Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection To Advance Notice To Amend the Supplemental Liquidity Deposit Requirements, 24989-24994 [2021-09788]
Download as PDF
<![CDATA[
Federal Register / Vol. 86, No. 88 / Monday, May 10, 2021 / Notices
Moreover, the Exchange notes that, as
discussed in the Proposed CAT Fee Plan
Amendment, the Operating Committee
determined that the proposed fees do
not impose an unnecessary or
inappropriate burden on competition as
they fairly and equitably allocate costs
among CAT Reporters.55 The Operating
Committee determined that the cost
allocation between Participants and
Industry Members recognizes the greater
number of Industry Members as
compared to the Participants and the
greater collective revenue of Industry
Members as compared to Participants.
In addition, cost allocations among
Industry Members based on message
traffic fairly and equitably distribute
CAT costs. Furthermore, the market
maker discounts and the Maximum
Industry Member CAT Fee address the
potential for burdens on market makers
and Industry Members with outsized
message traffic potentially resulting
from the proposed fee calculations.
Moreover, the Operating Committee
determined that the Minimum Industry
Member CAT Fee would not act as a
barrier to entry for smaller Industry
Member CAT Reporters.
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
The foregoing rule change has become
effective pursuant to Section
19(b)(3)(A)(ii) of the Act.56 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: (i)
Necessary or appropriate in the public
interest; (ii) for the protection of
investors; or (iii) otherwise in
furtherance of the purposes of the Act.
If the Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
khammond on DSKJM1Z7X2PROD with NOTICES
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.
55 See
Proposed CAT Fee Plan Amendment at
21070.
56 15 U.S.C. 78s(b)(3)(A)(ii).
VerDate Sep<11>2014
19:05 May 07, 2021
Jkt 253001
Comments may be submitted by any of
the following methods:
24989
SECURITIES AND EXCHANGE
COMMISSION
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–
GEMX–2021–03 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–GEMX–2021–03. 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–GEMX–2021–03su≤10 and
should be submitted on or before June
1, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.57
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–09784 Filed 5–7–21; 8:45 am]
BILLING CODE 8011–01–P
57 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00151
Fmt 4703
Sfmt 4703
[Release No. 34–91770; File No. SR–NSCC–
2021–801]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of No Objection To
Advance Notice To Amend the
Supplemental Liquidity Deposit
Requirements
May 4, 2021.
I. Introduction
On March 5, 2021, National Securities
Clearing Corporation (‘‘NSCC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) advance
notice SR–NSCC–2021–801 (‘‘Advance
Notice’’) pursuant to Section 806(e)(1) of
Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
entitled Payment, Clearing and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) 2 under the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 3 to amend its Supplemental
Liquidity Deposit Requirements.4 The
Advance Notice was published for
comment in the Federal Register on
March 24, 2021,5 and the Commission
has received comments in support of the
changes proposed in the Advance
Notice.6 The Commission is hereby
providing notice of no objection to the
Advance Notice.
1 12
U.S.C. 5465(e)(1).
CFR 240.19b–4(n)(1)(i).
3 15 U.S.C. 78a et seq.
4 See Notice of Filing infra note 5, at 86 FR 15750.
5 Exchange Act Release No. 91347 (March 18,
2021), 86 FR 15750 (March 24, 2021) (File No. SR–
NSCC–2021–801) (‘‘Notice of Filing’’). NSCC also
filed a related proposed rule change with the
Commission pursuant to Section 19(b)(1) of the
Exchange Act and Rule 19b–4 thereunder. 15 U.S.C.
78s(b)(1) and 17 CFR 240.19b–4, respectively. NSCC
seeks approval of the proposed changes to its rules
necessary to implement the Advance Notice (the
‘‘Proposed Rule Change’’). The Proposed Rule
Change was published in the Federal Register on
March 24, 2021. Securities Exchange Act Release
No. 91350 (March 18, 2021), 86 FR 15738 (March
24, 2021) (SR–NSCC–2021–002). The comment
period for the related Proposed Rule Change closed
on April 14, 2021.
6 Comments are available at https://www.sec.gov/
comments/sr-nscc-2021-801/srnscc2021801.htm.
Since the proposal contained in the Advance Notice
was also filed as a separate but related Proposed
Rule Change, all public comments received on the
proposals are considered regardless of whether the
comments are submitted to the Proposed Rule
Change or the Advance Notice. To date, the
comments received generally support the proposal.
2 17
E:\FR\FM\10MYN1.SGM
10MYN1
24990
Federal Register / Vol. 86, No. 88 / Monday, May 10, 2021 / Notices
II. The Advance Notice
A. Background
As a central counterparty (‘‘CCP’’),7
NSCC occupies an important role in the
securities settlement system by
interposing itself between
counterparties to financial transactions,
becoming the buyer to each seller and
seller to each buyer to ensure the
performance of the contract, thereby
reducing the risk faced by its Members 8
and contributing to global financial
stability. NSCC’s liquidity risk
management plays an integral part in
NSCC’s ability to perform its role as a
CCP. If a Member defaults, NSCC, as a
CCP, would need to complete settlement
of guaranteed transactions on the failing
Member’s behalf from the date of default
through the remainder of the settlement
cycle (currently two days for securities
that settle on a regular way basis in the
U.S. markets). To do so, and to meet its
related regulatory requirements, NSCC
seeks to maintain sufficient liquid
resources in order to meet the potential
funding required to settle outstanding
transactions of a defaulting Member in
a timely manner, as well as to hold
qualifying liquid resources sufficient to
meet its minimum liquidity resource
requirement in each relevant currency
for which it has payment obligations
owed to its Members.9
NSCC has a number of default
liquidity resources that it considers to
be qualifying liquid resources for the
purposes of Rule 17Ad–22(a)(14).10
These resources include: (1) Cash
deposits to the NSCC Clearing Fund; 11
(2) the proceeds of the issuance and
private placement of (a) short-term,
unsecured notes in the form of
commercial paper and extendable notes
(‘‘Commercial Paper Program’’),12 and
7 17
CFR 240.17Ad–22(a)(1).
terms not defined herein are defined
in NSCC’s Rules and Procedures (‘‘Rules’’),
available at https://dtcc.com/∼/media/Files/
Downloads/legal/rules/nscc_rules.pdf.
9 See Securities Exchange Act Release No. 82377
(December 21, 2017), 82 FR 61617 (December 28,
2017) (File Nos. SR–DTC–2017–004; SR–FICC–
2017–008; SR–NSCC–2017–005) (approving NSCC’s
Liquidity Risk Management Framework).
10 See Notice of Filing, supra note 5, at 15751.
Qualifying liquid resources include, among other
things: Cash held either at the central bank of issue
or at creditworthy commercial banks, and assets
that are readily available and convertible into cash
through prearranged funding arrangements, such as
committed arrangements without material adverse
change provisions, including lines of credit, foreign
exchange swaps, and repurchase agreements. 17
CFR 240.17Ad–22(a)(14).
11 See Rule 4 (Clearing Fund) and Procedure XV
(Clearing Fund Formula and Other Matters) of the
Rules, supra note 8.
12 See Securities Exchange Act Release Nos.
75730 (August 19, 2015), 80 FR 51638 (August 25,
khammond on DSKJM1Z7X2PROD with NOTICES
8 Capitalized
VerDate Sep<11>2014
19:05 May 07, 2021
Jkt 253001
(b) term debt (‘‘Term Debt Issuance’’); 13
(3) cash that would be obtained by
drawing on NSCC’s committed 364-day
credit facility with a consortium of
banks (‘‘Line of Credit’’); 14 and (4)
supplemental liquidity deposits,
collected pursuant to NSCC Rule 4(A),
as discussed further below.15
B. Current Rules Relating to
Supplemental Liquidity Deposits
Currently, NSCC only collects
supplemental liquidity deposits during
monthly options expiry periods in order
to cover the heightened liquidity
exposure resulting from increased
trading activity around options
expiration.16 NSCC only collects
supplemental liquidity deposits from its
30 largest Members or group of affiliated
Members (hereinafter, ‘‘Providers’’).17
NSCC calculates each Provider’s
supplemental liquidity obligation for an
upcoming options expiry period using
an estimate based on NSCC’s highest
liquidity need and the Provider’s
settlement activity during the prior 24months.18 Providers, in turn, must fund
their supplemental liquidity obligations
two business days prior to the start of
the options expiry period, which NSCC
will return seven business days after the
end of that period.19
In order to ensure NSCC maintains
adequate liquidity resources throughout
the options expiry period, providers
may voluntarily prefund additional
supplemental liquidity deposits at the
start of the period, if it anticipates
2015) (File No. SR–NSCC–2015–802); 82676
(February 9, 2018), 83 FR 6912 (February 15, 2018)
(File No. SR–NSCC–2017–807).
13 See Securities Exchange Act Release No. 88146
(February 7, 2020), 85 FR 8046 (February 12, 2020)
(File No. SR–NSCC–2019–802).
14 See Securities Exchange Act Release No. 80605
(May 5, 2017), 82 FR 21850 (May 10, 2017) (File
Nos. SR–DTC–2017–802; SR–NSCC–2017–802).
15 See Rule 4(A) (Supplemental Liquidity
Deposits) of the Rules, supra note 8. See also
Securities Exchange Act Release Nos. 70999
(December 5, 2013), 78 FR 75413 (December 11,
2013) (File No. SR–NSCC–2013–02); 71000
(December 5, 2013), 78 FR 75400 (December 11,
2013) (File No. SR–NSCC–2013–802).
16 See Rule 4(A), supra note 8. NSCC defines the
duration of the options expiry periods in its Rules,
which typically runs from the third Friday of the
month to the following Tuesday. See id.
17 See Section 2 of Rule 4(A), supra note 8. NSCC
may use a Provider’s supplemental liquidity deposit
to satisfy a loss or liability arising only from that
Provider’s default on its obligations to NSCC.
Supplemental liquidity deposits are not otherwise
subject to NSCC’s Loss Allocation Waterfall. See
Section 13(c) of Rule 4(A), supra note 8.
18 See Section 2 of Rule 4(A), supra note 8.
Typically, NSCC performs this calculation, at the
latest, one week prior to the start of the options
expiry period.
19 See Sections 4 and 9 of Rule 4(A), supra note
8.
PO 00000
Frm 00152
Fmt 4703
Sfmt 4703
increases in its trading activity,
compared to its historical activity, will
create a liquidity shortfall at NSCC.20 In
the event a Provider fails to provide
adequate voluntary prefunded deposits,
NSCC may require the Provider to fund
additional supplemental liquidity
deposits if NSCC experiences a resulting
liquidity shortfall,21 which NSCC may
hold for up to 90 days.22 The 90-day
lock-up incentivizes Providers to
voluntarily prefund their supplemental
liquidity deposits in order to ensure
NSCC maintains adequate liquidity
resources throughout the options expiry
period.
C. Proposed Changes to the Rules
Relating to Supplemental Liquidity
Deposits
As discussed above, NSCC may only
collect supplemental liquidity deposits
during monthly options expiry periods
under its current Rules. However, NSCC
can face sudden liquidity shortfalls on
any business day, not just those
business days that fall within monthly
options expiry periods, particularly
during volatile market conditions
unrelated to options expiration.23 To
address this issue, NSCC proposes to
change the frequency at which it may
collect supplemental liquidity deposits
to each business day, based on a daily
calculation. This proposed approach to
collecting supplemental liquidity
deposits should allow NSCC to respond
quickly to any sudden liquidity
shortfalls arising from a Provider’s
activity, regardless of when those
shortfalls occur.
NSCC also proposes an alternative pro
rata daily calculation in the rare event
its regular daily calculation would
inadvertently result in collecting
supplement liquidity deposits from
multiple Providers that, taken together,
would significantly exceed NSCC’s
liquidity needs on that day.
Additionally, NSCC proposes the ability
to collect supplemental liquidity
deposits on an intraday basis in certain
instances where sudden intraday
increases in liquidity risk justify
shortening the amount of time NSCC is
exposed to that risk, including a
mandatory intraday collection in
connection with monthly options expiry
periods.
20 See Section 2 of Rule 4(A), supra note 8. See
also, Notice of Filing, supra note 5, at 15752.
21 See Section 7 of Rule 4(A), supra note 8.
22 See Section 10 of Rule 4(A), supra note 8.
23 See Notice of Filing, supra note 5, at 15752.
E:\FR\FM\10MYN1.SGM
10MYN1
Federal Register / Vol. 86, No. 88 / Monday, May 10, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
1. Proposed Daily Calculation of
Supplemental Liquidity Deposits
A Provider 24 will be obligated to
provide a supplemental liquidity
deposit on each business day in which
its settlement activity causes a liquidity
shortfall at NSCC.25 NSCC will provide
a notice to each Provider of the amount
of its supplemental liquidity deposit,
which the Provider will be required to
fund within one hour of such notice.26
NSCC proposes to return supplemental
liquidity deposits on the next business
day.27
NSCC states that, under its proposed
calculation, it will no longer need to
estimate its liquidity need for a
Provider’s expected settlement activity
based on the Provider’s historical
settlement activity.28 Instead, each
Provider’s deposit will be calculated
based on NSCC’s actual liquidity need
based on the Provider’s daily settlement
activity in the event the Provider
defaulted on that day, which NSCC
believes will provide both NSCC and
Providers with a more reliable measure
of the liquidity risks posed to NSCC.29
NSCC provided the Commission with
the results of an impact study
comparing the proposal against the
observed regulatory liquidity needs and
24 Under the proposal, Providers will continue to
be the 30 largest Members or group of affiliated
Members, but NSCC proposes to simplify how it
determines the 30 Providers in order to provide
greater transparency and predictability in its
determination. The 30 Providers will be determined
daily and will be based on the Provider’s settlement
activity during the prior 24-months. NSCC’s
determination will no longer require a calculation
of liquidity exposures the Providers presented to
NSCC based on NSCC’s qualifying liquid resources
throughout a 24 month lookback period. NSCC will
continue to make available to each Member daily
information on NSCC’s liquidity need based on that
Member’s settlement activity on the previous
business day.
25 A liquidity shortfall will arise if NSCC’s daily
liquidity need exceeds its qualifying liquid
resources, assuming stressed market conditions.
NSCC will continue to apply stress scenarios in
determining its total qualifying liquid resources in
order to anticipate market conditions that could
cause those resources to be unavailable on that day.
Because the daily calculation will be done at the
start of each business day, it will be based on the
qualifying liquid resources available to NSCC as of
the end of the prior business day.
26 NSCC’s proposed timing would mirror the
current requirement that is applied to its Members’
Required Fund Deposits (i.e., margin), which is also
calculated and collected daily, and must be funded
within one hour of demand. NSCC expects to
deliver notification of Provider obligations by
around 8:30 a.m. ET each business day, with
deposits required by no later than 9:30 a.m. ET. See
Notice of Filing, supra note 5, at 15753.
27 See Notice of Filing, supra note 5, at 15754.
Because NSCC would recalculate supplemental
liquidity deposits daily, NSCC will no longer need
to hold deposits for the extended periods under its
current Rules. See id.
28 See Notice of Filing, supra note 5, at 15753.
29 See id.
VerDate Sep<11>2014
19:05 May 07, 2021
Jkt 253001
NSCC’s qualifying liquid resources
available during the period from 2016
through 2020. The study assessed both
pro-forma and hypothetical impacts of
the proposal under various liquidity
scenarios. The study also analyzed
historical trends including the average
composition and rankings of the top 30
Providers at NSCC during the 2016 to
2020 period. Based on the pro-forma/
hypothetical impact as well analysis of
the top Providers, the study’s results
generally indicate that the proposal
would continue to allow NSCC to meet
its regulatory liquidity obligations, and
the largest Members would continue to
be the ones affected by supplemental
liquidity obligations.30
2. Proposed Pro Rata Calculation of
Supplemental Liquidity Deposits
As a potential alternative to the
calculation described above, NSCC
proposes a discretionary pro rata
calculation that could apply in the event
two or more Providers each would be
obligated to provide a supplemental
liquidity deposit of more than $2 billion
on a business day pursuant to the
calculation described above.31 Under
the proposed alternative, NSCC will
have the option to allocate, on a pro rata
basis, its largest liquidity need on a
business day to all Providers that are
required to make a supplemental
liquidity deposit on that day, thereby
reducing all such Providers’ obligations
to NSCC on that day. NSCC’s
determination will be based on the
market conditions at that time. For
example, NSCC may determine that, in
certain market conditions, this
alternative approach would be
appropriate to alleviate liquidity
pressures on all Providers required to
make a supplemental liquidity deposit
on that day.32 NSCC states this
alternative would allow NSCC to use
this pro rata calculation to sufficiently
cover its liquidity exposure on that day,
without requiring that all Providers
fund the total amount of its calculated
supplemental liquidity deposit on that
day.
30 See id. NSCC further states that if its other
qualifying liquid resources materially decrease, it
would expect to see an increase in both number and
amount of supplemental liquidity obligations that
Providers would have been required to fund under
the proposed rule. See id. at 15756.
31 NSCC represents that it has never had two or
more Providers owe more than $2 billion on a
calculation date since its adoption of the
supplemental liquidity deposit Rules in 2013.
Therefore, NSCC believes this alternative
calculation would only be available in very limited
circumstances. See Notice of Filing, supra note 5,
at 15754.
32 See Notice of Filing, supra note 5, at 15754.
PO 00000
Frm 00153
Fmt 4703
Sfmt 4703
24991
3. Proposed Intraday Supplemental
Liquidity Calls
NSCC also proposes to establish
intraday supplemental liquidity calls,
which are intended to allow NSCC to
calculate and collect additional
supplemental liquidity deposits on an
intraday basis if a Provider’s increased
daily activity levels or projected
settlement activity causes a NSCC
liquidity shortfall during a given day.33
NSCC believes the proposed intraday
supplemental liquidity calls will help to
mitigate increased liquidity exposures
presented to NSCC on an intraday basis
in specified circumstances, as discussed
further below.34
i. Proposed Mandatory Intraday
Supplemental Liquidity Call
First, NSCC proposes to establish a
mandatory monthly intraday
supplemental liquidity call that is
calculated and collected, when
applicable, on the first business day
(typically a Friday) of an options expiry
period.35 A Provider’s mandatory
intraday supplemental liquidity call
will be the difference between, on the
one hand, NSCC’s qualifying liquid
resources and, on the other hand,
NSCC’s daily liquidity need based on
the Provider’s settlement activity at the
start of the business day, recalculated to
account for both the Provider’s actual
settlement activity submitted to NSCC
over the course of the day, and the
Provider’s projected settlement activity
in stock options expected to be
submitted to NSCC.36 Because NSCC’s
recalculated daily liquidity need will
not factor in late day trades or other offsetting settlement activity,37 NSCC
proposes to adjust its re-calculated daily
liquidity need using an estimated
33 The alternative pro rata calculation described
in Section II.C.2 would not apply to an intraday
supplemental liquidity call.
34 See Notice of Filing, supra note 5, at 15754.
35 NSCC will retain how it defines the duration
of the options expiry periods in its Rules. See supra
note 19.
36 Each business day, NSCC receives information
regarding projected settlement activity from The
Options Clearing Corporation (‘‘OCC’’) pursuant to
a Stock and Futures Settlement Agreement. That
agreement provides for the clearance and settlement
of exercises and assignments of options on eligible
securities or the maturity of eligible stock futures
contracts through NSCC. See Securities Exchange
Act Release No. 81260 (July 31, 2017), 82 FR 36484
(August 4, 2017) (File Nos. SR–NSCC–2017–803;
SR–OCC–2017–804). In this case, the re-calculation
will be based on the data NSCC receives from OCC
late Thursday.
37 See Notice of Filing, supra note 5, at 15754. For
example, an affiliated Member may be entitled,
under NSCC Rules, to liquidity credits based the
trading activity of its affiliates, who are also
Members, in order to determine NSCC’s net
liquidity exposure from the affiliated family of
Members.
E:\FR\FM\10MYN1.SGM
10MYN1
24992
Federal Register / Vol. 86, No. 88 / Monday, May 10, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
netting percentage based on each
Provider’s average percentage of netting
from its off-setting settlement activity
observed over the prior 24 months.
NSCC states that the actual settlement
activity flowing into NSCC for cash
settlement of stocks underlying expiring
options is typically lower than the
projected settlement activity NSCC
receives from OCC on the Thursday
before the start of the options expiry
period due to late day offsetting trades
in stock options on that Friday;
therefore, applying this netting
percentage should more accurately
reflect the actual liquidity exposures
that will be presented to NSCC from the
Providers.38
ii. Proposed Discretionary Intraday
Supplemental Liquidity Call
Second, NSCC proposes to establish a
discretionary intraday supplemental
liquidity call on any business day other
than the first business day during
options expiry periods. Under this
provision, NSCC will have the
discretion to call for additional
supplemental liquidity deposits on an
intraday basis on any such business day
if a Provider’s increased activity levels
during that day would cause a liquidity
shortfall at NSCC. The amount of a
Provider’s intraday supplemental
liquidity call, pursuant to NSCC’s
discretion, would be the difference
between NSCC’s daily liquidity need,
recalculated to take into account the
increase in the Provider’s settlement
activity during the day, and NSCC’s
qualifying liquid resources.
NSCC states that it would collect a
discretionary intraday call in
circumstances where NSCC believes it
should accelerate the collection of a
Provider’s supplemental liquidity
obligation because that Provider’s
intraday settlement activity would cause
NSCC’s liquidity needs to exceed its
liquidity resources.39 For example,
NSCC may impose an intraday
supplemental liquidity call on a
Provider if NSCC determines that
Provider is unlikely to meet its
projected settlement obligations through
the settlement cycle due to rapidly
escalating financial stress.40 NSCC will
make this determination based on a
variety of factors, including NSCC’s
assessment of the Provider’s ability to
meet its obligations to NSCC (i.e., an
assessment of the Provider’s
creditworthiness on a particular
business day) or estimates of settlement
activity that could offset settlement
38 See
Notice of Filing, supra note 5, at 15754.
id.
40 See id.
39 See
VerDate Sep<11>2014
19:05 May 07, 2021
Jkt 253001
exposures and are not reflected in
NSCC’s liquidity estimates.41
III. Discussion and Commission
Findings
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, the stated
purpose of the Clearing Supervision Act
is instructive: To mitigate systemic risk
in the financial system and promote
financial stability by, among other
things, promoting uniform risk
management standards for SIFMUs and
strengthening the liquidity of SIFMUs.42
Section 805(a)(2) of the Clearing
Supervision Act authorizes the
Commission to prescribe regulations
containing risk management standards
for the payment, clearing, and
settlement activities of designated
clearing entities engaged in designated
activities for which the Commission is
the supervisory agency.43 Section 805(b)
of the Clearing Supervision Act
provides the following objectives and
principles for the Commission’s risk
management standards prescribed under
Section 805(a): 44
• To promote robust risk
management;
• to promote safety and soundness;
• to reduce systemic risks; and
• to support the stability of the
broader financial system.
Section 805(c) provides, in addition,
that the Commission’s risk management
standards may address such areas as
risk management and default policies
and procedures, among other areas.45
The Commission has adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act and Section 17A of the Exchange
Act (the ‘‘Clearing Agency Rules’’).46
The Clearing Agency Rules require,
among other things, each covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures that are reasonably
designed to meet certain minimum
requirements for its operations and risk
management practices on an ongoing
basis.47 As such, it is appropriate for the
Commission to review advance notices
against the Clearing Agency Rules and
41 See
id.
12 U.S.C. 5461(b).
43 12 U.S.C. 5464(a)(2).
44 12 U.S.C. 5464(b).
45 12 U.S.C. 5464(c).
46 17 CFR 240.17Ad–22. See Securities Exchange
Act Release No. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7–08–11). See also
Securities Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786 (October 13,
2016) (S7–03–14) (‘‘Covered Clearing Agency
Adopting Release’’). NSCC is a ‘‘covered clearing
agency’’ as defined in Rule 17Ad–22(a)(5).
47 Id.
42 See
PO 00000
Frm 00154
Fmt 4703
Sfmt 4703
the objectives and principles of these
risk management standards as described
in Section 805(b) of the Clearing
Supervision Act. As discussed below,
the Commission finds the proposal in
the Advance Notice is consistent with
the objectives and principles described
in Section 805(b) of the Clearing
Supervision Act,48 and in the Clearing
Agency Rules, in particular Rule 17Ad–
22(e)(7)(i) and (ii).49
A. Consistency With Section 805(b) of
the Clearing Supervision Act
The Commission finds that the
Advance Notice is consistent with the
stated objectives and principles of
Section 805(b) of the Clearing
Supervision Act.50 Specifically, the
Commission finds that the changes
proposed in the Advance Notice are
consistent with promoting robust risk
management in the area of liquidity risk,
promoting safety and soundness,
reducing systemic risks, and supporting
the broader financial system.
The Commission finds that the
changes proposed in the Advance
Notice are consistent with promoting
robust risk management, in particular
the management of liquidity risk
presented to NSCC. As a CCP and a
SIFMU, it is imperative that NSCC
maintains adequate resources to satisfy
liquidity needs arising from its
settlement obligations, including in the
event of a Member default. As described
above in Section II.C.1, NSCC currently
may only collect supplemental liquidity
deposits during monthly options expiry
periods. However, NSCC can also face
increased liquidity exposure from a
Member’s activity outside of these
periods, even if unrelated to options
settlement activity. The ability to
calculate and collect supplemental
liquidity deposits, as applicable, on a
daily basis should help NSCC more
accurately manage its daily liquidity
exposures based on Members’ actual
activity, as opposed to only being able
to collect additional liquidity resources
from Members during monthly options
expiry. Moreover, the proposal would
allow NSCC to determine the amount of
supplemental liquidity deposits based
on Members’ actual activity, providing
more precise and, potentially, lower
charges for Members than provided
under the current methodology, which
uses estimates based on a look-back
period and can, on occasion, result in
NSCC collecting more resources than
needed to cover its exposure.
48 12
U.S.C. 5464(b).
CFR 240.17Ad–22(e)(7)(i) and (ii).
50 12 U.S.C. 5464(b).
49 17
E:\FR\FM\10MYN1.SGM
10MYN1
Federal Register / Vol. 86, No. 88 / Monday, May 10, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
Additionally, as described above in
Section II.C.3, NSCC also proposes to
include both mandatory and
discretionary intraday supplemental
liquidity calls which would allow NSCC
to calculate and collect additional
supplemental liquidity deposits on an
intraday basis if a Provider’s increased
activity levels during that day or
projected settlement activity causes
NSCC’s daily liquidity need to exceed
its qualifying liquid resources. The
Commission finds that the mandatory
monthly intraday supplemental
liquidity calls on the first business day
of the monthly options expiry periods
should help NSCC continue to manage
the potential increased liquidity
exposures that may arise from options
settlement-related activity by allowing it
to accelerate the collection of
supplemental liquidity deposits on that
day, as opposed to waiting for the
proposed daily collection that would
occur on the morning of the following
business day. Moreover, the proposed
discretionary intraday supplemental
liquidity calls should collect additional
supplemental liquidity deposits from
Members whose activity outside of the
monthly options expiry periods may
cause a sudden increase in NSCC’s
liquidity needs on an overnight basis.
Therefore, because NSCC’s proposal is
designed to enable NSCC to better limit
its liquidity exposures that could arise
in the event of a Member default, the
Commission finds the changes proposed
in the Advance Notice promote robust
risk management, specifically in the
area of liquidity risk.
The Commission also finds that the
changes proposed in the Advance
Notice are consistent with promoting
safety and soundness, reducing systemic
risks, and promoting the stability of the
broader financial system. As described
above, NSCC’s proposal to calculate and
collect, if applicable, supplemental
liquidity deposits on a daily basis could
provide NSCC with additional liquidity
resources, including on days outside of
monthly Options Expiration Activity
Periods, in the event of a Member
default. Therefore, the changes
proposed would promote safety and
soundness by enabling NSCC to obtain
additional liquid resources to cover a
liquidity gap that could arise in the
event of a Member default.51 By
51 The Commission has reviewed and considered
the results of NSCC’s hypothetical impact studies.
See supra note 30 and accompanying text. Based on
that review, the Commission concludes that the
proposal could help mitigate the risks to NSCC that
could arise if NSCC is unable to secure adequate
default liquidity from other sources in an amount
necessary to meet its liquidity needs. For example,
the proposal could help mitigate the risks that
VerDate Sep<11>2014
19:05 May 07, 2021
Jkt 253001
covering such a gap, the proposal
bolsters NSCC’s ability to meet its
settlement obligations in the event of a
Member default and its ability to
continue to provide CCP services to its
Members.
In addition, the proposed changes
should reduce the potential
procyclicality of NSCC’s liquidity
demands, which could reduce the
potential for unexpected liquidity stress
to market participants in certain
situations. Because NSCC would now
calculate and collect, if applicable,
supplemental liquidity deposits on a
daily basis, the proposal should reduce
the likelihood that NSCC would have to
call on its Members to contribute
additional liquidity in periods of
financial stress, when liquidity may be
most costly. Therefore, the Commission
finds that by enhancing NSCC’s ability
to address losses and liquidity pressures
that otherwise might cause financial
distress to NSCC or its Members, the
Advance Notice promotes safety and
soundness.
Maintaining adequate liquidity
resources to help meet settlement
obligations in the event of a Member
default also enhances NSCC’s ability to
manage systemic risk and to support the
broader financial system. NSCC’s ability
to obtain additional liquid resources for
use in the event of a Member default
should reduce the risk of loss contagion
(i.e., the risk of losses arising at other
NSCC Members if NSCC is unable to
deliver cash or securities on the
defaulting Member’s behalf). Reducing
the risk of loss contagion would reduce
the potential transmission of financial
shocks from defaulting Members to nondefaulting Members, thereby enhancing
the ability of NSCC and its Members to
continue to provide stability and safety
to the financial markets that they serve.
Additionally, establishing an optional
alternative pro rata calculation of
supplemental liquidity deposits could
help NSCC alleviate any unintended but
significant liquidity constraints on its
Members, while still enabling NSCC to
meet its regulatory requirements with
respect to liquidity without collecting
more liquidity resources than needed.
The proposed pro rata calculation
would provide NSCC with a method to
reduce the supplemental liquidity
deposits owed by all Providers who
would otherwise be obligated to provide
such a deposit, which would be
appropriate in light of the likely stressed
could arise if investor demand for the short-term
notes issued under the Commercial Paper Program
weakens, there is limited investor demand for term
debt issued pursuant to a Term Debt Issuance, or
NSCC is unable to renew its Line of Credit at the
targeted amount.
PO 00000
Frm 00155
Fmt 4703
Sfmt 4703
24993
market conditions that would result in
two or more Providers presenting a
potential supplemental liquidity deposit
of over $2 billion. Likewise, because
NSCC would recalculate supplemental
liquidity deposit obligations each
business day, NSCC will no longer need
to hold supplemental liquidity deposits
for the extended periods under its
current Rule 4(A), which could also
alleviate liquidity pressures on its
Members. Accordingly, the Commission
finds the proposal is consistent with
reducing systemic risks, and promoting
the stability of the broader financial
system as contemplated in Section
805(b) of the Clearing Supervision
Act.52
For the reasons stated above, the
Commission finds the changes proposed
in the Advance Notice are consistent
with Section 805(b) of the Clearing
Supervision Act.53
B. Consistency With Rule 17Ad–
22(e)(7)(i) and (ii)
The Commission finds the changes
proposed in the Advance Notice are
consistent with Rules 17Ad–22(e)(7)(i)
and (ii), each promulgated under the
Exchange Act,54 for the reasons
described below.
Rule 17Ad–22(e)(7)(i) under the
Exchange Act requires that a covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
maintain sufficient liquid resources at
the minimum in all relevant currencies
to effect same-day and, where
appropriate, intraday and multiday
settlement of payment obligations with
a high degree of confidence under a
wide range of foreseeable stress
scenarios that includes, but is not
limited to, the default of the participant
family that would generate the largest
aggregate payment obligation for the
covered clearing agency in extreme but
plausible market conditions.55 Rule
17Ad–22(e)(7)(ii) under the Act requires
that a cover clearing agency establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to hold qualifying
liquid resources sufficient to meet the
minimum liquidity resource
requirement under Rule 17Ad–
22(e)(7)(i) in each relevant currency for
which the covered clearing agency has
52 12
U.S.C. 5464(b).
U.S.C. 5464(b).
54 17 CFR 240.17Ad–22(e)(7)(i) and (ii).
55 17 CFR 240.17Ad–22(e)(7)(i).
53 12
E:\FR\FM\10MYN1.SGM
10MYN1
24994
Federal Register / Vol. 86, No. 88 / Monday, May 10, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
payment obligations owed to its clearing
members.56
As described above, the changed
proposed in the Advance Notice would
help strengthen NSCC’s ability to
maintain sufficient liquid resources to
complete end-of-day settlement in the
event of the Member default by allowing
NSCC to calculate and collect, when
applicable, supplemental liquidity
deposits every business day, or on an
intraday basis, from those Members that
pose the largest liquidity exposures to
NSCC on that day. These resources
would be available to NSCC to complete
end-of-day settlement in the event of the
default of a Member. Moreover, the
Commission has reviewed and
considered the impact study results
provided by NSCC comparing the
proposal against the observed regulatory
liquidity needs and NSCC’s qualifying
liquid resources available during the
period from 2016 through 2020, to
assess both pro-forma and hypothetical
impacts of the proposal under various
liquidity scenarios,57 and finds that
these results generally indicated that the
proposal would continue allow NSCC to
meet its regulatory liquidity obligations.
In addition, deposits made to satisfy
supplemental liquidity deposit
obligations are currently and will
continue to be required to be made as
cash deposits, which will continue to be
held by NSCC at either its cash deposit
account at the Federal Reserve Bank of
New York, at a creditworthy commercial
bank, or in other investments pursuant
to NSCC’s Clearing Agency Investment
Policy.58 Therefore, supplemental
liquidity deposits would continue to be
considered a qualifying liquid resource,
as defined by Rule 17Ad–22(a)(14),59
and would support NSCC’s ability to
hold qualifying liquid resources
sufficient to meet the minimum
liquidity resource requirement under
Rule 17Ad–22(e)(7)(i),60 as required by
Rule 17Ad–22(e)(7)(ii).61
Accordingly, the Commission finds
that implementation of the proposed
amendments to supplemental liquidity
56 17 CFR 240.17Ad–22(e)(7)(ii). For purposes of
Rule 17Ad–22(e)(7)(ii), ‘‘qualifying liquid
resources’’ are defined in Rule 17Ad–22(a)(14) as
including, in part, cash held either at the central
bank of issue or at creditworthy commercial banks.
17 CFR 240.17Ad–22(a)(14).
57 See supra note 30 and accompanying text.
58 See Securities Exchange Act Release Nos.
79528 (December 12, 2016), 81 FR 91232 (December
16, 2016) (File Nos. SR–DTC–2016–007, SR–FICC–
2016–005, SR–NSCC–2016–003); 84949 (December
21, 2018), 83 FR 67779 (December 31, 2018) (File
Nos. SR–DTC–2018–012, SR–FICC–2018–014, SR–
NSCC–2018–013).
59 17 CFR 240.17Ad–22(a)(14).
60 17 CFR 240.17Ad–22(e)(7)(i).
61 17 CFR 240.17Ad–22(e)(7)(ii).
VerDate Sep<11>2014
19:05 May 07, 2021
Jkt 253001
deposits would be consistent with Rule
17Ad–22(e)(7)(i) and (ii) under the
Exchange Act.62
IV. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act, that the Commission
does not object to Advance Notice (SR–
NSCC–2021–801) and that NSCC is
authorized to implement the proposed
change as of the date of this notice or
the date of an order by the Commission
approving proposed rule change SR–
NSCC–2021–002, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–09788 Filed 5–7–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91753; File No. SR–MRX–
2021–05]
Self-Regulatory Organizations; Nasdaq
MRX, LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Adopt a Fee Schedule
To Establish Fees for Industry
Members Related to the National
Market System Plan Governing the
Consolidated Audit Trail
May 4, 2021.
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 April 21,
2021, Nasdaq MRX, LLC (‘‘MRX’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III, below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to adopt a fee
schedule to establish fees for Industry
Members related to the National Market
System Plan Governing the
Consolidated Audit Trail (the ‘‘CAT
NMS Plan’’ or ‘‘Plan’’).3
62 17
CFR 240.17Ad–22(e)(7).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Unless otherwise specified, capitalized terms
used in this rule filing are defined as set forth in
Rule General 7 (Consolidated Audit Trail
Compliance) (MRX General 7 incorporates The
Nasdaq Stock Market LLC General 7 by reference).
1 15
PO 00000
Frm 00156
Fmt 4703
Sfmt 4703
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/mrx/rules, at the principal
office of the Exchange, and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Under the CAT NMS Plan, the
Operating Committee of the
Consolidated Audit Trail, LLC
(‘‘Company’’) (‘‘Operating Committee’’)
has discretion to establish funding for
the Company to operate the CAT,
including establishing fees that the
Participants will pay, and establishing
fees for Industry Members that will be
implemented by the Participants.4 The
Operating Committee has filed with the
SEC a proposal to amend the CAT NMS
Plan to implement a revised funding
model for the CAT (‘‘CAT Funding
Model’’) and to establish a fee schedule
for Participant CAT fees (‘‘Proposed
CAT Fee Plan Amendment’’).5 The
Proposed CAT Fee Plan Amendment
describes the CAT Funding Model in
detail, including the proposal to charge
Industry Members CAT fees. The
Participants are required to file with the
SEC under Section 19(b) of the
Exchange Act any CAT fees applicable
to Industry Members that the Operating
Committee approves.6 Accordingly, the
purpose of this proposed rule change is
to implement the required fee schedule
provisions for CAT fees applicable to
Industry Members that are MRX
members in accordance with the CAT
Funding Model. The fee schedule
provisions will become operative upon
4 Section
11.1(b) of the CAT NMS Plan.
Securities Exchange Act Release No. 91555
(April 14, 2017), 86 FR 21050 (April 21, 2021)
(‘‘Proposed CAT Fee Plan Amendment’’).
6 Section 11.1(b) of the CAT NMS Plan.
5 See
E:\FR\FM\10MYN1.SGM
10MYN1
]]>Agencies
[Federal Register Volume 86, Number 88 (Monday, May 10, 2021)]
[Notices]
[Pages 24989-24994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-09788]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91770; File No. SR-NSCC-2021-801]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of No Objection To Advance Notice To Amend the
Supplemental Liquidity Deposit Requirements
May 4, 2021.
I. Introduction
On March 5, 2021, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') advance notice SR-NSCC-2021-801 (``Advance Notice'')
pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled Payment, Clearing
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'')
\1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of
1934 (``Exchange Act'') \3\ to amend its Supplemental Liquidity Deposit
Requirements.\4\ The Advance Notice was published for comment in the
Federal Register on March 24, 2021,\5\ and the Commission has received
comments in support of the changes proposed in the Advance Notice.\6\
The Commission is hereby providing notice of no objection to the
Advance Notice.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ See Notice of Filing infra note 5, at 86 FR 15750.
\5\ Exchange Act Release No. 91347 (March 18, 2021), 86 FR 15750
(March 24, 2021) (File No. SR-NSCC-2021-801) (``Notice of Filing'').
NSCC also filed a related proposed rule change with the Commission
pursuant to Section 19(b)(1) of the Exchange Act and Rule 19b-4
thereunder. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively.
NSCC seeks approval of the proposed changes to its rules necessary
to implement the Advance Notice (the ``Proposed Rule Change''). The
Proposed Rule Change was published in the Federal Register on March
24, 2021. Securities Exchange Act Release No. 91350 (March 18,
2021), 86 FR 15738 (March 24, 2021) (SR-NSCC-2021-002). The comment
period for the related Proposed Rule Change closed on April 14,
2021.
\6\ Comments are available at https://www.sec.gov/comments/sr-nscc-2021-801/srnscc2021801.htm. Since the proposal contained in the
Advance Notice was also filed as a separate but related Proposed
Rule Change, all public comments received on the proposals are
considered regardless of whether the comments are submitted to the
Proposed Rule Change or the Advance Notice. To date, the comments
received generally support the proposal.
---------------------------------------------------------------------------
[[Page 24990]]
II. The Advance Notice
A. Background
As a central counterparty (``CCP''),\7\ NSCC occupies an important
role in the securities settlement system by interposing itself between
counterparties to financial transactions, becoming the buyer to each
seller and seller to each buyer to ensure the performance of the
contract, thereby reducing the risk faced by its Members \8\ and
contributing to global financial stability. NSCC's liquidity risk
management plays an integral part in NSCC's ability to perform its role
as a CCP. If a Member defaults, NSCC, as a CCP, would need to complete
settlement of guaranteed transactions on the failing Member's behalf
from the date of default through the remainder of the settlement cycle
(currently two days for securities that settle on a regular way basis
in the U.S. markets). To do so, and to meet its related regulatory
requirements, NSCC seeks to maintain sufficient liquid resources in
order to meet the potential funding required to settle outstanding
transactions of a defaulting Member in a timely manner, as well as to
hold qualifying liquid resources sufficient to meet its minimum
liquidity resource requirement in each relevant currency for which it
has payment obligations owed to its Members.\9\
---------------------------------------------------------------------------
\7\ 17 CFR 240.17Ad-22(a)(1).
\8\ Capitalized terms not defined herein are defined in NSCC's
Rules and Procedures (``Rules''), available at https://dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
\9\ See Securities Exchange Act Release No. 82377 (December 21,
2017), 82 FR 61617 (December 28, 2017) (File Nos. SR-DTC-2017-004;
SR-FICC-2017-008; SR-NSCC-2017-005) (approving NSCC's Liquidity Risk
Management Framework).
---------------------------------------------------------------------------
NSCC has a number of default liquidity resources that it considers
to be qualifying liquid resources for the purposes of Rule 17Ad-
22(a)(14).\10\ These resources include: (1) Cash deposits to the NSCC
Clearing Fund; \11\ (2) the proceeds of the issuance and private
placement of (a) short-term, unsecured notes in the form of commercial
paper and extendable notes (``Commercial Paper Program''),\12\ and (b)
term debt (``Term Debt Issuance''); \13\ (3) cash that would be
obtained by drawing on NSCC's committed 364-day credit facility with a
consortium of banks (``Line of Credit''); \14\ and (4) supplemental
liquidity deposits, collected pursuant to NSCC Rule 4(A), as discussed
further below.\15\
---------------------------------------------------------------------------
\10\ See Notice of Filing, supra note 5, at 15751. Qualifying
liquid resources include, among other things: Cash held either at
the central bank of issue or at creditworthy commercial banks, and
assets that are readily available and convertible into cash through
prearranged funding arrangements, such as committed arrangements
without material adverse change provisions, including lines of
credit, foreign exchange swaps, and repurchase agreements. 17 CFR
240.17Ad-22(a)(14).
\11\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules, supra note 8.
\12\ See Securities Exchange Act Release Nos. 75730 (August 19,
2015), 80 FR 51638 (August 25, 2015) (File No. SR-NSCC-2015-802);
82676 (February 9, 2018), 83 FR 6912 (February 15, 2018) (File No.
SR-NSCC-2017-807).
\13\ See Securities Exchange Act Release No. 88146 (February 7,
2020), 85 FR 8046 (February 12, 2020) (File No. SR-NSCC-2019-802).
\14\ See Securities Exchange Act Release No. 80605 (May 5,
2017), 82 FR 21850 (May 10, 2017) (File Nos. SR-DTC-2017-802; SR-
NSCC-2017-802).
\15\ See Rule 4(A) (Supplemental Liquidity Deposits) of the
Rules, supra note 8. See also Securities Exchange Act Release Nos.
70999 (December 5, 2013), 78 FR 75413 (December 11, 2013) (File No.
SR-NSCC-2013-02); 71000 (December 5, 2013), 78 FR 75400 (December
11, 2013) (File No. SR-NSCC-2013-802).
---------------------------------------------------------------------------
B. Current Rules Relating to Supplemental Liquidity Deposits
Currently, NSCC only collects supplemental liquidity deposits
during monthly options expiry periods in order to cover the heightened
liquidity exposure resulting from increased trading activity around
options expiration.\16\ NSCC only collects supplemental liquidity
deposits from its 30 largest Members or group of affiliated Members
(hereinafter, ``Providers'').\17\ NSCC calculates each Provider's
supplemental liquidity obligation for an upcoming options expiry period
using an estimate based on NSCC's highest liquidity need and the
Provider's settlement activity during the prior 24-months.\18\
Providers, in turn, must fund their supplemental liquidity obligations
two business days prior to the start of the options expiry period,
which NSCC will return seven business days after the end of that
period.\19\
---------------------------------------------------------------------------
\16\ See Rule 4(A), supra note 8. NSCC defines the duration of
the options expiry periods in its Rules, which typically runs from
the third Friday of the month to the following Tuesday. See id.
\17\ See Section 2 of Rule 4(A), supra note 8. NSCC may use a
Provider's supplemental liquidity deposit to satisfy a loss or
liability arising only from that Provider's default on its
obligations to NSCC. Supplemental liquidity deposits are not
otherwise subject to NSCC's Loss Allocation Waterfall. See Section
13(c) of Rule 4(A), supra note 8.
\18\ See Section 2 of Rule 4(A), supra note 8. Typically, NSCC
performs this calculation, at the latest, one week prior to the
start of the options expiry period.
\19\ See Sections 4 and 9 of Rule 4(A), supra note 8.
---------------------------------------------------------------------------
In order to ensure NSCC maintains adequate liquidity resources
throughout the options expiry period, providers may voluntarily prefund
additional supplemental liquidity deposits at the start of the period,
if it anticipates increases in its trading activity, compared to its
historical activity, will create a liquidity shortfall at NSCC.\20\ In
the event a Provider fails to provide adequate voluntary prefunded
deposits, NSCC may require the Provider to fund additional supplemental
liquidity deposits if NSCC experiences a resulting liquidity
shortfall,\21\ which NSCC may hold for up to 90 days.\22\ The 90-day
lock-up incentivizes Providers to voluntarily prefund their
supplemental liquidity deposits in order to ensure NSCC maintains
adequate liquidity resources throughout the options expiry period.
---------------------------------------------------------------------------
\20\ See Section 2 of Rule 4(A), supra note 8. See also, Notice
of Filing, supra note 5, at 15752.
\21\ See Section 7 of Rule 4(A), supra note 8.
\22\ See Section 10 of Rule 4(A), supra note 8.
---------------------------------------------------------------------------
C. Proposed Changes to the Rules Relating to Supplemental Liquidity
Deposits
As discussed above, NSCC may only collect supplemental liquidity
deposits during monthly options expiry periods under its current Rules.
However, NSCC can face sudden liquidity shortfalls on any business day,
not just those business days that fall within monthly options expiry
periods, particularly during volatile market conditions unrelated to
options expiration.\23\ To address this issue, NSCC proposes to change
the frequency at which it may collect supplemental liquidity deposits
to each business day, based on a daily calculation. This proposed
approach to collecting supplemental liquidity deposits should allow
NSCC to respond quickly to any sudden liquidity shortfalls arising from
a Provider's activity, regardless of when those shortfalls occur.
---------------------------------------------------------------------------
\23\ See Notice of Filing, supra note 5, at 15752.
---------------------------------------------------------------------------
NSCC also proposes an alternative pro rata daily calculation in the
rare event its regular daily calculation would inadvertently result in
collecting supplement liquidity deposits from multiple Providers that,
taken together, would significantly exceed NSCC's liquidity needs on
that day. Additionally, NSCC proposes the ability to collect
supplemental liquidity deposits on an intraday basis in certain
instances where sudden intraday increases in liquidity risk justify
shortening the amount of time NSCC is exposed to that risk, including a
mandatory intraday collection in connection with monthly options expiry
periods.
[[Page 24991]]
1. Proposed Daily Calculation of Supplemental Liquidity Deposits
A Provider \24\ will be obligated to provide a supplemental
liquidity deposit on each business day in which its settlement activity
causes a liquidity shortfall at NSCC.\25\ NSCC will provide a notice to
each Provider of the amount of its supplemental liquidity deposit,
which the Provider will be required to fund within one hour of such
notice.\26\ NSCC proposes to return supplemental liquidity deposits on
the next business day.\27\
---------------------------------------------------------------------------
\24\ Under the proposal, Providers will continue to be the 30
largest Members or group of affiliated Members, but NSCC proposes to
simplify how it determines the 30 Providers in order to provide
greater transparency and predictability in its determination. The 30
Providers will be determined daily and will be based on the
Provider's settlement activity during the prior 24-months. NSCC's
determination will no longer require a calculation of liquidity
exposures the Providers presented to NSCC based on NSCC's qualifying
liquid resources throughout a 24 month lookback period. NSCC will
continue to make available to each Member daily information on
NSCC's liquidity need based on that Member's settlement activity on
the previous business day.
\25\ A liquidity shortfall will arise if NSCC's daily liquidity
need exceeds its qualifying liquid resources, assuming stressed
market conditions. NSCC will continue to apply stress scenarios in
determining its total qualifying liquid resources in order to
anticipate market conditions that could cause those resources to be
unavailable on that day. Because the daily calculation will be done
at the start of each business day, it will be based on the
qualifying liquid resources available to NSCC as of the end of the
prior business day.
\26\ NSCC's proposed timing would mirror the current requirement
that is applied to its Members' Required Fund Deposits (i.e.,
margin), which is also calculated and collected daily, and must be
funded within one hour of demand. NSCC expects to deliver
notification of Provider obligations by around 8:30 a.m. ET each
business day, with deposits required by no later than 9:30 a.m. ET.
See Notice of Filing, supra note 5, at 15753.
\27\ See Notice of Filing, supra note 5, at 15754. Because NSCC
would recalculate supplemental liquidity deposits daily, NSCC will
no longer need to hold deposits for the extended periods under its
current Rules. See id.
---------------------------------------------------------------------------
NSCC states that, under its proposed calculation, it will no longer
need to estimate its liquidity need for a Provider's expected
settlement activity based on the Provider's historical settlement
activity.\28\ Instead, each Provider's deposit will be calculated based
on NSCC's actual liquidity need based on the Provider's daily
settlement activity in the event the Provider defaulted on that day,
which NSCC believes will provide both NSCC and Providers with a more
reliable measure of the liquidity risks posed to NSCC.\29\
---------------------------------------------------------------------------
\28\ See Notice of Filing, supra note 5, at 15753.
\29\ See id.
---------------------------------------------------------------------------
NSCC provided the Commission with the results of an impact study
comparing the proposal against the observed regulatory liquidity needs
and NSCC's qualifying liquid resources available during the period from
2016 through 2020. The study assessed both pro-forma and hypothetical
impacts of the proposal under various liquidity scenarios. The study
also analyzed historical trends including the average composition and
rankings of the top 30 Providers at NSCC during the 2016 to 2020
period. Based on the pro-forma/hypothetical impact as well analysis of
the top Providers, the study's results generally indicate that the
proposal would continue to allow NSCC to meet its regulatory liquidity
obligations, and the largest Members would continue to be the ones
affected by supplemental liquidity obligations.\30\
---------------------------------------------------------------------------
\30\ See id. NSCC further states that if its other qualifying
liquid resources materially decrease, it would expect to see an
increase in both number and amount of supplemental liquidity
obligations that Providers would have been required to fund under
the proposed rule. See id. at 15756.
---------------------------------------------------------------------------
2. Proposed Pro Rata Calculation of Supplemental Liquidity Deposits
As a potential alternative to the calculation described above, NSCC
proposes a discretionary pro rata calculation that could apply in the
event two or more Providers each would be obligated to provide a
supplemental liquidity deposit of more than $2 billion on a business
day pursuant to the calculation described above.\31\ Under the proposed
alternative, NSCC will have the option to allocate, on a pro rata
basis, its largest liquidity need on a business day to all Providers
that are required to make a supplemental liquidity deposit on that day,
thereby reducing all such Providers' obligations to NSCC on that day.
NSCC's determination will be based on the market conditions at that
time. For example, NSCC may determine that, in certain market
conditions, this alternative approach would be appropriate to alleviate
liquidity pressures on all Providers required to make a supplemental
liquidity deposit on that day.\32\ NSCC states this alternative would
allow NSCC to use this pro rata calculation to sufficiently cover its
liquidity exposure on that day, without requiring that all Providers
fund the total amount of its calculated supplemental liquidity deposit
on that day.
---------------------------------------------------------------------------
\31\ NSCC represents that it has never had two or more Providers
owe more than $2 billion on a calculation date since its adoption of
the supplemental liquidity deposit Rules in 2013. Therefore, NSCC
believes this alternative calculation would only be available in
very limited circumstances. See Notice of Filing, supra note 5, at
15754.
\32\ See Notice of Filing, supra note 5, at 15754.
---------------------------------------------------------------------------
3. Proposed Intraday Supplemental Liquidity Calls
NSCC also proposes to establish intraday supplemental liquidity
calls, which are intended to allow NSCC to calculate and collect
additional supplemental liquidity deposits on an intraday basis if a
Provider's increased daily activity levels or projected settlement
activity causes a NSCC liquidity shortfall during a given day.\33\ NSCC
believes the proposed intraday supplemental liquidity calls will help
to mitigate increased liquidity exposures presented to NSCC on an
intraday basis in specified circumstances, as discussed further
below.\34\
---------------------------------------------------------------------------
\33\ The alternative pro rata calculation described in Section
II.C.2 would not apply to an intraday supplemental liquidity call.
\34\ See Notice of Filing, supra note 5, at 15754.
---------------------------------------------------------------------------
i. Proposed Mandatory Intraday Supplemental Liquidity Call
First, NSCC proposes to establish a mandatory monthly intraday
supplemental liquidity call that is calculated and collected, when
applicable, on the first business day (typically a Friday) of an
options expiry period.\35\ A Provider's mandatory intraday supplemental
liquidity call will be the difference between, on the one hand, NSCC's
qualifying liquid resources and, on the other hand, NSCC's daily
liquidity need based on the Provider's settlement activity at the start
of the business day, recalculated to account for both the Provider's
actual settlement activity submitted to NSCC over the course of the
day, and the Provider's projected settlement activity in stock options
expected to be submitted to NSCC.\36\ Because NSCC's recalculated daily
liquidity need will not factor in late day trades or other off-setting
settlement activity,\37\ NSCC proposes to adjust its re-calculated
daily liquidity need using an estimated
[[Page 24992]]
netting percentage based on each Provider's average percentage of
netting from its off-setting settlement activity observed over the
prior 24 months. NSCC states that the actual settlement activity
flowing into NSCC for cash settlement of stocks underlying expiring
options is typically lower than the projected settlement activity NSCC
receives from OCC on the Thursday before the start of the options
expiry period due to late day offsetting trades in stock options on
that Friday; therefore, applying this netting percentage should more
accurately reflect the actual liquidity exposures that will be
presented to NSCC from the Providers.\38\
---------------------------------------------------------------------------
\35\ NSCC will retain how it defines the duration of the options
expiry periods in its Rules. See supra note 19.
\36\ Each business day, NSCC receives information regarding
projected settlement activity from The Options Clearing Corporation
(``OCC'') pursuant to a Stock and Futures Settlement Agreement. That
agreement provides for the clearance and settlement of exercises and
assignments of options on eligible securities or the maturity of
eligible stock futures contracts through NSCC. See Securities
Exchange Act Release No. 81260 (July 31, 2017), 82 FR 36484 (August
4, 2017) (File Nos. SR-NSCC-2017-803; SR-OCC-2017-804). In this
case, the re-calculation will be based on the data NSCC receives
from OCC late Thursday.
\37\ See Notice of Filing, supra note 5, at 15754. For example,
an affiliated Member may be entitled, under NSCC Rules, to liquidity
credits based the trading activity of its affiliates, who are also
Members, in order to determine NSCC's net liquidity exposure from
the affiliated family of Members.
\38\ See Notice of Filing, supra note 5, at 15754.
---------------------------------------------------------------------------
ii. Proposed Discretionary Intraday Supplemental Liquidity Call
Second, NSCC proposes to establish a discretionary intraday
supplemental liquidity call on any business day other than the first
business day during options expiry periods. Under this provision, NSCC
will have the discretion to call for additional supplemental liquidity
deposits on an intraday basis on any such business day if a Provider's
increased activity levels during that day would cause a liquidity
shortfall at NSCC. The amount of a Provider's intraday supplemental
liquidity call, pursuant to NSCC's discretion, would be the difference
between NSCC's daily liquidity need, recalculated to take into account
the increase in the Provider's settlement activity during the day, and
NSCC's qualifying liquid resources.
NSCC states that it would collect a discretionary intraday call in
circumstances where NSCC believes it should accelerate the collection
of a Provider's supplemental liquidity obligation because that
Provider's intraday settlement activity would cause NSCC's liquidity
needs to exceed its liquidity resources.\39\ For example, NSCC may
impose an intraday supplemental liquidity call on a Provider if NSCC
determines that Provider is unlikely to meet its projected settlement
obligations through the settlement cycle due to rapidly escalating
financial stress.\40\ NSCC will make this determination based on a
variety of factors, including NSCC's assessment of the Provider's
ability to meet its obligations to NSCC (i.e., an assessment of the
Provider's creditworthiness on a particular business day) or estimates
of settlement activity that could offset settlement exposures and are
not reflected in NSCC's liquidity estimates.\41\
---------------------------------------------------------------------------
\39\ See id.
\40\ See id.
\41\ See id.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: To mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for SIFMUs and
strengthening the liquidity of SIFMUs.\42\
---------------------------------------------------------------------------
\42\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------
Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe regulations containing risk management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency.\43\ Section 805(b) of the
Clearing Supervision Act provides the following objectives and
principles for the Commission's risk management standards prescribed
under Section 805(a): \44\
---------------------------------------------------------------------------
\43\ 12 U.S.C. 5464(a)(2).
\44\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
To promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk
management standards may address such areas as risk management and
default policies and procedures, among other areas.\45\
---------------------------------------------------------------------------
\45\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------
The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\46\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk management practices on an
ongoing basis.\47\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission finds the proposal in the Advance
Notice is consistent with the objectives and principles described in
Section 805(b) of the Clearing Supervision Act,\48\ and in the Clearing
Agency Rules, in particular Rule 17Ad-22(e)(7)(i) and (ii).\49\
---------------------------------------------------------------------------
\46\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
See also Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing
Agency Adopting Release''). NSCC is a ``covered clearing agency'' as
defined in Rule 17Ad-22(a)(5).
\47\ Id.
\48\ 12 U.S.C. 5464(b).
\49\ 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
---------------------------------------------------------------------------
A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission finds that the Advance Notice is consistent with the
stated objectives and principles of Section 805(b) of the Clearing
Supervision Act.\50\ Specifically, the Commission finds that the
changes proposed in the Advance Notice are consistent with promoting
robust risk management in the area of liquidity risk, promoting safety
and soundness, reducing systemic risks, and supporting the broader
financial system.
---------------------------------------------------------------------------
\50\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
The Commission finds that the changes proposed in the Advance
Notice are consistent with promoting robust risk management, in
particular the management of liquidity risk presented to NSCC. As a CCP
and a SIFMU, it is imperative that NSCC maintains adequate resources to
satisfy liquidity needs arising from its settlement obligations,
including in the event of a Member default. As described above in
Section II.C.1, NSCC currently may only collect supplemental liquidity
deposits during monthly options expiry periods. However, NSCC can also
face increased liquidity exposure from a Member's activity outside of
these periods, even if unrelated to options settlement activity. The
ability to calculate and collect supplemental liquidity deposits, as
applicable, on a daily basis should help NSCC more accurately manage
its daily liquidity exposures based on Members' actual activity, as
opposed to only being able to collect additional liquidity resources
from Members during monthly options expiry. Moreover, the proposal
would allow NSCC to determine the amount of supplemental liquidity
deposits based on Members' actual activity, providing more precise and,
potentially, lower charges for Members than provided under the current
methodology, which uses estimates based on a look-back period and can,
on occasion, result in NSCC collecting more resources than needed to
cover its exposure.
[[Page 24993]]
Additionally, as described above in Section II.C.3, NSCC also
proposes to include both mandatory and discretionary intraday
supplemental liquidity calls which would allow NSCC to calculate and
collect additional supplemental liquidity deposits on an intraday basis
if a Provider's increased activity levels during that day or projected
settlement activity causes NSCC's daily liquidity need to exceed its
qualifying liquid resources. The Commission finds that the mandatory
monthly intraday supplemental liquidity calls on the first business day
of the monthly options expiry periods should help NSCC continue to
manage the potential increased liquidity exposures that may arise from
options settlement-related activity by allowing it to accelerate the
collection of supplemental liquidity deposits on that day, as opposed
to waiting for the proposed daily collection that would occur on the
morning of the following business day. Moreover, the proposed
discretionary intraday supplemental liquidity calls should collect
additional supplemental liquidity deposits from Members whose activity
outside of the monthly options expiry periods may cause a sudden
increase in NSCC's liquidity needs on an overnight basis. Therefore,
because NSCC's proposal is designed to enable NSCC to better limit its
liquidity exposures that could arise in the event of a Member default,
the Commission finds the changes proposed in the Advance Notice promote
robust risk management, specifically in the area of liquidity risk.
The Commission also finds that the changes proposed in the Advance
Notice are consistent with promoting safety and soundness, reducing
systemic risks, and promoting the stability of the broader financial
system. As described above, NSCC's proposal to calculate and collect,
if applicable, supplemental liquidity deposits on a daily basis could
provide NSCC with additional liquidity resources, including on days
outside of monthly Options Expiration Activity Periods, in the event of
a Member default. Therefore, the changes proposed would promote safety
and soundness by enabling NSCC to obtain additional liquid resources to
cover a liquidity gap that could arise in the event of a Member
default.\51\ By covering such a gap, the proposal bolsters NSCC's
ability to meet its settlement obligations in the event of a Member
default and its ability to continue to provide CCP services to its
Members.
---------------------------------------------------------------------------
\51\ The Commission has reviewed and considered the results of
NSCC's hypothetical impact studies. See supra note 30 and
accompanying text. Based on that review, the Commission concludes
that the proposal could help mitigate the risks to NSCC that could
arise if NSCC is unable to secure adequate default liquidity from
other sources in an amount necessary to meet its liquidity needs.
For example, the proposal could help mitigate the risks that could
arise if investor demand for the short-term notes issued under the
Commercial Paper Program weakens, there is limited investor demand
for term debt issued pursuant to a Term Debt Issuance, or NSCC is
unable to renew its Line of Credit at the targeted amount.
---------------------------------------------------------------------------
In addition, the proposed changes should reduce the potential
procyclicality of NSCC's liquidity demands, which could reduce the
potential for unexpected liquidity stress to market participants in
certain situations. Because NSCC would now calculate and collect, if
applicable, supplemental liquidity deposits on a daily basis, the
proposal should reduce the likelihood that NSCC would have to call on
its Members to contribute additional liquidity in periods of financial
stress, when liquidity may be most costly. Therefore, the Commission
finds that by enhancing NSCC's ability to address losses and liquidity
pressures that otherwise might cause financial distress to NSCC or its
Members, the Advance Notice promotes safety and soundness.
Maintaining adequate liquidity resources to help meet settlement
obligations in the event of a Member default also enhances NSCC's
ability to manage systemic risk and to support the broader financial
system. NSCC's ability to obtain additional liquid resources for use in
the event of a Member default should reduce the risk of loss contagion
(i.e., the risk of losses arising at other NSCC Members if NSCC is
unable to deliver cash or securities on the defaulting Member's
behalf). Reducing the risk of loss contagion would reduce the potential
transmission of financial shocks from defaulting Members to non-
defaulting Members, thereby enhancing the ability of NSCC and its
Members to continue to provide stability and safety to the financial
markets that they serve.
Additionally, establishing an optional alternative pro rata
calculation of supplemental liquidity deposits could help NSCC
alleviate any unintended but significant liquidity constraints on its
Members, while still enabling NSCC to meet its regulatory requirements
with respect to liquidity without collecting more liquidity resources
than needed. The proposed pro rata calculation would provide NSCC with
a method to reduce the supplemental liquidity deposits owed by all
Providers who would otherwise be obligated to provide such a deposit,
which would be appropriate in light of the likely stressed market
conditions that would result in two or more Providers presenting a
potential supplemental liquidity deposit of over $2 billion. Likewise,
because NSCC would recalculate supplemental liquidity deposit
obligations each business day, NSCC will no longer need to hold
supplemental liquidity deposits for the extended periods under its
current Rule 4(A), which could also alleviate liquidity pressures on
its Members. Accordingly, the Commission finds the proposal is
consistent with reducing systemic risks, and promoting the stability of
the broader financial system as contemplated in Section 805(b) of the
Clearing Supervision Act.\52\
---------------------------------------------------------------------------
\52\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
For the reasons stated above, the Commission finds the changes
proposed in the Advance Notice are consistent with Section 805(b) of
the Clearing Supervision Act.\53\
---------------------------------------------------------------------------
\53\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(7)(i) and (ii)
The Commission finds the changes proposed in the Advance Notice are
consistent with Rules 17Ad-22(e)(7)(i) and (ii), each promulgated under
the Exchange Act,\54\ for the reasons described below.
---------------------------------------------------------------------------
\54\ 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(7)(i) under the Exchange Act requires that a
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain
sufficient liquid resources at the minimum in all relevant currencies
to effect same-day and, where appropriate, intraday and multiday
settlement of payment obligations with a high degree of confidence
under a wide range of foreseeable stress scenarios that includes, but
is not limited to, the default of the participant family that would
generate the largest aggregate payment obligation for the covered
clearing agency in extreme but plausible market conditions.\55\ Rule
17Ad-22(e)(7)(ii) under the Act requires that a cover clearing agency
establish, implement, maintain and enforce written policies and
procedures reasonably designed to hold qualifying liquid resources
sufficient to meet the minimum liquidity resource requirement under
Rule 17Ad-22(e)(7)(i) in each relevant currency for which the covered
clearing agency has
[[Page 24994]]
payment obligations owed to its clearing members.\56\
---------------------------------------------------------------------------
\55\ 17 CFR 240.17Ad-22(e)(7)(i).
\56\ 17 CFR 240.17Ad-22(e)(7)(ii). For purposes of Rule 17Ad-
22(e)(7)(ii), ``qualifying liquid resources'' are defined in Rule
17Ad-22(a)(14) as including, in part, cash held either at the
central bank of issue or at creditworthy commercial banks. 17 CFR
240.17Ad-22(a)(14).
---------------------------------------------------------------------------
As described above, the changed proposed in the Advance Notice
would help strengthen NSCC's ability to maintain sufficient liquid
resources to complete end-of-day settlement in the event of the Member
default by allowing NSCC to calculate and collect, when applicable,
supplemental liquidity deposits every business day, or on an intraday
basis, from those Members that pose the largest liquidity exposures to
NSCC on that day. These resources would be available to NSCC to
complete end-of-day settlement in the event of the default of a Member.
Moreover, the Commission has reviewed and considered the impact study
results provided by NSCC comparing the proposal against the observed
regulatory liquidity needs and NSCC's qualifying liquid resources
available during the period from 2016 through 2020, to assess both pro-
forma and hypothetical impacts of the proposal under various liquidity
scenarios,\57\ and finds that these results generally indicated that
the proposal would continue allow NSCC to meet its regulatory liquidity
obligations.
---------------------------------------------------------------------------
\57\ See supra note 30 and accompanying text.
---------------------------------------------------------------------------
In addition, deposits made to satisfy supplemental liquidity
deposit obligations are currently and will continue to be required to
be made as cash deposits, which will continue to be held by NSCC at
either its cash deposit account at the Federal Reserve Bank of New
York, at a creditworthy commercial bank, or in other investments
pursuant to NSCC's Clearing Agency Investment Policy.\58\ Therefore,
supplemental liquidity deposits would continue to be considered a
qualifying liquid resource, as defined by Rule 17Ad-22(a)(14),\59\ and
would support NSCC's ability to hold qualifying liquid resources
sufficient to meet the minimum liquidity resource requirement under
Rule 17Ad-22(e)(7)(i),\60\ as required by Rule 17Ad-22(e)(7)(ii).\61\
---------------------------------------------------------------------------
\58\ See Securities Exchange Act Release Nos. 79528 (December
12, 2016), 81 FR 91232 (December 16, 2016) (File Nos. SR-DTC-2016-
007, SR-FICC-2016-005, SR-NSCC-2016-003); 84949 (December 21, 2018),
83 FR 67779 (December 31, 2018) (File Nos. SR-DTC-2018-012, SR-FICC-
2018-014, SR-NSCC-2018-013).
\59\ 17 CFR 240.17Ad-22(a)(14).
\60\ 17 CFR 240.17Ad-22(e)(7)(i).
\61\ 17 CFR 240.17Ad-22(e)(7)(ii).
---------------------------------------------------------------------------
Accordingly, the Commission finds that implementation of the
proposed amendments to supplemental liquidity deposits would be
consistent with Rule 17Ad-22(e)(7)(i) and (ii) under the Exchange
Act.\62\
---------------------------------------------------------------------------
\62\ 17 CFR 240.17Ad-22(e)(7).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-NSCC-2021-801) and that NSCC is authorized to
implement the proposed change as of the date of this notice or the date
of an order by the Commission approving proposed rule change SR-NSCC-
2021-002, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-09788 Filed 5-7-21; 8:45 am]
BILLING CODE 8011-01-P
