Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Partial Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Partial Amendment No. 1, To Increase the National Securities Clearing Corporation's Minimum Required Fund Deposit, 46043-46047 [2021-17541]
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Federal Register / Vol. 86, No. 156 / Tuesday, August 17, 2021 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92640; File No. SR–NSCC–
2021–005]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of Partial
Amendment No. 1 and Order Granting
Accelerated Approval of Proposed
Rule Change, as Modified by Partial
Amendment No. 1, To Increase the
National Securities Clearing
Corporation’s Minimum Required Fund
Deposit
August 11, 2021.
I. Introduction
On April 26, 2021, National Securities
Clearing Corporation (‘‘NSCC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) proposed
rule change SR–NSCC–2021–005 (the
‘‘Proposed Rule Change’’) pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder 2 to increase its
minimum required fund deposit. The
Proposed Rule Change was published
for comment in the Federal Register on
May 14, 2021,3 and the Commission has
received comments 4 on the changes
proposed therein.5 On June 24, 2021,
pursuant to Section 19(b)(2) of the Act,6
the Commission designated a longer
period within which to approve,
disapprove, or institute proceedings to
determine whether to approve or
disapprove the proposed rule change.7
On August 5, 2021, NSCC filed a partial
amendment (‘‘Partial Amendment No.
1’’) to modify the Proposed Rule
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 91809 (May
10, 2021), 86 FR 26588 (May 14, 2021) (File No. SR–
NSCC–2021–005) (‘‘Notice of Filing’’).
4 See Letter from Parsons, Behle & Latimer,
Counsel for Alpine Securities Corporation, dated
June 4, 2021, to Vanessa Countryman, Secretary,
Commission (‘‘Alpine Letter’’), available at https://
www.sec.gov/comments/sr-nscc-2021-005/
srnscc2021005.htm.
5 NSCC appended an Exhibit 2 to the materials
filed on April 26, 2021. The appended Exhibit 2
consists of a comment letter that NSCC received
from one of its members objecting to NSCC’s
proposal in response to member outreach NSCC
conducted in 2019 (‘‘Wachtel Letter’’). See Notice
of Filing, supra note 3, at 26593. NSCC considered
that comment in its Proposed Rule Change, and the
Commission has considered the comment letter in
making its determination, as discussed in Section
III below. A copy of the comment letter is available
at https://www.dtcc.com/-/media/Files/Downloads/
legal/rule-filings/2021/NSCC/SR-NSCC-2021005.pdf.
6 15 U.S.C. 78s(b)(2).
7 Securities Exchange Act Release No. 92250
(June 24, 2021), 86 FR 34798 (June 30, 2021) (File
No. SR–NSCC–2021–005).
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Change.8 The Commission is publishing
this notice to solicit comments on
Partial Amendment No. 1 from
interested persons and is approving the
Proposed Rule Change, as modified by
Partial Amendment No. 1, on an
accelerated basis.9
II. Description of the Proposed Rule
Change
Currently, NSCC requires each
Member to maintain a minimum
Required Fund Deposit 10 amount of
$10,000.11 NSCC proposes to increase
each Member’s minimum Required
Fund Deposit amount to $250,000.
A. Background
NSCC provides central counterparty
(‘‘CCP’’) services, including clearing,
settlement, risk management, and a
guarantee of completion for virtually all
broker-to-broker trades involving equity
securities, corporate and municipal debt
securities, and certain other securities.
In its role as a CCP, a key tool NSCC
uses to manage its credit exposure to its
Members is determining and collecting
an appropriate Required Fund Deposit
(i.e., margin) from each Member.12 A
Member’s Required Fund Deposit serves
as collateral to mitigate potential losses
to NSCC associated with the liquidation
of the Member’s portfolio should that
Member default. The aggregate of all
Members’ Required Fund Deposits
constitutes NSCC’s Clearing Fund,
which it would access, among other
instances, should a defaulting Member’s
own Required Fund Deposit be
insufficient to satisfy losses to NSCC
caused by the liquidation of that
Member’s portfolio.13
NSCC conducts daily backtesting to
evaluate whether each Member’s
Required Fund Deposit is sufficient to
cover NSCC’s credit exposures to that
Member based on a simulated
8 In Partial Amendment No. 1, NSCC updates the
proposed rule text filed as Exhibit 5 to the proposed
rule change to include a legend to indicate a
delayed implementation date, specifically that the
rule change would be implemented not later than
20 business days after Commission approval of the
Proposed Rule Change. NSCC did not change the
purpose or substance of, or basis for, the Proposed
Rule Change.
9 References to the Proposed Rule Change from
this point forward refer to the Proposed Rule
Change as modified by Partial Amendment No. 1.
10 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.
11 See Section 1 of Rule 4, id.
12 See Rule 4 (Clearing Fund) and Procedure XV
(Clearing Fund Formula and Other Matters) of the
Rules (‘‘Procedure XV’’), supra note 8. The
minimum Required Fund Deposit amount is
required to be in cash. See Section II.(A) of
Procedure XV, supra note 8.
13 See id.
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46043
liquidation of the Member’s portfolio on
that day.14 Backtesting is an ex-post
comparison of actual outcomes with
expected outcomes derived from the use
of margin models.15 A backtesting
deficiency occurs when NSCC
determines that the projected
liquidation losses to NSCC arising in the
event of a Member’s default would be
greater than the Member’s Required
Fund Deposit.16 Therefore, backtesting
deficiencies highlight exposure that
could subject NSCC to potential losses
under normal market conditions in the
event that a Member defaults.17
NSCC regularly reviews backtesting
results to assess the effectiveness of its
margining requirements.18 As part of its
review, NSCC investigates the causes of
any backtesting deficiencies, paying
particular attention to repeat backtesting
deficiencies that would result in the
Member’s backtesting coverage to fall
below the 99% confidence target to
determine if there is an identifiable
cause of repeat backtesting
deficiencies.19 NSCC also evaluates
whether multiple Members may
experience backtesting deficiencies for
the same underlying reason.20
Based on its regular reviews, NSCC
states it has found that Members with
Required Fund Deposits below $250,000
disproportionately experience repeat
backtesting deficiencies because, should
the Member’s settlement activity
abruptly increase, the additional
exposure to NSCC would not be
mitigated until the collection of the
Required Fund Deposit either intraday
or on the next business day.21 NSCC
states it has also found that its current
minimum margin requirement of
$10,000 is disproportionately lower
14 See Securities Exchange Act Release No. 81485
(August 25, 2017), 82 FR 41433 (August 31, 2017)
(NSCC–2017–008) (adopting Model Risk
Management Framework and stating that Required
Fund Deposit backtesting would be performed at
least on a daily basis); Securities Exchange Act
Release No. 84458 (October 19, 2018), 83 FR 53925
(October 25, 2018) (File No. SR–NSCC–2018–009)
(amending the Model Risk Management Framework
to provide enhanced governance).
15 See 17 CFR 240.17Ad–22(a)(1).
16 See Notice of Filing, supra note 3, at 26589.
17 See id.
18 See Notice of Filing, supra note 3, at 26589.
19 NSCC states a Member’s backtesting coverage
would fall below the 99% confidence target if the
Member has more than two backtesting deficiency
days in a rolling twelve-month period. See Notice
of Filing, supra note 3, at 26589. In other words,
if a Member has three or more backtesting
deficiency days during a twelve-month period, then
the Member’s margin would not be sufficient 99%
of the time. NSCC believes that its targeted 99%
confidence level is consistent with its regulatory
requirements under Rule 17Ad–22(e)(4)(i) and
(e)(6)(iii). 17 CFR 240.17Ad–22 (e)(4)(i), and
(e)(6)(iii).
20 See Notice of Filing, supra note 3, at 26589.
21 See id.
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than the minimum margin requirements
of other CCPs that clear similar
securities products.22
Therefore, NSCC proposes to increase
its minimum Required Fund Deposit
from $10,000 to $250,000.
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B. Impact Study Results
To support its proposal, NSCC relies
upon the results of recent backtesting
analyses.23 Specifically, NSCC examines
the backtesting coverage 24 of each of its
Members during the period from June 3,
2019 to May 29, 2020, under the current
$10,000 minimum Required Fund
Deposit amount compared to
hypothetical (or ‘‘pro forma’’) minimum
Required Fund Deposit amounts,
including the proposed $250,000
amount and $100,000 (‘‘Impact Study
Results’’).25 NSCC uses the Impact
Study Results to show the number of
Member backtesting deficiencies 26 that
would have been eliminated during the
period had NSCC’s minimum Required
Fund Deposit been $250,000 and
compared to $100,000. NSCC then uses
the Impact Study Results to analyze the
improvement to each Member’s
backtesting coverage ratio 27 and, taking
all Members’ backtesting coverage ratio
results together, to analyze the
improvement to NSCC’s Clearing Fund
backtesting coverage.28
During the impact study period under
the current minimum Required Fund
Deposit, NSCC observed a total of 227
Member backtesting deficiencies, and 29
Members experienced repeat backtesting
deficiencies causing them to fall below
22 See id. For example, the minimum initial
contribution for The Options Clearing Corporation
(‘‘OCC’’) is $500,000. See Rule 1002(d) of the OCC
Rules, available at https://www.theocc.com/
components/docs/legal/rules_and_bylaws/occ_
rules.pdf. The minimum Required Fund Deposit for
both the Government Securities Division (‘‘GSD’’)
and Mortgage-Backed Securities Division (‘‘MBSD’’)
of Fixed Income Clearing Corporation (‘‘FICC’’) is
$100,000. See Rule 4 of FICC GSD Rulebook,
available at https://www.dtcc.com/∼/media/Files/
Downloads/legal/rules/ficc_gov_rules.pdf and Rule
4 of the FICC MBSD Clearing Rules, available at
https://www.dtcc.com/∼/media/Files/Downloads/
legal/rules/ficc_mbsd_rules.pdf.
23 See supra text accompanying notes 12–16.
24 See supra note 17 and accompanying text.
25 NSCC provided a public summary of the
information in this Section II.B in its Notice of
Filing, upon which this discussion is based. See
Notice of Filing, supra note 3, at 26590–92. NSCC
filed the data underlying the Impact Study Results
as a confidential Exhibit 3 to the Proposed Rule
Change pursuant to 17 CFR 240.24b-2.
26 See supra text accompanying notes 14–15.
27 See supra note 17 and accompanying text.
28 The Clearing Fund backtesting coverage
represents the daily sufficiency of the aggregate of
all Members’ margin over a rolling 12-month
period. As described in Section II.A above, NSCC
would be able to access the Clearing Fund to cover
any losses to it should a Member with insufficient
margin default. See supra text accompanying note
11.
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the 99% confidence target.29 Members
with a Required Fund Deposit lower
than $250,000 accounted for 22% of the
total backtesting deficiencies and
constituted approximately 45% of the
Members whose margin levels fell
below the 99% confidence target.30
Additionally, NSCC’s twelve-month
aggregate Clearing Fund backtesting
coverage was 99.28%.
A minimum requirement of $250,000
would have eliminated 44 backtesting
deficiencies across 13 Members and
would have eliminated approximately
88% of the deficiencies that occurred on
the days when Members maintained a
Required Fund Deposit of less than
$250,000.31 Additionally, a minimum
requirement of $250,000 would have
improved NSCC’s rolling twelve-month
coverage for seven Members to above
the 99% confidence interval.32 NSCC
states that, if the proposed $250,000
minimum had been in place, the
remaining Members still below the 99%
confidence interval would constitute
only 27% of Members that fell below
the 99% confidence target, which is
comparable to those Members’ overall
representation as a class of NSCC’s total
Members.33 Moreover, a minimum
requirement of $250,000 would have
increased NSCC’s twelve-month
aggregate Clearing Fund backtesting
coverage by 0.14% to 99.41%.34
An increase to $250,000 compared to
$100,000 would have further reduced
NSCC’s credit exposure to its Members
by eliminating ten additional
backtesting deficiencies from 34 to 44
total backtesting deficiencies and
resulting in increasing two additional
Members’ margin levels to above the
99% confidence interval from five
Members to seven Members.
Additionally, NSCC’s aggregate Clearing
Fund backtesting coverage would have
improved from 99.38% to 99.41%
representing an increase of 0.03%.
NSCC had approximately 150 total
Members during the impact study
period.35 Of those, 46 Members would
29 See
id.
id.
31 See Notice of Filing, supra note 3, at 26590. Not
all of the backtesting deficiencies would have been
eliminated because if the Member’s Required Fund
Deposit calculation increases to above $250,000
intraday, due to, for example, increases in trading
volume and/or adverse mark-to-market adjustments,
the $250,000 proposed minimum Required Fund
Deposit would still be insufficient to cover NSCC’s
exposure between margin collections. See supra
text accompanying note 19.
32 See Notice of Filing, supra note 3, at 26590.
33 See id.
34 See id.
35 See CPMI IOSCO Quantitative Disclosure
Results 2019 Q2 (September 25, 2019), available at
https://www.dtcc.com/-/media/Files/Downloads/
30 See
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be impacted by the proposed $250,000
minimum Required Fund Deposit.36 On
average, 18 Members maintained excess
deposits greater than the proposed
increase; therefore, 28 Members on
average would have been required to
deposit additional funds if the proposal
had been implemented.37 In addition,
the 46 Members that would be impacted
by the proposed $250,000 minimum
Required Fund Deposit maintained
excess net capital or equity capital (as
applicable) (‘‘ENC’’) in excess of
$800,000 on average over the Impact
Study Period, ranging between an
average of $834,000 to $211.5 billion,
with 98% of the impacted Members
having on average an ENC above $2.5
million.38 NSCC states it used ENC in its
analysis to estimate impacted Members’
ability to satisfy additional Required
Fund Deposit amounts required by the
proposal.39
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 40
directs the Commission to approve a
proposed rule change of a selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to such organization. After
careful consideration, the Commission
finds that the Proposed Rule Change is
consistent with the requirements of the
Act and the rules and regulations
applicable to NSCC.41 In particular, the
Commission finds that the Proposed
Rule Change is consistent with Section
17A(b)(3)(F) and (b)(3)(I) 42 of the Act
and Rules 17Ad–22(e)(4) and (e)(6)
thereunder.43
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
requires, in part, that the rules of a
clearing agency, such as NSCC, be
designed, in part, to assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible.44 The Commission believes
legal/policy-and-compliance/CPMI-IOSCOQuantitative-Disclosure-Results-2019-Q2-2.pdf.
36 See Notice of Filing, supra note 3 at 26593.
37 See id.
38 See id.
39 See id.
40 15 U.S.C. 78s(b)(2)(C).
41 The Commission’s findings are based on its
review of the Proposed Rule Change, including its
analysis of the Impact Study Results, which are
summarized in Section II.B above. See supra note
23 and accompanying text.
42 15 U.S.C. 78q–1(b)(3)(F).
43 17 CFR 240.17Ad–22(e)(4) and (e)(6).
44 15 U.S.C. 78q–1(b)(3)(F).
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that the Proposed Rule Change is
consistent with Section 17A(b)(3)(F) of
the Act.
As discussed in Section II.A above,
backtesting deficiencies highlight when
a Member’s margin is insufficient to
cover NSCC’s credit exposure to that
Member.45 If a defaulted Member’s
margin is insufficient to satisfy losses
caused by the closeout of that Member’s
positions, NSCC and its non-defaulting
Members may be subject to losses. As
summarized in Section II.B above, the
proposed increase would have provided
NSCC with additional resources, which
would have resulted in a decrease in
backtesting deficiencies and thus a
reduction in credit exposure to its
Members under the proposal.46
Therefore, the Commission believes
NSCC would improve the probability
that the increased minimum margin
amount it collects is sufficient to cover
NSCC’s credit exposure to those
Members, particularly in instances
where the defaulted Member’s clearing
activity abruptly increases following a
period of low or no activity. This
increase, in turn, could reduce the
possibility that NSCC or its nondefaulting Members face losses from the
close-out process.
Moreover, NSCC would continue to
require that Members pay an amount
equal to the minimum Required Fund
Deposit amount in cash. Therefore, the
proposal would enable NSCC to have
available additional collateral that is
easier for NSCC to access quickly to
complete end of day settlement upon a
Member’s default, further reducing the
risk of losses to NSCC or non-defaulting
Members. Accordingly, the Commission
believes the Proposed Rule Change
would promote the safeguarding of
securities and funds which are in the
custody or control of NSCC or for which
NSCC is responsible, consistent with
Section 17A(b)(3)(F) of the Act.47
45 See
supra text accompanying note 15.
supra text accompanying notes 29–31.
47 In addition to its arguments about the Proposed
Rule Change, one commenter also asserts that
NSCC’s other recent efforts to increase capital or
methodology-based margin requirements represent
unfair discrimination against Members who deal in
stocks trading in the OTC Markets, inconsistent
with Section 17A(b)(3)(F) of the Act. See Alpine
Letter, supra note 4, at 4–5. However, the Proposed
Rule Change would not amend NSCC’s capital or
methodology-based margin requirements and is
limited to the amendment of the minimum
Required Fund Deposit amount. Therefore, the
commenter’s arguments pursuant to Section
17A(b)(3)(F) of the Act are outside the scope of this
Proposed Rule Change. The commenter also argues
that NSCC should instead eliminate risk by
shortening the settlement cycle, rather than
monetizing risk through increased margin
requirements, such as under this Proposed Rule
Change. See Alpine Letter, supra note 4, at 7–8.
However, the Proposed Rule Change is limited to
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46 See
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B. Consistency With Section 17A(b)(3)(I)
of the Act
Section 17A(b)(3)(I) of the Act
requires that the rules of a clearing
agency do not impose any burden on
competition not necessary or
appropriate in furtherance of the Act.48
This provision does not require the
Commission to find that a proposed rule
change represents the least anticompetitive means of achieving the
goal.49 Rather, it requires the
Commission to balance the competitive
considerations against other relevant
policy goals of the Act.50
The Commission acknowledges that
the impact of increased margin
requirements will likely present higher
costs to some Members with lower
operating margins, lower cash reserves
or higher costs of capital compared to
other Members, which may weaken
those Members’ competitive positions
relative to others. For example, certain
smaller Members could be required to
make and hold an additional deposit of
up to $240,000 to the Clearing Fund,
which would limit the smaller
Member’s ability to utilize that cash for
other operating or investing purposes.
Although some of NSCC’s Members
could experience a burden on
competition because of these higher
costs, the Commission concludes any
burden to these Members is necessary
and appropriate in furtherance of the
policy goals under the Act 51 for the
following reasons.
As discussed in Section II.A above,
NSCC seeks to maintain sufficient
resources (i.e., margin) to cover its credit
exposures to its Members fully with a
high degree of confidence. Conversely,
NSCC uses backtesting to determine
when a Member’s margin would have
been insufficient to cover NSCC’s credit
exposure to that Member.52 As
previously discussed, the Impact Study
Results show the proposed $250,000
minimum Required Fund Deposit
would have decreased the number of
backtesting deficiencies, thereby
increasing the number of Members for
NSCC’s minimum Required Fund Deposit amount
in order to manage risk under the current settlement
cycle. Therefore, the commenter’s arguments
related to shortening the settlement cycle are
likewise outside the scope of this Proposed Rule
Change.
48 15 U.S.C. 78q–1(b)(3)(I).
49 See Bradford National Clearing Corp., 590 F.2d
1085, 1105 (D.C. Cir. 1978) (‘‘Bradford’’).
50
51 15 U.S.C. 78q–1(b)(3)(I). Specifically, as
discussed in greater detail in Section III.C and III.D
below, the Proposed Rule Change is necessary and
appropriate to further the policy goals under Rule
17Ad–22(e)(4)(i) and (e)(6)(iii). 17 CFR 240.17Ad–
22(e)(4)(i) and (e)(6)(iii).
52 See supra text accompanying notes 12–15.
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46045
which NSCC maintained sufficient
coverage at a confidence level of at least
99%.53 Therefore, the Proposed Rule
Change would enable NSCC to better
manage its credit exposure to its
Members by ensuring it holds sufficient
collateral to cover that exposure,
thereby reducing the likelihood that
NSCC or non-defaulting Members
would incur losses resulting from a
Member default.
Additionally, based on the
information set forth in Section II.B
above regarding the average ENC of the
impacted Members,54 the Commission
believes that the vast majority of
impacted Members likely would not
experience a weakened competitive
position compared to others as a result
of the Proposed Rule Change. The
average ENC data shows that almost all
of the impacted Members would likely
be able to satisfy the additional cash
deposits needed to comply with the
Proposed Rule Change with minimal
impact to the Members’ financials.55
Commenters have raised concerns
regarding the Proposed Rule Change in
light of its potential competitive impact
on certain NSCC Members. Specifically,
one commenter objects to the proposed
increase to $250,000, stating that
NSCC’s current Rules are more than
adequate to guard against risk at the
small firm-level and that the increase
would be purely a tax on the smallest,
inactive and lowest risk firms.56
Another commenter similarly objects to
the proposed change stating the increase
would disproportionately affect NSCC’s
smallest Members.57 The Commission
disagrees for the reasons discussed
above, which indicate that the proposed
increase would increase Members’
Required Fund Deposits proportional to
the risks posed by those Members.
Moreover, as discussed in Section II.A
above, it is possible that, in certain
circumstances, the current minimum
Required Fund Deposit amount would
53 See supra text accompanying note 44. See also,
supra text accompanying notes 29–31.
54 See supra notes 34–37 and accompanying text.
98% of the impacted Members had, on average, an
ENC above $2.5 million. Therefore, on average, 2%
of the 46 impacted Members would maintain ENC
below $2.5 million, which equals approximately
one Member who could be required to hold 9.6%
or more of its ENC on deposit at NSCC.
55 NSCC represents it would continue to require
that Members pay an amount equal to the minimum
Required Fund Deposit amount in cash. See Notice
of Filing, supra note 3, at 26590.
56 See Wachtel Letter, supra note 5.
57 The commenter concludes the Proposed Rule
Change will ‘‘undoubtedly put some members out
of business.’’ See Alpine Letter, supra note 4, at 5.
Based on its consideration of the ENC data, as
discussed above, the Commission does not agree
with the commenter’s argument. See supra text
accompanying notes 51–52.
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be insufficient to manage NSCC’s credit
exposure to participants between
margin collections should, for example,
the Member’s clearing activity abruptly
increase.58 As summarized in Section
II.B above, the Impact Study Results
show that approximately 88% of the
deficiencies that occurred on the days
when Members maintained a Required
Fund Deposit of less than $250,000
would have been eliminated, which
indicates the proposed increase to
$250,000 would have mitigated this
risk.59 Seven of the 28 Members that
would have to provide some additional
funding still held an average actual
clearing fund deposit of above $250,000
during the Impact Study Period, ranging
from approximately $315,000 to $1.7M.
In other words, there would have been
many days during the study period
where those seven Members would not
have to provide additional funding.
Additionally, four of the remaining 21
Members that would have to provide
some additional funding had an average
ENC below $5 million, ranging from
$834,000 to $4.8 million, during the
Impact Study Period, while 11 of the 21
Members had an average ENC above
$100 million during the same period.
For those 28 Members, the number of
backtesting deficiencies ranged from
zero and 22 based on the $10,000
minimum Required Fund Deposit
compared to zero and five had the
$250,000 minimum Required Fund
Deposit been in place during the Impact
Study Period. Moreover, the average
number of backtesting deficiencies of
the 28 Members would have decreased
from 1.54 to 0.41 per Member had the
$250,000 minimum Required Fund
Deposit been in place during the study
period. For the 14 Members impacted
with backtesting deficiencies, the largest
deficiency was $1.3 million and the
smallest deficiency was $11,000 (out of
50 total deficiencies). Under the
proposed minimum Required Fund
Deposit of $250,000, there would only
be six deficiencies across four members,
with a maximum deficiency of $1.1
million and a minimum deficiency of
$11,000.
One commenter further states that it
would not object to an increase to a
$100,000 Required Fund Deposit.
However, as discussed in Section II.B
above, an increase to $250,000
compared to $100,000 would have
further reduced NSCC’s credit exposure
to its Members by eliminating ten
additional backtesting deficiencies
resulting in NSCC maintaining
sufficient margin levels for two
58 See
59 See
supra text accompanying notes 17–19.
supra text accompanying note 29.
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additional Members to above the 99%
confidence interval. Therefore, the
Commission concludes that any
competitive burden to Members
imposed by the Proposed Rule Change
is necessary and appropriate in
furtherance of the Act. Accordingly, the
Commission finds that the Proposed
Rule Change is consistent with the
requirements of Section 17A(b)(3)(I) of
the Act.60
C. Consistency With Rule 17Ad–
22(e)(4)(i)
Rule 17Ad–22(e)(4)(i) requires that
NSCC establish, implement, maintain
and enforce written policies and
procedures reasonably designed to
effectively identify, measure, monitor,
and manage its credit exposures to
participants and those arising from its
payment, clearing, and settlement
processes, including by maintaining
sufficient financial resources to cover its
credit exposure to each participant fully
with a high degree of confidence.61
As described above in Section II.A,
NSCC and its non-defaulting Members
may be subject to losses should a
defaulted Member’s own Required Fund
Deposit be insufficient to satisfy losses
caused by the liquidation of that
Member’s portfolio. As summarized in
Section II.B above,62 the Impact Study
Results show a $250,000 minimum
Required Fund Deposit would have
decreased the number of backtesting
deficiencies, which would likely help
NSCC better manage its credit exposure
to each of its Members and credit
exposures arising from its payment,
clearing, and settlement processes.
Additionally, as discussed in Sections
II.A and III.B above, NSCC would
continue to require that Members pay an
amount equal to the minimum Required
Fund Deposit amount in cash,63 which
should enable NSCC to better maintain
sufficient prefunded margin to mitigate
potential future exposures to its
Members. Therefore, requiring the
proposed minimum $250,000 deposit to
be made in cash should reduce the
probability that NSCC or non-defaulting
Members would incur losses resulting
from a Member default. Accordingly,
the Commission finds that NSCC’s
proposed increase to its minimum
Required Fund Deposit would be
consistent with Rule 17Ad–22(e)(4)(i).64
U.S.C. 78q–1(b)(3)(I).
CFR 240.17Ad–22(e)(4)(i).
62 See supra text accompanying notes 29–32.
63 See supra note 52. See also, Notice of Filing,
supra note 3, at 26590.
64 17 CFR 240.17Ad–22(e)(4)(i).
D. Consistency with Rule 17Ad–
22(e)(6)(iii)
Rule 17Ad–22(e)(6)(iii) under the Act
requires that a covered clearing agency
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, calculates margin
sufficient to cover its potential future
exposure to Members in the interval
between the last margin collection and
the close out of positions following a
Member default.65
As summarized in Section III.B
above,66 NSCC employs daily
backtesting to determine the adequacy
of each Member’s Required Fund
Deposit paying particular attention to
Members that have backtesting
deficiencies below the 99% confidence
target.67 Such backtesting deficiencies
highlight exposure that could subject
NSCC to potential losses if a Member
defaults.
Based on the Impact Study Results,
which the Commission has reviewed
and analyzed, approximately 22% of all
backtesting deficiencies occur for those
Members that maintain a Required Fund
Deposit of less than $250,000, and
approximately 88% of the deficiencies
of those Members would have been
eliminated during the Impact Study
Period if the Required Fund Deposit
were $250,000 or higher. By raising the
minimum Required Fund Deposit
amount to $250,000, the Commission
believes the proposal could enable
NSCC to decrease the number of
backtesting deficiencies by Members,
and thus decrease NSCC’s exposure to
such Members in the event of a Member
default.
Additionally, based on the
Commission’s review and analysis of
the Impact Study Results, the proposed
$250,000 minimum Required Fund
Deposit amount would have decreased
the number of repeat backtesting
deficiencies during the study period,
which would have decreased the
number of Members whose margin
levels during the study period fell below
the 99% confidence target.68 Therefore,
by raising the minimum Required Fund
Deposit amount to $250,000, the
Commission concludes that the increase
in margin for NSCC Members that
currently maintain a Required Fund
Deposit of less than $250,000 would
improve the probabilities that the
60 15
61 17
PO 00000
Frm 00095
Fmt 4703
Sfmt 4703
65 17
CFR 240.17Ad–22(e)(6)(iii).
supra text accompanying note 49.
67 See supra text accompanying notes 16–18.
68 See supra text accompanying notes 29–31. See
also, supra text accompanying notes 17–19.
66 See
E:\FR\FM\17AUN1.SGM
17AUN1
Federal Register / Vol. 86, No. 156 / Tuesday, August 17, 2021 / Notices
margin maintained by these Members is
sufficient to cover NSCC’s potential
future exposure to Members in the
interval between the last margin
collection and the close out of positions
following a Member default.
One commenter states the increase in
margin is unwarranted because NSCC’s
Clearing Fund backtesting results from
the Impact Study Results show that
NSCC’s current minimum Required
Fund Deposit amount is sufficient to
cover the risks presented by smaller
Members.69 As summarized in Section
II.B above, the Impact Study Results
show that the proposed $250,000
minimum requirement would have
increased NSCC’s twelve-month rolling
Clearing Fund coverage by 0.14% to
99.41% resulting from decreased
backtesting deficiencies, which the
commenter argues does not warrant the
proposed increase in the minimum
Required Fund Deposit amount.
However, as discussed above and based
on the Commission’s review, the Impact
Study Results show that certain
Members who maintained Required
Fund Deposits of less than $250,000
experienced repeat backtesting
deficiencies that resulted in those
Members’ individual margin levels
falling below the 99% confidence level.
In other words, these Members’
individual margin levels were not
sufficient 99% of the time during the
study period. For that reason, the
Commission is not persuaded by the
commenter’s argument.
Therefore, the Commission concludes
NSCC’s Proposed Rule Change should
better ensure NSCC maintains sufficient
margin to cover its potential future
exposure to its Members in the interval
between the last margin collection and
the close out of positions following a
Member default, thereby reducing the
likelihood NSCC or non-defaulting
Members would incur losses as a result.
Accordingly, the Commission finds that
NSCC’s proposed increase to its
minimum Required Fund Deposit
would be consistent with Rule 17Ad–
22(e)(6)(iii).70
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, as modified by Partial
Amendment No. 1, is consistent with
the Exchange Act. Comments may be
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–2021–005 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–2021–005. 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 such
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–
2021–005 and should be submitted on
or before September 7, 2021.
V. Accelerated Approval of the
Proposed Rule Change, as Modified by
Partial Amendment No. 1
The Commission finds good cause,
pursuant to Section 19(b)(2) of the
Exchange Act,71 to approve the
69 See
70 17
Alpine Letter, supra note 4, at 5–6.
CFR 240.17Ad–22(e)(6)(iii).
submitted by any of the following
methods:
VerDate Sep<11>2014
17:08 Aug 16, 2021
Jkt 253001
71 15
PO 00000
U.S.C. 78s(b)(2).
Frm 00096
Fmt 4703
Sfmt 4703
46047
proposed rule change prior to the 30th
day after the date of publication of
Partial Amendment No. 1 in the Federal
Register. As discussed above, in Partial
Amendment No. 1, NSCC updates its
proposed rule text to include a legend
to indicate a delayed implementation
date, specifically that the rule change
would be implemented no later than 20
business days after Commission
approval of the Proposed Rule Change.
Partial Amendment No. 1 improves the
efficiency of the filing process by
obviating the need for NSCC to propose
another change to its rules to resolve the
omitted legend in the future, while not
changing the purpose of or basis for the
Proposed Rule Change.
For similar reasons as discussed
above, the Commission finds that Partial
Amendment No. 1 is consistent with the
requirement that NSCC’s rules be
designed, in part, to assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible under Section 17A(b)(3)(F)
of the Exchange Act.72 Accordingly, the
Commission finds good cause for
approving the Proposed Rule Change, as
modified by Partial Amendment No. 1,
on an accelerated basis, pursuant to
Section 19(b)(2) of the Exchange Act.73
VI. Conclusion
On the basis of the foregoing, the
Commission finds that the Proposed
Rule Change is consistent with the
requirements of the Act and in
particular with the requirements of
Section 17A of the Act 74 and the rules
and regulations promulgated
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 75 that
Proposed Rule Change SR–NSCC–2021–
005, as modified by Partial Amendment
No. 1, be, and hereby is, approved.76
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.77
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–17541 Filed 8–16–21; 8:45 am]
BILLING CODE 8011–01–P
72 15
U.S.C. 78q–1(b)(3)(F).
U.S.C. 78s(b)(2).
74 15 U.S.C. 78q–1.
75 15 U.S.C. 78s(b)(2).
76 In approving the Proposed Rule Change, the
Commission considered the proposals’ impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f). See discussion supra Section III.B.
77 17 CFR 200.30–3(a)(12).
73 15
E:\FR\FM\17AUN1.SGM
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Agencies
[Federal Register Volume 86, Number 156 (Tuesday, August 17, 2021)]
[Notices]
[Pages 46043-46047]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17541]
[[Page 46043]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92640; File No. SR-NSCC-2021-005]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Partial Amendment No. 1 and Order
Granting Accelerated Approval of Proposed Rule Change, as Modified by
Partial Amendment No. 1, To Increase the National Securities Clearing
Corporation's Minimum Required Fund Deposit
August 11, 2021.
I. Introduction
On April 26, 2021, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2021-005 (the ``Proposed
Rule Change'') pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder \2\ to increase its
minimum required fund deposit. The Proposed Rule Change was published
for comment in the Federal Register on May 14, 2021,\3\ and the
Commission has received comments \4\ on the changes proposed
therein.\5\ On June 24, 2021, pursuant to Section 19(b)(2) of the
Act,\6\ the Commission designated a longer period within which to
approve, disapprove, or institute proceedings to determine whether to
approve or disapprove the proposed rule change.\7\ On August 5, 2021,
NSCC filed a partial amendment (``Partial Amendment No. 1'') to modify
the Proposed Rule Change.\8\ The Commission is publishing this notice
to solicit comments on Partial Amendment No. 1 from interested persons
and is approving the Proposed Rule Change, as modified by Partial
Amendment No. 1, on an accelerated basis.\9\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 91809 (May 10, 2021), 86
FR 26588 (May 14, 2021) (File No. SR-NSCC-2021-005) (``Notice of
Filing'').
\4\ See Letter from Parsons, Behle & Latimer, Counsel for Alpine
Securities Corporation, dated June 4, 2021, to Vanessa Countryman,
Secretary, Commission (``Alpine Letter''), available at https://www.sec.gov/comments/sr-nscc-2021-005/srnscc2021005.htm.
\5\ NSCC appended an Exhibit 2 to the materials filed on April
26, 2021. The appended Exhibit 2 consists of a comment letter that
NSCC received from one of its members objecting to NSCC's proposal
in response to member outreach NSCC conducted in 2019 (``Wachtel
Letter''). See Notice of Filing, supra note 3, at 26593. NSCC
considered that comment in its Proposed Rule Change, and the
Commission has considered the comment letter in making its
determination, as discussed in Section III below. A copy of the
comment letter is available at https://www.dtcc.com/-/media/Files/Downloads/legal/rule-filings/2021/NSCC/SR-NSCC-2021-005.pdf.
\6\ 15 U.S.C. 78s(b)(2).
\7\ Securities Exchange Act Release No. 92250 (June 24, 2021),
86 FR 34798 (June 30, 2021) (File No. SR-NSCC-2021-005).
\8\ In Partial Amendment No. 1, NSCC updates the proposed rule
text filed as Exhibit 5 to the proposed rule change to include a
legend to indicate a delayed implementation date, specifically that
the rule change would be implemented not later than 20 business days
after Commission approval of the Proposed Rule Change. NSCC did not
change the purpose or substance of, or basis for, the Proposed Rule
Change.
\9\ References to the Proposed Rule Change from this point
forward refer to the Proposed Rule Change as modified by Partial
Amendment No. 1.
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II. Description of the Proposed Rule Change
Currently, NSCC requires each Member to maintain a minimum Required
Fund Deposit \10\ amount of $10,000.\11\ NSCC proposes to increase each
Member's minimum Required Fund Deposit amount to $250,000.
---------------------------------------------------------------------------
\10\ 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.
\11\ See Section 1 of Rule 4, id.
---------------------------------------------------------------------------
A. Background
NSCC provides central counterparty (``CCP'') services, including
clearing, settlement, risk management, and a guarantee of completion
for virtually all broker-to-broker trades involving equity securities,
corporate and municipal debt securities, and certain other securities.
In its role as a CCP, a key tool NSCC uses to manage its credit
exposure to its Members is determining and collecting an appropriate
Required Fund Deposit (i.e., margin) from each Member.\12\ A Member's
Required Fund Deposit serves as collateral to mitigate potential losses
to NSCC associated with the liquidation of the Member's portfolio
should that Member default. The aggregate of all Members' Required Fund
Deposits constitutes NSCC's Clearing Fund, which it would access, among
other instances, should a defaulting Member's own Required Fund Deposit
be insufficient to satisfy losses to NSCC caused by the liquidation of
that Member's portfolio.\13\
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\12\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules (``Procedure XV''), supra
note 8. The minimum Required Fund Deposit amount is required to be
in cash. See Section II.(A) of Procedure XV, supra note 8.
\13\ See id.
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NSCC conducts daily backtesting to evaluate whether each Member's
Required Fund Deposit is sufficient to cover NSCC's credit exposures to
that Member based on a simulated liquidation of the Member's portfolio
on that day.\14\ Backtesting is an ex-post comparison of actual
outcomes with expected outcomes derived from the use of margin
models.\15\ A backtesting deficiency occurs when NSCC determines that
the projected liquidation losses to NSCC arising in the event of a
Member's default would be greater than the Member's Required Fund
Deposit.\16\ Therefore, backtesting deficiencies highlight exposure
that could subject NSCC to potential losses under normal market
conditions in the event that a Member defaults.\17\
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\14\ See Securities Exchange Act Release No. 81485 (August 25,
2017), 82 FR 41433 (August 31, 2017) (NSCC-2017-008) (adopting Model
Risk Management Framework and stating that Required Fund Deposit
backtesting would be performed at least on a daily basis);
Securities Exchange Act Release No. 84458 (October 19, 2018), 83 FR
53925 (October 25, 2018) (File No. SR-NSCC-2018-009) (amending the
Model Risk Management Framework to provide enhanced governance).
\15\ See 17 CFR 240.17Ad-22(a)(1).
\16\ See Notice of Filing, supra note 3, at 26589.
\17\ See id.
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NSCC regularly reviews backtesting results to assess the
effectiveness of its margining requirements.\18\ As part of its review,
NSCC investigates the causes of any backtesting deficiencies, paying
particular attention to repeat backtesting deficiencies that would
result in the Member's backtesting coverage to fall below the 99%
confidence target to determine if there is an identifiable cause of
repeat backtesting deficiencies.\19\ NSCC also evaluates whether
multiple Members may experience backtesting deficiencies for the same
underlying reason.\20\
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\18\ See Notice of Filing, supra note 3, at 26589.
\19\ NSCC states a Member's backtesting coverage would fall
below the 99% confidence target if the Member has more than two
backtesting deficiency days in a rolling twelve-month period. See
Notice of Filing, supra note 3, at 26589. In other words, if a
Member has three or more backtesting deficiency days during a
twelve-month period, then the Member's margin would not be
sufficient 99% of the time. NSCC believes that its targeted 99%
confidence level is consistent with its regulatory requirements
under Rule 17Ad-22(e)(4)(i) and (e)(6)(iii). 17 CFR 240.17Ad-22
(e)(4)(i), and (e)(6)(iii).
\20\ See Notice of Filing, supra note 3, at 26589.
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Based on its regular reviews, NSCC states it has found that Members
with Required Fund Deposits below $250,000 disproportionately
experience repeat backtesting deficiencies because, should the Member's
settlement activity abruptly increase, the additional exposure to NSCC
would not be mitigated until the collection of the Required Fund
Deposit either intraday or on the next business day.\21\ NSCC states it
has also found that its current minimum margin requirement of $10,000
is disproportionately lower
[[Page 46044]]
than the minimum margin requirements of other CCPs that clear similar
securities products.\22\
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\21\ See id.
\22\ See id. For example, the minimum initial contribution for
The Options Clearing Corporation (``OCC'') is $500,000. See Rule
1002(d) of the OCC Rules, available at https://www.theocc.com/components/docs/legal/rules_and_bylaws/occ_rules.pdf. The minimum
Required Fund Deposit for both the Government Securities Division
(``GSD'') and Mortgage-Backed Securities Division (``MBSD'') of
Fixed Income Clearing Corporation (``FICC'') is $100,000. See Rule 4
of FICC GSD Rulebook, available at https://www.dtcc.com/~/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf and Rule 4 of the
FICC MBSD Clearing Rules, available at https://www.dtcc.com/~/media/
Files/Downloads/legal/rules/ficc_mbsd_rules.pdf.
---------------------------------------------------------------------------
Therefore, NSCC proposes to increase its minimum Required Fund
Deposit from $10,000 to $250,000.
B. Impact Study Results
To support its proposal, NSCC relies upon the results of recent
backtesting analyses.\23\ Specifically, NSCC examines the backtesting
coverage \24\ of each of its Members during the period from June 3,
2019 to May 29, 2020, under the current $10,000 minimum Required Fund
Deposit amount compared to hypothetical (or ``pro forma'') minimum
Required Fund Deposit amounts, including the proposed $250,000 amount
and $100,000 (``Impact Study Results'').\25\ NSCC uses the Impact Study
Results to show the number of Member backtesting deficiencies \26\ that
would have been eliminated during the period had NSCC's minimum
Required Fund Deposit been $250,000 and compared to $100,000. NSCC then
uses the Impact Study Results to analyze the improvement to each
Member's backtesting coverage ratio \27\ and, taking all Members'
backtesting coverage ratio results together, to analyze the improvement
to NSCC's Clearing Fund backtesting coverage.\28\
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\23\ See supra text accompanying notes 12-16.
\24\ See supra note 17 and accompanying text.
\25\ NSCC provided a public summary of the information in this
Section II.B in its Notice of Filing, upon which this discussion is
based. See Notice of Filing, supra note 3, at 26590-92. NSCC filed
the data underlying the Impact Study Results as a confidential
Exhibit 3 to the Proposed Rule Change pursuant to 17 CFR 240.24b-2.
\26\ See supra text accompanying notes 14-15.
\27\ See supra note 17 and accompanying text.
\28\ The Clearing Fund backtesting coverage represents the daily
sufficiency of the aggregate of all Members' margin over a rolling
12-month period. As described in Section II.A above, NSCC would be
able to access the Clearing Fund to cover any losses to it should a
Member with insufficient margin default. See supra text accompanying
note 11.
---------------------------------------------------------------------------
During the impact study period under the current minimum Required
Fund Deposit, NSCC observed a total of 227 Member backtesting
deficiencies, and 29 Members experienced repeat backtesting
deficiencies causing them to fall below the 99% confidence target.\29\
Members with a Required Fund Deposit lower than $250,000 accounted for
22% of the total backtesting deficiencies and constituted approximately
45% of the Members whose margin levels fell below the 99% confidence
target.\30\ Additionally, NSCC's twelve-month aggregate Clearing Fund
backtesting coverage was 99.28%.
---------------------------------------------------------------------------
\29\ See id.
\30\ See id.
---------------------------------------------------------------------------
A minimum requirement of $250,000 would have eliminated 44
backtesting deficiencies across 13 Members and would have eliminated
approximately 88% of the deficiencies that occurred on the days when
Members maintained a Required Fund Deposit of less than $250,000.\31\
Additionally, a minimum requirement of $250,000 would have improved
NSCC's rolling twelve-month coverage for seven Members to above the 99%
confidence interval.\32\ NSCC states that, if the proposed $250,000
minimum had been in place, the remaining Members still below the 99%
confidence interval would constitute only 27% of Members that fell
below the 99% confidence target, which is comparable to those Members'
overall representation as a class of NSCC's total Members.\33\
Moreover, a minimum requirement of $250,000 would have increased NSCC's
twelve-month aggregate Clearing Fund backtesting coverage by 0.14% to
99.41%.\34\
---------------------------------------------------------------------------
\31\ See Notice of Filing, supra note 3, at 26590. Not all of
the backtesting deficiencies would have been eliminated because if
the Member's Required Fund Deposit calculation increases to above
$250,000 intraday, due to, for example, increases in trading volume
and/or adverse mark-to-market adjustments, the $250,000 proposed
minimum Required Fund Deposit would still be insufficient to cover
NSCC's exposure between margin collections. See supra text
accompanying note 19.
\32\ See Notice of Filing, supra note 3, at 26590.
\33\ See id.
\34\ See id.
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An increase to $250,000 compared to $100,000 would have further
reduced NSCC's credit exposure to its Members by eliminating ten
additional backtesting deficiencies from 34 to 44 total backtesting
deficiencies and resulting in increasing two additional Members' margin
levels to above the 99% confidence interval from five Members to seven
Members. Additionally, NSCC's aggregate Clearing Fund backtesting
coverage would have improved from 99.38% to 99.41% representing an
increase of 0.03%.
NSCC had approximately 150 total Members during the impact study
period.\35\ Of those, 46 Members would be impacted by the proposed
$250,000 minimum Required Fund Deposit.\36\ On average, 18 Members
maintained excess deposits greater than the proposed increase;
therefore, 28 Members on average would have been required to deposit
additional funds if the proposal had been implemented.\37\ In addition,
the 46 Members that would be impacted by the proposed $250,000 minimum
Required Fund Deposit maintained excess net capital or equity capital
(as applicable) (``ENC'') in excess of $800,000 on average over the
Impact Study Period, ranging between an average of $834,000 to $211.5
billion, with 98% of the impacted Members having on average an ENC
above $2.5 million.\38\ NSCC states it used ENC in its analysis to
estimate impacted Members' ability to satisfy additional Required Fund
Deposit amounts required by the proposal.\39\
---------------------------------------------------------------------------
\35\ See CPMI IOSCO Quantitative Disclosure Results 2019 Q2
(September 25, 2019), available at https://www.dtcc.com/-/media/Files/Downloads/legal/policy-and-compliance/CPMI-IOSCO-Quantitative-Disclosure-Results-2019-Q2-2.pdf.
\36\ See Notice of Filing, supra note 3 at 26593.
\37\ See id.
\38\ See id.
\39\ See id.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \40\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such organization. After careful consideration, the
Commission finds that the Proposed Rule Change is consistent with the
requirements of the Act and the rules and regulations applicable to
NSCC.\41\ In particular, the Commission finds that the Proposed Rule
Change is consistent with Section 17A(b)(3)(F) and (b)(3)(I) \42\ of
the Act and Rules 17Ad-22(e)(4) and (e)(6) thereunder.\43\
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\40\ 15 U.S.C. 78s(b)(2)(C).
\41\ The Commission's findings are based on its review of the
Proposed Rule Change, including its analysis of the Impact Study
Results, which are summarized in Section II.B above. See supra note
23 and accompanying text.
\42\ 15 U.S.C. 78q-1(b)(3)(F).
\43\ 17 CFR 240.17Ad-22(e)(4) and (e)(6).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a clearing agency, such as NSCC, be designed, in part, to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible.\44\ The
Commission believes
[[Page 46045]]
that the Proposed Rule Change is consistent with Section 17A(b)(3)(F)
of the Act.
---------------------------------------------------------------------------
\44\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As discussed in Section II.A above, backtesting deficiencies
highlight when a Member's margin is insufficient to cover NSCC's credit
exposure to that Member.\45\ If a defaulted Member's margin is
insufficient to satisfy losses caused by the closeout of that Member's
positions, NSCC and its non-defaulting Members may be subject to
losses. As summarized in Section II.B above, the proposed increase
would have provided NSCC with additional resources, which would have
resulted in a decrease in backtesting deficiencies and thus a reduction
in credit exposure to its Members under the proposal.\46\ Therefore,
the Commission believes NSCC would improve the probability that the
increased minimum margin amount it collects is sufficient to cover
NSCC's credit exposure to those Members, particularly in instances
where the defaulted Member's clearing activity abruptly increases
following a period of low or no activity. This increase, in turn, could
reduce the possibility that NSCC or its non-defaulting Members face
losses from the close-out process.
---------------------------------------------------------------------------
\45\ See supra text accompanying note 15.
\46\ See supra text accompanying notes 29-31.
---------------------------------------------------------------------------
Moreover, NSCC would continue to require that Members pay an amount
equal to the minimum Required Fund Deposit amount in cash. Therefore,
the proposal would enable NSCC to have available additional collateral
that is easier for NSCC to access quickly to complete end of day
settlement upon a Member's default, further reducing the risk of losses
to NSCC or non-defaulting Members. Accordingly, the Commission believes
the Proposed Rule Change would promote the safeguarding of securities
and funds which are in the custody or control of NSCC or for which NSCC
is responsible, consistent with Section 17A(b)(3)(F) of the Act.\47\
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\47\ In addition to its arguments about the Proposed Rule
Change, one commenter also asserts that NSCC's other recent efforts
to increase capital or methodology-based margin requirements
represent unfair discrimination against Members who deal in stocks
trading in the OTC Markets, inconsistent with Section 17A(b)(3)(F)
of the Act. See Alpine Letter, supra note 4, at 4-5. However, the
Proposed Rule Change would not amend NSCC's capital or methodology-
based margin requirements and is limited to the amendment of the
minimum Required Fund Deposit amount. Therefore, the commenter's
arguments pursuant to Section 17A(b)(3)(F) of the Act are outside
the scope of this Proposed Rule Change. The commenter also argues
that NSCC should instead eliminate risk by shortening the settlement
cycle, rather than monetizing risk through increased margin
requirements, such as under this Proposed Rule Change. See Alpine
Letter, supra note 4, at 7-8. However, the Proposed Rule Change is
limited to NSCC's minimum Required Fund Deposit amount in order to
manage risk under the current settlement cycle. Therefore, the
commenter's arguments related to shortening the settlement cycle are
likewise outside the scope of this Proposed Rule Change.
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B. Consistency With Section 17A(b)(3)(I) of the Act
Section 17A(b)(3)(I) of the Act requires that the rules of a
clearing agency do not impose any burden on competition not necessary
or appropriate in furtherance of the Act.\48\ This provision does not
require the Commission to find that a proposed rule change represents
the least anti-competitive means of achieving the goal.\49\ Rather, it
requires the Commission to balance the competitive considerations
against other relevant policy goals of the Act.\50\
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\48\ 15 U.S.C. 78q-1(b)(3)(I).
\49\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105
(D.C. Cir. 1978) (``Bradford'').
\50\
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The Commission acknowledges that the impact of increased margin
requirements will likely present higher costs to some Members with
lower operating margins, lower cash reserves or higher costs of capital
compared to other Members, which may weaken those Members' competitive
positions relative to others. For example, certain smaller Members
could be required to make and hold an additional deposit of up to
$240,000 to the Clearing Fund, which would limit the smaller Member's
ability to utilize that cash for other operating or investing purposes.
Although some of NSCC's Members could experience a burden on
competition because of these higher costs, the Commission concludes any
burden to these Members is necessary and appropriate in furtherance of
the policy goals under the Act \51\ for the following reasons.
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\51\ 15 U.S.C. 78q-1(b)(3)(I). Specifically, as discussed in
greater detail in Section III.C and III.D below, the Proposed Rule
Change is necessary and appropriate to further the policy goals
under Rule 17Ad-22(e)(4)(i) and (e)(6)(iii). 17 CFR 240.17Ad-
22(e)(4)(i) and (e)(6)(iii).
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As discussed in Section II.A above, NSCC seeks to maintain
sufficient resources (i.e., margin) to cover its credit exposures to
its Members fully with a high degree of confidence. Conversely, NSCC
uses backtesting to determine when a Member's margin would have been
insufficient to cover NSCC's credit exposure to that Member.\52\ As
previously discussed, the Impact Study Results show the proposed
$250,000 minimum Required Fund Deposit would have decreased the number
of backtesting deficiencies, thereby increasing the number of Members
for which NSCC maintained sufficient coverage at a confidence level of
at least 99%.\53\ Therefore, the Proposed Rule Change would enable NSCC
to better manage its credit exposure to its Members by ensuring it
holds sufficient collateral to cover that exposure, thereby reducing
the likelihood that NSCC or non-defaulting Members would incur losses
resulting from a Member default.
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\52\ See supra text accompanying notes 12-15.
\53\ See supra text accompanying note 44. See also, supra text
accompanying notes 29-31.
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Additionally, based on the information set forth in Section II.B
above regarding the average ENC of the impacted Members,\54\ the
Commission believes that the vast majority of impacted Members likely
would not experience a weakened competitive position compared to others
as a result of the Proposed Rule Change. The average ENC data shows
that almost all of the impacted Members would likely be able to satisfy
the additional cash deposits needed to comply with the Proposed Rule
Change with minimal impact to the Members' financials.\55\
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\54\ See supra notes 34-37 and accompanying text. 98% of the
impacted Members had, on average, an ENC above $2.5 million.
Therefore, on average, 2% of the 46 impacted Members would maintain
ENC below $2.5 million, which equals approximately one Member who
could be required to hold 9.6% or more of its ENC on deposit at
NSCC.
\55\ NSCC represents it would continue to require that Members
pay an amount equal to the minimum Required Fund Deposit amount in
cash. See Notice of Filing, supra note 3, at 26590.
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Commenters have raised concerns regarding the Proposed Rule Change
in light of its potential competitive impact on certain NSCC Members.
Specifically, one commenter objects to the proposed increase to
$250,000, stating that NSCC's current Rules are more than adequate to
guard against risk at the small firm-level and that the increase would
be purely a tax on the smallest, inactive and lowest risk firms.\56\
Another commenter similarly objects to the proposed change stating the
increase would disproportionately affect NSCC's smallest Members.\57\
The Commission disagrees for the reasons discussed above, which
indicate that the proposed increase would increase Members' Required
Fund Deposits proportional to the risks posed by those Members.
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\56\ See Wachtel Letter, supra note 5.
\57\ The commenter concludes the Proposed Rule Change will
``undoubtedly put some members out of business.'' See Alpine Letter,
supra note 4, at 5. Based on its consideration of the ENC data, as
discussed above, the Commission does not agree with the commenter's
argument. See supra text accompanying notes 51-52.
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Moreover, as discussed in Section II.A above, it is possible that,
in certain circumstances, the current minimum Required Fund Deposit
amount would
[[Page 46046]]
be insufficient to manage NSCC's credit exposure to participants
between margin collections should, for example, the Member's clearing
activity abruptly increase.\58\ As summarized in Section II.B above,
the Impact Study Results show that approximately 88% of the
deficiencies that occurred on the days when Members maintained a
Required Fund Deposit of less than $250,000 would have been eliminated,
which indicates the proposed increase to $250,000 would have mitigated
this risk.\59\ Seven of the 28 Members that would have to provide some
additional funding still held an average actual clearing fund deposit
of above $250,000 during the Impact Study Period, ranging from
approximately $315,000 to $1.7M. In other words, there would have been
many days during the study period where those seven Members would not
have to provide additional funding. Additionally, four of the remaining
21 Members that would have to provide some additional funding had an
average ENC below $5 million, ranging from $834,000 to $4.8 million,
during the Impact Study Period, while 11 of the 21 Members had an
average ENC above $100 million during the same period.
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\58\ See supra text accompanying notes 17-19.
\59\ See supra text accompanying note 29.
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For those 28 Members, the number of backtesting deficiencies ranged
from zero and 22 based on the $10,000 minimum Required Fund Deposit
compared to zero and five had the $250,000 minimum Required Fund
Deposit been in place during the Impact Study Period. Moreover, the
average number of backtesting deficiencies of the 28 Members would have
decreased from 1.54 to 0.41 per Member had the $250,000 minimum
Required Fund Deposit been in place during the study period. For the 14
Members impacted with backtesting deficiencies, the largest deficiency
was $1.3 million and the smallest deficiency was $11,000 (out of 50
total deficiencies). Under the proposed minimum Required Fund Deposit
of $250,000, there would only be six deficiencies across four members,
with a maximum deficiency of $1.1 million and a minimum deficiency of
$11,000.
One commenter further states that it would not object to an
increase to a $100,000 Required Fund Deposit. However, as discussed in
Section II.B above, an increase to $250,000 compared to $100,000 would
have further reduced NSCC's credit exposure to its Members by
eliminating ten additional backtesting deficiencies resulting in NSCC
maintaining sufficient margin levels for two additional Members to
above the 99% confidence interval. Therefore, the Commission concludes
that any competitive burden to Members imposed by the Proposed Rule
Change is necessary and appropriate in furtherance of the Act.
Accordingly, the Commission finds that the Proposed Rule Change is
consistent with the requirements of Section 17A(b)(3)(I) of the
Act.\60\
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\60\ 15 U.S.C. 78q-1(b)(3)(I).
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C. Consistency With Rule 17Ad-22(e)(4)(i)
Rule 17Ad-22(e)(4)(i) requires that NSCC establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively identify, measure, monitor, and manage its
credit exposures to participants and those arising from its payment,
clearing, and settlement processes, including by maintaining sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence.\61\
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\61\ 17 CFR 240.17Ad-22(e)(4)(i).
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As described above in Section II.A, NSCC and its non-defaulting
Members may be subject to losses should a defaulted Member's own
Required Fund Deposit be insufficient to satisfy losses caused by the
liquidation of that Member's portfolio. As summarized in Section II.B
above,\62\ the Impact Study Results show a $250,000 minimum Required
Fund Deposit would have decreased the number of backtesting
deficiencies, which would likely help NSCC better manage its credit
exposure to each of its Members and credit exposures arising from its
payment, clearing, and settlement processes.
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\62\ See supra text accompanying notes 29-32.
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Additionally, as discussed in Sections II.A and III.B above, NSCC
would continue to require that Members pay an amount equal to the
minimum Required Fund Deposit amount in cash,\63\ which should enable
NSCC to better maintain sufficient prefunded margin to mitigate
potential future exposures to its Members. Therefore, requiring the
proposed minimum $250,000 deposit to be made in cash should reduce the
probability that NSCC or non-defaulting Members would incur losses
resulting from a Member default. Accordingly, the Commission finds that
NSCC's proposed increase to its minimum Required Fund Deposit would be
consistent with Rule 17Ad-22(e)(4)(i).\64\
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\63\ See supra note 52. See also, Notice of Filing, supra note
3, at 26590.
\64\ 17 CFR 240.17Ad-22(e)(4)(i).
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D. Consistency with Rule 17Ad-22(e)(6)(iii)
Rule 17Ad-22(e)(6)(iii) under the Act requires that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to cover its credit
exposures to its participants by establishing a risk-based margin
system that, at a minimum, calculates margin sufficient to cover its
potential future exposure to Members in the interval between the last
margin collection and the close out of positions following a Member
default.\65\
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\65\ 17 CFR 240.17Ad-22(e)(6)(iii).
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As summarized in Section III.B above,\66\ NSCC employs daily
backtesting to determine the adequacy of each Member's Required Fund
Deposit paying particular attention to Members that have backtesting
deficiencies below the 99% confidence target.\67\ Such backtesting
deficiencies highlight exposure that could subject NSCC to potential
losses if a Member defaults.
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\66\ See supra text accompanying note 49.
\67\ See supra text accompanying notes 16-18.
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Based on the Impact Study Results, which the Commission has
reviewed and analyzed, approximately 22% of all backtesting
deficiencies occur for those Members that maintain a Required Fund
Deposit of less than $250,000, and approximately 88% of the
deficiencies of those Members would have been eliminated during the
Impact Study Period if the Required Fund Deposit were $250,000 or
higher. By raising the minimum Required Fund Deposit amount to
$250,000, the Commission believes the proposal could enable NSCC to
decrease the number of backtesting deficiencies by Members, and thus
decrease NSCC's exposure to such Members in the event of a Member
default.
Additionally, based on the Commission's review and analysis of the
Impact Study Results, the proposed $250,000 minimum Required Fund
Deposit amount would have decreased the number of repeat backtesting
deficiencies during the study period, which would have decreased the
number of Members whose margin levels during the study period fell
below the 99% confidence target.\68\ Therefore, by raising the minimum
Required Fund Deposit amount to $250,000, the Commission concludes that
the increase in margin for NSCC Members that currently maintain a
Required Fund Deposit of less than $250,000 would improve the
probabilities that the
[[Page 46047]]
margin maintained by these Members is sufficient to cover NSCC's
potential future exposure to Members in the interval between the last
margin collection and the close out of positions following a Member
default.
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\68\ See supra text accompanying notes 29-31. See also, supra
text accompanying notes 17-19.
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One commenter states the increase in margin is unwarranted because
NSCC's Clearing Fund backtesting results from the Impact Study Results
show that NSCC's current minimum Required Fund Deposit amount is
sufficient to cover the risks presented by smaller Members.\69\ As
summarized in Section II.B above, the Impact Study Results show that
the proposed $250,000 minimum requirement would have increased NSCC's
twelve-month rolling Clearing Fund coverage by 0.14% to 99.41%
resulting from decreased backtesting deficiencies, which the commenter
argues does not warrant the proposed increase in the minimum Required
Fund Deposit amount. However, as discussed above and based on the
Commission's review, the Impact Study Results show that certain Members
who maintained Required Fund Deposits of less than $250,000 experienced
repeat backtesting deficiencies that resulted in those Members'
individual margin levels falling below the 99% confidence level. In
other words, these Members' individual margin levels were not
sufficient 99% of the time during the study period. For that reason,
the Commission is not persuaded by the commenter's argument.
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\69\ See Alpine Letter, supra note 4, at 5-6.
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Therefore, the Commission concludes NSCC's Proposed Rule Change
should better ensure NSCC maintains sufficient margin to cover its
potential future exposure to its Members in the interval between the
last margin collection and the close out of positions following a
Member default, thereby reducing the likelihood NSCC or non-defaulting
Members would incur losses as a result. Accordingly, the Commission
finds that NSCC's proposed increase to its minimum Required Fund
Deposit would be consistent with Rule 17Ad-22(e)(6)(iii).\70\
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\70\ 17 CFR 240.17Ad-22(e)(6)(iii).
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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 Partial Amendment No. 1, is consistent with the
Exchange 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-2021-005 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-2021-005. 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 such 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-2021-005 and should be submitted on
or before September 7, 2021.
V. Accelerated Approval of the Proposed Rule Change, as Modified by
Partial Amendment No. 1
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Exchange Act,\71\ to approve the proposed rule change prior to the
30th day after the date of publication of Partial Amendment No. 1 in
the Federal Register. As discussed above, in Partial Amendment No. 1,
NSCC updates its proposed rule text to include a legend to indicate a
delayed implementation date, specifically that the rule change would be
implemented no later than 20 business days after Commission approval of
the Proposed Rule Change. Partial Amendment No. 1 improves the
efficiency of the filing process by obviating the need for NSCC to
propose another change to its rules to resolve the omitted legend in
the future, while not changing the purpose of or basis for the Proposed
Rule Change.
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\71\ 15 U.S.C. 78s(b)(2).
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For similar reasons as discussed above, the Commission finds that
Partial Amendment No. 1 is consistent with the requirement that NSCC's
rules be designed, in part, to assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible under Section 17A(b)(3)(F) of the Exchange
Act.\72\ Accordingly, the Commission finds good cause for approving the
Proposed Rule Change, as modified by Partial Amendment No. 1, on an
accelerated basis, pursuant to Section 19(b)(2) of the Exchange
Act.\73\
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\72\ 15 U.S.C. 78q-1(b)(3)(F).
\73\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \74\ and
the rules and regulations promulgated thereunder.
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\74\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\75\ that Proposed Rule Change SR-NSCC-2021-005, as modified by Partial
Amendment No. 1, be, and hereby is, approved.\76\
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\75\ 15 U.S.C. 78s(b)(2).
\76\ In approving the Proposed Rule Change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f). See discussion supra Section
III.B.
\77\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\77\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17541 Filed 8-16-21; 8:45 am]
BILLING CODE 8011-01-P