Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Advance Notice, as Modified by Amendment No. 1, To Introduce the Margin Liquidity Adjustment Charge and Include a Bid-Ask Risk Charge in the VaR Charge, 55332-55337 [2020-19656]
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Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89719; File No. SR–NSCC–
2020–804]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Advance Notice, as Modified by
Amendment No. 1, To Introduce the
Margin Liquidity Adjustment Charge
and Include a Bid-Ask Risk Charge in
the VaR Charge
September 1, 2020.
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
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) under the Securities
Exchange Act of 1934 (‘‘Act’’),2 notice is
hereby given that on July 30, 2020,
National Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the advance notice SR–NSCC–2020–
804. On August 13, 2020, NSCC filed
Amendment No. 1 to the advance
notice, to make clarifications and
corrections to the advance notice.3 The
advance notice, as modified by
Amendment No. 1 (hereinafter, the
‘‘Advance Notice’’), is described in
Items I, II and III below, which Items
have been prepared by the clearing
agency.4 The Commission is publishing
this notice to solicit comments on the
Advance Notice from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Advance
Notice
This Advance Notice consists of
modifications to NSCC’s Rules &
Procedures (‘‘Rules’’) to (1) introduce a
new component of the Clearing Fund,
the Margin Liquidity Adjustment
(‘‘MLA’’) charge, and (2) enhance the
calculation of the volatility component
1 12
U.S.C. 5465(e)(1).
CFR 240.19b–4(n)(1)(i).
3 Amendment No. 1 made clarifications and
corrections to the description of the advance notice
and Exhibits 3 and 5 of the filing, and these
clarifications and corrections have been
incorporated, as appropriate, into the description of
the advance notice in Item I below.
4 On July 30, 2020, NSCC filed this Advance
Notice as a proposed rule change (SR–NSCC–2020–
016) with the Commission pursuant to Section
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule
19b–4 thereunder, 17 CFR 240.19b–4. On August
13, 2020, NSCC filed Amendment No. 1 to the
proposed rule change to make similar clarifications
and corrections to the proposed rule change. A copy
of the proposed rule change, as modified by
Amendment No. 1, is available at https://
www.dtcc.com/legal/sec-rule-filings.aspx.
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2 17
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of the Clearing Fund formula that
utilizes a parametric Value-at-Risk
(‘‘VaR’’) model (defined for purposes of
this filing as the ‘‘VaR Charge,’’ and
described in more detail in Item II(B)(i)
below) by including a bid-ask spread
risk charge, as described in greater
detail below.5
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Advance Notice
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the Advance Notice and discussed any
comments it received on the Advance
Notice. 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 and B below, of the most
significant aspects of such statements.
(A) Clearing Agency’s Statement on
Comments on the Advance Notice
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.
(B) Advance Notice Filed Pursuant to
Section 806(e) of the Clearing
Supervision Act
Description of Proposed Change
NSCC is proposing to enhance its
Clearing Fund methodology by (1)
introducing a new component, the MLA
charge, which would be calculated to
address the risk presented to NSCC
when a Member’s portfolio contains
large Net Unsettled Positions 6 in a
particular group of securities with a
similar risk profile or in a particular
asset type (referred to as ‘‘asset
groups’’), and (2) enhancing the
calculation of the VaR Charge by
including a bid-ask spread risk charge,
as described in more detail below.7
(i) Overview of the Required Fund
Deposit and NSCC’s Clearing Fund
As part of its market risk management
strategy, NSCC manages its credit
5 Capitalized terms not defined herein are defined
in the Rules, available at https://dtcc.com/∼/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
6 ‘‘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. See Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules, id.
7 The results of a study of the potential impact of
adopting the proposed changes have been provided
to the Commission.
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exposure to Members by determining
the appropriate Required Fund Deposits
to the Clearing Fund and monitoring its
sufficiency, as provided for in the
Rules.8 The Required Fund Deposit
serves as each Member’s margin.
The objective of a Member’s Required
Fund Deposit is to mitigate potential
losses to NSCC associated with
liquidating a Member’s portfolio in the
event NSCC ceases to act for that
Member (hereinafter referred to as a
‘‘default’’).9 The aggregate of all
Members’ Required Fund Deposits
constitutes the Clearing Fund of NSCC.
NSCC would access its Clearing Fund
should a defaulting Member’s own
Required Fund Deposit be insufficient
to satisfy losses to NSCC caused by the
liquidation of that Member’s portfolio.
Pursuant to the Rules, each Member’s
Required Fund Deposit amount consists
of a number of applicable components,
each of which is calculated to address
specific risks faced by NSCC, as
identified within Procedure XV of the
Rules.10 The volatility component of
each Member’s Required Fund Deposit
is designed to measure market price
volatility and is calculated for Members’
Net Unsettled Positions. The volatility
component is designed to capture the
market price risk associated with each
Member’s portfolio at a 99th percentile
level of confidence. The VaR Charge is
the volatility component applicable to
most Net Unsettled Positions,11 and
usually comprises the largest portion of
a Member’s Required Fund Deposit.
Procedure XV of the Rules currently
provides that the VaR Charge shall be
calculated in accordance with a
generally accepted portfolio volatility
margin model utilizing assumptions
based on historical data as NSCC deems
reasonable and a volatility range that
NSCC deems appropriate.12
8 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 Rule 17Ad–22(e)(4) under
the Act, where these risks are referred to as ‘‘credit
risks.’’ 17 CFR 240.17Ad–22(e)(4).
9 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.
10 Supra note 4.
11 As described in Procedure XV, Section
I(A)(1)(a)(ii), (iii) and (iv), and Section I(A)(2)(a)(ii),
(iii) and (iv) of the Rules, Net Unsettled Positions
in certain securities are excluded from the VaR
Charge and instead charged a volatility component
that is calculated by multiplying the absolute value
of those Net Unsettled Positions by a percentage.
Supra note 4.
12 Procedure XV, Section I(A)(1)(a)(i) and Section
I(A)(2)(a)(i) of the Rules, supra note 4.
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NSCC regularly assesses market and
liquidity risks as such risks relate to its
margining methodologies to evaluate
whether margin levels are
commensurate with the particular risk
attributes of each relevant product,
portfolio, and market. The proposed
changes to include the MLA charge to
its Clearing Fund methodology and to
enhance the VaR Charge by including a
bid-ask spread risk charge, as described
below, are the result of NSCC’s regular
review of the effectiveness of its
margining methodology.
(ii) Overview of Liquidation Transaction
Costs and Proposed Changes
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Each of the proposed changes
addresses a similar, but separate, risk
that NSCC faces increased transaction
costs when it liquidates the Net
Unsettled Positions of a defaulted
Member due to the unique
characteristics of that Member’s
portfolio. The transaction costs to NSCC
to liquidate a defaulted Member’s
portfolio include both market impact
costs and fixed costs. Market impact
costs are the costs due to the
marketability of a security, and
generally increase when a portfolio
contains large Net Unsettled Positions
in a particular group of securities with
a similar risk profile or in a particular
asset type, as described more below.
Fixed costs are the costs that generally
do not fluctuate and may be caused by
the bid-ask spread of a particular
security. The bid-ask spread of a
security accounts for the difference
between the observed market price that
a buyer is willing to pay for that security
and the observed market price that a
seller is willing to sell that security.
The transaction cost to liquidate a
defaulted Member’s portfolio is
currently captured by the measurement
of market risk through the calculation of
the applicable volatility charge.13 The
proposed changes would supplement
and enhance the current measurement
of this market risk to address situations
where the characteristics of the
defaulted Member’s portfolio could
cause these costs to be higher than the
amount collected for the applicable
volatility charge.
13 The calculation of the VaR Charge and the
haircut-based volatility charge are described in
Sections I.(A)(1)(a) and I.(A)(2)(a) of Procedure XV
of the Rules. Supra note 4. The methodologies for
these calculations and how they are designed to
address risks faced by NSCC have been described
in recent proposed rule change and advance notice
filings. See Securities Exchange Act Release Nos.
82780 (February 26, 2018), 82 FR 9035 (March 2,
2018) (File No. SR–NSCC–2017–808); 82781
(February 26, 2018), 82 FR 9042 (March 2, 2018)
(File No. SR–NSCC–2017–020).
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First, as described in more detail
below, the MLA charge is designed to
address the market impact costs of
liquidating a defaulted Member’s
portfolio that may increase when that
portfolio includes large Net Unsettled
Positions in a particular group of
securities with a similar risk profile or
in a particular asset type. These
positions may be more difficult to
liquidate because a large number of
securities with similar risk profiles
could reduce the marketability of those
large Net Unsettled Positions, increasing
the market impact costs to NSCC. As
described below, the MLA charge would
supplement the applicable volatility
charge.
Second, as described in more detail
below, the bid-ask spread risk charge
would address the risk that the
transaction costs of liquidating a
defaulted Member’s Net Unsettled
Positions may increase due to the fixed
costs related to the bid-ask spread. As
described below, this proposed change
would be incorporated into, and,
thereby, enhance the current measure of
transaction costs through, the VaR
Charge.
(iii) Proposed Margin Liquidity
Adjustment Charge
In order to address the risks of an
increased market impact cost presented
by portfolios that contain large Net
Unsettled Positions in the same asset
group, NSCC is proposing to introduce
a new component to the Clearing Fund
formula, the MLA charge.
As noted above, a Member portfolio
with large Net Unsettled Positions in a
particular group of securities with a
similar risk profile or in a particular
asset type may be more difficult to
liquidate in the market in the event the
Member defaults because a
concentration in that group of securities
or in an asset type could reduce the
marketability of those large Net
Unsettled Positions. Therefore, such
portfolios create a risk that NSCC may
face increased market impact cost to
liquidate that portfolio in the assumed
margin period of risk of three business
days at market prices.
The proposed MLA charge would be
calculated to address this increased
market impact cost by assessing
sufficient margin to mitigate this risk.
As described below, the proposed MLA
charge would be calculated for different
asset groups, and subgroups for the
equities asset group. Essentially, the
calculation is designed to compare the
total market value of a Net Unsettled
Position in a particular asset group or
subgroup, which NSCC would be
required to liquidate in the event of a
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Member default, to the available trading
volume of that asset group or equities
subgroup in the market.14 If the market
value of the Net Unsettled Position is
large, as compared to the available
trading volume of that asset group or
subgroup, then there is an increased risk
that NSCC would face additional market
impact costs in liquidating that position
in the event of a Member default.
Therefore, the proposed calculation
would provide NSCC with a
measurement of the possible increased
market impact cost that NSCC could
face when it liquidates a large Net
Unsettled Position in a particular asset
group or subgroup.
Rather than calculate the market
impact cost for each CUSIP, NSCC’s
MLA charge would estimate market
impact cost at the portfolio-level using
aggregated volume data. For example, as
described in greater detail below, the
calculation of market impact cost would
include a measurement of the gross
market value of the portfolio. Given the
vast number of CUSIPs processed by
NSCC, this approach is simpler and is
expected to result in more predicable
calculations of the MLA charge.
To calculate the MLA charge, NSCC
would categorize securities into separate
asset groups, which have similar risk
profiles—(1) equities 15 (excluding
equities defined as Illiquid Securities
pursuant to the Rules 16), (2) Illiquid
Securities, (3) unit investment trusts, or
UITs, (4) municipal bonds (including
municipal bond exchange-traded
products, or ‘‘ETPs’’), and (5) corporate
bonds (including corporate bond ETPs).
NSCC would then further segment the
equities asset group into the following
subgroups: (i) Micro-capitalization
equities, (ii) small capitalization
equities, (iii) medium capitalization
equities, (iv) large capitalization
equities, (v) treasury ETPs, and (vi) all
other ETPs.17
14 NSCC would determine average daily trading
volume by reviewing data that is made publicly
available by the Securities Industry and Financial
Markets Association (‘‘SIFMA’’), at https://
www.sifma.org/resources/archive/research/
statistics.
15 NSCC would exclude long positions in FamilyIssued Securities, as defined in Rule 1 (Definitions)
of the Rules, from the MLA charge. NSCC believes
the margin charge applicable to long Net Unsettled
Positions in Family-Issued Securities pursuant to
Sections I.(A)(1)(a)(iv) and (2)(a)(iv) of Procedure
XV of the Rules provides adequate mitigation of the
risks presented by those Net Unsettled Positions,
such that an MLA charge would not be triggered.
Supra note 4.
16 See Rule 1 (Definitions), supra note 4.
17 Initially, the market capitalization
categorizations would be: (i) Micro-capitalization
equities would be less than $300 million, (ii) small
capitalization equities would be equal to or greater
than $300 million and less than $2 billion, (iii)
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NSCC would first calculate a
measurement of market impact cost for
each asset group and equities subgroup
for which a Member has Net Unsettled
Positions in its portfolio. As described
above, the calculation of an MLA charge
is designed to measure the potential
additional market impact cost to NSCC
of closing out a large Net Unsettled
Position in that particular asset group or
equities subgroup.
Market Impact Cost Calculation for
Market Capitalization Subgroups of
Equities Asset Group
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The market impact cost for each Net
Unsettled Position in a market
capitalization subgroup of the equities
asset group would be calculated by
multiplying four components: (1) An
impact cost coefficient that is a multiple
of the one-day market volatility of that
subgroup and is designed to measure
impact costs, (2) the gross market value
of the Net Unsettled Position in that
subgroup, (3) the square root of the gross
market value of the Net Unsettled
Position in that subgroup in the
portfolio divided by an assumed
percentage of the average daily trading
volume of that subgroup, and (4) a
measurement of the concentration of the
Net Unsettled Position in that subgroup
in the portfolio (as described in greater
detail below).18
NSCC also represents that its
measurement of the concentration of the
Net Unsettled Position in the portfolio
would include aggregating the relative
weight of each CUSIP in that Net
Unsettled Position relative to the weight
of that CUSIP in the subgroup, such that
a portfolio with fewer positions in a
subgroup would have a higher measure
of concentration for that subgroup.19
medium capitalization equities would be equal to
or greater than $2 billion and less than $10 billion,
and (iv) large capitalization equities would be equal
to or greater than $10 billion. In determining the
range of these market capitalization categorizations,
NSCC would consult publications issued by sources
it deems appropriate. NSCC would review these
categories annually and any changes that NSCC
deems appropriate 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’’). See Securities Exchange Act Release
Nos. 81485 (August 25, 2017), 82 FR 41433 (August
31, 2017) (File No. SR–NSCC–2017–008); 84458
(October 19, 2018), 83 FR 53925 (October 25, 2018)
(File No. SR–NSCC–2018–009); 88911 (May 20,
2020), 85 FR 31828 (May 27, 2020) (File No. SR–
NSCC–2020–008).
18 See supra note 13.
19 The relative weight would be calculated by
dividing the absolute market value of a single
CUSIP in the Member’s portfolio by the total
absolute market value of that portfolio.
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Market Impact Cost Calculation for the
Other Asset Groups and Equities
Subgroups
The market impact cost for Net
Unsettled Positions in the municipal
bond, corporate bond, Illiquid Securities
and UIT asset groups and for Net
Unsettled Positions in the treasury ETP
and other ETP subgroups of the equities
asset group would be calculated by
multiplying three components: (1) An
impact cost coefficient that is a multiple
of the one-day market volatility of that
asset group or subgroup, (2) the gross
market value of the Net Unsettled
Position in that asset group or subgroup,
and (3) the square root of the gross
market value of the Net Unsettled
Position in that asset group or subgroup
in the portfolio divided by an assumed
percentage of the average daily trading
volume of that subgroup.20
Total MLA Charge Calculation for Each
Portfolio
For each asset group or subgroup,
NSCC would compare the calculated
market impact cost to a portion of the
volatility charge that is allocated to Net
Unsettled Positions in that asset group
or subgroup (as determined by Sections
I.(A)(1)(a) and I.(A)(2)(a) of Procedure
XV of the Rules).21 If the ratio of the
calculated market impact cost to the
applicable 1-day volatility charge is
greater than a threshold, an MLA charge
would be applied to that asset group or
subgroup.22 If the ratio of these two
amounts is equal to or less than this
threshold, an MLA charge would not be
applied to that asset group or subgroup.
The threshold would be based on an
estimate of the market impact cost that
is incorporated into the calculation of
the applicable 1-day volatility charge,
such that an MLA charge would apply
only when the calculated market impact
cost exceeds this threshold.
When applicable, an MLA charge for
each asset group or subgroup would be
20 See
supra note 13.
note 4. NSCC’s margining methodology
uses a three-day assumed period of risk. For
purposes of this calculation, NSCC would use a
portion of the applicable volatility charge that is
based on one-day assumed period of risk and
calculated by applying a simple square-root of time
scaling, referred to in this proposed rule change as
‘‘1-day volatility charge.’’ Any changes that NSCC
deems appropriate to this assumed period of risk
would be subject to NSCC’s model risk management
governance procedures set forth in the Model Risk
Management Framework. See supra note 16.
22 Initially, the threshold would be 0.4, because,
currently, approximately 40 percent of the 1-day
volatility charge addresses market impact costs.
NSCC would review this threshold from time to
time and any changes that NSCC deems appropriate
would be subject to NSCC’s model risk management
governance procedures set forth in the Model Risk
Management Framework. See id.
21 Supra
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calculated as a proportion of the
product of (1) the amount by which the
ratio of the calculated market impact
cost to the applicable 1-day volatility
charge exceeds the threshold, and (2)
the 1-day volatility charge allocated to
that asset group or subgroup.
For each Member portfolio, NSCC
would add the MLA charges for Net
Unsettled Positions in each of the
subgroups of the equities asset group to
determine an MLA charge for the Net
Unsettled Positions in the equities asset
group. NSCC would then add the MLA
charge for Net Unsettled Positions in the
equities asset group with each of the
MLA charges for Net Unsettled
Positions in the other asset groups to
determine a total MLA charge for a
Member.
The ratio of the calculated market
impact cost to the 1-day volatility
charge would also determine if NSCC
would apply a downward adjustment,
based on a scaling factor, to the total
MLA charge, and the size of any
adjustment. For Net Unsettled Positions
that have a higher ratio of calculated
market impact cost to the 1-day
volatility charge, NSCC would apply a
larger adjustment to the MLA charge by
assuming that it would liquidate that
position on a different timeframe than
the assumed margin period of risk of
three business days. For example, NSCC
may be able to mitigate potential losses
associated with liquidating a Member’s
portfolio by liquidating a Net Unsettled
Position with a larger volatility charge
over a longer timeframe. Therefore,
when applicable, NSCC would apply a
multiplier to the calculated MLA
charge. When the ratio of calculated
market impact cost to the 1-day
volatility charge is lower, the multiplier
would be one, and no adjustment would
be applied; as the ratio gets higher the
multiplier decreases and the MLA
charge is adjusted downward.
The final MLA charge would be
calculated daily and, when the charge is
applicable, as described above, would
be included as a component of
Members’ Required Fund Deposit.
Proposed Changes to NSCC Rules
The proposal described above would
be implemented into Procedure XV of
the NSCC Rules. Specifically, the
proposed changes to Procedure XV
would describe the calculation of the
MLA charge in a new subsection (i) of
Section I(A)(1) and a new subsection (g)
of Section I(A)(2).
These new subsections would first
identify each of the asset groups and
subgroups. The proposed new
subsections would then separately
describe the two calculations of market
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impact cost for these asset groups and
subgroups by identifying the
components of these calculations. The
new subsections would state that NSCC
would compare the calculated market
impact cost to a portion of that
Member’s volatility charge, to determine
if an MLA charge would be applied to
an asset group or subgroup. The new
subsections would then state that NSCC
would add each of the applicable MLA
charges calculated for each asset group
together. Finally, the new subsections
would state that NSCC may apply a
downward adjusting scaling factor to
result in a final MLA charge.
NSCC would also amend Section
I(B)(2) of Procedure VX, which
describes the Excess Capital Premium
charge, to add the MLA charge to the list
of Clearing Fund components that are
excluded from the calculation of the
Excess Capital Premium charge.23 The
Excess Capital Premium is imposed on
a Member when the Member’s Required
Fund Deposit exceeds its excess net
capital. NSCC believes that including
the MLA charge in the calculation of the
Excess Capital Premium could lead to
more frequent and unnecessary Excess
Capital Premium charges. This is not the
intended purpose of the Excess Capital
Premium charge and could place an
unnecessary burden on Members.
(iv) Proposed Bid-Ask Spread Risk
Charge
NSCC has identified potential risk
that its margining methodologies do not
account for the transaction costs related
to bid-ask spread in the market that
could be incurred when liquidating a
portfolio. Bid-ask spreads account for
the difference between the observed
market price that a buyer is willing to
pay for a security and the observed
market price that a seller is willing to
sell that security. Therefore, NSCC is
proposing to include a bid-ask spread
risk charge in the VaR Charge to address
this risk.
In order to calculate this charge,
NSCC would segment Member’s
portfolios into four bid-ask spread risk
classes: (i) Large and medium
capitalization equities, (ii) small
capitalization equities, (iii) micro
capitalization equities, and (iv) ETPs.24
Each risk class would be assigned a
specific bid-ask spread haircut rate in
the form of a basis point charge that
would be applied to the gross market
value in that particular risk class. The
applicable bid-ask spread risk charge
would be the product of the gross
23 See
Section I.(B)(2) of Procedure XV of the
Rules. Supra note 4.
24 See supra note 16.
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market value in a particular risk class in
the Member’s portfolio and the
applicable basis point charge. The bidask spread risk charge would be
calculated at the portfolio level, such
that NSCC would aggregate the bid-ask
spread risk charges of the applicable
risk classes for the Member’s portfolio.
NSCC proposes to review the haircut
rates annually based on either the
analysis of liquidation transaction costs
related to the bid-ask spread that is
conducted in connection with its annual
simulation of a Member default or
market data that is sourced from a thirdparty data vendor. Based on the
analyses from recent years’ simulation
exercises, NSCC does not anticipate that
these haircut rates would change
significantly year over year. NSCC may
also adjust the haircut rates following its
annual model validation review, to the
extent the results of that review indicate
the current haircut rates are not
adequate to address the risk presented
by transaction costs from a bid-ask
spread.25
The proposed initial haircuts are
based on the analysis from the most
recent annual default simulation and
market data sourced from a third-party
data vendor, and are listed in the table
below:
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after the later of the no objection to the
Advance Notice and approval of the
related proposed rule change 26 by the
Commission. NSCC would announce
the effective date of the proposed
changes by Important Notice posted to
its website.
Anticipated Effect on and Management
of Risk
NSCC believes that the proposed
changes to enhance the margining
methodology as described above would
enable NSCC to better limit its risk
exposures to Members arising out of
their Net Unsettled Positions.
As stated above, the proposed MLA
charge is designed to help limit NSCC’s
exposures to the risks presented by a
Member portfolio that contains large Net
Unsettled Positions in securities of the
same asset group, and would enhance
NSCC’s ability to address risks related to
liquidating such positions in the event
of a Member default. The proposed
MLA charge would allow NSCC to
collect sufficient financial resources to
cover its exposure that it may face
increased market impact costs in
liquidating Net Unsettled Positions that
is not captured by the applicable
volatility charge.
The proposal to enhance the VaR
Charge by including a bid-ask spread
Haircut
Class
risk charge is also designed to help limit
(bps)
NSCC’s exposures to the risks related to
Large and Medium Capitalizaincreased transaction costs due to the
tion Equities ..........................
5.0 bid-ask spread in the market that could
Small Capitalization Equities ....
12.3 be incurred when liquidating a
Micro Capitalization Equities ....
23.1 portfolio. Therefore, this proposed
ETPs .........................................
1.5
change would also help address NSCC’s
risks related to its ability to liquidate
Proposed Changes to NSCC Rules
such positions in the event of a Member
The proposal described above would
default.
be implemented into Procedure XV of
By providing NSCC with a more
the NSCC Rules. Specifically, NSCC
effective measurement of its exposures,
would amend subsection (a)(i)(I) of
the proposed changes would also
Sections I(A)(1) and I(A)(2) of Procedure mitigate risk for Members because
XV by stating that the calculations of the lowering the risk profile for NSCC
estimations of volatility described in
would in turn lower the risk exposure
these Sections shall include an
that Members may have with respect to
additional bid-ask spread risk charge
NSCC in its role as a central
measured by multiplying the gross
counterparty.
market value of each Net Unsettled
Consistency With Clearing Supervision
Position by a basis point charge. The
Act
proposed change to this subsection
would also state that the basis point
NSCC believes that the proposals are
charge would be based on four risk
consistent with the Clearing
classes and would identify those risk
Supervision Act, specifically with the
classes.
risk management objectives and
principles of Section 802(b), and with
(v) Implementation Timeframe
certain of the risk management
NSCC would implement the proposed standards adopted by the Commission
changes no later than 10 Business Days
pursuant to Section 805(a)(2), for the
reasons described below.27
25
All proposed changes to the haircuts would be
subject to NSCC’s model risk management
governance procedures set forth in the Model Risk
Management Framework. See id.
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26 Supra
27 12
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note 3.
U.S.C. 5464(a)(2) and (b)(1).
04SEN1
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(i) Consistency With Section 805(b) of
the Clearing Supervision Act
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, its stated
purpose is instructive: To mitigate
systemic risk in the financial system
and promote financial stability by,
among other things, promoting uniform
risk management standards for
systemically important financial market
utilities and strengthening the liquidity
of systemically important financial
market utilities.28
NSCC believes the proposals are
consistent with the objectives and
principles of these risk management
standards as described in Section 805(b)
of the Clearing Supervision Act and in
the Covered Clearing Agency Standards.
First, the proposal would include the
MLA charge as an additional component
to the Clearing Fund. As described
above, this new margin charge is
designed to address the market impact
costs of liquidating a defaulted
Member’s portfolio that may increase
when that portfolio includes large Net
Unsettled Positions in a particular group
of securities with a similar risk profile
or in a particular asset type. These
positions may be more difficult to
liquidate in the market because a
concentrating in that group of securities
or in an asset type could reduce the
marketability of those large Net
Unsettled Positions, increasing the
market impact costs to NSCC. The
proposed MLA charge would allow
NSCC to collect sufficient financial
resources to cover its exposure that it
may face increased market impact costs
in liquidating Net Unsettled Positions
that is not captured by the applicable
volatility charge.
Second, the proposed bid-ask spread
risk charge is designed to help limit
NSCC’s exposures to the risks related to
increased transaction costs due to the
bid-ask spread in the market that could
be incurred when liquidating a
portfolio. As stated above, this proposal
would also help address NSCC’s risks
related to its ability to liquidate such
positions in the event of a Member
default.
Therefore, because the proposals are
designed to enable NSCC to better limit
its exposure to Members in the event of
a Member default, NSCC believes they
are consistent with promoting robust
risk management. The proposals would
also strengthen the liquidity of NSCC by
requiring deposits to the Clearing Fund
that are calculated to address the
potential risks NSCC may face, which is
one of NSCC’s default liquidity
resources.
As a result, NSCC believes the
proposals would be consistent with the
objectives and principles of Section
805(b) of the Clearing Supervision Act,
which specify the promotion of robust
risk management, promotion of safety
and soundness, reduction of systemic
risks and support of the stability of the
broader financial system by, among
other things, strengthening the liquidity
of systemically important financial
market utilities, such as NSCC.
(ii) Consistency With Rule 17Ad–
22(e)(4)(i) and (6)(i) Under the Act
Section 805(a)(2) of the Clearing
Supervision Act authorizes the
Commission to prescribe risk
management standards for the payment,
clearing and settlement activities of
designated clearing entities, like NSCC,
and financial institutions engaged in
designated activities for which the
Commission is the supervisory agency
or the appropriate financial regulator.29
The Commission has accordingly
adopted risk management standards
under Section 805(a)(2) of the Clearing
Supervision Act 30 and Section 17A of
the Act (‘‘Covered Clearing Agency
Standards’’).31 The Covered Clearing
Agency Standards require covered
clearing agencies to establish,
implement, maintain, and enforce
written policies and procedures that are
reasonably designed to meet certain
minimum requirements for their
operations and risk management
practices on an ongoing basis.32
NSCC believes that the proposed
changes are consistent with Rules
17Ad–22(e)(4)(i) and (e)(6)(i) of the
Covered Clearing Agency Standards 33
for the reasons described below.
Rule 17Ad–22(e)(4)(i) under the Act
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.34
As described above, NSCC believes
that both of the proposed changes
would enable it to better identify,
29 12
31 17
U.S.C. 5464(b)(1).
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16:42 Sep 03, 2020
34 17
Jkt 250001
CFR 240.17Ad–22(e).
32 Id.
33 17
28 12
U.S.C. 5464(a)(2).
30 Id.
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CFR 240.17Ad–22(e)(4)(i).
Frm 00085
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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.
Specifically, NSCC believes that the
proposed MLA charge would effectively
mitigate the risks related to large Net
Unsettled Positions of securities in the
same asset group within a portfolio and
would address the potential increased
risks NSCC may face related to its
ability to liquidate such positions in the
event of a 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.35
Additionally, NSCC believes that the
proposed bid-ask spread risk charge
would enhance NSCC’s ability to
identify, measure, monitor and manage
its credit exposures to Members and
those exposures arising from its
payment, clearing, and settlement
processes because the proposed changes
would better ensure that NSCC
maintains sufficient financial resources
to cover its credit exposure to each
Member with a high degree of
confidence. NSCC believes that the
proposed change would enable NSCC to
more effectively identify, measure,
monitor and manage its exposures to
risks related to market price, and enable
it to better limit its exposure to potential
losses from Member defaults by
providing a more effective measure of
the risks related to market price. As
described above, due to the bid-ask
spread in the market, there is an
observable transaction cost to liquidate
a portfolio. The proposed bid-ask spread
risk charge is designed to manage the
risk related to this transaction cost in
the event a Member’s portfolio is
liquidated. As such, NSCC believes that
the proposed change would better
address the potential risks that NSCC
may face that are related to its ability
liquidate a Member’s Net Unsettled
Positions in the event of that firm’s
default, and thereby 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
35 Id.
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Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Notices
with a high degree of confidence. In this
way, NSCC believes this proposed
change is also consistent with Rule
17Ad–22(e)(4)(i) under the Act.36
Rule 17Ad–22(e)(6)(i) under the Act
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.37
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, including the VaR Charge.
NSCC’s proposed change to introduce
an MLA charge is designed to more
effectively address the risks presented
by large Net Unsettled Positions in the
same asset group. NSCC believes the
addition of the MLA charge would
enable NSCC to assess a more
appropriate level of margin that
accounts for these risks. This proposed
change is 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
contain large Net Unsettled Positions in
the same asset group and may be more
difficult to liquidate in the event of a
Member default. Therefore, NSCC
believes the proposed change is
consistent with Rule 17Ad–22(e)(6)(i)
under the Act.38
Furthermore, NSCC believes that
including the bid-ask spread risk charge
within the calculation of the final VaR
Charge would provide NSCC with a
better assessment of its risks related to
market price. This proposed change
would enable NSCC to assess a more
appropriate level of margin that
accounts for this risk at the portfolio
level. As such, each Member portfolio
would be subject to a risk-based
margining system that, at minimum,
considers, and produces margin levels
commensurate with, the risks and
particular attributes of each relevant
product, portfolio, and market,
consistent with Rule 17Ad–22(e)(6)(i)
under the Act.39
36 Id.
37 17
CFR 240.17Ad–22(e)(6)(i).
38 Id.
39 Id.
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III. Date of Effectiveness of the Advance
Notice, and Timing for Commission
Action
The proposed change may be
implemented if the Commission does
not object to the proposed change
within 60 days of the later of (i) the date
that the proposed change was filed with
the Commission or (ii) the date that any
additional information requested by the
Commission is received. The clearing
agency shall not implement the
proposed change if the Commission has
any objection to the proposed change.
The Commission may extend the
period for review by an additional 60
days if the proposed change raises novel
or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension. A proposed change may
be implemented in less than 60 days
from the date the advance notice is
filed, or the date further information
requested by the Commission is
received, if the Commission notifies the
clearing agency in writing that it does
not object to the proposed change and
authorizes the clearing agency to
implement the proposed change on an
earlier date, subject to any conditions
imposed by the Commission.
The clearing agency shall post notice
on its website of proposed changes that
are implemented.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
55337
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 Advance Notice that
are filed with the Commission, and all
written communications relating to the
Advance Notice between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of NSCC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–NSCC–
2020–804 and should be submitted on
or before September 21, 2020.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
IV. Solicitation of Comments
[FR Doc. 2020–19656 Filed 9–3–20; 8:45 am]
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the Advance Notice
is consistent with the Clearing
Supervision Act. Comments may be
submitted by any of the following
methods:
BILLING CODE 8011–01–P
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–2020–804 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–2020–804. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
PO 00000
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89722; File No. SR–
CboeBZX–2020–042]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change To Accommodate
Exchange Listing and Trading of
Options-Linked Securities
September 1, 2020.
On May 15, 2020, Cboe BZX
Exchange, Inc. (‘‘Exchange’’ or ‘‘BZX’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to amend BZX Rule 14.11(d) to
1 15
2 17
E:\FR\FM\04SEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
04SEN1
]]>Agencies
[Federal Register Volume 85, Number 173 (Friday, September 4, 2020)]
[Notices]
[Pages 55332-55337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19656]
[[Page 55332]]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89719; File No. SR-NSCC-2020-804]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Advance Notice, as Modified by
Amendment No. 1, To Introduce the Margin Liquidity Adjustment Charge
and Include a Bid-Ask Risk Charge in the VaR Charge
September 1, 2020.
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 (``Clearing
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on July
30, 2020, National Securities Clearing Corporation (``NSCC'') filed
with the Securities and Exchange Commission (``Commission'') the
advance notice SR-NSCC-2020-804. On August 13, 2020, NSCC filed
Amendment No. 1 to the advance notice, to make clarifications and
corrections to the advance notice.\3\ The advance notice, as modified
by Amendment No. 1 (hereinafter, the ``Advance Notice''), is described
in Items I, II and III below, which Items have been prepared by the
clearing agency.\4\ The Commission is publishing this notice to solicit
comments on the Advance Notice from interested persons.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ Amendment No. 1 made clarifications and corrections to the
description of the advance notice and Exhibits 3 and 5 of the
filing, and these clarifications and corrections have been
incorporated, as appropriate, into the description of the advance
notice in Item I below.
\4\ On July 30, 2020, NSCC filed this Advance Notice as a
proposed rule change (SR-NSCC-2020-016) with the Commission pursuant
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4
thereunder, 17 CFR 240.19b-4. On August 13, 2020, NSCC filed
Amendment No. 1 to the proposed rule change to make similar
clarifications and corrections to the proposed rule change. A copy
of the proposed rule change, as modified by Amendment No. 1, is
available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This Advance Notice consists of modifications to NSCC's Rules &
Procedures (``Rules'') to (1) introduce a new component of the Clearing
Fund, the Margin Liquidity Adjustment (``MLA'') charge, and (2) enhance
the calculation of the volatility component of the Clearing Fund
formula that utilizes a parametric Value-at-Risk (``VaR'') model
(defined for purposes of this filing as the ``VaR Charge,'' and
described in more detail in Item II(B)(i) below) by including a bid-ask
spread risk charge, as described in greater detail below.\5\
---------------------------------------------------------------------------
\5\ Capitalized terms not defined herein are defined in the
Rules, available at https://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the Advance Notice
and discussed any comments it received on the Advance Notice. 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 and B below, of the most significant aspects of such
statements.
(A) Clearing Agency's Statement on Comments on the Advance Notice
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.
(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing
Supervision Act
Description of Proposed Change
NSCC is proposing to enhance its Clearing Fund methodology by (1)
introducing a new component, the MLA charge, which would be calculated
to address the risk presented to NSCC when a Member's portfolio
contains large Net Unsettled Positions \6\ in a particular group of
securities with a similar risk profile or in a particular asset type
(referred to as ``asset groups''), and (2) enhancing the calculation of
the VaR Charge by including a bid-ask spread risk charge, as described
in more detail below.\7\
---------------------------------------------------------------------------
\6\ ``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. See Procedure XV (Clearing Fund Formula and
Other Matters) of the Rules, id.
\7\ The results of a study of the potential impact of adopting
the proposed changes have been provided to the Commission.
---------------------------------------------------------------------------
(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.\8\ The Required Fund Deposit serves as each
Member's margin.
---------------------------------------------------------------------------
\8\ 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 Rule 17Ad-22(e)(4)
under the Act, where these risks are referred to as ``credit
risks.'' 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------
The objective of a Member's Required Fund Deposit is to mitigate
potential losses to NSCC associated with liquidating a Member's
portfolio in the event NSCC ceases to act for that Member (hereinafter
referred to as a ``default'').\9\ The aggregate of all Members'
Required Fund Deposits constitutes the Clearing Fund of NSCC. NSCC
would access its Clearing Fund should a defaulting Member's own
Required Fund Deposit be insufficient to satisfy losses to NSCC caused
by the liquidation of that Member's portfolio.
---------------------------------------------------------------------------
\9\ 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 of the Rules.\10\ The volatility component of each
Member's Required Fund Deposit is designed to measure market price
volatility and is calculated for Members' Net Unsettled Positions. The
volatility component is designed to capture the market price risk
associated with each Member's portfolio at a 99th percentile level of
confidence. The VaR Charge is the volatility component applicable to
most Net Unsettled Positions,\11\ and usually comprises the largest
portion of a Member's Required Fund Deposit. Procedure XV of the Rules
currently provides that the VaR Charge shall be calculated in
accordance with a generally accepted portfolio volatility margin model
utilizing assumptions based on historical data as NSCC deems reasonable
and a volatility range that NSCC deems appropriate.\12\
---------------------------------------------------------------------------
\10\ Supra note 4.
\11\ As described in Procedure XV, Section I(A)(1)(a)(ii), (iii)
and (iv), and Section I(A)(2)(a)(ii), (iii) and (iv) of the Rules,
Net Unsettled Positions in certain securities are excluded from the
VaR Charge and instead charged a volatility component that is
calculated by multiplying the absolute value of those Net Unsettled
Positions by a percentage. Supra note 4.
\12\ Procedure XV, Section I(A)(1)(a)(i) and Section
I(A)(2)(a)(i) of the Rules, supra note 4.
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[[Page 55333]]
NSCC regularly assesses market and liquidity risks as such risks
relate to its margining methodologies to evaluate whether margin levels
are commensurate with the particular risk attributes of each relevant
product, portfolio, and market. The proposed changes to include the MLA
charge to its Clearing Fund methodology and to enhance the VaR Charge
by including a bid-ask spread risk charge, as described below, are the
result of NSCC's regular review of the effectiveness of its margining
methodology.
(ii) Overview of Liquidation Transaction Costs and Proposed Changes
Each of the proposed changes addresses a similar, but separate,
risk that NSCC faces increased transaction costs when it liquidates the
Net Unsettled Positions of a defaulted Member due to the unique
characteristics of that Member's portfolio. The transaction costs to
NSCC to liquidate a defaulted Member's portfolio include both market
impact costs and fixed costs. Market impact costs are the costs due to
the marketability of a security, and generally increase when a
portfolio contains large Net Unsettled Positions in a particular group
of securities with a similar risk profile or in a particular asset
type, as described more below. Fixed costs are the costs that generally
do not fluctuate and may be caused by the bid-ask spread of a
particular security. The bid-ask spread of a security accounts for the
difference between the observed market price that a buyer is willing to
pay for that security and the observed market price that a seller is
willing to sell that security.
The transaction cost to liquidate a defaulted Member's portfolio is
currently captured by the measurement of market risk through the
calculation of the applicable volatility charge.\13\ The proposed
changes would supplement and enhance the current measurement of this
market risk to address situations where the characteristics of the
defaulted Member's portfolio could cause these costs to be higher than
the amount collected for the applicable volatility charge.
---------------------------------------------------------------------------
\13\ The calculation of the VaR Charge and the haircut-based
volatility charge are described in Sections I.(A)(1)(a) and
I.(A)(2)(a) of Procedure XV of the Rules. Supra note 4. The
methodologies for these calculations and how they are designed to
address risks faced by NSCC have been described in recent proposed
rule change and advance notice filings. See Securities Exchange Act
Release Nos. 82780 (February 26, 2018), 82 FR 9035 (March 2, 2018)
(File No. SR-NSCC-2017-808); 82781 (February 26, 2018), 82 FR 9042
(March 2, 2018) (File No. SR-NSCC-2017-020).
---------------------------------------------------------------------------
First, as described in more detail below, the MLA charge is
designed to address the market impact costs of liquidating a defaulted
Member's portfolio that may increase when that portfolio includes large
Net Unsettled Positions in a particular group of securities with a
similar risk profile or in a particular asset type. These positions may
be more difficult to liquidate because a large number of securities
with similar risk profiles could reduce the marketability of those
large Net Unsettled Positions, increasing the market impact costs to
NSCC. As described below, the MLA charge would supplement the
applicable volatility charge.
Second, as described in more detail below, the bid-ask spread risk
charge would address the risk that the transaction costs of liquidating
a defaulted Member's Net Unsettled Positions may increase due to the
fixed costs related to the bid-ask spread. As described below, this
proposed change would be incorporated into, and, thereby, enhance the
current measure of transaction costs through, the VaR Charge.
(iii) Proposed Margin Liquidity Adjustment Charge
In order to address the risks of an increased market impact cost
presented by portfolios that contain large Net Unsettled Positions in
the same asset group, NSCC is proposing to introduce a new component to
the Clearing Fund formula, the MLA charge.
As noted above, a Member portfolio with large Net Unsettled
Positions in a particular group of securities with a similar risk
profile or in a particular asset type may be more difficult to
liquidate in the market in the event the Member defaults because a
concentration in that group of securities or in an asset type could
reduce the marketability of those large Net Unsettled Positions.
Therefore, such portfolios create a risk that NSCC may face increased
market impact cost to liquidate that portfolio in the assumed margin
period of risk of three business days at market prices.
The proposed MLA charge would be calculated to address this
increased market impact cost by assessing sufficient margin to mitigate
this risk. As described below, the proposed MLA charge would be
calculated for different asset groups, and subgroups for the equities
asset group. Essentially, the calculation is designed to compare the
total market value of a Net Unsettled Position in a particular asset
group or subgroup, which NSCC would be required to liquidate in the
event of a Member default, to the available trading volume of that
asset group or equities subgroup in the market.\14\ If the market value
of the Net Unsettled Position is large, as compared to the available
trading volume of that asset group or subgroup, then there is an
increased risk that NSCC would face additional market impact costs in
liquidating that position in the event of a Member default. Therefore,
the proposed calculation would provide NSCC with a measurement of the
possible increased market impact cost that NSCC could face when it
liquidates a large Net Unsettled Position in a particular asset group
or subgroup.
---------------------------------------------------------------------------
\14\ NSCC would determine average daily trading volume by
reviewing data that is made publicly available by the Securities
Industry and Financial Markets Association (``SIFMA''), at https://www.sifma.org/resources/archive/research/statistics.
---------------------------------------------------------------------------
Rather than calculate the market impact cost for each CUSIP, NSCC's
MLA charge would estimate market impact cost at the portfolio-level
using aggregated volume data. For example, as described in greater
detail below, the calculation of market impact cost would include a
measurement of the gross market value of the portfolio. Given the vast
number of CUSIPs processed by NSCC, this approach is simpler and is
expected to result in more predicable calculations of the MLA charge.
To calculate the MLA charge, NSCC would categorize securities into
separate asset groups, which have similar risk profiles--(1) equities
\15\ (excluding equities defined as Illiquid Securities pursuant to the
Rules \16\), (2) Illiquid Securities, (3) unit investment trusts, or
UITs, (4) municipal bonds (including municipal bond exchange-traded
products, or ``ETPs''), and (5) corporate bonds (including corporate
bond ETPs). NSCC would then further segment the equities asset group
into the following subgroups: (i) Micro-capitalization equities, (ii)
small capitalization equities, (iii) medium capitalization equities,
(iv) large capitalization equities, (v) treasury ETPs, and (vi) all
other ETPs.\17\
---------------------------------------------------------------------------
\15\ NSCC would exclude long positions in Family-Issued
Securities, as defined in Rule 1 (Definitions) of the Rules, from
the MLA charge. NSCC believes the margin charge applicable to long
Net Unsettled Positions in Family-Issued Securities pursuant to
Sections I.(A)(1)(a)(iv) and (2)(a)(iv) of Procedure XV of the Rules
provides adequate mitigation of the risks presented by those Net
Unsettled Positions, such that an MLA charge would not be triggered.
Supra note 4.
\16\ See Rule 1 (Definitions), supra note 4.
\17\ Initially, the market capitalization categorizations would
be: (i) Micro-capitalization equities would be less than $300
million, (ii) small capitalization equities would be equal to or
greater than $300 million and less than $2 billion, (iii) medium
capitalization equities would be equal to or greater than $2 billion
and less than $10 billion, and (iv) large capitalization equities
would be equal to or greater than $10 billion. In determining the
range of these market capitalization categorizations, NSCC would
consult publications issued by sources it deems appropriate. NSCC
would review these categories annually and any changes that NSCC
deems appropriate 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''). See
Securities Exchange Act Release Nos. 81485 (August 25, 2017), 82 FR
41433 (August 31, 2017) (File No. SR-NSCC-2017-008); 84458 (October
19, 2018), 83 FR 53925 (October 25, 2018) (File No. SR-NSCC-2018-
009); 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (File No. SR-
NSCC-2020-008).
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[[Page 55334]]
NSCC would first calculate a measurement of market impact cost for
each asset group and equities subgroup for which a Member has Net
Unsettled Positions in its portfolio. As described above, the
calculation of an MLA charge is designed to measure the potential
additional market impact cost to NSCC of closing out a large Net
Unsettled Position in that particular asset group or equities subgroup.
Market Impact Cost Calculation for Market Capitalization Subgroups of
Equities Asset Group
The market impact cost for each Net Unsettled Position in a market
capitalization subgroup of the equities asset group would be calculated
by multiplying four components: (1) An impact cost coefficient that is
a multiple of the one-day market volatility of that subgroup and is
designed to measure impact costs, (2) the gross market value of the Net
Unsettled Position in that subgroup, (3) the square root of the gross
market value of the Net Unsettled Position in that subgroup in the
portfolio divided by an assumed percentage of the average daily trading
volume of that subgroup, and (4) a measurement of the concentration of
the Net Unsettled Position in that subgroup in the portfolio (as
described in greater detail below).\18\
---------------------------------------------------------------------------
\18\ See supra note 13.
---------------------------------------------------------------------------
NSCC also represents that its measurement of the concentration of
the Net Unsettled Position in the portfolio would include aggregating
the relative weight of each CUSIP in that Net Unsettled Position
relative to the weight of that CUSIP in the subgroup, such that a
portfolio with fewer positions in a subgroup would have a higher
measure of concentration for that subgroup.\19\
---------------------------------------------------------------------------
\19\ The relative weight would be calculated by dividing the
absolute market value of a single CUSIP in the Member's portfolio by
the total absolute market value of that portfolio.
---------------------------------------------------------------------------
Market Impact Cost Calculation for the Other Asset Groups and Equities
Subgroups
The market impact cost for Net Unsettled Positions in the municipal
bond, corporate bond, Illiquid Securities and UIT asset groups and for
Net Unsettled Positions in the treasury ETP and other ETP subgroups of
the equities asset group would be calculated by multiplying three
components: (1) An impact cost coefficient that is a multiple of the
one-day market volatility of that asset group or subgroup, (2) the
gross market value of the Net Unsettled Position in that asset group or
subgroup, and (3) the square root of the gross market value of the Net
Unsettled Position in that asset group or subgroup in the portfolio
divided by an assumed percentage of the average daily trading volume of
that subgroup.\20\
---------------------------------------------------------------------------
\20\ See supra note 13.
---------------------------------------------------------------------------
Total MLA Charge Calculation for Each Portfolio
For each asset group or subgroup, NSCC would compare the calculated
market impact cost to a portion of the volatility charge that is
allocated to Net Unsettled Positions in that asset group or subgroup
(as determined by Sections I.(A)(1)(a) and I.(A)(2)(a) of Procedure XV
of the Rules).\21\ If the ratio of the calculated market impact cost to
the applicable 1-day volatility charge is greater than a threshold, an
MLA charge would be applied to that asset group or subgroup.\22\ If the
ratio of these two amounts is equal to or less than this threshold, an
MLA charge would not be applied to that asset group or subgroup. The
threshold would be based on an estimate of the market impact cost that
is incorporated into the calculation of the applicable 1-day volatility
charge, such that an MLA charge would apply only when the calculated
market impact cost exceeds this threshold.
---------------------------------------------------------------------------
\21\ Supra note 4. NSCC's margining methodology uses a three-day
assumed period of risk. For purposes of this calculation, NSCC would
use a portion of the applicable volatility charge that is based on
one-day assumed period of risk and calculated by applying a simple
square-root of time scaling, referred to in this proposed rule
change as ``1-day volatility charge.'' Any changes that NSCC deems
appropriate to this assumed period of risk would be subject to
NSCC's model risk management governance procedures set forth in the
Model Risk Management Framework. See supra note 16.
\22\ Initially, the threshold would be 0.4, because, currently,
approximately 40 percent of the 1-day volatility charge addresses
market impact costs. NSCC would review this threshold from time to
time and any changes that NSCC deems appropriate would be subject to
NSCC's model risk management governance procedures set forth in the
Model Risk Management Framework. See id.
---------------------------------------------------------------------------
When applicable, an MLA charge for each asset group or subgroup
would be calculated as a proportion of the product of (1) the amount by
which the ratio of the calculated market impact cost to the applicable
1-day volatility charge exceeds the threshold, and (2) the 1-day
volatility charge allocated to that asset group or subgroup.
For each Member portfolio, NSCC would add the MLA charges for Net
Unsettled Positions in each of the subgroups of the equities asset
group to determine an MLA charge for the Net Unsettled Positions in the
equities asset group. NSCC would then add the MLA charge for Net
Unsettled Positions in the equities asset group with each of the MLA
charges for Net Unsettled Positions in the other asset groups to
determine a total MLA charge for a Member.
The ratio of the calculated market impact cost to the 1-day
volatility charge would also determine if NSCC would apply a downward
adjustment, based on a scaling factor, to the total MLA charge, and the
size of any adjustment. For Net Unsettled Positions that have a higher
ratio of calculated market impact cost to the 1-day volatility charge,
NSCC would apply a larger adjustment to the MLA charge by assuming that
it would liquidate that position on a different timeframe than the
assumed margin period of risk of three business days. For example, NSCC
may be able to mitigate potential losses associated with liquidating a
Member's portfolio by liquidating a Net Unsettled Position with a
larger volatility charge over a longer timeframe. Therefore, when
applicable, NSCC would apply a multiplier to the calculated MLA charge.
When the ratio of calculated market impact cost to the 1-day volatility
charge is lower, the multiplier would be one, and no adjustment would
be applied; as the ratio gets higher the multiplier decreases and the
MLA charge is adjusted downward.
The final MLA charge would be calculated daily and, when the charge
is applicable, as described above, would be included as a component of
Members' Required Fund Deposit.
Proposed Changes to NSCC Rules
The proposal described above would be implemented into Procedure XV
of the NSCC Rules. Specifically, the proposed changes to Procedure XV
would describe the calculation of the MLA charge in a new subsection
(i) of Section I(A)(1) and a new subsection (g) of Section I(A)(2).
These new subsections would first identify each of the asset groups
and subgroups. The proposed new subsections would then separately
describe the two calculations of market
[[Page 55335]]
impact cost for these asset groups and subgroups by identifying the
components of these calculations. The new subsections would state that
NSCC would compare the calculated market impact cost to a portion of
that Member's volatility charge, to determine if an MLA charge would be
applied to an asset group or subgroup. The new subsections would then
state that NSCC would add each of the applicable MLA charges calculated
for each asset group together. Finally, the new subsections would state
that NSCC may apply a downward adjusting scaling factor to result in a
final MLA charge.
NSCC would also amend Section I(B)(2) of Procedure VX, which
describes the Excess Capital Premium charge, to add the MLA charge to
the list of Clearing Fund components that are excluded from the
calculation of the Excess Capital Premium charge.\23\ The Excess
Capital Premium is imposed on a Member when the Member's Required Fund
Deposit exceeds its excess net capital. NSCC believes that including
the MLA charge in the calculation of the Excess Capital Premium could
lead to more frequent and unnecessary Excess Capital Premium charges.
This is not the intended purpose of the Excess Capital Premium charge
and could place an unnecessary burden on Members.
---------------------------------------------------------------------------
\23\ See Section I.(B)(2) of Procedure XV of the Rules. Supra
note 4.
---------------------------------------------------------------------------
(iv) Proposed Bid-Ask Spread Risk Charge
NSCC has identified potential risk that its margining methodologies
do not account for the transaction costs related to bid-ask spread in
the market that could be incurred when liquidating a portfolio. Bid-ask
spreads account for the difference between the observed market price
that a buyer is willing to pay for a security and the observed market
price that a seller is willing to sell that security. Therefore, NSCC
is proposing to include a bid-ask spread risk charge in the VaR Charge
to address this risk.
In order to calculate this charge, NSCC would segment Member's
portfolios into four bid-ask spread risk classes: (i) Large and medium
capitalization equities, (ii) small capitalization equities, (iii)
micro capitalization equities, and (iv) ETPs.\24\
---------------------------------------------------------------------------
\24\ See supra note 16.
---------------------------------------------------------------------------
Each risk class would be assigned a specific bid-ask spread haircut
rate in the form of a basis point charge that would be applied to the
gross market value in that particular risk class. The applicable bid-
ask spread risk charge would be the product of the gross market value
in a particular risk class in the Member's portfolio and the applicable
basis point charge. The bid-ask spread risk charge would be calculated
at the portfolio level, such that NSCC would aggregate the bid-ask
spread risk charges of the applicable risk classes for the Member's
portfolio.
NSCC proposes to review the haircut rates annually based on either
the analysis of liquidation transaction costs related to the bid-ask
spread that is conducted in connection with its annual simulation of a
Member default or market data that is sourced from a third-party data
vendor. Based on the analyses from recent years' simulation exercises,
NSCC does not anticipate that these haircut rates would change
significantly year over year. NSCC may also adjust the haircut rates
following its annual model validation review, to the extent the results
of that review indicate the current haircut rates are not adequate to
address the risk presented by transaction costs from a bid-ask
spread.\25\
---------------------------------------------------------------------------
\25\ All proposed changes to the haircuts would be subject to
NSCC's model risk management governance procedures set forth in the
Model Risk Management Framework. See id.
---------------------------------------------------------------------------
The proposed initial haircuts are based on the analysis from the
most recent annual default simulation and market data sourced from a
third-party data vendor, and are listed in the table below:
------------------------------------------------------------------------
Haircut
Class (bps)
------------------------------------------------------------------------
Large and Medium Capitalization Equities................... 5.0
Small Capitalization Equities.............................. 12.3
Micro Capitalization Equities.............................. 23.1
ETPs....................................................... 1.5
------------------------------------------------------------------------
Proposed Changes to NSCC Rules
The proposal described above would be implemented into Procedure XV
of the NSCC Rules. Specifically, NSCC would amend subsection (a)(i)(I)
of Sections I(A)(1) and I(A)(2) of Procedure XV by stating that the
calculations of the estimations of volatility described in these
Sections shall include an additional bid-ask spread risk charge
measured by multiplying the gross market value of each Net Unsettled
Position by a basis point charge. The proposed change to this
subsection would also state that the basis point charge would be based
on four risk classes and would identify those risk classes.
(v) Implementation Timeframe
NSCC would implement the proposed changes no later than 10 Business
Days after the later of the no objection to the Advance Notice and
approval of the related proposed rule change \26\ by the Commission.
NSCC would announce the effective date of the proposed changes by
Important Notice posted to its website.
---------------------------------------------------------------------------
\26\ Supra note 3.
---------------------------------------------------------------------------
Anticipated Effect on and Management of Risk
NSCC believes that the proposed changes to enhance the margining
methodology as described above would enable NSCC to better limit its
risk exposures to Members arising out of their Net Unsettled Positions.
As stated above, the proposed MLA charge is designed to help limit
NSCC's exposures to the risks presented by a Member portfolio that
contains large Net Unsettled Positions in securities of the same asset
group, and would enhance NSCC's ability to address risks related to
liquidating such positions in the event of a Member default. The
proposed MLA charge would allow NSCC to collect sufficient financial
resources to cover its exposure that it may face increased market
impact costs in liquidating Net Unsettled Positions that is not
captured by the applicable volatility charge.
The proposal to enhance the VaR Charge by including a bid-ask
spread risk charge is also designed to help limit NSCC's exposures to
the risks related to increased transaction costs due to the bid-ask
spread in the market that could be incurred when liquidating a
portfolio. Therefore, this proposed change would also help address
NSCC's risks related to its ability to liquidate such positions in the
event of a Member default.
By providing NSCC with a more effective measurement of its
exposures, the proposed changes would also mitigate risk for Members
because lowering the risk profile for NSCC would in turn lower the risk
exposure that Members may have with respect to NSCC in its role as a
central counterparty.
Consistency With Clearing Supervision Act
NSCC believes that the proposals are consistent with the Clearing
Supervision Act, specifically with the risk management objectives and
principles of Section 802(b), and with certain of the risk management
standards adopted by the Commission pursuant to Section 805(a)(2), for
the reasons described below.\27\
---------------------------------------------------------------------------
\27\ 12 U.S.C. 5464(a)(2) and (b)(1).
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[[Page 55336]]
(i) Consistency With Section 805(b) of the Clearing Supervision Act
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, its stated purpose is instructive: To
mitigate systemic risk in the financial system and promote financial
stability by, among other things, promoting uniform risk management
standards for systemically important financial market utilities and
strengthening the liquidity of systemically important financial market
utilities.\28\
---------------------------------------------------------------------------
\28\ 12 U.S.C. 5464(b)(1).
---------------------------------------------------------------------------
NSCC believes the proposals are consistent with the objectives and
principles of these risk management standards as described in Section
805(b) of the Clearing Supervision Act and in the Covered Clearing
Agency Standards.
First, the proposal would include the MLA charge as an additional
component to the Clearing Fund. As described above, this new margin
charge is designed to address the market impact costs of liquidating a
defaulted Member's portfolio that may increase when that portfolio
includes large Net Unsettled Positions in a particular group of
securities with a similar risk profile or in a particular asset type.
These positions may be more difficult to liquidate in the market
because a concentrating in that group of securities or in an asset type
could reduce the marketability of those large Net Unsettled Positions,
increasing the market impact costs to NSCC. The proposed MLA charge
would allow NSCC to collect sufficient financial resources to cover its
exposure that it may face increased market impact costs in liquidating
Net Unsettled Positions that is not captured by the applicable
volatility charge.
Second, the proposed bid-ask spread risk charge is designed to help
limit NSCC's exposures to the risks related to increased transaction
costs due to the bid-ask spread in the market that could be incurred
when liquidating a portfolio. As stated above, this proposal would also
help address NSCC's risks related to its ability to liquidate such
positions in the event of a Member default.
Therefore, because the proposals are designed to enable NSCC to
better limit its exposure to Members in the event of a Member default,
NSCC believes they are consistent with promoting robust risk
management. The proposals would also strengthen the liquidity of NSCC
by requiring deposits to the Clearing Fund that are calculated to
address the potential risks NSCC may face, which is one of NSCC's
default liquidity resources.
As a result, NSCC believes the proposals would be consistent with
the objectives and principles of Section 805(b) of the Clearing
Supervision Act, which specify the promotion of robust risk management,
promotion of safety and soundness, reduction of systemic risks and
support of the stability of the broader financial system by, among
other things, strengthening the liquidity of systemically important
financial market utilities, such as NSCC.
(ii) Consistency With Rule 17Ad-22(e)(4)(i) and (6)(i) Under the Act
Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities,
like NSCC, and financial institutions engaged in designated activities
for which the Commission is the supervisory agency or the appropriate
financial regulator.\29\ The Commission has accordingly adopted risk
management standards under Section 805(a)(2) of the Clearing
Supervision Act \30\ and Section 17A of the Act (``Covered Clearing
Agency Standards'').\31\ The Covered Clearing Agency Standards require
covered clearing agencies to establish, implement, maintain, and
enforce written policies and procedures that are reasonably designed to
meet certain minimum requirements for their operations and risk
management practices on an ongoing basis.\32\
---------------------------------------------------------------------------
\29\ 12 U.S.C. 5464(a)(2).
\30\ Id.
\31\ 17 CFR 240.17Ad-22(e).
\32\ Id.
---------------------------------------------------------------------------
NSCC believes that the proposed changes are consistent with Rules
17Ad-22(e)(4)(i) and (e)(6)(i) of the Covered Clearing Agency Standards
\33\ for the reasons described below.
---------------------------------------------------------------------------
\33\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(i) under the Act 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.\34\
---------------------------------------------------------------------------
\34\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
As described above, NSCC believes that both of 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.
Specifically, NSCC believes that the proposed MLA charge would
effectively mitigate the risks related to large Net Unsettled Positions
of securities in the same asset group within a portfolio and would
address the potential increased risks NSCC may face related to its
ability to liquidate such positions in the event of a 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.\35\
---------------------------------------------------------------------------
\35\ Id.
---------------------------------------------------------------------------
Additionally, NSCC believes that the proposed bid-ask spread risk
charge would enhance NSCC's ability to identify, measure, monitor and
manage its credit exposures to Members and those exposures arising from
its payment, clearing, and settlement processes because the proposed
changes would better ensure that NSCC maintains sufficient financial
resources to cover its credit exposure to each Member with a high
degree of confidence. NSCC believes that the proposed change would
enable NSCC to more effectively identify, measure, monitor and manage
its exposures to risks related to market price, and enable it to better
limit its exposure to potential losses from Member defaults by
providing a more effective measure of the risks related to market
price. As described above, due to the bid-ask spread in the market,
there is an observable transaction cost to liquidate a portfolio. The
proposed bid-ask spread risk charge is designed to manage the risk
related to this transaction cost in the event a Member's portfolio is
liquidated. As such, NSCC believes that the proposed change would
better address the potential risks that NSCC may face that are related
to its ability liquidate a Member's Net Unsettled Positions in the
event of that firm's default, and thereby 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
[[Page 55337]]
with a high degree of confidence. In this way, NSCC believes this
proposed change is also consistent with Rule 17Ad-22(e)(4)(i) under the
Act.\36\
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(i) under the Act 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.\37\
---------------------------------------------------------------------------
\37\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
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, including the VaR Charge. NSCC's proposed change
to introduce an MLA charge is designed to more effectively address the
risks presented by large Net Unsettled Positions in the same asset
group. NSCC believes the addition of the MLA charge would enable NSCC
to assess a more appropriate level of margin that accounts for these
risks. This proposed change is 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 contain large Net Unsettled Positions in the same asset group and
may be more difficult to liquidate in the event of a Member default.
Therefore, NSCC believes the proposed change is consistent with Rule
17Ad-22(e)(6)(i) under the Act.\38\
---------------------------------------------------------------------------
\38\ Id.
---------------------------------------------------------------------------
Furthermore, NSCC believes that including the bid-ask spread risk
charge within the calculation of the final VaR Charge would provide
NSCC with a better assessment of its risks related to market price.
This proposed change would enable NSCC to assess a more appropriate
level of margin that accounts for this risk at the portfolio level. As
such, each Member portfolio would be subject to a risk-based margining
system that, at minimum, considers, and produces margin levels
commensurate with, the risks and particular attributes of each relevant
product, portfolio, and market, consistent with Rule 17Ad-22(e)(6)(i)
under the Act.\39\
---------------------------------------------------------------------------
\39\ Id.
---------------------------------------------------------------------------
III. Date of Effectiveness of the Advance Notice, and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. The clearing agency shall not implement the proposed change
if the Commission has any objection to the proposed change.
The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not object to the
proposed change and authorizes the clearing agency to implement the
proposed change on an earlier date, subject to any conditions imposed
by the Commission.
The clearing agency shall post notice on its website of proposed
changes that are implemented.
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 Advance
Notice is consistent with the Clearing Supervision 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-2020-804 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-2020-804. 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 Advance Notice that are filed with the
Commission, and all written communications relating to the Advance
Notice between the Commission and any person, other than those that may
be withheld from the public in accordance with the provisions of 5
U.S.C. 552, will be available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of NSCC and on DTCC's website
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NSCC-2020-804 and should be submitted on
or before September 21, 2020.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-19656 Filed 9-3-20; 8:45 am]
BILLING CODE 8011-01-P
