Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change, as Modified by Amendment No. 1, To Amend the Fee Structure, 78892-78897 [2020-26785]
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Federal Register / Vol. 85, No. 235 / Monday, December 7, 2020 / Notices
Shares to the same halt requirements
currently applicable to the similar
product structures of Index Fund
Shares, Managed Fund Shares and
Exchange Traded Fund Shares.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 14 and Rule 19b–
4(f)(6) thereunder.15
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2020–078 on the subject line.
Paper Comments
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• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
14 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
15 17
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All submissions should refer to File
Number SR–NASDAQ–2020–078. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NASDAQ–2020–078 and
should be submitted on or before
December 28, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–26784 Filed 12–4–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90543; File No. SR–NSCC–
2020–018]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change, as Modified by
Amendment No. 1, To Amend the Fee
Structure
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
PO 00000
CFR 200.30–3(a)(12).
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I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change, as Modified by
Amendment No. 1
The proposed rule change, as
modified by Amendment No. 1, consists
of amendments to Addendum A (Fee
Structure) of the NSCC Rules &
Procedures (‘‘Rules’’) 5 in order to (i)
modify the Clearing Fund Maintenance
Fee (‘‘Maintenance Fee’’), (ii) modify the
‘‘value out of the net’’ component of the
Clearance Activity Fee, and (iii) replace
the description currently under the
heading ‘‘NSCC Pricing Policy’’ with a
description of NSCC’s current policy
regarding the issuance of rebates to
Members, as described in greater detail
below.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change, as Modified by
Amendment No. 1
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change, as modified
by Amendment No. 1, and discussed
any comments it received on the
proposed rule change, as modified by
Amendment No. 1. The text of these
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(2).
5 Capitalized terms not defined herein are defined
in the Rules, available at https://www.dtcc.com/∼/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
2 17
December 1, 2020.
16 17
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
16, 2020, National Securities Clearing
Corporation (‘‘NSCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change. On November 30, 2020, NSCC
filed Amendment No. 1 to the proposed
rule change, which revised a portion of
the rule text and corresponding
description in the notice relating to
NSCC’s current policy regarding the
issuance of rebates to Participants.
NSCC filed the proposed rule change, as
modified by Amendment No. 1,
pursuant to Section 19(b)(3)(A) of the
Act 3 and Rule 19b–4(f)(2) thereunder.4
The proposed rule change, as modified
by Amendment No. 1, is described in
Items I, II, and III below, which Items
have been prepared primarily by NSCC.
The Commission is publishing this
notice to solicit comments on the
proposed rule change, as modified by
Amendment No. 1, from interested
persons.
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summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change, as Modified by
Amendment No. 1
1. Purpose
The purpose of this proposed rule
change, as modified by Amendment No.
1, is to amend Addendum A (Fee
Structure) of the Rules in order to (i)
modify the Maintenance Fee, (ii) modify
the ‘‘value out of the net’’ component of
the Clearance Activity Fee, and (iii)
replace the description currently under
the heading ‘‘NSCC Pricing Policy’’ with
a description of NSCC’s current policy
regarding the issuance of rebates to
Members.
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(i) Overview
NSCC provides clearance and
settlement services for trades executed
by its Members in the U.S. equity,
corporate and municipal bond, and unit
investment trust markets.
Members are assessed fees in
accordance with Addendum A (Fee
Structure). The current Fee Structure
covers a multitude of fees that are
assessed on Members based upon their
activities and the services utilized.
NSCC operates a cost plus low margin
pricing model and has in place
procedures to control costs and to
regularly review pricing levels against
costs of operation. It reviews pricing
levels against its costs of operation
typically during the annual budget
process. The budget is approved
annually by the Board. NSCC’s fees are
cost-based plus a markup, as approved
by the Board or management (pursuant
to authority delegated by the Board), as
applicable. This markup or ‘‘low
margin’’ is applied to recover
development costs and operating
expenses, and to accumulate capital
sufficient to meet regulatory and
economic requirements.
Maintenance Fee
NSCC implemented the Maintenance
Fee in the current Fee Structure in 2016
in order to (i) diversify NSCC’s revenue
sources, mitigating NSCC’s dependence
on revenues driven by trading volumes,
and (ii) add a more stable revenue
source that would contribute to NSCC’s
operating margin by offsetting
increasing costs and expenses.6 The fee
is charged to all NSCC Members and
Limited Members that are required to
6 Securities Exchange Act Release No. 78525
(August 9, 2016), 81 FR 54146 (August 15, 2016)
(SR–NSCC–2016–002).
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make deposits to the NSCC Clearing
Fund (collectively, ‘‘Contributing
Members’’) in proportion to the
Contributing Member’s average, end of
day, monthly cash deposit to the
Clearing Fund.
Until June 2020, the Maintenance Fee
had been calculated monthly, in arrears,
as the product of (A) 0.25 percent and
(B) the average of the Contributing
Member’s actual cash deposit to the
NSCC Clearing Fund as of the end of
each day of the month, multiplied by
the number of days in that month and
divided by 360. However, by its terms
at the time, the fee had been waived if
the monthly rate of return on NSCC’s
investment of the cash portion in the
Clearing Fund was less than 0.25
percent for the month (‘‘Waiver
Provision’’).
In June 2020, NSCC modified the
Maintenance Fee in three ways.7 First,
NSCC removed the Waiver Provision.
Second, instead of using a fixed rate of
0.25 percent when calculating the
Maintenance Fee, NSCC calculated the
fee using the corresponding month’s
average Interest Rate on Excess Reserves
(i.e., the IOER rate) that is determined
by the Board of Governors of the Federal
Reserve System.8 Third, NSCC set a
ceiling of 0.25 percent and a floor of
0.00 percent on the IOER rate used in
the fee calculation.
Those three modifications were
designed to help address an immediate
financial issue that NSCC was
experiencing due to the coronavirus
global pandemic and overall reaction by
the financial markets, and, based on
information at the time, to better
position NSCC going forward, with
respect to its ability to fund its default
liquidity resources in various economic
environments, as well as to improve the
overall functioning of the Maintenance
Fee.9 However, after completing NSCC’s
annual budgeting process that began in
August and finished in October 2020—
in which NSCC evaluated its short- and
long-term financial position in
consideration of expected Contributing
Member activity, revenues, cost of
funding,10 market volatility, and the
financial markets more broadly,
7 Securities Exchange Act Release No. 89141
(June 24, 2020), 85 FR 39253 (June 30, 2020) (SR–
NSCC–2020–011) (‘‘June Filing’’).
8 Policy Tools, Interest on Required Reserve
Balances and Excess Balances, https://
www.federalreserve.gov/monetarypolicy/
reqresbalances.htm.
9 See June Filing, supra note 7 (discussing the
rationale for the three modifications made to the
Maintenance Fee).
10 See June Filing, supra note 7 (discussing
NSCC’s cost of funding).
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concerns remained around NSCC’s net
income operating margin.
To help address this issue, NSCC
proposes to further modify the
Maintenance Fee. Specifically, NSCC
will no longer calculate the fee using the
corresponding month’s average IOER
rate but, instead, return to using a fixed
rate of 0.25 percent, which,
consequently, would render the current
floor of 0.00 percent unnecessary. NSCC
is using a fixed rate of 0.25 percent so
that Members will not be charged an
amount greater than what was possible
under the original and current
calculation of the fee.
NSCC believes that reverting to a
fixed rate in calculating the
Maintenance Fee would have a number
of benefits. For example, by using a
fixed rate, the fee would no longer
fluctuate as the IOER rate fluctuates,
which should help Contributing
Members better anticipate the cost of the
fee and, for NSCC, stabilize revenue
generated from the fee. Greater stability
in the revenue generated from the fee
would help support NSCC’s net income
operating margin and, accordingly, its
credit ratings, which are key factors in
NSCC’s costs, expenses, and funding.11
Additionally, the proposed change
would help provide consistent pricing
between NSCC and its affiliate clearing
agencies, The Depository Trust
Company (‘‘DTC’’) and Fixed Income
Clearing Corporation (‘‘FICC’’),12 as both
DTC and FICC have filed proposed rule
changes concurrently with this filing
that would result in the same
calculation of their respective
maintenance fees.13
Clearance Activity Fee
The ‘‘value out of the net’’ component
of the Clearance Activity Fee in the Fee
Structure is a fee based on the daily
aggregate market value of all settling
CNS positions after netting. It is
currently $2.12 per million dollars of
settling value (i.e., the absolute value of
11 Not only could a downgrade to an NSCC credit
rating increase NSCC costs and expenses, but, more
importantly, it could reduce the overall availability
of default liquidity resources to NSCC if investors
or lending banks reduce their current levels of
engagement with NSCC.
12 The Depository Trust & Clearing Corporation
(‘‘DTCC’’) is the parent company of DTC, NSCC,
and FICC. DTCC operates on a shared services
model for DTC, NSCC, and FICC. Most corporate
functions are established and managed on an
enterprise-wide basis pursuant to intercompany
agreements under which it is generally DTCC that
provides a relevant service to DTC, NSCC, or FICC.
13 See File No. SR–DTC–2020–014 and File No.
SR–FICC–2020–014 available at https://
www.dtcc.com/legal/sec-rule-filings.
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the CNS Long Positions and Short
Positions).14
Due to the coronavirus global
pandemic and overall reaction by the
financial markets, NSCC’s cost of
funding has risen sharply in 2020,
particularly for NSCC’s key default
liquidity resources. The unexpected
increases in cost and expense to secure
and maintain those default liquidity
resources has added millions of dollars
to NSCC’s expense.
As described above, after completing
NSCC’s 2020 annual budgeting
process—in which NSCC evaluated its
short- and long-term financial position
in consideration of expected Member
activity, revenues, cost of funding,
market volatility, and the financial
markets more broadly, concerns
remained around NSCC’s net income
operating margin. In order to address
this issue and to better align cost with
revenue, NSCC proposes to modify the
‘‘value out of the net’’ component of the
Clearance Activity Fee from $2.12 per
million dollars of settling value to $2.56
per million dollars of settling value.
Specifically, NSCC anticipates that the
proposed change would enable NSCC to
offset the increase in its cost and
expense while generating a low net
income operating margin, consistent
with NSCC’s cost plus low margin
pricing model.
NSCC believes modifying the ‘‘value
out of the net’’ component of the
Clearance Activity Fee would further
help support NSCC’s net income
operating margin and, accordingly, its
credit ratings, which, as described
above, are key factors in NSCC’s costs,
expenses, and funding.
Rebate Policy
NSCC is also proposing to amend
Section VIII of the Fee Structure to
replace the description currently under
the heading ‘‘NSCC Pricing Policy’’ with
a description of its current policy
regarding the issuance of rebates to
Members. In connection with this
change, the proposed change would also
amend the title of Section VIII to ‘‘NSCC
Rebate Policy’’ to better describe the
policy in this section.
Section VIII of the Fee Structure
currently includes an outdated
description of NSCC’s policy to adjust
Members’ invoices based on NSCC’s
revenues. This description states that
NSCC may adjust invoices down in the
form of a discount or up in the form of
14 The current ‘‘value out of the net’’ component
of the Clearance Activity Fee was implemented in
2019 as part of fee changes to address pricing
complexity. See Securities Exchange Act Release
No. 84770 (December 10, 2018), 83 FR 64374
(December 14, 2018) (SR–NSCC–2018–011).
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a surcharge, based on its revenues.
NSCC did historically provide its
Members with a discount on their
invoices, but it does not have any record
of adjusting Members’ invoices up, in
the form of a surcharge, in the past.
NSCC views its practice of providing
a rebate to its Members as a corporate
function, and not related to its operation
as a self-regulatory organization. An
NSCC rebate is essentially a return of
the revenue that NSCC collects through
the fees it charges Members for its
services (as set forth in Addendum A of
the Rules). Rebates are not related to the
amounts Members deposit with NSCC
as their Required Fund Deposits, which
are made up of risk-based margin
charges calculated pursuant to
Procedure XV of the Rules. The
determination to provide a rebate is
made at the corporation-level, based on
a number of factors and considerations,
as described below, and is not a separate
determination made for each individual
Member.
Following the financial recession of
2008, NSCC ceased providing such
discounts in connection with the
implementation of a financial strategy to
strengthen its financial position and
health. As a result of that strategy and
improved financial markets, in 2019
NSCC determined to reinstitute its
practice of discounting Members’
invoices, in the form of a rebate, based
on its financial performance. In
connection with this decision, NSCC is
proposing to replace the language under
the heading ‘‘NSCC Pricing Policy’’ in
Section VIII of the Fee Structure to
describe its current rebate practice. This
proposed change would not change
NSCC’s current rebate practice but
would provide Members with
transparency into this practice and the
governance around rebates.
(ii) Proposed Fee Changes
NSCC is proposing to change the
Maintenance Fee in Subsection G
(Clearing Fund Maintenance Fee) of
Section V (Pass-Through and Other
Fees) of the Fee Structure. Specifically,
NSCC is proposing to modify the
Maintenance Fee by removing language
regarding application of the IOER rate
and a floor of 0.00 percent.
In addition, NSCC is proposing to
change the Clearance Activity Fee in
Subsection A (Clearance Activity Fee) of
Section II (Trade Clearance Fees) of the
Fee Structure. Specifically, NSCC is
proposing to modify the ‘‘value out of
the net’’ component of the Clearance
Activity Fee from $2.12 per million of
settling value to $2.56 per million of
settling value.
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Finally, NSCC is proposing to amend
Section VIII of the Fee Structure to
replace the description currently under
the heading ‘‘NSCC Pricing Policy’’ with
a description of its current policy
regarding the issuance of rebates to
Members, as described above.
First, in connection with this change,
the proposed change would also amend
the title of Section VIII to ‘‘NSCC Rebate
Policy’’ to better describe the policy in
this section.
Second, the proposed language would
describe that NSCC may provide
Members with a rebate of excess net
income, and would define excess net
income as either income of NSCC or
income related to one business line of
NSCC, after application of expenses,
capitalization costs, and applicable
regulatory requirements. The language
would also state that a rebate is
discretionary, to make it clear that
NSCC is not obligated to provide a
rebate.
Third, the proposed language would
state that a rebate would be approved by
the Board. The proposed language
would also state that, in determining
whether a rebate is appropriate, the
Board would consider one or more of
the following, as appropriate: NSCC’s
regulatory capital requirements,15
anticipated expenses, investment needs,
anticipated future expenses with respect
to improvement or maintenance of
NSCC’s operations, cash balances,
financial projections, and appropriate
level of shareholders’ equity.
Fourth, the proposed language would
state that, if the Board determined to
issue a rebate, it would set a rebate
period and a rebate payment date, both
of which are used to determine which
Members are eligible for a rebate. The
proposed language would state that
Members that maintain their
membership during all or a portion of
the rebate period and on the rebate
payment date are eligible for a rebate.
Finally, the proposed language would
describe how rebates are applied to the
invoices of eligible Members. The
proposed language would state that
rebates are applied to all eligible
Members on a pro-rata basis based on
15 NSCC manages its general business risk by
holding sufficient liquid net assets funded by equity
to cover potential general business losses so it can
continue operations and services as going concerns
if those losses materialize, in compliance with the
requirements of Rule 17Ad–22(e)(15). 17 CFR
240.17Ad–22(e)(15). NSCC maintains a Clearing
Agency Policy on Capital Requirements which
defines the amount of capital it must maintain for
this purpose and sets forth the manner in which
this amount is calculated. See Securities Exchange
Act Release No. 89360 (July 21, 2020), 85 FR 45280
(July 27, 2020) (SR–NSCC–2020–014) (amending
original filing).
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such Members’ gross fees paid to NSCC
within the applicable rebate period,
excluding pass-through fees and interest
earned on Required Fund Deposits. The
proposed language would also state that
rebates are applied to eligible Members’
invoices on the rebate payment date as
either a reduction in fees owed or, if
fees owed are lower than the allocated
rebate amount, a payment of such
difference. The proposed language
would also note that rebate amounts
may be adjusted for miscellaneous
charges and discounts.
(iii) Expected Member Impact
The proposed rule change, as
modified by Amendment No. 1, is
expected to increase NSCC’s annual
revenue by approximately $31.6
million.
In general, NSCC anticipates that, as
result of the proposed changes,
approximately 62% of impacted
affiliated family of members would have
a fee increase of less than $1,000 per
year, approximately 24% of impacted
affiliated family of members would have
a fee increase between $1,000 to
$100,000 per year, approximately 10%
of impacted affiliated family of members
would have a fee increase of $100,000
to $1 million per year, and
approximately 4% of impacted affiliated
family of members would have a fee
increase of $1 million or greater per
year.
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(iv) Member Outreach
NSCC has conducted ongoing
outreach to each Member in order to
provide them with notice of the
proposed changes and the anticipated
impact for the Member. As of the date
of this filing, no written comments
relating to the proposed changes have
been received in response to this
outreach. The Commission will be
notified of any written comments
received.
(v) Implementation Timeframe
NSCC would implement this proposal
on January 1, 2021. As proposed, a
legend would be added to the Fee
Structure stating there are changes that
became effective upon filing with the
Commission but have not yet been
implemented. The proposed legend also
would include the date on which such
changes would be implemented and the
file number of this proposal, and state
that, once this proposal is implemented,
the legend would automatically be
removed.
2. Statutory Basis
NSCC believes this proposal is
consistent with the requirements of the
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Act, and the rules and regulations
thereunder applicable to a registered
clearing agency. Specifically, NSCC
believes the proposed changes to modify
the Maintenance Fee and the ‘‘value out
of the net’’ component of the Clearance
Activity Fee are consistent with Section
17A(b)(3)(D) of the Act 16 and the
proposed change to include a
description of NSCC’s current policy
regarding the issuance of rebates to
Members is consistent with Rule 17Ad–
22(e)(23)(ii),17 as promulgated under the
Act, for the reasons described below.
Section 17A(b)(3)(D) of the Act 18
requires that the Rules provide for the
equitable allocation of reasonable dues,
fees, and other charges among its
participants. NSCC believes that the
proposed changes to the Maintenance
Fee and the ‘‘value out of the net’’
component of the Clearance Activity
Fee are consistent with this provision of
the Act.
As described above, the proposal
would modify the Maintenance Fee to
no longer calculate the fee using the
corresponding month’s average IOER
rate; rather, the calculation would revert
to using a fixed rate of 0.25 percent,
thus, negating the need to maintain the
current floor of 0.00 percent.
Because the proposed change would
not alter how the Maintenance Fee is
currently allocated (i.e., charged) to
Contributing Members, NSCC believes
the fee would continue to be equitably
allocated. More specifically, as
mentioned above, the Maintenance Fee
is and would continue to be charged to
all Contributing Members in proportion
to the Contributing Member’s average
monthly cash deposit to the Clearing
Fund. As such, and as is currently the
case, Contributing Members that make
greater use of NSCC’s guaranteed
services or which have activity in those
services that present greater risk to
NSCC would generally be subject to a
larger Maintenance Fee because such
Contributing Members would typically
be required to maintain larger Clearing
Fund deposits pursuant to the Rules.19
Conversely, Contributing Members that
use NSCC’s guaranteed services less or
which have activity that presents less
risk would generally be subject to a
smaller Maintenance Fee because such
Contributing Members would typically
be required to maintain smaller Clearing
Fund deposits pursuant to the Rules.20
The proposed change to the
Maintenance Fee would not adjust that
16 15
U.S.C. 78q–1(b)(3)(D).
CFR.17Ad–22(e)(23)(ii).
18 15 U.S.C. 78q–1(b)(3)(D).
19 See Rule 4 and Procedure XV, supra note 5.
20 Id.
17 17
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78895
allocation. For this reason, NSCC
believes the Maintenance Fee would
continue to be equitably allocated
among Contributing Members.
Similarly, NSCC believes that the
Maintenance Fee would continue to be
a reasonable fee under the proposed
change described above. For example,
by using a fixed rate, instead of a rate
that fluctuates with the IOER rate,
Contributing Members should be better
able to anticipate the cost of the fee.
Meanwhile, a fixed rate would not only
improve NSCC’s ability to estimate
revenue from the fee, but it also would
stabilize the revenue received from the
fee. As described above, greater stability
in the revenue generated from the fee
would help support NSCC’s net income
operating margin and, accordingly, its
credit ratings, which are key factors in
NSCC’s costs, expenses, and funding.
Additionally, using a fixed rate of 0.25
percent would help ensure that
Contributing Members are not charged
an amount greater than what was
possible under the original and current
calculation of the fee. Lastly, the
proposed change would help establish
consistent pricing between NSCC and
its affiliates, DTC and FICC, regarding
each of their respective Maintenance
Fees, as concurrent proposals by DTC
and FICC would result in the same
calculation.21 For this reason, NSCC
believes the Maintenance Fee would
continue to be reasonable. Based on the
forgoing, NSCC believes the proposed
rule change to the Maintenance Fee is
consistent with Section 17A(b)(3)(D) of
the Act.22
NSCC believes the proposed rule
change to the ‘‘value out of the net’’
component of the Clearance Activity
Fee would provide for the equitable
allocation of reasonable fees. Because
the proposed change would not alter
how the Clearance Activity Fee is
currently allocated (i.e., charged) to
Members, NSCC believes the fee would
continue to be equitably allocated. More
specifically, as mentioned above, the
‘‘value out of the net’’ component of the
Clearance Activity Fee is based on a
Member’s daily aggregate market value
of all settling CNS positions after
netting. As such, and as is currently the
case, Members that make greater use of
NSCC’s guaranteed services would
generally be subject to a larger Clearance
Activity Fee because such Members
would typically have higher value of net
positions after netting. Conversely,
Members that use NSCC’s guaranteed
services less would generally be subject
to a smaller Clearance Activity Fee
21 See
22 15
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supra note 13.
U.S.C. 78q–1(b)(3)(D).
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because such Members would typically
have lower value of net positions after
netting. The proposed change to the
‘‘value out of the net’’ component of the
Clearance Activity Fee would not adjust
that allocation. For this reason, NSCC
believes the Clearance Activity Fee
would continue to be equitably
allocated among Members.
NSCC believes that the Clearance
Activity Fee would continue to be a
reasonable fee under the proposed
change described above. This is because
the proposed change to modify the
‘‘value out of the net’’ component of the
Clearance Activity Fee is designed to
offset NSCC’s increased costs and
expenses while generating a low net
income operating margin. As described
above, in determining the appropriate
level of the proposed change to modify
the ‘‘value out of the net’’ component of
the Clearance Activity Fee, NSCC
considered a variety of factors,
including expected Member activity,
revenues, cost of funding, market
volatility, and the financial markets
more broadly. Based on that
consideration, NSCC believes the
proposed change would allow NSCC to
assess a fee that is better aligned with
NSCC’s increased costs and expenses.
Having the ability to assess a fee that is
better aligned with NSCC’s increased
costs and expenses would further help
support NSCC’s net income operating
margin and, accordingly, its credit
ratings, which are key factors in NSCC’s
costs, expenses, and funding. For this
reason, NSCC believes the Clearance
Activity Fee would continue to be
reasonable. Based on the forgoing, NSCC
believes the proposed rule change to the
‘‘value out of the net’’ component of the
Clearance Activity Fee is consistent
with Section 17A(b)(3)(D) of the Act.23
Rule 17Ad–22(e)(23)(ii) under the Act
requires that NSCC establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide
sufficient information to enable
participants to identify and evaluate the
risks, fees, and other material costs they
incur by participating in the covered
clearing agency.24 The proposed change
would replace an outdated description
of NSCC’s past practice of adjusting
Members’ invoices with an updated
description of its current rebate practice,
which, when applicable, results in a
reduction to the amount of fees a
Member owes to NSCC. By updating the
Fee Structure with a clear, transparent
description of NSCC’s current rebate
practice, the proposed change would
23 Id.
24 17
provide Members with sufficient
information to evaluate the fees they
may incur by participating in NSCC.
Therefore, NSCC believes the proposed
change would be consistent with the
requirements of Rule 17Ad–
22(e)(23)(ii).25
(B) Clearing Agency’s Statement on
Burden on Competition
NSCC does not believe that the
proposed change to the Maintenance
Fee would have an impact on
competition among Contributing
Members. As described above, the
Maintenance Fee is charged ratably
based on Contributing Members’ use of
NSCC’s guaranteed services, as reflected
in Contributing Members’ deposits to
the Clearing Fund. Thus, the fee is
designed to be reflective of each
Contributing Member’s individual
activity at NSCC. Additionally, NSCC
does not believe reverting to a fixed rate
of 0.25 percent in calculating the
Maintenance Fee would have any
impact on competition among
Contributing Members because using
such a rate means that Contributing
Members still cannot be assessed an
amount greater than what could have
been assessed under the original and
current calculations of the fee.
However, appreciating that the value
of a dollar is not consistent for each
Contributing Member, if the change to
no longer calculate the fee using the
corresponding month’s average IOER
rate would create a competitive burden
for a Contributing Member because the
Contributing Member could be assessed
a higher fee at a time when that IOER
rate is lower than the proposed 0.25
percent fixed rate, NSCC believes such
a burden would not be significant, given
that the amount assessed would still be
within the range of what could be
assessed under the current calculation.
Moreover, NSCC believes that any such
burden would be necessary and
appropriate in furtherance of the
purposes of the Act, as permitted by
Section 17A(b)(3)(I) of the Act.26
The burden would be necessary
because it is essential that NSCC
continue to offset some of its costs and
expenses with stable revenue generated
from the Maintenance Fee, regardless of
the economic environment. As
described above, not doing so could
adversely affect NSCC’s credit ratings,
which could further increase funding or,
possibly, decrease the availability of
crucial liquidity resources for NSCC.
The burden would be appropriate
because, as described above, the
25 Id.
CFR 240.17Ad–22(e)(23)(ii).
VerDate Sep<11>2014
18:32 Dec 04, 2020
26 15
Jkt 253001
PO 00000
Maintenance Fee is calculated, using a
balanced formula, to assess a fee that is
reflective of the Contributing Member’s
use of NSCC’s guaranteed services, so
that NSCC can defray some of its costs
and expenses in providing those
services. More specifically, returning to
a fixed rate of 0.25 percent would be
appropriate because it is the same rate
that was used prior to the change made
in June 2020,27 and it is currently the
ceiling used in the existing calculation;
thus, the new calculation still would not
use a rate any higher than it could have
previously.
NSCC believes the proposed rule
change to modify the ‘‘value out of the
net’’ component of the Clearance
Activity Fee may have an impact on
competition among its Members because
the change would likely increase the
fees of those Members that utilize
NSCC’s guaranteed service when
compared to their fees under the current
Fee Structure. NSCC believes the
proposed change could burden
competition by negatively affecting such
Members’ operating costs. While these
Members may experience increases in
their fees when compared to their fees
under the current Fee Structure, NSCC
does not believe the proposed change in
and of itself mean that the burden on
competition is significant. This is
because even though the amount of the
fee increase may seem significant (e.g.,
from $2.12 to $2.56 per million of
settling value), NSCC believes the
increase in fees would similarly affect
all Members that utilize NSCC’s
guaranteed services and would be
reflective of each Member’s individual
activity at NSCC, and therefore the
burden on competition would not be
significant. Regardless of whether the
burden on competition is deemed
significant, NSCC believes any burden
that is created by this proposed change
would be necessary and appropriate in
furtherance of the purposes of the Act,
as permitted by Section 17A(b)(3)(I) of
the Act.28
The burden would be necessary
because it is essential that NSCC
continue to offset some of its costs and
expenses with revenue generated from
the Clearance Activity Fee, regardless of
the economic environment. As
described above, not doing so could
adversely affect NSCC’s credit ratings,
which could further increase funding or,
possibly, decrease the availability of
crucial liquidity resources for NSCC.
The burden would be appropriate
because, as described above, the
Clearance Activity Fee is calculated,
27 See
U.S.C. 78q–1(b)(3)(I).
Frm 00076
Fmt 4703
Sfmt 4703
June Filing, supra note 7.
28 Id.
E:\FR\FM\07DEN1.SGM
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using a balanced formula, to assess a fee
that is reflective of the Member’s use of
NSCC’s guaranteed services, so that
NSCC can defray some of its costs and
expenses in providing those services.
More specifically, NSCC believes the
proposed rule change to modify the
‘‘value out of the net’’ component of the
Clearance Activity Fee would be
appropriate because it would allow
NSCC to assess a fee that is better
aligned with NSCC’s increased costs
and expenses while generating a low net
income operating margin.
NSCC does not believe the proposed
change to describe its current rebate
practice would have any impact, or
impose any burden, on competition
among its Members. As described above,
this proposed rule change, as modified
by Amendment No. 1, would replace
outdated information currently in the
Fee Structure with an updated
description of NSCC’s current rebate
practice. As described in the proposed
language, under its current practice,
rebates are allocated to eligible Members
on a pro-rata basis based on such
Members’ gross fees paid to NSCC
within the applicable rebate period.
Therefore, the current practice is
applied equally to all eligible Members.
The proposed change to provide
Members with transparency into this
practice would not cause any increase
or decrease in the rebates Members may
receive. Therefore, this proposed rule
change, as modified by Amendment No.
1, would not have any impact, or
impose any burden, on competition.
khammond on DSKJM1Z7X2PROD with NOTICES
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change, as Modified by Amendment No.
1, Received From Members,
Participants, or Others
Written comments relating to this
proposed rule change, as modified by
Amendment No. 1, have not been
solicited or received. NSCC will notify
the Commission of any written
comments received by NSCC.
III. Date of Effectiveness of the
Proposed Rule Change, as Modified by
Amendment No. 1, and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 29 and paragraph (f) of Rule
19b–4 thereunder.30 At any time within
60 days of the filing of the proposed rule
change, as modified by Amendment No.
1, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
29 15
30 17
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
VerDate Sep<11>2014
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action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change, as modified by Amendment No.
1, is consistent with the Act. Comments
may be submitted by any of the
following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NSCC–2020–018 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–2020–018. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change, as modified by Amendment No.
1, that are filed with the Commission,
and all written communications relating
to the proposed rule change, as
modified by Amendment No. 1, 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–
PO 00000
Frm 00077
Fmt 4703
Sfmt 4703
78897
2020–018 and should be submitted on
or before December 28, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–26785 Filed 12–4–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90546; File No. SR–DTC–
2020–014]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change, as Modified
by Amendment No. 1, To Amend the
Guide to the DTC Fee Schedule
December 1, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on November
16, 2020, The Depository Trust
Company (‘‘DTC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change. On November 30, 2020, DTC
filed Amendment No. 1 to the proposed
rule change, which revised a portion of
the rule text and corresponding
description in the notice relating to
DTC’s current policy regarding the
issuance of rebates to Participants. DTC
filed the proposed rule change, as
modified by Amendment No. 1,
pursuant to Section 19(b)(3)(A) of the
Act 3 and Rule 19b–4(f)(2) thereunder.4
The proposed rule change, as modified
by Amendment No. 1, is described in
Items I, II, and III below, which Items
have been prepared primarily by DTC.
The Commission is publishing this
notice to solicit comments on the
proposed rule change, as modified by
Amendment No. 1, from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change, as Modified by
Amendment No. 1
The proposed rule change, as
modified by Amendment No. 1,5
31 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(2).
5 Each capitalized term not otherwise defined
herein has its respective meaning as set forth the
Rules, By-Laws and Organization Certificate of DTC
1 15
E:\FR\FM\07DEN1.SGM
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07DEN1
]]>Agencies
[Federal Register Volume 85, Number 235 (Monday, December 7, 2020)]
[Notices]
[Pages 78892-78897]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-26785]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90543; File No. SR-NSCC-2020-018]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing and Immediate Effectiveness of a Proposed
Rule Change, as Modified by Amendment No. 1, To Amend the Fee Structure
December 1, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 16, 2020, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change. On November 30, 2020, NSCC
filed Amendment No. 1 to the proposed rule change, which revised a
portion of the rule text and corresponding description in the notice
relating to NSCC's current policy regarding the issuance of rebates to
Participants. NSCC filed the proposed rule change, as modified by
Amendment No. 1, pursuant to Section 19(b)(3)(A) of the Act \3\ and
Rule 19b-4(f)(2) thereunder.\4\ The proposed rule change, as modified
by Amendment No. 1, is described in Items I, II, and III below, which
Items have been prepared primarily by NSCC. The Commission is
publishing this notice to solicit comments on the proposed rule change,
as modified by Amendment No. 1, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change, as Modified by Amendment No. 1
The proposed rule change, as modified by Amendment No. 1, consists
of amendments to Addendum A (Fee Structure) of the NSCC Rules &
Procedures (``Rules'') \5\ in order to (i) modify the Clearing Fund
Maintenance Fee (``Maintenance Fee''), (ii) modify the ``value out of
the net'' component of the Clearance Activity Fee, and (iii) replace
the description currently under the heading ``NSCC Pricing Policy''
with a description of NSCC's current policy regarding the issuance of
rebates to Members, as described in greater detail below.
---------------------------------------------------------------------------
\5\ Capitalized terms not defined herein are defined in the
Rules, available at https://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change, as Modified by Amendment No. 1
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change, as modified by Amendment No. 1, and discussed any comments it
received on the proposed rule change, as modified by Amendment No. 1.
The text of these statements may be examined at the places specified in
Item IV below. The clearing agency has prepared
[[Page 78893]]
summaries, set forth in sections A, B, and C below, of the most
significant aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change, as Modified by Amendment No. 1
1. Purpose
The purpose of this proposed rule change, as modified by Amendment
No. 1, is to amend Addendum A (Fee Structure) of the Rules in order to
(i) modify the Maintenance Fee, (ii) modify the ``value out of the
net'' component of the Clearance Activity Fee, and (iii) replace the
description currently under the heading ``NSCC Pricing Policy'' with a
description of NSCC's current policy regarding the issuance of rebates
to Members.
(i) Overview
NSCC provides clearance and settlement services for trades executed
by its Members in the U.S. equity, corporate and municipal bond, and
unit investment trust markets.
Members are assessed fees in accordance with Addendum A (Fee
Structure). The current Fee Structure covers a multitude of fees that
are assessed on Members based upon their activities and the services
utilized.
NSCC operates a cost plus low margin pricing model and has in place
procedures to control costs and to regularly review pricing levels
against costs of operation. It reviews pricing levels against its costs
of operation typically during the annual budget process. The budget is
approved annually by the Board. NSCC's fees are cost-based plus a
markup, as approved by the Board or management (pursuant to authority
delegated by the Board), as applicable. This markup or ``low margin''
is applied to recover development costs and operating expenses, and to
accumulate capital sufficient to meet regulatory and economic
requirements.
Maintenance Fee
NSCC implemented the Maintenance Fee in the current Fee Structure
in 2016 in order to (i) diversify NSCC's revenue sources, mitigating
NSCC's dependence on revenues driven by trading volumes, and (ii) add a
more stable revenue source that would contribute to NSCC's operating
margin by offsetting increasing costs and expenses.\6\ The fee is
charged to all NSCC Members and Limited Members that are required to
make deposits to the NSCC Clearing Fund (collectively, ``Contributing
Members'') in proportion to the Contributing Member's average, end of
day, monthly cash deposit to the Clearing Fund.
---------------------------------------------------------------------------
\6\ Securities Exchange Act Release No. 78525 (August 9, 2016),
81 FR 54146 (August 15, 2016) (SR-NSCC-2016-002).
---------------------------------------------------------------------------
Until June 2020, the Maintenance Fee had been calculated monthly,
in arrears, as the product of (A) 0.25 percent and (B) the average of
the Contributing Member's actual cash deposit to the NSCC Clearing Fund
as of the end of each day of the month, multiplied by the number of
days in that month and divided by 360. However, by its terms at the
time, the fee had been waived if the monthly rate of return on NSCC's
investment of the cash portion in the Clearing Fund was less than 0.25
percent for the month (``Waiver Provision'').
In June 2020, NSCC modified the Maintenance Fee in three ways.\7\
First, NSCC removed the Waiver Provision. Second, instead of using a
fixed rate of 0.25 percent when calculating the Maintenance Fee, NSCC
calculated the fee using the corresponding month's average Interest
Rate on Excess Reserves (i.e., the IOER rate) that is determined by the
Board of Governors of the Federal Reserve System.\8\ Third, NSCC set a
ceiling of 0.25 percent and a floor of 0.00 percent on the IOER rate
used in the fee calculation.
---------------------------------------------------------------------------
\7\ Securities Exchange Act Release No. 89141 (June 24, 2020),
85 FR 39253 (June 30, 2020) (SR-NSCC-2020-011) (``June Filing'').
\8\ Policy Tools, Interest on Required Reserve Balances and
Excess Balances, https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm.
---------------------------------------------------------------------------
Those three modifications were designed to help address an
immediate financial issue that NSCC was experiencing due to the
coronavirus global pandemic and overall reaction by the financial
markets, and, based on information at the time, to better position NSCC
going forward, with respect to its ability to fund its default
liquidity resources in various economic environments, as well as to
improve the overall functioning of the Maintenance Fee.\9\ However,
after completing NSCC's annual budgeting process that began in August
and finished in October 2020--in which NSCC evaluated its short- and
long-term financial position in consideration of expected Contributing
Member activity, revenues, cost of funding,\10\ market volatility, and
the financial markets more broadly, concerns remained around NSCC's net
income operating margin.
---------------------------------------------------------------------------
\9\ See June Filing, supra note 7 (discussing the rationale for
the three modifications made to the Maintenance Fee).
\10\ See June Filing, supra note 7 (discussing NSCC's cost of
funding).
---------------------------------------------------------------------------
To help address this issue, NSCC proposes to further modify the
Maintenance Fee. Specifically, NSCC will no longer calculate the fee
using the corresponding month's average IOER rate but, instead, return
to using a fixed rate of 0.25 percent, which, consequently, would
render the current floor of 0.00 percent unnecessary. NSCC is using a
fixed rate of 0.25 percent so that Members will not be charged an
amount greater than what was possible under the original and current
calculation of the fee.
NSCC believes that reverting to a fixed rate in calculating the
Maintenance Fee would have a number of benefits. For example, by using
a fixed rate, the fee would no longer fluctuate as the IOER rate
fluctuates, which should help Contributing Members better anticipate
the cost of the fee and, for NSCC, stabilize revenue generated from the
fee. Greater stability in the revenue generated from the fee would help
support NSCC's net income operating margin and, accordingly, its credit
ratings, which are key factors in NSCC's costs, expenses, and
funding.\11\ Additionally, the proposed change would help provide
consistent pricing between NSCC and its affiliate clearing agencies,
The Depository Trust Company (``DTC'') and Fixed Income Clearing
Corporation (``FICC''),\12\ as both DTC and FICC have filed proposed
rule changes concurrently with this filing that would result in the
same calculation of their respective maintenance fees.\13\
---------------------------------------------------------------------------
\11\ Not only could a downgrade to an NSCC credit rating
increase NSCC costs and expenses, but, more importantly, it could
reduce the overall availability of default liquidity resources to
NSCC if investors or lending banks reduce their current levels of
engagement with NSCC.
\12\ The Depository Trust & Clearing Corporation (``DTCC'') is
the parent company of DTC, NSCC, and FICC. DTCC operates on a shared
services model for DTC, NSCC, and FICC. Most corporate functions are
established and managed on an enterprise-wide basis pursuant to
intercompany agreements under which it is generally DTCC that
provides a relevant service to DTC, NSCC, or FICC.
\13\ See File No. SR-DTC-2020-014 and File No. SR-FICC-2020-014
available at https://www.dtcc.com/legal/sec-rule-filings.
---------------------------------------------------------------------------
Clearance Activity Fee
The ``value out of the net'' component of the Clearance Activity
Fee in the Fee Structure is a fee based on the daily aggregate market
value of all settling CNS positions after netting. It is currently
$2.12 per million dollars of settling value (i.e., the absolute value
of
[[Page 78894]]
the CNS Long Positions and Short Positions).\14\
---------------------------------------------------------------------------
\14\ The current ``value out of the net'' component of the
Clearance Activity Fee was implemented in 2019 as part of fee
changes to address pricing complexity. See Securities Exchange Act
Release No. 84770 (December 10, 2018), 83 FR 64374 (December 14,
2018) (SR-NSCC-2018-011).
---------------------------------------------------------------------------
Due to the coronavirus global pandemic and overall reaction by the
financial markets, NSCC's cost of funding has risen sharply in 2020,
particularly for NSCC's key default liquidity resources. The unexpected
increases in cost and expense to secure and maintain those default
liquidity resources has added millions of dollars to NSCC's expense.
As described above, after completing NSCC's 2020 annual budgeting
process--in which NSCC evaluated its short- and long-term financial
position in consideration of expected Member activity, revenues, cost
of funding, market volatility, and the financial markets more broadly,
concerns remained around NSCC's net income operating margin. In order
to address this issue and to better align cost with revenue, NSCC
proposes to modify the ``value out of the net'' component of the
Clearance Activity Fee from $2.12 per million dollars of settling value
to $2.56 per million dollars of settling value. Specifically, NSCC
anticipates that the proposed change would enable NSCC to offset the
increase in its cost and expense while generating a low net income
operating margin, consistent with NSCC's cost plus low margin pricing
model.
NSCC believes modifying the ``value out of the net'' component of
the Clearance Activity Fee would further help support NSCC's net income
operating margin and, accordingly, its credit ratings, which, as
described above, are key factors in NSCC's costs, expenses, and
funding.
Rebate Policy
NSCC is also proposing to amend Section VIII of the Fee Structure
to replace the description currently under the heading ``NSCC Pricing
Policy'' with a description of its current policy regarding the
issuance of rebates to Members. In connection with this change, the
proposed change would also amend the title of Section VIII to ``NSCC
Rebate Policy'' to better describe the policy in this section.
Section VIII of the Fee Structure currently includes an outdated
description of NSCC's policy to adjust Members' invoices based on
NSCC's revenues. This description states that NSCC may adjust invoices
down in the form of a discount or up in the form of a surcharge, based
on its revenues. NSCC did historically provide its Members with a
discount on their invoices, but it does not have any record of
adjusting Members' invoices up, in the form of a surcharge, in the
past.
NSCC views its practice of providing a rebate to its Members as a
corporate function, and not related to its operation as a self-
regulatory organization. An NSCC rebate is essentially a return of the
revenue that NSCC collects through the fees it charges Members for its
services (as set forth in Addendum A of the Rules). Rebates are not
related to the amounts Members deposit with NSCC as their Required Fund
Deposits, which are made up of risk-based margin charges calculated
pursuant to Procedure XV of the Rules. The determination to provide a
rebate is made at the corporation-level, based on a number of factors
and considerations, as described below, and is not a separate
determination made for each individual Member.
Following the financial recession of 2008, NSCC ceased providing
such discounts in connection with the implementation of a financial
strategy to strengthen its financial position and health. As a result
of that strategy and improved financial markets, in 2019 NSCC
determined to reinstitute its practice of discounting Members'
invoices, in the form of a rebate, based on its financial performance.
In connection with this decision, NSCC is proposing to replace the
language under the heading ``NSCC Pricing Policy'' in Section VIII of
the Fee Structure to describe its current rebate practice. This
proposed change would not change NSCC's current rebate practice but
would provide Members with transparency into this practice and the
governance around rebates.
(ii) Proposed Fee Changes
NSCC is proposing to change the Maintenance Fee in Subsection G
(Clearing Fund Maintenance Fee) of Section V (Pass-Through and Other
Fees) of the Fee Structure. Specifically, NSCC is proposing to modify
the Maintenance Fee by removing language regarding application of the
IOER rate and a floor of 0.00 percent.
In addition, NSCC is proposing to change the Clearance Activity Fee
in Subsection A (Clearance Activity Fee) of Section II (Trade Clearance
Fees) of the Fee Structure. Specifically, NSCC is proposing to modify
the ``value out of the net'' component of the Clearance Activity Fee
from $2.12 per million of settling value to $2.56 per million of
settling value.
Finally, NSCC is proposing to amend Section VIII of the Fee
Structure to replace the description currently under the heading ``NSCC
Pricing Policy'' with a description of its current policy regarding the
issuance of rebates to Members, as described above.
First, in connection with this change, the proposed change would
also amend the title of Section VIII to ``NSCC Rebate Policy'' to
better describe the policy in this section.
Second, the proposed language would describe that NSCC may provide
Members with a rebate of excess net income, and would define excess net
income as either income of NSCC or income related to one business line
of NSCC, after application of expenses, capitalization costs, and
applicable regulatory requirements. The language would also state that
a rebate is discretionary, to make it clear that NSCC is not obligated
to provide a rebate.
Third, the proposed language would state that a rebate would be
approved by the Board. The proposed language would also state that, in
determining whether a rebate is appropriate, the Board would consider
one or more of the following, as appropriate: NSCC's regulatory capital
requirements,\15\ anticipated expenses, investment needs, anticipated
future expenses with respect to improvement or maintenance of NSCC's
operations, cash balances, financial projections, and appropriate level
of shareholders' equity.
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\15\ NSCC manages its general business risk by holding
sufficient liquid net assets funded by equity to cover potential
general business losses so it can continue operations and services
as going concerns if those losses materialize, in compliance with
the requirements of Rule 17Ad-22(e)(15). 17 CFR 240.17Ad-22(e)(15).
NSCC maintains a Clearing Agency Policy on Capital Requirements
which defines the amount of capital it must maintain for this
purpose and sets forth the manner in which this amount is
calculated. See Securities Exchange Act Release No. 89360 (July 21,
2020), 85 FR 45280 (July 27, 2020) (SR-NSCC-2020-014) (amending
original filing).
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Fourth, the proposed language would state that, if the Board
determined to issue a rebate, it would set a rebate period and a rebate
payment date, both of which are used to determine which Members are
eligible for a rebate. The proposed language would state that Members
that maintain their membership during all or a portion of the rebate
period and on the rebate payment date are eligible for a rebate.
Finally, the proposed language would describe how rebates are
applied to the invoices of eligible Members. The proposed language
would state that rebates are applied to all eligible Members on a pro-
rata basis based on
[[Page 78895]]
such Members' gross fees paid to NSCC within the applicable rebate
period, excluding pass-through fees and interest earned on Required
Fund Deposits. The proposed language would also state that rebates are
applied to eligible Members' invoices on the rebate payment date as
either a reduction in fees owed or, if fees owed are lower than the
allocated rebate amount, a payment of such difference. The proposed
language would also note that rebate amounts may be adjusted for
miscellaneous charges and discounts.
(iii) Expected Member Impact
The proposed rule change, as modified by Amendment No. 1, is
expected to increase NSCC's annual revenue by approximately $31.6
million.
In general, NSCC anticipates that, as result of the proposed
changes, approximately 62% of impacted affiliated family of members
would have a fee increase of less than $1,000 per year, approximately
24% of impacted affiliated family of members would have a fee increase
between $1,000 to $100,000 per year, approximately 10% of impacted
affiliated family of members would have a fee increase of $100,000 to
$1 million per year, and approximately 4% of impacted affiliated family
of members would have a fee increase of $1 million or greater per year.
(iv) Member Outreach
NSCC has conducted ongoing outreach to each Member in order to
provide them with notice of the proposed changes and the anticipated
impact for the Member. As of the date of this filing, no written
comments relating to the proposed changes have been received in
response to this outreach. The Commission will be notified of any
written comments received.
(v) Implementation Timeframe
NSCC would implement this proposal on January 1, 2021. As proposed,
a legend would be added to the Fee Structure stating there are changes
that became effective upon filing with the Commission but have not yet
been implemented. The proposed legend also would include the date on
which such changes would be implemented and the file number of this
proposal, and state that, once this proposal is implemented, the legend
would automatically be removed.
2. Statutory Basis
NSCC believes this proposal is consistent with the requirements of
the Act, and the rules and regulations thereunder applicable to a
registered clearing agency. Specifically, NSCC believes the proposed
changes to modify the Maintenance Fee and the ``value out of the net''
component of the Clearance Activity Fee are consistent with Section
17A(b)(3)(D) of the Act \16\ and the proposed change to include a
description of NSCC's current policy regarding the issuance of rebates
to Members is consistent with Rule 17Ad-22(e)(23)(ii),\17\ as
promulgated under the Act, for the reasons described below.
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\16\ 15 U.S.C. 78q-1(b)(3)(D).
\17\ 17 CFR.17Ad-22(e)(23)(ii).
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Section 17A(b)(3)(D) of the Act \18\ requires that the Rules
provide for the equitable allocation of reasonable dues, fees, and
other charges among its participants. NSCC believes that the proposed
changes to the Maintenance Fee and the ``value out of the net''
component of the Clearance Activity Fee are consistent with this
provision of the Act.
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\18\ 15 U.S.C. 78q-1(b)(3)(D).
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As described above, the proposal would modify the Maintenance Fee
to no longer calculate the fee using the corresponding month's average
IOER rate; rather, the calculation would revert to using a fixed rate
of 0.25 percent, thus, negating the need to maintain the current floor
of 0.00 percent.
Because the proposed change would not alter how the Maintenance Fee
is currently allocated (i.e., charged) to Contributing Members, NSCC
believes the fee would continue to be equitably allocated. More
specifically, as mentioned above, the Maintenance Fee is and would
continue to be charged to all Contributing Members in proportion to the
Contributing Member's average monthly cash deposit to the Clearing
Fund. As such, and as is currently the case, Contributing Members that
make greater use of NSCC's guaranteed services or which have activity
in those services that present greater risk to NSCC would generally be
subject to a larger Maintenance Fee because such Contributing Members
would typically be required to maintain larger Clearing Fund deposits
pursuant to the Rules.\19\ Conversely, Contributing Members that use
NSCC's guaranteed services less or which have activity that presents
less risk would generally be subject to a smaller Maintenance Fee
because such Contributing Members would typically be required to
maintain smaller Clearing Fund deposits pursuant to the Rules.\20\ The
proposed change to the Maintenance Fee would not adjust that
allocation. For this reason, NSCC believes the Maintenance Fee would
continue to be equitably allocated among Contributing Members.
---------------------------------------------------------------------------
\19\ See Rule 4 and Procedure XV, supra note 5.
\20\ Id.
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Similarly, NSCC believes that the Maintenance Fee would continue to
be a reasonable fee under the proposed change described above. For
example, by using a fixed rate, instead of a rate that fluctuates with
the IOER rate, Contributing Members should be better able to anticipate
the cost of the fee. Meanwhile, a fixed rate would not only improve
NSCC's ability to estimate revenue from the fee, but it also would
stabilize the revenue received from the fee. As described above,
greater stability in the revenue generated from the fee would help
support NSCC's net income operating margin and, accordingly, its credit
ratings, which are key factors in NSCC's costs, expenses, and funding.
Additionally, using a fixed rate of 0.25 percent would help ensure that
Contributing Members are not charged an amount greater than what was
possible under the original and current calculation of the fee. Lastly,
the proposed change would help establish consistent pricing between
NSCC and its affiliates, DTC and FICC, regarding each of their
respective Maintenance Fees, as concurrent proposals by DTC and FICC
would result in the same calculation.\21\ For this reason, NSCC
believes the Maintenance Fee would continue to be reasonable. Based on
the forgoing, NSCC believes the proposed rule change to the Maintenance
Fee is consistent with Section 17A(b)(3)(D) of the Act.\22\
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\21\ See supra note 13.
\22\ 15 U.S.C. 78q-1(b)(3)(D).
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NSCC believes the proposed rule change to the ``value out of the
net'' component of the Clearance Activity Fee would provide for the
equitable allocation of reasonable fees. Because the proposed change
would not alter how the Clearance Activity Fee is currently allocated
(i.e., charged) to Members, NSCC believes the fee would continue to be
equitably allocated. More specifically, as mentioned above, the ``value
out of the net'' component of the Clearance Activity Fee is based on a
Member's daily aggregate market value of all settling CNS positions
after netting. As such, and as is currently the case, Members that make
greater use of NSCC's guaranteed services would generally be subject to
a larger Clearance Activity Fee because such Members would typically
have higher value of net positions after netting. Conversely, Members
that use NSCC's guaranteed services less would generally be subject to
a smaller Clearance Activity Fee
[[Page 78896]]
because such Members would typically have lower value of net positions
after netting. The proposed change to the ``value out of the net''
component of the Clearance Activity Fee would not adjust that
allocation. For this reason, NSCC believes the Clearance Activity Fee
would continue to be equitably allocated among Members.
NSCC believes that the Clearance Activity Fee would continue to be
a reasonable fee under the proposed change described above. This is
because the proposed change to modify the ``value out of the net''
component of the Clearance Activity Fee is designed to offset NSCC's
increased costs and expenses while generating a low net income
operating margin. As described above, in determining the appropriate
level of the proposed change to modify the ``value out of the net''
component of the Clearance Activity Fee, NSCC considered a variety of
factors, including expected Member activity, revenues, cost of funding,
market volatility, and the financial markets more broadly. Based on
that consideration, NSCC believes the proposed change would allow NSCC
to assess a fee that is better aligned with NSCC's increased costs and
expenses. Having the ability to assess a fee that is better aligned
with NSCC's increased costs and expenses would further help support
NSCC's net income operating margin and, accordingly, its credit
ratings, which are key factors in NSCC's costs, expenses, and funding.
For this reason, NSCC believes the Clearance Activity Fee would
continue to be reasonable. Based on the forgoing, NSCC believes the
proposed rule change to the ``value out of the net'' component of the
Clearance Activity Fee is consistent with Section 17A(b)(3)(D) of the
Act.\23\
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\23\ Id.
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Rule 17Ad-22(e)(23)(ii) under the Act requires that NSCC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide sufficient information to enable
participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in the covered clearing
agency.\24\ The proposed change would replace an outdated description
of NSCC's past practice of adjusting Members' invoices with an updated
description of its current rebate practice, which, when applicable,
results in a reduction to the amount of fees a Member owes to NSCC. By
updating the Fee Structure with a clear, transparent description of
NSCC's current rebate practice, the proposed change would provide
Members with sufficient information to evaluate the fees they may incur
by participating in NSCC. Therefore, NSCC believes the proposed change
would be consistent with the requirements of Rule 17Ad-
22(e)(23)(ii).\25\
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\24\ 17 CFR 240.17Ad-22(e)(23)(ii).
\25\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
NSCC does not believe that the proposed change to the Maintenance
Fee would have an impact on competition among Contributing Members. As
described above, the Maintenance Fee is charged ratably based on
Contributing Members' use of NSCC's guaranteed services, as reflected
in Contributing Members' deposits to the Clearing Fund. Thus, the fee
is designed to be reflective of each Contributing Member's individual
activity at NSCC. Additionally, NSCC does not believe reverting to a
fixed rate of 0.25 percent in calculating the Maintenance Fee would
have any impact on competition among Contributing Members because using
such a rate means that Contributing Members still cannot be assessed an
amount greater than what could have been assessed under the original
and current calculations of the fee.
However, appreciating that the value of a dollar is not consistent
for each Contributing Member, if the change to no longer calculate the
fee using the corresponding month's average IOER rate would create a
competitive burden for a Contributing Member because the Contributing
Member could be assessed a higher fee at a time when that IOER rate is
lower than the proposed 0.25 percent fixed rate, NSCC believes such a
burden would not be significant, given that the amount assessed would
still be within the range of what could be assessed under the current
calculation. Moreover, NSCC believes that any such burden would be
necessary and appropriate in furtherance of the purposes of the Act, as
permitted by Section 17A(b)(3)(I) of the Act.\26\
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\26\ 15 U.S.C. 78q-1(b)(3)(I).
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The burden would be necessary because it is essential that NSCC
continue to offset some of its costs and expenses with stable revenue
generated from the Maintenance Fee, regardless of the economic
environment. As described above, not doing so could adversely affect
NSCC's credit ratings, which could further increase funding or,
possibly, decrease the availability of crucial liquidity resources for
NSCC. The burden would be appropriate because, as described above, the
Maintenance Fee is calculated, using a balanced formula, to assess a
fee that is reflective of the Contributing Member's use of NSCC's
guaranteed services, so that NSCC can defray some of its costs and
expenses in providing those services. More specifically, returning to a
fixed rate of 0.25 percent would be appropriate because it is the same
rate that was used prior to the change made in June 2020,\27\ and it is
currently the ceiling used in the existing calculation; thus, the new
calculation still would not use a rate any higher than it could have
previously.
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\27\ See June Filing, supra note 7.
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NSCC believes the proposed rule change to modify the ``value out of
the net'' component of the Clearance Activity Fee may have an impact on
competition among its Members because the change would likely increase
the fees of those Members that utilize NSCC's guaranteed service when
compared to their fees under the current Fee Structure. NSCC believes
the proposed change could burden competition by negatively affecting
such Members' operating costs. While these Members may experience
increases in their fees when compared to their fees under the current
Fee Structure, NSCC does not believe the proposed change in and of
itself mean that the burden on competition is significant. This is
because even though the amount of the fee increase may seem significant
(e.g., from $2.12 to $2.56 per million of settling value), NSCC
believes the increase in fees would similarly affect all Members that
utilize NSCC's guaranteed services and would be reflective of each
Member's individual activity at NSCC, and therefore the burden on
competition would not be significant. Regardless of whether the burden
on competition is deemed significant, NSCC believes any burden that is
created by this proposed change would be necessary and appropriate in
furtherance of the purposes of the Act, as permitted by Section
17A(b)(3)(I) of the Act.\28\
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\28\ Id.
---------------------------------------------------------------------------
The burden would be necessary because it is essential that NSCC
continue to offset some of its costs and expenses with revenue
generated from the Clearance Activity Fee, regardless of the economic
environment. As described above, not doing so could adversely affect
NSCC's credit ratings, which could further increase funding or,
possibly, decrease the availability of crucial liquidity resources for
NSCC. The burden would be appropriate because, as described above, the
Clearance Activity Fee is calculated,
[[Page 78897]]
using a balanced formula, to assess a fee that is reflective of the
Member's use of NSCC's guaranteed services, so that NSCC can defray
some of its costs and expenses in providing those services. More
specifically, NSCC believes the proposed rule change to modify the
``value out of the net'' component of the Clearance Activity Fee would
be appropriate because it would allow NSCC to assess a fee that is
better aligned with NSCC's increased costs and expenses while
generating a low net income operating margin.
NSCC does not believe the proposed change to describe its current
rebate practice would have any impact, or impose any burden, on
competition among its Members. As described above, this proposed rule
change, as modified by Amendment No. 1, would replace outdated
information currently in the Fee Structure with an updated description
of NSCC's current rebate practice. As described in the proposed
language, under its current practice, rebates are allocated to eligible
Members on a pro-rata basis based on such Members' gross fees paid to
NSCC within the applicable rebate period. Therefore, the current
practice is applied equally to all eligible Members. The proposed
change to provide Members with transparency into this practice would
not cause any increase or decrease in the rebates Members may receive.
Therefore, this proposed rule change, as modified by Amendment No. 1,
would not have any impact, or impose any burden, on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule
Change, as Modified by Amendment No. 1, Received From Members,
Participants, or Others
Written comments relating to this proposed rule change, as modified
by Amendment No. 1, have not been solicited or received. NSCC will
notify the Commission of any written comments received by NSCC.
III. Date of Effectiveness of the Proposed Rule Change, as Modified by
Amendment No. 1, and Timing for Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \29\ and paragraph (f) of Rule 19b-4
thereunder.\30\ At any time within 60 days of the filing of the
proposed rule change, as modified by Amendment No. 1, the Commission
summarily may temporarily suspend such rule change if it appears to the
Commission that such action is necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the purposes of the Act.
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\29\ 15 U.S.C. 78s(b)(3)(A).
\30\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 1, is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NSCC-2020-018 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-2020-018. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change, as modified by
Amendment No. 1, that are filed with the Commission, and all written
communications relating to the proposed rule change, as modified by
Amendment No. 1, 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-2020-018 and should be
submitted on or before December 28, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-26785 Filed 12-4-20; 8:45 am]
BILLING CODE 8011-01-P
