in Procedure XV was
referring to a separate charge that was applied to
long Net Unsettled Positions in Family-Issued
Securities and the exclusion of ‘‘family issued
security’’ from the defined term Illiquid Security
was intended to refer to long Net Unsettled
Positions in Family-Issued Securities not short Net
Unsettled Positions in Family-Issued Securities.
32 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,
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currently, only long Net Unsettled
Positions in Family-Issued Securities
would be excluded from the
calculations in Sections I.(A)(1)(a)(ii)
and I.(A)(2)(a)(ii) of Procedure XV
which would be noted in I.(A)(1)(a)(ii)
as proposed below. The proposed rule
change would not change the treatment
of long Net Unsettled Positions in
Family-Issued Securities which would
remain subject to the calculations set
forth in Sections I.(A)(1)(a)(iv) and
I.(A)(2)(a)(iv) of Procedure XV.
NSCC believes that each of these
proposed changes would improve the
definition for its new proposed purpose
and improve Members’ transparency
into the application of the existing
criteria of the Illiquid Security
definition.
b. New Criteria in the Definition of
Illiquid Security
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NSCC is also proposing to include
additional criteria in order to identify
securities that exhibit illiquid
characteristics and may not be captured
by the existing definition as described
below.
Although the criterion for this
definition relating to whether a security
is traded on or subject to the rules of a
specified securities exchange would be
determined on a daily basis, as noted
above, under the proposal, NSCC would
also apply new criteria, described
below, on a monthly basis, to identify
those securities that are subject to the
rules of a specified securities exchange
but may still exhibit illiquid
characteristics and should be identified
as Illiquid Securities. The new criteria
would be based on (i) the security’s
market capitalization and (ii) the trading
history of the security. In addition,
ADRs would also be subject to
additional review to determine if they
should be deemed to be Illiquid
Securities.
First, NSCC is proposing to revise the
definition of Illiquid Security to identify
securities issued by an entity with a
micro-capitalization, which can be a
characteristic of illiquidity. For
purposes of this criterion, NSCC would
calculate the product of the outstanding
NSCC would close out those positions following a
likely drop in the creditworthiness of the issuer,
possibly resulting in a loss to NSCC from a resulting
drop in price in the securities. As such, NSCC
provides a specific charge for such securities. See
id. Short positions present a different risk profile
than long positions in this close out scenario based
on, in part, the difference in the potential
responsiveness of price change to quantity that may
occur when NSCC is liquidating a long position in
an Illiquid Security, compared to when it is
liquidating a short position. As a result, the charge
for Family-Issued Securities is only applied to long
positions in such securities.
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shares and market price on a daily basis
for each issuance. Each month, NSCC
would use the average of those
calculations over the prior month to
determine market capitalization. If the
average for a particular security is below
a threshold determined by NSCC from
time to time, the security would be
considered micro-capitalization.
Initially, NSCC would define microcapitalization as capitalization of less
than $300 million. Securities with a
capitalization below $300 million and
which are considered microcapitalization tend to exhibit illiquid
characteristics such as limited public
information and lower trading volumes.
NSCC may update the microcapitalization threshold from time to
time as announced by an important
notice to the Members. Changes to the
threshold would be subject to NSCC’s
model risk governance procedures set
forth in the Model Risk Management
Framework.33
If the average market capitalization of
a security is considered microcapitalization or if the security is an
ADR, then the security would be subject
to an additional illiquidity ratio test
described below to determine if it is an
Illiquid Security. NSCC believes it is
appropriate to subject a security to the
illiquidity ratio test if a security is
considered within the range of microcapitalization because the capitalization
of a security could be an indicator of the
lack of liquidity of a security. In
addition, for ADRs, the market
capitalization of the ADR may be
difficult to calculate because each ADR
often converts to different number of
shares of a local security. As a result,
NSCC has decided to subject all ADRs
to the illiquidity ratio test to determine
if it is an Illiquid Security. As noted
above,34 ETPs and ADRs would be
excluded from the pool of securities that
are used to calculate the illiquidity ratio
threshold. However, ETPs that are
considered micro-capitalization and
ADRs would be subject to the illiquidity
ratio test to determine if they are
Illiquid Securities.
If a security is considered within the
range of micro-capitalization or if the
security is an ADR, it would be subject
to additional illiquidity ratio test that
would include the application of an
‘‘illiquidity ratio’’ to determine if the
security should be deemed an Illiquid
Security. The illiquidity ratio of a
security on any day would be equal to
(i) the security’s price return on such
day (based on the natural logarithm of
the ratio between the closing price of
33 See
34 See
PO 00000
supra note 25.
supra note 21.
Frm 00067
Fmt 4703
Sfmt 4703
the stock on such day to the closing
price of the stock on the prior trading
day) divided by (ii) the average daily
trading amount 35 of such security over
the prior 20 business days.36 The
illiquidity ratio for each security that is
subject to this illiquidity ratio test
would be determined monthly.
A security that is subject to the
illiquidity ratio test would only be
deemed an Illiquid Security if the
calculated median illiquidity ratio of the
prior six months exceeds a threshold to
be determined by NSCC on a monthly
basis based on the 99th percentile of the
illiquidity ratio of non-microcapitalization common stocks over the
prior six months.37 If the calculated
median illiquidity ratio of a security did
not exceed such threshold it would not
be deemed an Illiquid Security and
would be subject to the VaR Charge.
NSCC believes the illiquidity ratio
would provide it with a reliable
measurement of a security’s liquidity
because NSCC would use the absolute
value of the daily return-to-volume ratio
to capture price impact. Given the same
dollar amount of trading activity, higher
price impact typically indicates less
liquidity.
Second, NSCC would include in the
Illiquid Security definition securities
that are subject to the rules of a
specified securities exchange, but, as
determined on a monthly basis, have
fewer than 31 business days of trading
history over the past 153 business days
on such exchange. NSCC has
historically used this time period to
identify IPOs which tend to exhibit
illiquid characteristics due to their
limited trading history.38
In order to implement these proposed
changes, NSCC would include these
additional criteria in the revised
definition of ‘‘Illiquid Security’’ in Rule
1 of the Rules.
35 Supra
note 26.
example, assuming Stock A has a closing
price of $10 on day 1, and a closing price of $11
on day 2, then the ‘‘price return’’ as of day 2 would
be abs(log(11/10)) = 0.09531018. Assuming the
average daily trading amount of the stock over the
prior 20 business days is $1,100,000, the daily
‘‘illiquidity ratio’’ for Stock A on day 2 is
0.09531018 divided by 1,100,000 × 10∧6 = 0.0866.
37 See supra note 21.
38 NSCC has observed that the use of the metric,
31 business days of trading over the past 153
business days, has been useful in identifying
securities, such as IPOs, that exhibit illiquid
characteristics based on their limited trading
history. As such, NSCC would use this metric in the
definition of Illiquid Security to ensure that these
securities, including IPOs, are identified as Illiquid
Securities.
36 For
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subsections (A)(I) and (II) and (B)(I) and
(II) relating to such securities.
(iii) Proposed Enhancement to the
Volatility Component Applicable to
Illiquid Securities and UITs
jbell on DSKJLSW7X2PROD with NOTICES
NSCC is also proposing to enhance
the calculation of the haircut-based
volatility component for Illiquid
Securities and UITs. As described
above, Sections I.(A)(1)(a)(ii) and
I.(A)(2)(a)(ii) of Procedure XV currently
provide that NSCC has the discretion to
exclude from the VaR Charge Net
Unsettled Positions in classes of
securities whose volatility is (1) less
amenable to statistical analysis, or (2)
amenable to generally accepted
statistical analysis only in a complex
manner, and permits NSCC to instead
calculate the volatility charge for Net
Unsettled Positions in these securities
as a haircut-based charge.39
Pursuant to this authority, NSCC
calculates the volatility charge for IPOs
by multiplying the absolute value of the
Net Unsettled Position by a fixed 15%,
and calculates the volatility charge for
all other Illiquid Securities (as currently
defined) and sub-penny securities by
multiplying the absolute value 40 of the
Net Unsettled Position by a fixed 20%.
Net Unsettled Positions in UITs are
subject to the same haircut-based
volatility charge as other securities
whose volatility is amenable to
generally accepted statistical analysis
only in a complex manner. Today,
NSCC generally does not adjust the
applicable haircut-based volatility
charge, which is a percent that is no less
than 2%, pursuant to Procedure XV.
Based on backtesting results, NSCC
has observed that market price
movements are correlated to a security’s
market price. Therefore, NSCC believes
it would be able to calculate a haircutbased volatility charge that more
appropriately addresses the risks
presented by a Net Unsettled Position if
NSCC considers a security’s price level
or risk profile when determining the
haircut percentage to be used in that
calculation. As described below, NSCC
is proposing to enhance the calculation
of the haircut-based volatility
component for Illiquid Securities and
UITs. In order to implement the changes
described below, NSCC would revise
Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii)
of Procedure XV by including new
39 See Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of
Procedure XV, supra note 4.
40 For purposes of the calculating the absolute
value, the share price of each sub-penny security is
rounded up to one cent. If a transaction in any
security with a share price below one cent is
entered into NSCC’s Continuous Net Settlement
system or Balance Order Accounting Operation,
NSCC rounds up the price of the security to one
cent.
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a. Enhancing the Volatility Charge for
Illiquid Securities
First, NSCC is proposing to enhance
the haircut-based volatility charge for
Illiquid Securities. The applicable
percent would be determined at least
annually 41 as the highest of (1) 10%, (2)
a percent benchmarked to be sufficient
to cover 99.5th percentile of the
historical 3-day return of each group of
Illiquid Securities 42 in each Member’s
portfolio and (3) a percent benchmarked
to be sufficient to cover 99th percentile
of the historical 3-day return of each
group in each Member’s portfolio after
incorporating a fixed transaction cost.43
The applicable percent, and the
determination of how often the
applicable percent is determined if more
often than annually, would be subject to
NSCC’s model risk management
governance procedures set forth in the
Model Risk Management Framework.44
The look-back period for this calibration
would be no less than five years and
would initially be five years to be
consistent with the historical data set
used in model development. The lookback period may be adjusted by NSCC
as necessary consistent with the model
risk management practices adopted by
NSCC to respond to, for example,
market events that impact liquidity in
the market and Member backtesting
deficiencies. Adjustments to the lookback period would be subject to NSCC’s
model risk governance procedures set
forth in the Model Risk Management
Framework.45 Generally, lower priced
securities that may present NSCC with
a greater risk would be charged a
haircut-based volatility charge based on
a higher percent.
NSCC would group Illiquid Securities
by price level, and Illiquid Securities
that are sub-penny securities would be
separately grouped by long or short
position, where each group is assigned
a percent to be used in the calculation
of the haircut-based volatility charge.
41 A number of important considerations
consistent with the model risk management
practices adopted by NSCC could prompt more
frequent haircut review, such as material
deterioration of Members’ backtesting performance,
market events or structure changes, and model
validation findings. See also Model Risk
Management Framework, supra note 25.
42 NSCC would group Illiquid Securities by price
level, and Illiquid Securities that are sub-penny
securities would be separately grouped by long or
short position, as discussed in more detail below.
43 The fixed transaction cost would be equal to
one-half of the estimated bid-ask spread and would
be included in the simulated liquidation gain/loss
of the positions in each Member’s portfolio.
44 See supra note 25.
45 See supra note 25.
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17915
The price level groupings would be
subject to NSCC’s model risk
management governance procedures set
forth in the Model Risk Management
Framework.46 The proposal would
allow NSCC to calculate this charge
based on the market price of Illiquid
Securities. With respect to an Illiquid
Security that is not a sub-penny
security, NSCC would calculate one
haircut-based volatility charge for short
and long positions. However, with
respect to an Illiquid Security that is a
sub-penny security, NSCC would
calculate the haircut-based volatility
charge for short positions and long
positions separately. NSCC believes the
proposed change is appropriate for
Illiquid Securities that are sub-penny
securities, particularly as short positions
in sub-penny securities could
experience price movements of more
than 100%. Further, these securities are
typically issued by companies with low
market capitalization, and may be
susceptible to market manipulation,
enforcement actions, or private
litigation. The proposed change would
allow NSCC to calculate a haircut-based
volatility charge that accounts for this
risk of price movements. Although subpenny securities would be separately
grouped by price level based on the subpenny values, since the price of subpenny securities is rounded up to one
cent when it is entered into the
Continuous Net Settlement System and
Balance Order Accounting Operation,
the current market price of each subpenny security would be deemed to be
one cent for purposes of applying the
haircut-based volatility charge.
By setting a floor of 10%, the proposal
would allow NSCC to charge an amount
that has been adequate, based on
historical observation, to address risks
presented by Net Unsettled Positions in
these securities and is consistent with
the current methodology, which also
sets a floor for the haircut-based
volatility charge of no less than 10%. In
this way, the haircut-based volatility
charge would be calculated to allow
NSCC to collect margin at levels that
reflect the risk presented by these Net
Unsettled Positions. Unlike the current
methodology which provides NSCC the
discretion to apply a haircut, NSCC
would not have discretion as to whether
to apply the haircut-based volatility
charge to Illiquid Securities and all
Illiquid Securities would be subject to
the charge.
In order to implement this proposed
change, NSCC would describe the
haircut-based volatility charge
applicable to Illiquid Securities in the
46 See
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new Sections I.(A)(1)(a)(ii)(B)(I) and
I.(A)(2)(a)(ii)(B)(I) of Procedure XV.
jbell on DSKJLSW7X2PROD with NOTICES
b. Enhancing the Volatility Charge for
UITs
NSCC is also proposing to revise the
calculation of the haircut-based
volatility charge applied to UITs by
reviewing the percent used in this
calculation at least annually, in order to
apply a haircut-based volatility charge
to Net Unsettled Positions in UITs that
is more closely based on a measurement
of the risk presented by Members’
portfolio composition and market
conditions.
Currently, NSCC applies a haircutbased volatility charge that is a fixed 2%
to Net Unsettled Positions in securities
whose volatility is amenable to
generally accepted statistical analysis
(for example, the methodology used to
calculate the VaR Charge) only in a
complex manner, which include UITs.
NSCC is proposing to continue to apply
a haircut-based volatility charge to Net
Unsettled Positions in UITs that would
be no less than 2%, as currently
provided for in Procedure XV, but
would re-calculate the applicable
percent designated by NSCC at least
annually. The re-calculation of the
applicable percent would be subject to
NSCC’s model risk management
governance procedures set forth in the
Model Risk Management Framework.47
Subject to this existing floor, the
applicable percent would be
benchmarked to be sufficient to cover
99.5th percentile of the historical 3-day
return of UITs in each Member’s
portfolio, with a lookback period of no
less than five years. Unlike the current
methodology which provides NSCC the
discretion to apply a haircut, NSCC
would not have discretion as to whether
to apply the haircut-based volatility
charge to UITs and all UITs would be
subject to the charge.
In order to implement this proposed
change, NSCC would describe the
haircut-based volatility charge
applicable to UITs in the new Sections
I.(A)(1)(a)(ii)(B)(II) and
I.(A)(2)(a)(ii)(B)(II) of Procedure XV.
c. Enhancing Existing Language for
Volatility Charge
NSCC is also proposing to re-arrange
the existing language relating to
securities whose volatility is (1) less
amenable to statistical analysis, or (2)
amenable to generally accepted
statistical analysis only in a complex
manner, to clarify the language and
make it more transparent. NSCC would
move the description of securities
47 See
supra note 25.
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whose volatility is less amenable to
statistical analysis to new Sections
I.(A)(1)(a)(ii)(A)(I) and
I.(A)(2)(a)(ii)(A)(I) of Procedure XV and
move the description of securities
whose volatility is amenable to
generally accepted statistical analysis
only in a complex manner to new
Sections I.(A)(1)(a)(ii)(A)(II) and
I.(A)(2)(a)(ii)(A)(II). NSCC would
indicate that securities that are Illiquid
Securities or UITs would not be subject
to these general categories. NSCC would
also remove the phrase ‘‘such as OTC
Bulletin Board or Pink Sheet issues or
issues trading below a designated dollar
threshold (e.g., five dollars)’’ which was
intended as an example of securities
whose volatility is less amenable to
statistical analysis because NSCC does
not believe that the example adequately
describes all of the securities that are
less amenable to statistical analysis and
may be misleading. In addition,
securities in the example would include
securities that are Illiquid Securities and
that would no longer be subject to this
general category. In addition, NSCC is
proposing to remove the phrase ‘‘other
than corporate and municipal bonds,’’
which qualifies securities amenable to
generally accepted statistical analysis
only in a complex manner, because the
treatment of corporate and municipal
bonds would be clarified as set forth in
subsection (v) below.
NSCC believes that the new defined
term Illiquid Security would identify all
securities for which a haircut is
currently applied because such
securities are less amenable to statistical
analysis pursuant to Sections
I.(A)(1)(a)(ii)(x) and I.(A)(2)(a)(ii)(x) of
Procedure XV.48 The haircut for Illiquid
Securities upon implementation of the
rule change would be calculated
pursuant to the new category for Illiquid
Securities under Sections
I.(A)(1)(a)(ii)(B)(I) and I.(A)(2)(a)(ii)(B)(I)
of Procedure XV rather than Sections
I.(A)(1)(a)(ii)(A)(I) and
I.(A)(2)(a)(ii)(A)(I) of Procedure XV.
NSCC believes that UITs are currently
substantially all of the securities for
which a haircut is currently applied
because such securities are amenable to
generally accepted statistical analysis
only in a complex manner pursuant to
Sections I.(A)(1)(a)(ii)(y) and
I.(A)(2)(a)(ii)(y) of Procedure XV.49 The
48 See Sections I.(A)(1)(a)(ii)(x) and
I.(A)(2)(a)(ii)(x) of Procedure XV, supra note 4.
49 See Sections I.(A)(1)(a)(ii)(y) and
I.(A)(2)(a)(ii)(y) of Procedure XV, supra note 4. Note
that the haircuts for municipal and corporate bonds
which are also fixed-income securities that are
amenable to generally accepted statistical analysis
only in a complex manner are separately calculated
pursuant to Sections I.(A)(1)(a)(iii) and
PO 00000
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Sfmt 4703
haircut for UITs upon implementation
of the rule change would be calculated
pursuant to the new category for UITs
under Sections I.(A)(1)(a)(ii)(B)(II) and
I.(A)(2)(a)(ii)(B)(II) of Procedure XV
rather than Sections I.(A)(1)(a)(ii)(A)(II)
and I.(A)(2)(a)(ii)(A)(II) of Procedure XV.
There are some types of securities that
are amenable to generally accepted
statistical analysis only in a complex
manner that would not constitute UITs
and for which a haircut would continue
to be calculated using the category for
securities that are amenable to generally
accepted statistical analysis only in a
complex manner upon implementation
of the rule change. NSCC believes that
there are no current types of securities
for which the haircut would be
calculated using the general category for
securities that are less amenable to
statistical analysis upon implementation
of the rule change. NSCC, however, may
deem it necessary to calculate a haircut
for securities that fall within this
existing category, if such securities do
not fall within the categories for Illiquid
Securities, after assessing margin
suitability or future asset class reviews.
Therefore, NSCC is proposing to keep
these two more general categories in the
Rules revised as contemplated above. As
with these existing general categories
currently, NSCC would have the
discretion to determine whether a
security fits within one of these
categories. NSCC would follow its
existing risk management practices and
procedures when determining whether
to apply a security that is not an Illiquid
Security or a UIT to one of these
categories. Applying a new security to
one of these categories would be subject
to NSCC’s model risk management
governance procedures set forth in the
Model Risk Management Framework.50
(iv) Proposal To Eliminate the Illiquid
Charge
NSCC is proposing to eliminate the
existing Illiquid Charge in conjunction
with the aforementioned enhancements.
The Illiquid Charge is currently
imposed on Net Unsettled Positions in
Illiquid Securities, in addition to other
applicable components of the Clearing
Fund. Because the current haircut-based
volatility charge is a flat charge,
calculated as a percentage of the
I.(A)(2)(a)(iii) of Procedure XV. See Sections
I.(A)(1)(a)(iii) and I.(A)(2)(a)(iii) of Procedure XV,
supra note 4. Examples of fixed income securities
that may remain subject to calculations under
Sections I.(A)(1)(a)(ii)(A)(I) and I.(A)(2)(a)(ii)(A)(I)
of Procedure XV would include preferred stock or
other fixed income securities that are amenable to
generally accepted statistical analysis only in a
complex manner other than UITs or corporate or
municipal bonds.
50 See supra note 25.
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absolute value of these Net Unsettled
Positions, it may not currently address
the lack of liquidity and marketability
that are characteristic of Illiquid
Securities. The Illiquid Charge is
calculated and applied to address these
additional risks. Currently, due to the
existing definition of Illiquid Security,
the Illiquid Charge has limited
applicability, and generally only applies
to a small population of securities that
exhibit illiquid characteristics (i.e.,
over-the-counter securities traded offexchange).51
However, NSCC believes the proposed
enhancements would address the risks
presented by Net Unsettled Positions in
Illiquid Securities more adequately. As
described above, the enhanced
methodology for identifying Illiquid
Securities would enable NSCC to
identify additional securities that could
pose credit exposure to NSCC. Further,
NSCC believes that the proposed
methodology for calculating the
applicable haircut-based volatility
charge would be more responsive to the
risks presented by Net Unsettled
Positions in those securities because it
would be based on historical
performance and would be recalibrated
more frequently. Therefore, NSCC is
proposing to eliminate the Illiquid
Charge in connection with these
proposed rule changes as it would be no
longer needed to address the risks
presented by Illiquid Securities.
In connection with this change, NSCC
would also remove the definition of
‘‘Illiquid Position’’ from Rule 1 of the
Rules, as this term is only used in
connection with the Illiquid Charge.
In order to implement this proposed
change, NSCC would amend Rule 1 of
the Rules by removing the definition of
‘‘Illiquid Position,’’ and NSCC would
amend Procedure XV by removing
references to the Illiquid Charge in
subsection (g) of Section I.(A)(1) and
subsection (e) of Section I.(A)(2) and
removing subsection (h) of Section
I.(A)(1) and subsection (f) of Section
I.(A)(2) where the Illiquid Charge is
currently described.
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(v) Proposal To Enhance Language in
Section I.(A) of Procedure XV
In addition to the enhancements
described above, NSCC is proposing to
make the following changes to Section
I.(A) of Procedure XV: (x) Add language
in subsections (1)(a)(ii) and (iii), and
(2)(a)(ii) and (iii), that indicates that Net
Unsettled Positions in corporate and
51 Between November 2017 and November 2018,
the Illiquid Charge represented an average of
approximately 1.5% of the total Clearing Fund
requirement.
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municipal bonds are excluded from
calculations in subsections (1)(a)(i) and
(ii), and (2)(a)(i) and (ii), respectively;
and (y) add language in subsections
(1)(a)(ii) and (iv), and 2(a)(ii) and (iv),
that indicates that long Net Unsettled
Positions in Family-Issued Securities
are excluded from calculations in
subsections (1)(a)(i) and (ii), and (2)(a)(i)
and (ii), respectively. The current
language indicates that corporate and
municipal bonds and long Net Unsettled
Positions in Family-Issued Securities
are excluded from calculations in
subsections (1)(a)(i) and (2)(a)(i) but
does not explicitly indicate that
corporate and municipal bonds and long
Net Unsettled Positions in FamilyIssued Securities are excluded from
(1)(a)(ii) and (2)(a)(ii). NSCC currently
applies a haircut for corporate and
municipal bonds pursuant to (1)(a)(iii)
and (2)(a)(iii) and long Net Unsettled
Positions in Family-Issued Securities
pursuant to subsections (1)(a)(iii) and
(2)(a)(iii) and does not apply a haircut
for those securities pursuant to
subsections (1)(a)(ii) or (2)(a)(ii).52 The
proposed changes are intended to
improve Members’ transparency into the
treatment of Net Unsettled Positions in
corporate and municipal bonds and long
Net Unsettled Positions in FamilyIssued Securities in Section I.(A) of
Procedure XV and would not change
NSCC’s methodology with respect to
corporate and municipal bonds or long
Net Unsettled Positions in FamilyIssued Securities.
2. Statutory Basis
NSCC believes that the proposed
changes described above are consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to a registered clearing
agency. In particular, NSCC believes
that the proposed changes are consistent
with Section 17A(b)(3)(F) of the Act,53
and Rules 17Ad–22(e)(4)(i), (e)(6)(i), and
(e)(6)(v), each promulgated under the
Act,54 for the reasons described below.
Section 17A(b)(3)(F) of the Act 55
requires that the rules of NSCC be
designed to, among other things, assure
the safeguarding of securities and funds
which are in the custody or control of
52 As discussed above, currently, short Net
Unsettled Positions in Family-Issued Securities
whose volatility is less amenable to statistical
analysis are subject to the haircut set forth in
Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of
Procedure XV. In addition, short Net Unsettled
Positions in Family-Issued Securities that are
Illiquid Positions are currently subject to the
Illiquid Charge.
53 15 U.S.C. 78q–1(b)(3)(F).
54 17 CFR 240.17Ad–22(e)(4)(i), (e)(6)(i), and
(e)(6)(v).
55 15 U.S.C. 78q–1(b)(3)(F).
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17917
the clearing agency or for which it is
responsible. NSCC believes the
proposed changes are designed to assure
the safeguarding of securities and funds
which are in its custody or control or for
which it is responsible because they are
designed to enable NSCC to better limit
its exposure to Members in the event of
a Member default, as described below.
First, NSCC is proposing to enhance
the definition of Illiquid Security by (i)
enhancing an existing criterion used in
this definition relating to whether a
security is subject to the rules of a
national securities exchange by
specifying that NSCC would rely on a
list of specified securities exchanges
that includes exchanges that have
established listing services and are
covered by industry pricing and data
vendors, (ii) deleting references to OTC
Link and OTC Bulletin Board and (iii)
adding new criteria it would use to
assess the risks a security may present
to NSCC due to its illiquid
characteristics based on the market
capitalization of the issuer of the
security and the trading history of the
security. The enhancements to the
existing criterion relating to whether a
security is subject to the rules of a
national securities exchange would
provide that NSCC would utilize a
process that identifies securities listed
on national securities exchanges that
have established listing services and are
covered by industry pricing and data
vendors and as a result that list
securities that are less likely to exhibit
illiquid characteristics. Therefore,
NSCC, by identifying which securities
are listed on these exchanges, would
enhance its ability to determine
securities that exhibit illiquidity
characteristics. In addition, the
enhancements would improve
Members’ understanding of the analysis
by ensuring that the Members better
understand the process used by NSCC
for defining Illiquid Securities based on
whether a security is subject to the rules
of a specified securities exchange. The
references to OTC Link and OTC
Bulletin Board would be removed
because following the enhancements
made pursuant to this rule change, the
definition as revised pursuant to this
rule change would capture securities
listed on the OTC Bulletin Board and
OTC Link and the reference to such
platforms would be unnecessary.
The proposed additional criteria are
designed to capture additional risk
presented by securities that are subject
to the rules of a specified securities
exchange and exhibit illiquid
characteristics based on the
capitalization of the issuer or the trading
history. NSCC believes that the new
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criteria would enable NSCC to better
limit its exposure to Members by
applying a volatility component that is
a more appropriate measure of volatility
for Net Unsettled Positions in these
securities exhibiting illiquid
characteristics. Specifically, NSCC has
observed that securities that are on a
specified securities exchange but that
have limited trading, such as IPOs, or
that are considered micro-capitalization
also exhibit illiquid characteristics.
Finally, due to the potential difficulty in
determining market capitalization
accurately with respect to ADRs, NSCC
would add ADRs to the definition of
Illiquid Security so that they undergo
the same review as if the ADRs were
considered micro-capitalization. As
such, NSCC believes that adding these
criteria to the definition of Illiquid
Security would provide a better and
more accurate measure of volatility of
illiquid securities.
Second, NSCC proposes
enhancements to the haircut-based
volatility charge for Illiquid Securities
and UITs to allow NSCC to base this
charge on these securities’ price level
and risk profile. In this way, the haircutbased volatility charge for Net Unsettled
Positions in these securities would be
calculated to enable NSCC to collect
margin at levels that better reflect the
risk presented by these Net Unsettled
Positions and would help NSCC limit its
exposures to Members. As an example,
a recent impact study indicated that
under the current methodology short
positions in sub-penny securities and
securities priced between one cent and
one dollar exhibited the lowest average
backtesting coverage percentages with
96.2% during the study period, whereas
using the proposed methodology
average backtesting coverage percentage
for such securities would have
increased to 99.5% over the study
period.
Third, NSCC believes that the
proposed clarifications to the language
relating to securities whose volatility is
(i) less amenable to statistical analysis
or (2) amenable to generally accepted
statistical analysis only in a complex
manner would improve Members’
understanding of the current analysis by
ensuring that the Members better
understand the process used by NSCC
for these categories by adding clarity
and transparency. In addition, by
adding that such categories would not
be used for securities that are not
Illiquid Securities or UITs would allow
Members to understand that Illiquid
Securities and UITs would be subject to
the new sections specific to those
securities.
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Fourth, NSCC believes that following
the proposed changes, the Illiquid
Charge would no longer be needed to
address the credit exposures presented
by Net Unsettled Positions in Illiquid
Securities because such risks would be
addressed by of the proposed haircutbased volatility enhancements.
Finally, NSCC believes that the
proposed changes to the language in
Section I.(A) of Procedure XV relating to
Net Unsettled Positions in corporate and
municipal bonds and long Net Unsettled
Positions in Family-Issued Securities
would improve Members’ transparency
into the treatment of Net Unsettled
Positions in corporate and municipal
bonds and long Net Unsettled Positions
in Family-Issued Securities.
The Clearing Fund is composed of
Members’ Required Fund Deposits
which include the volatility component,
and is a key tool that NSCC uses to
mitigate potential losses to NSCC
associated with liquidating a Member’s
portfolio in the event of Member
default. The changes relating to (a)
enhancing the existing criterion for
determining an Illiquid Security, (b)
clarifying and enhancing the language
relating to securities whose volatility is
(i) less amenable to statistical analysis
or (ii) amenable to generally accepted
statistical analysis only in a complex
manner and (c) changing the language in
Section I.(A) of Procedure XV relating to
Net Unsettled Positions in corporate and
municipal bonds and long Net Unsettled
Positions in Family-Issued Securities,
would enhance clarity and transparency
for Members with respect to the
volatility component allowing Members
to have a better understanding of the
Rules. Having clear and accurate Rules
would help Members to better
understand their rights and obligations
regarding NSCC’s clearance and
settlement services. NSCC believes that
when Members better understand their
rights and obligations regarding NSCC’s
services, they can act in accordance
with the Rules. NSCC believes that
better enabling Members to comply with
the Rules would promote the prompt
and accurate clearance and settlement of
securities transactions by NSCC
consistent with the requirements of the
Act, in particular Section 17A(b)(3)(F) of
the Act.56
Each of the proposed changes listed
above would improve the methodology
relating to the volatility component
enabling NSCC to better limit its
exposure to Members such that, in the
event of Member default, NSCC’s
operations would not be disrupted and
non-defaulting Members would not be
exposed to losses they cannot anticipate
or control. In this way, the proposed
rules are designed to assure the
safeguarding of securities and funds
which are in the custody or control of
NSCC or for which it is responsible and
therefore consistent with Section
17A(b)(3)(F) of the Act.57
Rule 17Ad–22(e)(4)(i) under the Act 58
requires, in part, that NSCC establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to effectively
identify, measure, monitor, and manage
its credit exposures to participants and
those arising from its payment, clearing,
and settlement processes, including by
maintaining sufficient financial
resources to cover its credit exposure to
each participant fully with a high degree
of confidence.
As described above, NSCC believes
that the proposed changes would enable
it to better identify, measure, monitor,
and, through the collection of Members’
Required Fund Deposits, manage its
credit exposures to Members by
maintaining sufficient resources to
cover those credit exposures fully with
a high degree of confidence. More
specifically, the proposed changes to the
methodology for identifying Illiquid
Securities would allow NSCC to better
identify securities that may present
credit exposures, for purposes of
applying an appropriate margin charge.
The proposed enhancements to the
volatility charge applicable to Illiquid
Securities and UITs would provide
NSCC with a more effective measure of
the risks that may be presented to NSCC
by positions in the securities.
Specifically, the proposal to base the
calculation of the haircut-based
volatility charge applied to positions in
Illiquid Securities and UITs on those
securities’ price level and risk profile
would enable NSCC to manage its credit
exposures by allowing NSCC to collect
and maintain sufficient resources to
cover those credit exposures fully with
a high degree of confidence. As an
example, a recent impact study
indicated that under the current
methodology short positions in subpenny securities and securities priced
between one cent and one dollar
exhibited the lowest average backtesting
coverage percentages with 96.2% during
the study period, whereas using the
proposed methodology average
backtesting coverage percentage for such
securities would have increased to
99.5% over the study period. NSCC also
believes that with the proposed changes
NSCC could remove the Illiquid Charge
57 Id.
56 Id.
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from the Clearing Fund formula because
the proposed changes would provide
NSCC with a more effective measure of
risks related to Net Unsettled Positions
in Illiquid Securities. As such, the
proposed enhancements to the
calculation of the volatility component
would permit NSCC to more effectively
identify, measure, monitor and manage
its exposures to risk, and would enable
it to better limit its exposure to potential
losses from Member default.
Therefore, NSCC believes that the
proposal would enhance NSCC’s ability
to effectively identify, measure and
monitor its credit exposures and would
enhance its ability to maintain sufficient
financial resources to cover its credit
exposure to each participant fully with
a high degree of confidence. As such,
NSCC believes the proposed changes are
consistent with Rule 17Ad–22(e)(4)(i)
under the Act.59
Rule 17Ad–22(e)(6)(i) under the Act 60
requires, in part, that NSCC establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, considers, and
produces margin levels commensurate
with, the risks and particular attributes
of each relevant product, portfolio, and
market.
The Required Fund Deposits are made
up of risk-based components (as margin)
that are calculated and assessed daily to
limit NSCC’s credit exposures to
Members. NSCC is proposing changes
that are designed to more effectively
address risk characteristics of Net
Unsettled Positions in Illiquid
Securities. NSCC believes that these
changes would enable NSCC to produce
margin levels that are more
commensurate with the particular risk
attributes of these securities, including
the risk of increased transaction and
market costs to NSCC to liquidate or
hedge due to lack of liquidity or
marketability of such positions.
For example, by enhancing the
methodology for Illiquid Securities
through an additional review of market
capitalization of a security and the use
of an illiquidity ratio, NSCC believes
that the proposed change would allow
NSCC to better identify those securities
that may exhibit illiquid characteristics.
The proposed changes to the haircutbased methodology to base the
calculation on the price level and risk
profile of the applicable security, rather
than a static percent, would, NSCC
believes, enable NSCC to more
effectively measure the risks that are
particular to Illiquid Securities and
UITs. Backtesting results indicate that
by calculating a haircut-based volatility
charge that addresses the risks
presented by a security’s price level or
risk profile, the proposed methodology
would result in a volatility charge that
more appropriately addresses the risk of
these securities.
These proposed changes are designed
to assist NSCC in maintaining a riskbased margin system that considers, and
produces margin levels commensurate
with, the risks and particular attributes
of portfolios that exhibit illiquid risk
attributes. Therefore, NSCC believes the
proposed change is consistent with Rule
17Ad–22(e)(6)(i) under the Act.61
Rule 17Ad–22(e)(6)(v) under the
Act 62 requires, in part, that NSCC
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, uses an appropriate
method for measuring credit exposure
that accounts for relevant product risk
factors and portfolio effects across
products. NSCC is proposing to
eliminate the Illiquid Charge because,
NSCC believes, the other proposed
changes would provide NSCC with a
more effective measure of the risks
presented by Illiquid Securities.
Eliminating this charge would enable
NSCC to remove what would become,
with the implementation of the other
proposed changes, an unnecessary
component from the Clearing Fund
calculation, and would help NSCC to
rely on a more appropriate method of
measuring its exposures to this risk.
Therefore, NSCC believes the proposed
change is consistent with Rule 17Ad22(e)(6)(v) under the Act.63
(B) Clearing Agency’s Statement on
Burden on Competition
NSCC believes that the proposed
changes to enhance its risk management
of Illiquid Securities could have an
impact on competition. Specifically,
NSCC believes that the proposed
changes could burden competition
because they would result in larger
Required Fund Deposit amounts for
Members when the enhancements result
in a haircut-based volatility component
that is greater than the amount
calculated pursuant to the current
methodology. Impact studies indicate
that the proposed changes would have
resulted in an approximate 2.6%
17919
increase on average of NSCC’s daily
Clearing Fund had the proposed
changes been in place over the period
from November 2017 to October 2018.
When the proposal results in a larger
volatility component, the proposed
changes could burden competition for
Members that have lower operating
margins or higher costs of capital
compared to other Members. Impact
studies indicate that Members with
higher percentages of Illiquid Securities
in their portfolio, particularly penny or
sub-penny securities, are more likely to
be impacted by the proposed changes.
However, the increase in Required Fund
Deposit would be in direct relation to
the specific risks presented by each
Members’ Net Unsettled Positions, and
each Member’s Required Fund Deposit
would continue to be calculated with
the same parameters and at the same
confidence level for each Member.
Therefore, Members that present similar
Net Unsettled Positions, regardless of
the type of Member, would have similar
impacts on their Required Fund Deposit
amounts. As such, NSCC does not
believe that any burden on competition
imposed by the proposed changes
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
risks and meet the requirements of the
Act, 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
to margining Illiquid Securities and
UITs would be necessary in furtherance
of the Act, specifically Section
17A(b)(3)(F) of the Act,64 because, as
described above, the Rules must be
designed to assure the safeguarding of
securities and funds that are in NSCC’s
custody or control or which it is
responsible.
More specifically, NSCC believes
these proposed changes are necessary to
support NSCC’s compliance with Rules
17Ad–22(e)(4)(i) and Rule 17Ad–
22(e)(6)(i) and (v) under the Act,65
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
61 Id.
59 Id.
60 17
62 17
CFR 240.17Ad–22(e)(6)(i).
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63 Id.
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64 15
65 17
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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 its methodology for
identifying Illiquid Securities and the
calculation of the applicable volatility
charge would improve the risk-based
methodology that NSCC employs to
measure risks related to securities that
exhibit illiquid characteristics. The
proposed change would introduce
additional criteria for defining Illiquid
Securities to improve NSCC’s
methodology for identifying securities
that exhibit illiquid characteristics. The
proposed change would also enhance
the calculation of the applicable
volatility component to address the
unique risks presented by Members’ Net
Unsettled Positions in these securities,
regardless of Member type, as described
above. Therefore, NSCC believes that
these proposed changes would better
limit NSCC’s credit exposures to
Members, consistent with the
requirements of Rules 17Ad–22(e)(4)(i)
and Rule 17Ad–22(e)(6)(i) and (v) under
the Act.
NSCC also believes that the above
described burden on competition that
could be created by the proposed
changes would be appropriate in
furtherance of the Act because such
changes have been appropriately
designed to assure the safeguarding of
securities and funds which are in the
custody or control of NSCC or for which
it is responsible, as described in detail
above. The proposal would enable
NSCC to produce margin levels more
commensurate with the risks and
particular attributes of each Member’s
portfolio. Specifically, the proposal to
enhance the methodology for
identifying Illiquid Securities and the
calculation of the haircut-based
volatility component applicable to these
securities and UITs would improve the
risk-based margining methodology that
NSCC employs to set margin
requirements and better limit NSCC’s
credit exposures to its Members. Impact
studies indicate that the proposed
methodology, by calculating a haircut-
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based volatility charge that addresses
the risks presented by a security’s price
level or risk profile, would result in
backtesting coverage that more
appropriately addresses the risk of these
securities. Therefore, because the
proposed changes are designed to
provide NSCC with a more appropriate
and complete measure of the risks
presented by Members’ Net Unsettled
Positions, NSCC believes the proposals
are appropriately designed to meet its
risk management goals and its
regulatory obligations.
Therefore, as described above, NSCC
believes the proposed changes are
necessary and appropriate in
furtherance of NSCC’s obligations under
the Act, specifically Section
17A(b)(3)(F) of the Act 66 and Rules
17Ad–22(e)(4)(i) and Rule 17Ad–
22(e)(6)(i) and (e)(6)(v) under the Act.67
Because the proposal to eliminate the
Illiquid Charge would remove this
charge from the margining methodology
as applied to all Members, when
applicable, NSCC does not believe the
proposed change to eliminate the
Illiquid Charge would have any impact
on competition. NSCC does not believe
that the proposed changes in Section
I.(A) of Procedure XV relating to
securities whose volatility is less
amenable to statistical analysis,
securities whose volatility is amenable
to generally accepted statistical analysis
only in a complex manner, or to
corporate and municipal bonds and long
Net Unsettled Positions in FamilyIssued Securities, would have any
impact on competition as these changes
would just add clarity and transparency
to the Rules and not affect Member’s
rights and 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
66 15
67 17
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CFR 240.17Ad–22(e)(4)(i), (e)(6)(i), (e)(6)(v).
Frm 00073
Fmt 4703
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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–2020–003 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–2020–003. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of NSCC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
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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–
2020–003 and should be submitted on
or before April 21, 2020.
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.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.68
J. Matthew DeLesDernier,
Assistant Secretary.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2020–06617 Filed 3–30–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–88472; File No. SR–GEMX–
2020–08]
Self-Regulatory Organizations; Nasdaq
GEMX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Options 3,
Section 8, Opening
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 GEMX, LLC (‘‘GEMX’’ 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.
jbell on DSKJLSW7X2PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
GEMX Rules at Options 3, Section 8,
titled ‘‘Opening.’’
The text of the proposed rule change
is available on the Exchange’s website at
https://nasdaqgemx.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
68 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
VerDate Sep<11>2014
19:01 Mar 30, 2020
Jkt 250001
1. Purpose
The Exchange proposes to amend
GEMX Rules at Options 3, Section 8,
titled ‘‘Opening.’’ 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.’’
Today Options 3, Section 8(a)(2)
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
Exchange further proposes an additional
contingency. In the event that the
primary market is unable to open, and
an alternative market is not designated
(and/or the designated alternative
market does not open), the Exchange
may utilize a non-primary market to
open all underlying securities from the
primary market. The Exchange will
select the non-primary market with the
most liquidity in the aggregate for all
underlying securities that trade on the
primary market for the previous two
calendar months, excluding the primary
3 The Exchange notes that the primary listing
market and the primary volume market as defined
in GEMX’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
Arca, Inc. (‘‘NYSE Arca’’) as its alternative market,
then GEMX would utilize NYSE Arca as the market
for the underlying.
PO 00000
Frm 00074
Fmt 4703
Sfmt 4703
17921
and alternate markets. The Exchange
notes that in order to open an option
series it would require an equity
market’s underlying quote. If another
equity market displays opening prices
for the underlying security, the
Exchange proposes to utilize those
quotes. This proposed change to the
current System would allow the
Exchange to open in situations where
the primary market is experiencing an
issue and also where an alternative
market designated by the primary
market may not be designated by the
primary market or is unable to open.
The Exchange believes that this
proposal would effectively provide the
Exchange with additional opportunities
to open the market and provide its
members with a venue in which to
transact options trading. The Exchange
notes that utilizing a non-primary
market with the most liquidity in the
aggregate for all underlying securities
for the previous two calendar months
will ensure that the Exchange opens
with quotes which are representative of
the volume on that primary market. The
Exchange believes that this proposal
will enable it to open in the event that
there are issues with the primary market
or the alternate market assigned by the
primary.
The Exchange also proposes to make
a corresponding amendment to Options
3, Section 8(c)(2) to replace the
reference to ‘‘primary market’’ with the
defined term ‘‘market for the underlying
security.’’
2. Statutory Basis
The Exchange believes that its
proposal is consistent with Section 6(b)
of the Act,5 in general, and furthers the
objectives of Section 6(b)(5) of the Act,6
in particular, in that it is designed to
promote just and equitable principles of
trade and to protect investors and the
public interest by providing for
alternative processes to determine the
market for the underlying. The
Exchange’s proposal to amend the
definition of ‘‘market for the underlying
security’’ within Options 3, Section
8(a)(2) is consistent with the Act.
First, the Exchange’s proposal would
remove the concept of a primary volume
market and replace that concept with an
alternative market designated by the
primary market. The Exchange notes
that it is most likely the case that the
primary market is the primary volume
market, so this term offers no
contingency in most cases. The primary
market has the ability to designate an
alternate primary market when the
5 15
6 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
E:\FR\FM\31MRN1.SGM
31MRN1
]]>Agencies
[Federal Register Volume 85, Number 62 (Tuesday, March 31, 2020)]
[Notices]
[Pages 17910-17921]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06617]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88474; File No. SR-NSCC-2020-003]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change To Enhance
National Securities Clearing Corporation's Haircut-Based Volatility
Charge Applicable to Illiquid Securities and UITs and Make Certain
Other Changes to Procedure XV
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 16, 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 March 16, 2020, NSCC filed this proposed rule change as
an advance notice (SR-NSCC-2020-802) 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
& Procedures (``Rules'') \4\ in order to enhance the calculation of
certain components of the Clearing Fund formula. First, the proposed
rule change would clarify and enhance the methodology for identifying
securities as illiquid for purposes of determining the applicable
calculation of the volatility component of the Clearing Fund formula,
and would revise the definition of ``Illiquid Security'' in the Rules
to reflect these changes.\5\ Second, the proposed rule change would
enhance the calculation of the haircut-based volatility component of
the Clearing Fund formula that is applied to positions in (1) Illiquid
Securities (which include securities that are priced at less than a
penny (``sub-penny securities'') and initial public offerings
(``IPOs'')), and (2) unit investment trusts (``UITs''). Third, the
proposed rule change would eliminate the existing Illiquid Charge, as
the risk it was designed to address would be addressed by the other
enhancements being proposed. Finally, NSCC would make certain changes
to Section I.(A) of Procedure XV (Clearing Fund Formula and Other
Matters) of the Rules (``Procedure XV'') \6\ for greater transparency.
Each of these proposed changes are described in greater detail below.
---------------------------------------------------------------------------
\4\ Capitalized terms not defined herein are defined in the
Rules, available at https://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
\5\ See Rule 1 (Definitions and Descriptions). Id.
\6\ Procedure XV, supra note 4.
---------------------------------------------------------------------------
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.
[[Page 17911]]
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
NSCC is proposing a number of enhancements to its methodology for
calculations of certain components of the Clearing Fund. First, NSCC is
proposing to (1) clarify and improve the transparency and use of the
term ``Illiquid Security'' for purposes of determining the applicable
calculation of the volatility component of the Clearing Fund formula to
Net Unsettled Positions in those securities, and (2) enhance the
methodology used in this term by including additional criteria.\7\
Specifically, certain criteria relating to listing national securities
exchanges would continue to be utilized and would be enhanced and
described with greater clarity and transparency under the proposed
changes. In addition, NSCC would (i) add securities' market
capitalization and a median illiquidity ratio, as described in greater
detail below, as additional measurements of liquidity and (ii) remove
the references to OTC Bulletin Board and OTC Link issue. NSCC would
revise the definition of ``Illiquid Security'' in the Rules to reflect
these enhancements.
---------------------------------------------------------------------------
\7\ ``Net Unsettled Positions'' and ``Net Balance Order
Unsettled Positions'' refer to net positions that have not yet
passed their settlement date, or did not settle on their settlement
date, and are referred to collectively in this filing as Net
Unsettled Positions. NSCC does not take into account any offsets,
such as inventory held at other clearing agencies, when determining
Net Unsettled Positions for the purpose of calculating the
volatility component. See Procedure XV, supra note 4.
---------------------------------------------------------------------------
Second, NSCC would enhance the calculation of the haircut-based
volatility component of the Clearing Fund methodology for Net Unsettled
Positions in securities whose volatility is less amenable to
statistical analysis and securities whose volatility is amenable to
generally accepted statistical analysis only in a complex manner.
Currently, NSCC uses a fixed percentage in the calculation of charges
for Net Unsettled Positions in each of these securities.\8\ NSCC would
modify these calculations by adding two specific categories for
Illiquid Securities (as newly defined pursuant to the proposed changes)
and UITs. For Illiquid Securities, NSCC would apply a percentage that
is based on the applicable security's price level and for both Illiquid
Securities and UITs, NSCC would recalculate the applicable percentages
applied to such securities at least annually. NSCC would retain the
existing general categories for securities whose volatility is less
amenable to statistical analysis and securities whose volatility is
amenable to generally accepted statistical analysis only in a complex
manner for securities that fall within those descriptions but that are
not Illiquid Securities or UITs, and would continue to apply a fixed
percentage to such securities.
---------------------------------------------------------------------------
\8\ See Section I.(A)(1)(a)(ii) and Section I.(A)(2)(a)(ii) of
Procedure XV, supra note 4.
---------------------------------------------------------------------------
Third, NSCC would eliminate the existing Illiquid Charge. The
Illiquid Charge was designed to cover the risk that NSCC may be unable
to easily liquidate Net Unsettled Positions in Illiquid Securities in
the event of a Member default due to the securities' lack of
marketability and other characteristics. This risk would be addressed
by the enhanced criteria for identifying Illiquid Securities, and the
enhanced calculation of the applicable haircut-based volatility charge
proposed by this filing. Therefore, NSCC believes the Illiquid Charge
would no longer be needed to address these risks. In connection with
this proposed change, NSCC would also remove the definition of
``Illiquid Position'' from the Rules, as this term is only used in
connection with the calculation of the Illiquid Charge.
Finally, NSCC would provide greater detail to describe the
treatment of Net Unsettled Positions in corporate and municipal bonds
and long Net Unsettled Positions in Family-Issued Securities in Section
I.(A) of Procedure XV for greater transparency.
Each of the proposed changes is described in more detail below.
(i) Overview of the Required Fund Deposit and NSCC's Clearing Fund
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.\9\ The Required Fund Deposit serves as each
Member's margin. The objective of a Member's Required Fund Deposit
includes mitigation of potential losses to NSCC associated with
liquidation of the Member's portfolio in the event NSCC ceases to act
for that Member (hereinafter referred to as a ``default'').\10\ The
aggregate of all Members' Required Fund Deposits, together with certain
other deposits required under the Rules, constitutes the Clearing Fund
of NSCC, which it would access, among other instances, 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.
---------------------------------------------------------------------------
\9\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters), supra note 4. NSCC's market risk
management strategy is designed to comply with Rules 17Ad-22(e)(4)
and (e)(6) under the Securities Exchange Act of 1934, where these
risks are referred to as ``credit risks.'' 17 CFR 240.17Ad-22(e)(4)
and (e)(6).
\10\ The Rules identify when NSCC may cease to act for a Member
and the types of actions NSCC may take. For example, NSCC may
suspend a firm's membership with NSCC or prohibit or limit a
Member's access to NSCC's services in the event that Member defaults
on a financial or other obligation to NSCC. See Rule 46
(Restrictions on Access to Services) of the Rules, supra note 4.
---------------------------------------------------------------------------
Pursuant to the Rules, each Member's Required Fund Deposit amount
consists of a number of applicable components, each of which is
calculated to address specific risks faced by NSCC, as identified
within Procedure XV.\11\ Generally, the largest component of Members'
Required Fund Deposits is the volatility component. The volatility
component is designed to calculate the amount of money that could be
lost on a portfolio over a given period of time assumed necessary to
liquidate the portfolio, within a 99% confidence level.
---------------------------------------------------------------------------
\11\ See Procedure XV, supra note 4.
---------------------------------------------------------------------------
NSCC has two methodologies for calculating the volatility
component. For the majority of Net Unsettled Positions, NSCC calculates
the volatility component as the greater of (1) the larger of two
separate calculations that utilize a parametric Value at Risk (``VaR'')
model, (2) a gap risk measure calculation based on the concentration
threshold of the largest non-index position in a portfolio, and (3) a
portfolio margin floor calculation based on the market values of the
long and short positions in the portfolio (``VaR Charge'').\12\
Pursuant to Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of Procedure
XV, certain Net Unsettled Positions are excluded from the calculation
of the VaR Charge and are instead charged a haircut-based volatility
component that is calculated by multiplying the absolute value of the
position by a percent determined by NSCC that is (i) not less than 10%
for securities whose volatility is less amenable to statistical
analysis and (ii) not less than 2% for securities whose volatility is
amenable to generally accepted statistical analysis only in a complex
manner.\13\ Generally, certain equity securities, including Illiquid
Securities, fall within the first category as securities whose
volatility is less amenable to statistical analysis and fixed-income
securities, including UITs, fall within the second category as
[[Page 17912]]
securities whose volatility is amenable to generally accepted
statistical analysis only in a complex manner.\14\ The securities that
fall within either one of these categories tend to exhibit
unpredictable illiquid characteristics, such as low trading volumes or
infrequent trading. Because the VaR Charge is a model-based
calculation, which generally relies on predictability, this charge may
be less reliable for measuring market risk of securities that exhibit
unpredictable illiquid characteristics.\15\ Therefore, NSCC believes
that the haircut-based volatility charge is a more appropriate measure
of volatility for Net Unsettled Positions in these securities.
---------------------------------------------------------------------------
\12\ See Sections I.(A)(1)(a)(i) and I.(A)(2)(a)(i) of Procedure
XV, supra note 4.
\13\ Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of Procedure
XV, supra note 4.
\14\ UITs are redeemable securities, or units, issued by
investment companies that offer fixed security portfolios for a
defined period of time.
\15\ More specifically, the model that is used to calculate the
VaR Charge relies on assumptions that are based on historic
observations of a security's price. Such assumptions are not
reliable predictors of price for securities that exhibit illiquid
characteristics, which generally have low trading volumes or are
infrequently traded.
---------------------------------------------------------------------------
In addition to charging a haircut-based volatility component rather
than a VaR Charge for certain Illiquid Securities, Members' Required
Fund Deposits may also include an Illiquid Charge, which is calculated
as described in Sections I.(A)(1)(h) and I.(A)(2)(f) of Procedure
XV.\16\ The Illiquid Charge is a component of the Clearing Fund that
may be assessed with respect to ``Illiquid Positions,'' which are Net
Unsettled Positions in ``Illiquid Securities'' that exceed applicable
volume thresholds, as described in the definition of Illiquid Position
in Rule 1 of the Rules.\17\ The Illiquid Charge is designed to mitigate
the risk that NSCC may face when liquidating Net Unsettled Positions in
these securities following a Member default.
---------------------------------------------------------------------------
\16\ Sections I.(A)(1)(h) and I.(A)(2)(f) of Procedure XV, supra
note 4.
\17\ Rule 1, supra note 4.
---------------------------------------------------------------------------
Currently, an Illiquid Security is defined in the Rules as ``a
security, other than a family-issued security as defined in Procedure
XV, that either (i) is not traded on or subject to the rules of a
national securities exchange registered under [the Act]; or (ii) is an
OTC Bulletin Board \18\ or OTC Link issue.'' \19\
---------------------------------------------------------------------------
\18\ The OTC Bulletin Board is an interdealer quotation system
that is used by subscribing members of the Financial Industry
Regulatory Authority (``FINRA'') to reflect market making interest
in eligible securities (as defined in FINRA's Rules). See https://www.finra.org/industry/otcbb/otc-bulletin-board-otcbb.
\19\ OTC Link is an electronic inter-dealer quotation system
that displays quotes from broker-dealers for many over-the-counter
securities. See https://www.otcmarkets.com.
---------------------------------------------------------------------------
NSCC regularly assesses its market and credit risks, as such risks
are related to its margining methodologies, to evaluate whether margin
levels are commensurate with the particular risk attributes of each
relevant product, portfolio, and market.\20\ The proposed changes
described below are a result of NSCC's regular review of the
effectiveness of its margining methodology.
---------------------------------------------------------------------------
\20\ See 17 CFR 240.17Ad-22(e)(6)(i), (e)(6)(vi).
---------------------------------------------------------------------------
(ii) Proposed Enhancements to the Definition of Illiquid Security
NSCC is proposing to revise the Rules to (1) enhance certain
existing criteria used in the definition of Illiquid Security for
purposes of determining the applicable calculation of the volatility
component; (2) remove certain criteria that would become unnecessary
following the proposed enhancements; (3) enhance the definition by
introducing additional criteria; and (4) repurpose the enhanced
definition of Illiquid Security to use with respect to the calculation
of the volatility component, as described below. NSCC believes that the
proposed changes would provide Members with improved clarity and
transparency into the methodology used to apply this definition. The
proposed change would also provide NSCC with additional measures of a
security's liquidity to improve its ability to apply margin that
reflects the risk characteristics of that security.
Following the implementation of the proposed enhancements to this
definition, as described below, the definition of Illiquid Security in
Rule 1 of the Rules would be a security that: (i) Is not listed on a
specified securities exchange (defined below) as determined on a daily
basis; (ii) is listed on a specified securities exchange and, as
determined on a monthly basis, (a)(I) its market capitalization is
considered a micro-capitalization (as described below) as of the last
business day of the prior month or (II) it is an American depositary
receipt (``ADR''); and (b) the median of its calculated illiquidity
ratio (defined below) of the prior six months exceeds a threshold that
would be determined by NSCC on a monthly basis and is based on the 99th
percentile of the illiquidity ratio of non-micro-capitalization common
stocks \21\ over the prior six months; or (iii) is listed on a
specified securities exchange, and, as determined on a monthly basis,
has fewer than 31 business days of trading history over the past 153
business days on such exchange. As discussed above, because the VaR
Charge is a model-based calculation, which generally relies on
predictability, the VaR Charge may be less reliable for measuring
market risk of securities that exhibit unpredictable illiquid
characteristics.\22\ Each of the types of securities that would be in
the definition of Illiquid Security are securities that tend to exhibit
unpredictable illiquid characteristics including limited trading
volumes or infrequent trading.
---------------------------------------------------------------------------
\21\ Securities that are exchange-traded products (``ETPs'') or
ADRs would not be included when calculating the illiquidity ratio
threshold. ETPs are not included when calculating the illiquidity
ratio threshold because the underlying common stocks that comprise
the indexes of equity ETPs are included in the calculation. ADRs are
not included when calculating the illiquidity ratio threshold
because the market capitalization of ADRs may be difficult to
calculate because each ADR often converts to different number of
shares of a local security. In addition, if NSCC is unable to
retrieve data to calculate the illiquidity ratio for the median
illiquidity ratio for a security on any day, NSCC would use a
default value for that day for purposes of the calculation for the
security (i.e., the security would essentially be treated as
illiquid for that day).
\22\ See supra note 15.
---------------------------------------------------------------------------
For purposes of this definition a ``specified securities exchange''
would be a national securities exchange that has established listing
services and is covered by industry pricing and data vendors.\23\
Initially, NSCC would define micro-capitalization as capitalization of
less than $300 million. Consistent with generally prevailing views,
NSCC believes that given the lack of public information and limited
trading volumes, securities with capitalization below this threshold
tend to involve higher risks and exhibit illiquid characteristics.\24\
NSCC may adjust this definition from time to time as appropriate in
order to continue to reflect a threshold that captures securities with
capitalization that would indicate that the securities exhibit illiquid
characteristics. Changes to the micro-capitalization threshold would be
subject to NSCC's model risk management governance procedures set forth
in the Clearing Agency Model Risk Management Framework (``Model Risk
Management Framework'').\25\ NSCC
[[Page 17913]]
would notify Members of changes to the micro-capitalization threshold
by important notice. For purposes of the definition of Illiquid
Security, the ``illiquidity ratio'' of a security on any day would be
equal to (i) the price return of such security on such day (based on
the natural logarithm of the ratio between the closing price of the
stock on such day to the closing price of the stock on the prior
trading day) divided by (ii) the average daily trading amount \26\ of
such security over the prior 20 business days.\27\
---------------------------------------------------------------------------
\23\ The exchanges that would initially be specified securities
exchanges are: New York Stock Exchange LLC, NYSE American LLC, NYSE
Arca, Inc., The Nasdaq Stock Market and Cboe BZX Exchange, Inc.
\24\ See, e.g., https://www.sec.gov/reportspubs/investor-publications/investorpubsmicrocapstockhtm.html.
\25\ See Securities Exchange Act Release No. 81485 (August 25,
2017), 82 FR 41433 (August 31, 2017) (File No. SR-NSCC-2017-008)
(describes the adoption of the Model Risk Management Framework of
NSCC which sets forth the model risk management practices of NSCC)
and Securities Exchange Act Release No. 84458 (October 19, 2018), 83
FR 53925 (October 25, 2018) (File No. SR-NSCC-2018-009) (amends the
Model Risk Management Framework). The Model Risk Management
Framework describes the model management practices adopted by NSCC,
which have been designed to assist NSCC in identifying, measuring,
monitoring, and managing the risks associated with the design,
development, implementation, use, and validation of ``models'' which
would include the methodology for determining the volatility
component of the Clearing Fund. Id.
\26\ The daily trading amount equals the daily trading volume
multiplied by the end-of-day price.
\27\ NSCC believes that the 20-business day period is sufficient
to reflect recent market activity for the security.
---------------------------------------------------------------------------
a. Enhancements to the Existing Criteria in the Definition of Illiquid
Security
NSCC is proposing to enhance existing criteria in the definition of
Illiquid Security as set forth below.
In the current definition, an Illiquid Security is a security that
is ``either (i) not traded or subject to the rules of a national
securities exchange registered under the Securities Exchange Act of
1934, as amended; or (ii) is an OTC Bulletin Board or OTC Link issue.''
\28\ On a daily basis, NSCC receives from third party vendors data
relating to securities processed through NSCC which indicates the
exchanges, if any, on which each security is listed. If a security is
not listed on of one of the national securities exchanges covered by
the third party vendors, then, currently, NSCC would consider that
security an Illiquid Security for the purpose of calculating the
Illiquid Charge.\29\ Based on historic performances, NSCC believes the
national securities exchanges that the vendors cover for this purpose
are appropriate for determining if a security exhibits characteristics
of liquidity because such exchanges have established listing services
and are covered by industry pricing and data vendors. NSCC believes
that such exchanges tend to list securities that exhibit liquid
characteristics such as having more available public information,
larger trading volumes and higher capitalization. NSCC continues to
believe this analysis is appropriate for identifying securities that
exhibit illiquid characteristics, and would retain and enhance this
criterion in the definition in the Rules by specifying that it uses the
specified securities exchanges that have established listing services
and that are covered by industry pricing and data vendors and providing
that it would determine on a daily basis whether securities are subject
to the rules of a specified securities exchange.
---------------------------------------------------------------------------
\28\ See Rule 1, supra, note 4.
\29\ The exchanges that have established listing services that
the vendors cover for this purpose are: New York Stock Exchange LLC,
NYSE American LLC, NYSE Arca, Inc., The Nasdaq Stock Market and Cboe
BZX Exchange, Inc. Members' Clearing Fund Summary reports, available
through the DTCC Risk Portal, identify securities within their
portfolio by the ticker symbol and whether those securities are
considered Illiquid Securities for purposes of the calculation of
the Illiquid Charge. This information provides Members with insight
into the basis for their margin calculations.
---------------------------------------------------------------------------
NSCC would use the same process for determining whether a security
is an Illiquid Security based on if such security is listed on a
national security exchange and would enhance the definition to reflect
the process that will be used. NSCC would change ``national securities
exchange registered under the Securities Exchange Act of 1934, as
amended'' to ``specified securities exchange'' in the definition of
Illiquid Security and add a defined term for ``specified securities
exchange'', which would be a national securities exchange that has
established listing services and is covered by industry pricing and
data vendors.
As a further enhancement, NSCC is proposing to replace the phrase
``not traded on or subject to the rules of'' with ``not listed on'' to
more accurately describe the process that NSCC and its vendors use to
determine if a security is on a national securities exchange. In
addition, determining whether a security is listed on an exchange is
more definitive and more reliably verifiable than determining whether a
security is traded on or subject to the rules of a securities exchange.
NSCC is also proposing to remove references to the OTC Bulletin Board
and OTC Link issues in the definition of Illiquid Security. NSCC
believes that the definition as revised pursuant to this rule change
would capture securities listed on the OTC Bulletin Board and OTC Link
and the reference to such platforms is unnecessary.
NSCC is also proposing to remove the phrase ``other than a family
issued security as defined in Procedure XV'' from the definition of
Illiquid Security because family issued security is not defined in
Procedure XV and, given the new proposed use of the definition of
Illiquid Security together with other proposed changes, it is not
necessary to exclude Family-Issued Securities from the definition. The
current defined term ``Illiquid Security'' is only used in the defined
term ``Illiquid Position'' and in sections relating to the Illiquid
Charge which would be removed pursuant to the proposed changes as
described herein. The phrase ``other than a family issued security as
defined in Procedure XV'' was intended to ensure that long Net
Unsettled Positions in Family-Issued Securities are excluded from the
Illiquid Charge.\30\ Currently, short Net Unsettled Positions in
Family-Issued Securities whose volatility is less amenable to
statistical analysis are subject to the haircut set forth in Sections
I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of Procedure XV. In addition, short
Net Unsettled Positions in Family-Issued Securities that are Illiquid
Positions are currently subject to the Illiquid Charge.\31\ Long Net
Unsettled Positions in Family Issued Securities are not subject to the
haircut set forth Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of
Procedure XV nor to the Illiquid Charge.
---------------------------------------------------------------------------
\30\ Long Net Unsettled Positions in Family-Issued Securities
are not subject to the Illiquid Charge because the risk that long
Net Unsettled Positions in Family-Issued Securities raise, wrong way
risk, is separately provided for by a separate charge for such
securities. See Section I.(A)(1)(a)(iv) and Section I.(A)(2)(a)(iv),
supra note 4. Wrong way risk is a risk that an exposure to a
counterparty is highly likely to increase when the creditworthiness
of that counterparty deteriorates. 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. Short Net
Unsettled Positions in Family-Issued Securities do not present the
same wrong way risk as long Net Unsettled Positions in Family-Issued
Securities. See note 29 below.
\31\ The defined term ``Illiquid Security'' currently excludes
``a family issued security as defined in Procedure XV'', however,
family issued security is not defined in Procedure XV. The defined
term Illiquid Security was added to the Rules in 2017. See
Securities Exchange Act Release No. 80260 (March 16, 2017), 82 FR
14781 (March 22, 2017) (File No. SR-NSCC-2017-001). When the defined
term was added, the section where family issued securities was
defined in Procedure XV was referring to a separate charge that was
applied to long Net Unsettled Positions in Family-Issued Securities
and the exclusion of ``family issued security'' from the defined
term Illiquid Security was intended to refer to long Net Unsettled
Positions in Family-Issued Securities not short Net Unsettled
Positions in Family-Issued Securities.
---------------------------------------------------------------------------
As described below, following the proposed rule change, the defined
term Illiquid Security would be repurposed to be used in Sections
I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of Procedure XV which sections
would apply to certain short Net Unsettled Positions in Family-Issued
Securities.\32\ As is the case
[[Page 17914]]
currently, only long Net Unsettled Positions in Family-Issued
Securities would be excluded from the calculations in Sections
I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of Procedure XV which would be
noted in I.(A)(1)(a)(ii) as proposed below. The proposed rule change
would not change the treatment of long Net Unsettled Positions in
Family-Issued Securities which would remain subject to the calculations
set forth in Sections I.(A)(1)(a)(iv) and I.(A)(2)(a)(iv) of Procedure
XV.
---------------------------------------------------------------------------
\32\ 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 from a resulting
drop in price in the securities. As such, NSCC provides a specific
charge for such securities. See id. Short positions present a
different risk profile than long positions in this close out
scenario based on, in part, the difference in the potential
responsiveness of price change to quantity that may occur when NSCC
is liquidating a long position in an Illiquid Security, compared to
when it is liquidating a short position. As a result, the charge for
Family-Issued Securities is only applied to long positions in such
securities.
---------------------------------------------------------------------------
NSCC believes that each of these proposed changes would improve the
definition for its new proposed purpose and improve Members'
transparency into the application of the existing criteria of the
Illiquid Security definition.
b. New Criteria in the Definition of Illiquid Security
NSCC is also proposing to include additional criteria in order to
identify securities that exhibit illiquid characteristics and may not
be captured by the existing definition as described below.
Although the criterion for this definition relating to whether a
security is traded on or subject to the rules of a specified securities
exchange would be determined on a daily basis, as noted above, under
the proposal, NSCC would also apply new criteria, described below, on a
monthly basis, to identify those securities that are subject to the
rules of a specified securities exchange but may still exhibit illiquid
characteristics and should be identified as Illiquid Securities. The
new criteria would be based on (i) the security's market capitalization
and (ii) the trading history of the security. In addition, ADRs would
also be subject to additional review to determine if they should be
deemed to be Illiquid Securities.
First, NSCC is proposing to revise the definition of Illiquid
Security to identify securities issued by an entity with a micro-
capitalization, which can be a characteristic of illiquidity. For
purposes of this criterion, NSCC would calculate the product of the
outstanding shares and market price on a daily basis for each issuance.
Each month, NSCC would use the average of those calculations over the
prior month to determine market capitalization. If the average for a
particular security is below a threshold determined by NSCC from time
to time, the security would be considered micro-capitalization.
Initially, NSCC would define micro-capitalization as capitalization of
less than $300 million. Securities with a capitalization below $300
million and which are considered micro-capitalization tend to exhibit
illiquid characteristics such as limited public information and lower
trading volumes. NSCC may update the micro-capitalization threshold
from time to time as announced by an important notice to the Members.
Changes to the threshold would be subject to NSCC's model risk
governance procedures set forth in the Model Risk Management
Framework.\33\
---------------------------------------------------------------------------
\33\ See supra note 25.
---------------------------------------------------------------------------
If the average market capitalization of a security is considered
micro-capitalization or if the security is an ADR, then the security
would be subject to an additional illiquidity ratio test described
below to determine if it is an Illiquid Security. NSCC believes it is
appropriate to subject a security to the illiquidity ratio test if a
security is considered within the range of micro-capitalization because
the capitalization of a security could be an indicator of the lack of
liquidity of a security. In addition, for ADRs, the market
capitalization of the ADR may be difficult to calculate because each
ADR often converts to different number of shares of a local security.
As a result, NSCC has decided to subject all ADRs to the illiquidity
ratio test to determine if it is an Illiquid Security. As noted
above,\34\ ETPs and ADRs would be excluded from the pool of securities
that are used to calculate the illiquidity ratio threshold. However,
ETPs that are considered micro-capitalization and ADRs would be subject
to the illiquidity ratio test to determine if they are Illiquid
Securities.
---------------------------------------------------------------------------
\34\ See supra note 21.
---------------------------------------------------------------------------
If a security is considered within the range of micro-
capitalization or if the security is an ADR, it would be subject to
additional illiquidity ratio test that would include the application of
an ``illiquidity ratio'' to determine if the security should be deemed
an Illiquid Security. The illiquidity ratio of a security on any day
would be equal to (i) the security's price return on such day (based on
the natural logarithm of the ratio between the closing price of the
stock on such day to the closing price of the stock on the prior
trading day) divided by (ii) the average daily trading amount \35\ of
such security over the prior 20 business days.\36\ The illiquidity
ratio for each security that is subject to this illiquidity ratio test
would be determined monthly.
---------------------------------------------------------------------------
\35\ Supra note 26.
\36\ For example, assuming Stock A has a closing price of $10 on
day 1, and a closing price of $11 on day 2, then the ``price
return'' as of day 2 would be abs(log(11/10)) = 0.09531018. Assuming
the average daily trading amount of the stock over the prior 20
business days is $1,100,000, the daily ``illiquidity ratio'' for
Stock A on day 2 is 0.09531018 divided by 1,100,000 x 10[supcaret]6
= 0.0866.
---------------------------------------------------------------------------
A security that is subject to the illiquidity ratio test would only
be deemed an Illiquid Security if the calculated median illiquidity
ratio of the prior six months exceeds a threshold to be determined by
NSCC on a monthly basis based on the 99th percentile of the illiquidity
ratio of non-micro-capitalization common stocks over the prior six
months.\37\ If the calculated median illiquidity ratio of a security
did not exceed such threshold it would not be deemed an Illiquid
Security and would be subject to the VaR Charge. NSCC believes the
illiquidity ratio would provide it with a reliable measurement of a
security's liquidity because NSCC would use the absolute value of the
daily return-to-volume ratio to capture price impact. Given the same
dollar amount of trading activity, higher price impact typically
indicates less liquidity.
---------------------------------------------------------------------------
\37\ See supra note 21.
---------------------------------------------------------------------------
Second, NSCC would include in the Illiquid Security definition
securities that are subject to the rules of a specified securities
exchange, but, as determined on a monthly basis, have fewer than 31
business days of trading history over the past 153 business days on
such exchange. NSCC has historically used this time period to identify
IPOs which tend to exhibit illiquid characteristics due to their
limited trading history.\38\
---------------------------------------------------------------------------
\38\ NSCC has observed that the use of the metric, 31 business
days of trading over the past 153 business days, has been useful in
identifying securities, such as IPOs, that exhibit illiquid
characteristics based on their limited trading history. As such,
NSCC would use this metric in the definition of Illiquid Security to
ensure that these securities, including IPOs, are identified as
Illiquid Securities.
---------------------------------------------------------------------------
In order to implement these proposed changes, NSCC would include
these additional criteria in the revised definition of ``Illiquid
Security'' in Rule 1 of the Rules.
[[Page 17915]]
(iii) Proposed Enhancement to the Volatility Component Applicable to
Illiquid Securities and UITs
NSCC is also proposing to enhance the calculation of the haircut-
based volatility component for Illiquid Securities and UITs. As
described above, Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of
Procedure XV currently provide that NSCC has the discretion to exclude
from the VaR Charge Net Unsettled Positions in classes of securities
whose volatility is (1) less amenable to statistical analysis, or (2)
amenable to generally accepted statistical analysis only in a complex
manner, and permits NSCC to instead calculate the volatility charge for
Net Unsettled Positions in these securities as a haircut-based
charge.\39\
---------------------------------------------------------------------------
\39\ See Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of
Procedure XV, supra note 4.
---------------------------------------------------------------------------
Pursuant to this authority, NSCC calculates the volatility charge
for IPOs by multiplying the absolute value of the Net Unsettled
Position by a fixed 15%, and calculates the volatility charge for all
other Illiquid Securities (as currently defined) and sub-penny
securities by multiplying the absolute value \40\ of the Net Unsettled
Position by a fixed 20%. Net Unsettled Positions in UITs are subject to
the same haircut-based volatility charge as other securities whose
volatility is amenable to generally accepted statistical analysis only
in a complex manner. Today, NSCC generally does not adjust the
applicable haircut-based volatility charge, which is a percent that is
no less than 2%, pursuant to Procedure XV.
---------------------------------------------------------------------------
\40\ For purposes of the calculating the absolute value, the
share price of each sub-penny security is rounded up to one cent. If
a transaction in any security with a share price below one cent is
entered into NSCC's Continuous Net Settlement system or Balance
Order Accounting Operation, NSCC rounds up the price of the security
to one cent.
---------------------------------------------------------------------------
Based on backtesting results, NSCC has observed that market price
movements are correlated to a security's market price. Therefore, NSCC
believes it would be able to calculate a haircut-based volatility
charge that more appropriately addresses the risks presented by a Net
Unsettled Position if NSCC considers a security's price level or risk
profile when determining the haircut percentage to be used in that
calculation. As described below, NSCC is proposing to enhance the
calculation of the haircut-based volatility component for Illiquid
Securities and UITs. In order to implement the changes described below,
NSCC would revise Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of
Procedure XV by including new subsections (A)(I) and (II) and (B)(I)
and (II) relating to such securities.
a. Enhancing the Volatility Charge for Illiquid Securities
First, NSCC is proposing to enhance the haircut-based volatility
charge for Illiquid Securities. The applicable percent would be
determined at least annually \41\ as the highest of (1) 10%, (2) a
percent benchmarked to be sufficient to cover 99.5th percentile of the
historical 3-day return of each group of Illiquid Securities \42\ in
each Member's portfolio and (3) a percent benchmarked to be sufficient
to cover 99th percentile of the historical 3-day return of each group
in each Member's portfolio after incorporating a fixed transaction
cost.\43\ The applicable percent, and the determination of how often
the applicable percent is determined if more often than annually, would
be subject to NSCC's model risk management governance procedures set
forth in the Model Risk Management Framework.\44\ The look-back period
for this calibration would be no less than five years and would
initially be five years to be consistent with the historical data set
used in model development. The look-back period may be adjusted by NSCC
as necessary consistent with the model risk management practices
adopted by NSCC to respond to, for example, market events that impact
liquidity in the market and Member backtesting deficiencies.
Adjustments to the look-back period would be subject to NSCC's model
risk governance procedures set forth in the Model Risk Management
Framework.\45\ Generally, lower priced securities that may present NSCC
with a greater risk would be charged a haircut-based volatility charge
based on a higher percent.
---------------------------------------------------------------------------
\41\ A number of important considerations consistent with the
model risk management practices adopted by NSCC could prompt more
frequent haircut review, such as material deterioration of Members'
backtesting performance, market events or structure changes, and
model validation findings. See also Model Risk Management Framework,
supra note 25.
\42\ NSCC would group Illiquid Securities by price level, and
Illiquid Securities that are sub-penny securities would be
separately grouped by long or short position, as discussed in more
detail below.
\43\ The fixed transaction cost would be equal to one-half of
the estimated bid-ask spread and would be included in the simulated
liquidation gain/loss of the positions in each Member's portfolio.
\44\ See supra note 25.
\45\ See supra note 25.
---------------------------------------------------------------------------
NSCC would group Illiquid Securities by price level, and Illiquid
Securities that are sub-penny securities would be separately grouped by
long or short position, where each group is assigned a percent to be
used in the calculation of the haircut-based volatility charge. The
price level groupings would be subject to NSCC's model risk management
governance procedures set forth in the Model Risk Management
Framework.\46\ The proposal would allow NSCC to calculate this charge
based on the market price of Illiquid Securities. With respect to an
Illiquid Security that is not a sub-penny security, NSCC would
calculate one haircut-based volatility charge for short and long
positions. However, with respect to an Illiquid Security that is a sub-
penny security, NSCC would calculate the haircut-based volatility
charge for short positions and long positions separately. NSCC believes
the proposed change is appropriate for Illiquid Securities that are
sub-penny securities, particularly as short positions in sub-penny
securities could experience price movements of more than 100%. Further,
these securities are typically issued by companies with low market
capitalization, and may be susceptible to market manipulation,
enforcement actions, or private litigation. The proposed change would
allow NSCC to calculate a haircut-based volatility charge that accounts
for this risk of price movements. Although sub-penny securities would
be separately grouped by price level based on the sub-penny values,
since the price of sub-penny securities is rounded up to one cent when
it is entered into the Continuous Net Settlement System and Balance
Order Accounting Operation, the current market price of each sub-penny
security would be deemed to be one cent for purposes of applying the
haircut-based volatility charge.
---------------------------------------------------------------------------
\46\ See supra note 25.
---------------------------------------------------------------------------
By setting a floor of 10%, the proposal would allow NSCC to charge
an amount that has been adequate, based on historical observation, to
address risks presented by Net Unsettled Positions in these securities
and is consistent with the current methodology, which also sets a floor
for the haircut-based volatility charge of no less than 10%. In this
way, the haircut-based volatility charge would be calculated to allow
NSCC to collect margin at levels that reflect the risk presented by
these Net Unsettled Positions. Unlike the current methodology which
provides NSCC the discretion to apply a haircut, NSCC would not have
discretion as to whether to apply the haircut-based volatility charge
to Illiquid Securities and all Illiquid Securities would be subject to
the charge.
In order to implement this proposed change, NSCC would describe the
haircut-based volatility charge applicable to Illiquid Securities in
the
[[Page 17916]]
new Sections I.(A)(1)(a)(ii)(B)(I) and I.(A)(2)(a)(ii)(B)(I) of
Procedure XV.
b. Enhancing the Volatility Charge for UITs
NSCC is also proposing to revise the calculation of the haircut-
based volatility charge applied to UITs by reviewing the percent used
in this calculation at least annually, in order to apply a haircut-
based volatility charge to Net Unsettled Positions in UITs that is more
closely based on a measurement of the risk presented by Members'
portfolio composition and market conditions.
Currently, NSCC applies a haircut-based volatility charge that is a
fixed 2% to Net Unsettled Positions in securities whose volatility is
amenable to generally accepted statistical analysis (for example, the
methodology used to calculate the VaR Charge) only in a complex manner,
which include UITs. NSCC is proposing to continue to apply a haircut-
based volatility charge to Net Unsettled Positions in UITs that would
be no less than 2%, as currently provided for in Procedure XV, but
would re-calculate the applicable percent designated by NSCC at least
annually. The re-calculation of the applicable percent would be subject
to NSCC's model risk management governance procedures set forth in the
Model Risk Management Framework.\47\ Subject to this existing floor,
the applicable percent would be benchmarked to be sufficient to cover
99.5th percentile of the historical 3-day return of UITs in each
Member's portfolio, with a lookback period of no less than five years.
Unlike the current methodology which provides NSCC the discretion to
apply a haircut, NSCC would not have discretion as to whether to apply
the haircut-based volatility charge to UITs and all UITs would be
subject to the charge.
---------------------------------------------------------------------------
\47\ See supra note 25.
---------------------------------------------------------------------------
In order to implement this proposed change, NSCC would describe the
haircut-based volatility charge applicable to UITs in the new Sections
I.(A)(1)(a)(ii)(B)(II) and I.(A)(2)(a)(ii)(B)(II) of Procedure XV.
c. Enhancing Existing Language for Volatility Charge
NSCC is also proposing to re-arrange the existing language relating
to securities whose volatility is (1) less amenable to statistical
analysis, or (2) amenable to generally accepted statistical analysis
only in a complex manner, to clarify the language and make it more
transparent. NSCC would move the description of securities whose
volatility is less amenable to statistical analysis to new Sections
I.(A)(1)(a)(ii)(A)(I) and I.(A)(2)(a)(ii)(A)(I) of Procedure XV and
move the description of securities whose volatility is amenable to
generally accepted statistical analysis only in a complex manner to new
Sections I.(A)(1)(a)(ii)(A)(II) and I.(A)(2)(a)(ii)(A)(II). NSCC would
indicate that securities that are Illiquid Securities or UITs would not
be subject to these general categories. NSCC would also remove the
phrase ``such as OTC Bulletin Board or Pink Sheet issues or issues
trading below a designated dollar threshold (e.g., five dollars)''
which was intended as an example of securities whose volatility is less
amenable to statistical analysis because NSCC does not believe that the
example adequately describes all of the securities that are less
amenable to statistical analysis and may be misleading. In addition,
securities in the example would include securities that are Illiquid
Securities and that would no longer be subject to this general
category. In addition, NSCC is proposing to remove the phrase ``other
than corporate and municipal bonds,'' which qualifies securities
amenable to generally accepted statistical analysis only in a complex
manner, because the treatment of corporate and municipal bonds would be
clarified as set forth in subsection (v) below.
NSCC believes that the new defined term Illiquid Security would
identify all securities for which a haircut is currently applied
because such securities are less amenable to statistical analysis
pursuant to Sections I.(A)(1)(a)(ii)(x) and I.(A)(2)(a)(ii)(x) of
Procedure XV.\48\ The haircut for Illiquid Securities upon
implementation of the rule change would be calculated pursuant to the
new category for Illiquid Securities under Sections
I.(A)(1)(a)(ii)(B)(I) and I.(A)(2)(a)(ii)(B)(I) of Procedure XV rather
than Sections I.(A)(1)(a)(ii)(A)(I) and I.(A)(2)(a)(ii)(A)(I) of
Procedure XV. NSCC believes that UITs are currently substantially all
of the securities for which a haircut is currently applied because such
securities are amenable to generally accepted statistical analysis only
in a complex manner pursuant to Sections I.(A)(1)(a)(ii)(y) and
I.(A)(2)(a)(ii)(y) of Procedure XV.\49\ The haircut for UITs upon
implementation of the rule change would be calculated pursuant to the
new category for UITs under Sections I.(A)(1)(a)(ii)(B)(II) and
I.(A)(2)(a)(ii)(B)(II) of Procedure XV rather than Sections
I.(A)(1)(a)(ii)(A)(II) and I.(A)(2)(a)(ii)(A)(II) of Procedure XV.
---------------------------------------------------------------------------
\48\ See Sections I.(A)(1)(a)(ii)(x) and I.(A)(2)(a)(ii)(x) of
Procedure XV, supra note 4.
\49\ See Sections I.(A)(1)(a)(ii)(y) and I.(A)(2)(a)(ii)(y) of
Procedure XV, supra note 4. Note that the haircuts for municipal and
corporate bonds which are also fixed-income securities that are
amenable to generally accepted statistical analysis only in a
complex manner are separately calculated pursuant to Sections
I.(A)(1)(a)(iii) and I.(A)(2)(a)(iii) of Procedure XV. See Sections
I.(A)(1)(a)(iii) and I.(A)(2)(a)(iii) of Procedure XV, supra note 4.
Examples of fixed income securities that may remain subject to
calculations under Sections I.(A)(1)(a)(ii)(A)(I) and
I.(A)(2)(a)(ii)(A)(I) of Procedure XV would include preferred stock
or other fixed income securities that are amenable to generally
accepted statistical analysis only in a complex manner other than
UITs or corporate or municipal bonds.
---------------------------------------------------------------------------
There are some types of securities that are amenable to generally
accepted statistical analysis only in a complex manner that would not
constitute UITs and for which a haircut would continue to be calculated
using the category for securities that are amenable to generally
accepted statistical analysis only in a complex manner upon
implementation of the rule change. NSCC believes that there are no
current types of securities for which the haircut would be calculated
using the general category for securities that are less amenable to
statistical analysis upon implementation of the rule change. NSCC,
however, may deem it necessary to calculate a haircut for securities
that fall within this existing category, if such securities do not fall
within the categories for Illiquid Securities, after assessing margin
suitability or future asset class reviews. Therefore, NSCC is proposing
to keep these two more general categories in the Rules revised as
contemplated above. As with these existing general categories
currently, NSCC would have the discretion to determine whether a
security fits within one of these categories. NSCC would follow its
existing risk management practices and procedures when determining
whether to apply a security that is not an Illiquid Security or a UIT
to one of these categories. Applying a new security to one of these
categories would be subject to NSCC's model risk management governance
procedures set forth in the Model Risk Management Framework.\50\
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\50\ See supra note 25.
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(iv) Proposal To Eliminate the Illiquid Charge
NSCC is proposing to eliminate the existing Illiquid Charge in
conjunction with the aforementioned enhancements. The Illiquid Charge
is currently imposed on Net Unsettled Positions in Illiquid Securities,
in addition to other applicable components of the Clearing Fund.
Because the current haircut-based volatility charge is a flat charge,
calculated as a percentage of the
[[Page 17917]]
absolute value of these Net Unsettled Positions, it may not currently
address the lack of liquidity and marketability that are characteristic
of Illiquid Securities. The Illiquid Charge is calculated and applied
to address these additional risks. Currently, due to the existing
definition of Illiquid Security, the Illiquid Charge has limited
applicability, and generally only applies to a small population of
securities that exhibit illiquid characteristics (i.e., over-the-
counter securities traded off-exchange).\51\
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\51\ Between November 2017 and November 2018, the Illiquid
Charge represented an average of approximately 1.5% of the total
Clearing Fund requirement.
---------------------------------------------------------------------------
However, NSCC believes the proposed enhancements would address the
risks presented by Net Unsettled Positions in Illiquid Securities more
adequately. As described above, the enhanced methodology for
identifying Illiquid Securities would enable NSCC to identify
additional securities that could pose credit exposure to NSCC. Further,
NSCC believes that the proposed methodology for calculating the
applicable haircut-based volatility charge would be more responsive to
the risks presented by Net Unsettled Positions in those securities
because it would be based on historical performance and would be
recalibrated more frequently. Therefore, NSCC is proposing to eliminate
the Illiquid Charge in connection with these proposed rule changes as
it would be no longer needed to address the risks presented by Illiquid
Securities.
In connection with this change, NSCC would also remove the
definition of ``Illiquid Position'' from Rule 1 of the Rules, as this
term is only used in connection with the Illiquid Charge.
In order to implement this proposed change, NSCC would amend Rule 1
of the Rules by removing the definition of ``Illiquid Position,'' and
NSCC would amend Procedure XV by removing references to the Illiquid
Charge in subsection (g) of Section I.(A)(1) and subsection (e) of
Section I.(A)(2) and removing subsection (h) of Section I.(A)(1) and
subsection (f) of Section I.(A)(2) where the Illiquid Charge is
currently described.
(v) Proposal To Enhance Language in Section I.(A) of Procedure XV
In addition to the enhancements described above, NSCC is proposing
to make the following changes to Section I.(A) of Procedure XV: (x) Add
language in subsections (1)(a)(ii) and (iii), and (2)(a)(ii) and (iii),
that indicates that Net Unsettled Positions in corporate and municipal
bonds are excluded from calculations in subsections (1)(a)(i) and (ii),
and (2)(a)(i) and (ii), respectively; and (y) add language in
subsections (1)(a)(ii) and (iv), and 2(a)(ii) and (iv), that indicates
that long Net Unsettled Positions in Family-Issued Securities are
excluded from calculations in subsections (1)(a)(i) and (ii), and
(2)(a)(i) and (ii), respectively. The current language indicates that
corporate and municipal bonds and long Net Unsettled Positions in
Family-Issued Securities are excluded from calculations in subsections
(1)(a)(i) and (2)(a)(i) but does not explicitly indicate that corporate
and municipal bonds and long Net Unsettled Positions in Family-Issued
Securities are excluded from (1)(a)(ii) and (2)(a)(ii). NSCC currently
applies a haircut for corporate and municipal bonds pursuant to
(1)(a)(iii) and (2)(a)(iii) and long Net Unsettled Positions in Family-
Issued Securities pursuant to subsections (1)(a)(iii) and (2)(a)(iii)
and does not apply a haircut for those securities pursuant to
subsections (1)(a)(ii) or (2)(a)(ii).\52\ The proposed changes are
intended to improve Members' transparency into the treatment of Net
Unsettled Positions in corporate and municipal bonds and long Net
Unsettled Positions in Family-Issued Securities in Section I.(A) of
Procedure XV and would not change NSCC's methodology with respect to
corporate and municipal bonds or long Net Unsettled Positions in
Family-Issued Securities.
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\52\ As discussed above, currently, short Net Unsettled
Positions in Family-Issued Securities whose volatility is less
amenable to statistical analysis are subject to the haircut set
forth in Sections I.(A)(1)(a)(ii) and I.(A)(2)(a)(ii) of Procedure
XV. In addition, short Net Unsettled Positions in Family-Issued
Securities that are Illiquid Positions are currently subject to the
Illiquid Charge.
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2. Statutory Basis
NSCC believes that the proposed changes described above are
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a registered clearing agency. In
particular, NSCC believes that the proposed changes are consistent with
Section 17A(b)(3)(F) of the Act,\53\ and Rules 17Ad-22(e)(4)(i),
(e)(6)(i), and (e)(6)(v), each promulgated under the Act,\54\ for the
reasons described below.
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\53\ 15 U.S.C. 78q-1(b)(3)(F).
\54\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(v).
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Section 17A(b)(3)(F) of the Act \55\ requires that the rules of
NSCC be designed to, among other things, assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible. NSCC believes the
proposed changes are designed to assure the safeguarding of securities
and funds which are in its custody or control or for which it is
responsible because they are designed to enable NSCC to better limit
its exposure to Members in the event of a Member default, as described
below.
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\55\ 15 U.S.C. 78q-1(b)(3)(F).
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First, NSCC is proposing to enhance the definition of Illiquid
Security by (i) enhancing an existing criterion used in this definition
relating to whether a security is subject to the rules of a national
securities exchange by specifying that NSCC would rely on a list of
specified securities exchanges that includes exchanges that have
established listing services and are covered by industry pricing and
data vendors, (ii) deleting references to OTC Link and OTC Bulletin
Board and (iii) adding new criteria it would use to assess the risks a
security may present to NSCC due to its illiquid characteristics based
on the market capitalization of the issuer of the security and the
trading history of the security. The enhancements to the existing
criterion relating to whether a security is subject to the rules of a
national securities exchange would provide that NSCC would utilize a
process that identifies securities listed on national securities
exchanges that have established listing services and are covered by
industry pricing and data vendors and as a result that list securities
that are less likely to exhibit illiquid characteristics. Therefore,
NSCC, by identifying which securities are listed on these exchanges,
would enhance its ability to determine securities that exhibit
illiquidity characteristics. In addition, the enhancements would
improve Members' understanding of the analysis by ensuring that the
Members better understand the process used by NSCC for defining
Illiquid Securities based on whether a security is subject to the rules
of a specified securities exchange. The references to OTC Link and OTC
Bulletin Board would be removed because following the enhancements made
pursuant to this rule change, the definition as revised pursuant to
this rule change would capture securities listed on the OTC Bulletin
Board and OTC Link and the reference to such platforms would be
unnecessary.
The proposed additional criteria are designed to capture additional
risk presented by securities that are subject to the rules of a
specified securities exchange and exhibit illiquid characteristics
based on the capitalization of the issuer or the trading history. NSCC
believes that the new
[[Page 17918]]
criteria would enable NSCC to better limit its exposure to Members by
applying a volatility component that is a more appropriate measure of
volatility for Net Unsettled Positions in these securities exhibiting
illiquid characteristics. Specifically, NSCC has observed that
securities that are on a specified securities exchange but that have
limited trading, such as IPOs, or that are considered micro-
capitalization also exhibit illiquid characteristics. Finally, due to
the potential difficulty in determining market capitalization
accurately with respect to ADRs, NSCC would add ADRs to the definition
of Illiquid Security so that they undergo the same review as if the
ADRs were considered micro-capitalization. As such, NSCC believes that
adding these criteria to the definition of Illiquid Security would
provide a better and more accurate measure of volatility of illiquid
securities.
Second, NSCC proposes enhancements to the haircut-based volatility
charge for Illiquid Securities and UITs to allow NSCC to base this
charge on these securities' price level and risk profile. In this way,
the haircut-based volatility charge for Net Unsettled Positions in
these securities would be calculated to enable NSCC to collect margin
at levels that better reflect the risk presented by these Net Unsettled
Positions and would help NSCC limit its exposures to Members. As an
example, a recent impact study indicated that under the current
methodology short positions in sub-penny securities and securities
priced between one cent and one dollar exhibited the lowest average
backtesting coverage percentages with 96.2% during the study period,
whereas using the proposed methodology average backtesting coverage
percentage for such securities would have increased to 99.5% over the
study period.
Third, NSCC believes that the proposed clarifications to the
language relating to securities whose volatility is (i) less amenable
to statistical analysis or (2) amenable to generally accepted
statistical analysis only in a complex manner would improve Members'
understanding of the current analysis by ensuring that the Members
better understand the process used by NSCC for these categories by
adding clarity and transparency. In addition, by adding that such
categories would not be used for securities that are not Illiquid
Securities or UITs would allow Members to understand that Illiquid
Securities and UITs would be subject to the new sections specific to
those securities.
Fourth, NSCC believes that following the proposed changes, the
Illiquid Charge would no longer be needed to address the credit
exposures presented by Net Unsettled Positions in Illiquid Securities
because such risks would be addressed by of the proposed haircut-based
volatility enhancements.
Finally, NSCC believes that the proposed changes to the language in
Section I.(A) of Procedure XV relating to Net Unsettled Positions in
corporate and municipal bonds and long Net Unsettled Positions in
Family-Issued Securities would improve Members' transparency into the
treatment of Net Unsettled Positions in corporate and municipal bonds
and long Net Unsettled Positions in Family-Issued Securities.
The Clearing Fund is composed of Members' Required Fund Deposits
which include the volatility component, and is a key tool that NSCC
uses to mitigate potential losses to NSCC associated with liquidating a
Member's portfolio in the event of Member default. The changes relating
to (a) enhancing the existing criterion for determining an Illiquid
Security, (b) clarifying and enhancing the language relating to
securities whose volatility is (i) less amenable to statistical
analysis or (ii) amenable to generally accepted statistical analysis
only in a complex manner and (c) changing the language in Section I.(A)
of Procedure XV relating to Net Unsettled Positions in corporate and
municipal bonds and long Net Unsettled Positions in Family-Issued
Securities, would enhance clarity and transparency for Members with
respect to the volatility component allowing Members to have a better
understanding of the Rules. Having clear and accurate Rules would help
Members to better understand their rights and obligations regarding
NSCC's clearance and settlement services. NSCC believes that when
Members better understand their rights and obligations regarding NSCC's
services, they can act in accordance with the Rules. NSCC believes that
better enabling Members to comply with the Rules would promote the
prompt and accurate clearance and settlement of securities transactions
by NSCC consistent with the requirements of the Act, in particular
Section 17A(b)(3)(F) of the Act.\56\
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\56\ Id.
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Each of the proposed changes listed above would improve the
methodology relating to the volatility component enabling NSCC to
better limit its exposure to Members such that, in the event of Member
default, NSCC's operations would not be disrupted and non-defaulting
Members would not be exposed to losses they cannot anticipate or
control. In this way, the proposed rules are designed to assure the
safeguarding of securities and funds which are in the custody or
control of NSCC or for which it is responsible and therefore consistent
with Section 17A(b)(3)(F) of the Act.\57\
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\57\ Id.
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Rule 17Ad-22(e)(4)(i) under the Act \58\ requires, in part, that
NSCC establish, implement, maintain and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes, including
by maintaining sufficient financial resources to cover its credit
exposure to each participant fully with a high degree of confidence.
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\58\ 17 CFR 240.17Ad-22(e)(4)(i).
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As described above, NSCC believes that the proposed changes would
enable it to better identify, measure, monitor, and, through the
collection of Members' Required Fund Deposits, manage its credit
exposures to Members by maintaining sufficient resources to cover those
credit exposures fully with a high degree of confidence. More
specifically, the proposed changes to the methodology for identifying
Illiquid Securities would allow NSCC to better identify securities that
may present credit exposures, for purposes of applying an appropriate
margin charge. The proposed enhancements to the volatility charge
applicable to Illiquid Securities and UITs would provide NSCC with a
more effective measure of the risks that may be presented to NSCC by
positions in the securities. Specifically, the proposal to base the
calculation of the haircut-based volatility charge applied to positions
in Illiquid Securities and UITs on those securities' price level and
risk profile would enable NSCC to manage its credit exposures by
allowing NSCC to collect and maintain sufficient resources to cover
those credit exposures fully with a high degree of confidence. As an
example, a recent impact study indicated that under the current
methodology short positions in sub-penny securities and securities
priced between one cent and one dollar exhibited the lowest average
backtesting coverage percentages with 96.2% during the study period,
whereas using the proposed methodology average backtesting coverage
percentage for such securities would have increased to 99.5% over the
study period. NSCC also believes that with the proposed changes NSCC
could remove the Illiquid Charge
[[Page 17919]]
from the Clearing Fund formula because the proposed changes would
provide NSCC with a more effective measure of risks related to Net
Unsettled Positions in Illiquid Securities. As such, the proposed
enhancements to the calculation of the volatility component would
permit NSCC to more effectively identify, measure, monitor and manage
its exposures to risk, and would enable it to better limit its exposure
to potential losses from Member default.
Therefore, NSCC believes that the proposal would enhance NSCC's
ability to effectively identify, measure and monitor its credit
exposures and would enhance its ability to maintain sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence. As such, NSCC believes the
proposed changes are consistent with Rule 17Ad-22(e)(4)(i) under the
Act.\59\
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\59\ Id.
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Rule 17Ad-22(e)(6)(i) under the Act \60\ requires, in part, that
NSCC establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.
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\60\ 17 CFR 240.17Ad-22(e)(6)(i).
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The Required Fund Deposits are made up of risk-based components (as
margin) that are calculated and assessed daily to limit NSCC's credit
exposures to Members. NSCC is proposing changes that are designed to
more effectively address risk characteristics of Net Unsettled
Positions in Illiquid Securities. NSCC believes that these changes
would enable NSCC to produce margin levels that are more commensurate
with the particular risk attributes of these securities, including the
risk of increased transaction and market costs to NSCC to liquidate or
hedge due to lack of liquidity or marketability of such positions.
For example, by enhancing the methodology for Illiquid Securities
through an additional review of market capitalization of a security and
the use of an illiquidity ratio, NSCC believes that the proposed change
would allow NSCC to better identify those securities that may exhibit
illiquid characteristics. The proposed changes to the haircut-based
methodology to base the calculation on the price level and risk profile
of the applicable security, rather than a static percent, would, NSCC
believes, enable NSCC to more effectively measure the risks that are
particular to Illiquid Securities and UITs. Backtesting results
indicate that by calculating a haircut-based volatility charge that
addresses the risks presented by a security's price level or risk
profile, the proposed methodology would result in a volatility charge
that more appropriately addresses the risk of these securities.
These proposed changes are designed to assist NSCC in maintaining a
risk-based margin system that considers, and produces margin levels
commensurate with, the risks and particular attributes of portfolios
that exhibit illiquid risk attributes. Therefore, NSCC believes the
proposed change is consistent with Rule 17Ad-22(e)(6)(i) under the
Act.\61\
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\61\ Id.
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Rule 17Ad-22(e)(6)(v) under the Act \62\ requires, in part, that
NSCC establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, uses an appropriate method for measuring credit exposure that
accounts for relevant product risk factors and portfolio effects across
products. NSCC is proposing to eliminate the Illiquid Charge because,
NSCC believes, the other proposed changes would provide NSCC with a
more effective measure of the risks presented by Illiquid Securities.
Eliminating this charge would enable NSCC to remove what would become,
with the implementation of the other proposed changes, an unnecessary
component from the Clearing Fund calculation, and would help NSCC to
rely on a more appropriate method of measuring its exposures to this
risk. Therefore, NSCC believes the proposed change is consistent with
Rule 17Ad-22(e)(6)(v) under the Act.\63\
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\62\ 17 CFR 240.17Ad-22(e)(6)(v).
\63\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
NSCC believes that the proposed changes to enhance its risk
management of Illiquid Securities could have an impact on competition.
Specifically, NSCC believes that the proposed changes could burden
competition because they would result in larger Required Fund Deposit
amounts for Members when the enhancements result in a haircut-based
volatility component that is greater than the amount calculated
pursuant to the current methodology. Impact studies indicate that the
proposed changes would have resulted in an approximate 2.6% increase on
average of NSCC's daily Clearing Fund had the proposed changes been in
place over the period from November 2017 to October 2018.
When the proposal results in a larger volatility component, the
proposed changes could burden competition for Members that have lower
operating margins or higher costs of capital compared to other Members.
Impact studies indicate that Members with higher percentages of
Illiquid Securities in their portfolio, particularly penny or sub-penny
securities, are more likely to be impacted by the proposed changes.
However, the increase in Required Fund Deposit would be in direct
relation to the specific risks presented by each Members' Net Unsettled
Positions, and each Member's Required Fund Deposit would continue to be
calculated with the same parameters and at the same confidence level
for each Member. Therefore, Members that present similar Net Unsettled
Positions, regardless of the type of Member, would have similar impacts
on their Required Fund Deposit amounts. As such, NSCC does not believe
that any burden on competition imposed by the proposed changes 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 risks and meet the
requirements of the Act, 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 to margining Illiquid Securities
and UITs would be necessary in furtherance of the Act, specifically
Section 17A(b)(3)(F) of the Act,\64\ because, as described above, the
Rules must be designed to assure the safeguarding of securities and
funds that are in NSCC's custody or control or which it is responsible.
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\64\ 15 U.S.C. 78q-1(b)(3)(F).
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More specifically, NSCC believes these proposed changes are
necessary to support NSCC's compliance with Rules 17Ad-22(e)(4)(i) and
Rule 17Ad-22(e)(6)(i) and (v) under the Act,\65\ 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
[[Page 17920]]
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.
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\65\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), (e)(6)(v).
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As described above, NSCC believes implementing the proposed
enhancements to its methodology for identifying Illiquid Securities and
the calculation of the applicable volatility charge would improve the
risk-based methodology that NSCC employs to measure risks related to
securities that exhibit illiquid characteristics. The proposed change
would introduce additional criteria for defining Illiquid Securities to
improve NSCC's methodology for identifying securities that exhibit
illiquid characteristics. The proposed change would also enhance the
calculation of the applicable volatility component to address the
unique risks presented by Members' Net Unsettled Positions in these
securities, regardless of Member type, as described above. Therefore,
NSCC believes that these proposed changes would better limit NSCC's
credit exposures to Members, consistent with the requirements of Rules
17Ad-22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) and (v) under the Act.
NSCC also believes that the above described burden on competition
that could be created by the proposed changes would be appropriate in
furtherance of the Act because such changes have been appropriately
designed to assure the safeguarding of securities and funds which are
in the custody or control of NSCC or for which it is responsible, as
described in detail above. The proposal would enable NSCC to produce
margin levels more commensurate with the risks and particular
attributes of each Member's portfolio. Specifically, the proposal to
enhance the methodology for identifying Illiquid Securities and the
calculation of the haircut-based volatility component applicable to
these securities and UITs would improve the risk-based margining
methodology that NSCC employs to set margin requirements and better
limit NSCC's credit exposures to its Members. Impact studies indicate
that the proposed methodology, by calculating a haircut-based
volatility charge that addresses the risks presented by a security's
price level or risk profile, would result in backtesting coverage that
more appropriately addresses the risk of these securities. Therefore,
because the proposed changes are designed to provide NSCC with a more
appropriate and complete measure of the risks presented by Members' Net
Unsettled Positions, NSCC believes the proposals are appropriately
designed to meet its risk management goals and its regulatory
obligations.
Therefore, as described above, NSCC believes the proposed changes
are necessary and appropriate in furtherance of NSCC's obligations
under the Act, specifically Section 17A(b)(3)(F) of the Act \66\ and
Rules 17Ad-22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) and (e)(6)(v) under
the Act.\67\
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\66\ 15 U.S.C. 78q-1(b)(3)(F).
\67\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), (e)(6)(v).
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Because the proposal to eliminate the Illiquid Charge would remove
this charge from the margining methodology as applied to all Members,
when applicable, NSCC does not believe the proposed change to eliminate
the Illiquid Charge would have any impact on competition. NSCC does not
believe that the proposed changes in Section I.(A) of Procedure XV
relating to securities whose volatility is less amenable to statistical
analysis, securities whose volatility is amenable to generally accepted
statistical analysis only in a complex manner, or to corporate and
municipal bonds and long Net Unsettled Positions in Family-Issued
Securities, would have any impact on competition as these changes would
just add clarity and transparency to the Rules and not affect Member's
rights and 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-2020-003 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-2020-003. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of NSCC and on DTCC's website
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal
[[Page 17921]]
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-2020-003 and should be
submitted on or before April 21, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\68\
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\68\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-06617 Filed 3-30-20; 8:45 am]
BILLING CODE 8011-01-P
