Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Enhance Capital Requirements and Make Other Changes, 74185-74198 [2021-28250]
Download as PDF
<![CDATA[
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
Methodology. Because the relief
requested is the same as certain of the
relief granted by the Commission under
the Reference Order and because the
Initial Adviser has entered into a
licensing agreement with NYSE Group,
Inc. in order to offer Funds that utilize
the NYSE Proxy Portfolio
Methodology,3 the Order would
incorporate by reference the terms and
conditions of the same relief of the
Reference Order.
5. Applicants request that the Order
apply to the Initial Fund and to any
other existing or future registered openend management investment company
or series thereof that: (a) Is advised by
the Initial Adviser or any entity
controlling, controlled by, or under
common control with the Initial Adviser
(any such entity, along with the Initial
Adviser, included in the term
‘‘Adviser’’); (b) offers exchange-traded
shares utilizing active management
investment strategies as contemplated
by the Reference Order; and (c)
complies with the terms and conditions
of the Order and the terms and
conditions of the Reference Order that
are incorporated by reference into the
Order (each such company or series and
the Initial Fund, a ‘‘Fund’’).4
6. Section 6(c) of the Act provides that
the Commission may exempt any
person, security or transaction, or any
class of persons, securities or
transactions, from any provisions of the
Act, if and to the extent that such
exemption is necessary or appropriate
in the public interest and consistent
with the protection of investors and the
purposes fairly intended by the policy
and provisions of the Act. Section 17(b)
of the Act authorizes the Commission to
exempt a proposed transaction from
section 17(a) of the Act if evidence
establishes that the terms of the
transaction, including the consideration
to be paid or received, are reasonable
and fair and do not involve
overreaching on the part of any person
concerned, and the transaction is
consistent with the policies of the
registered investment company and the
general purposes of the Act. Applicants
submit that for the reasons stated in the
Reference Order the requested relief
meets the exemptive standards under
sections 6(c) and 17(b) of the Act.
3 The NYSE Proxy Portfolio Methodology (as
defined in the Reference Order) is the intellectual
property of the NYSE Group, Inc.
4 All entities that currently intend to rely on the
Order are named as applicants. Any other entity
that relies on the Order in the future will comply
with the terms and conditions of the Order and the
terms and conditions of the Reference Order that
are incorporated by reference into the Order.
VerDate Sep<11>2014
20:20 Dec 28, 2021
Jkt 256001
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–28235 Filed 12–28–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93856; File No. SR–NSCC–
2021–016]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Proposed Rule Change To Enhance
Capital Requirements and Make Other
Changes
December 22, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on December 13, 2021, National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change as described
in Items I, II and III below, which Items
have been prepared by the clearing
agency. The Commission is publishing
this notice to solicit comments on the
proposed rule change from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change consists of
amendments to the Rules & Procedures
(‘‘Rules’’) of NSCC in order to (i)
enhance NSCC’s capital requirements
for Members and Limited Members
(collectively, ‘‘members’’), (ii) redefine
NSCC’s Watch List and eliminate
NSCC’s enhanced surveillance list, and
(iii) make certain other clarifying,
technical and supplementary changes in
the Rules, including definitional
updates, to accomplish items (i) and (ii),
as described in greater detail below.3
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Capitalized terms not defined herein are defined
in the Rules, available at https://www.dtcc.com/∼/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
2 17
PO 00000
Frm 00123
Fmt 4703
Sfmt 4703
74185
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
The purpose of this proposed rule
change is to (i) enhance NSCC’s capital
requirements for Members and Limited
Members (collectively, ‘‘members’’), (ii)
redefine NSCC’s Watch List and
eliminate NSCC’s enhanced surveillance
list, and (iii) make certain other
clarifying, technical and supplementary
changes in the Rules, including
definitional updates, to accomplish
items (i) and (ii).
(i) Background
Central counterparties (‘‘CCPs’’) play
a key role in financial markets by
mitigating counterparty credit risk on
transactions of their participants. CCPs
achieve this by providing guaranties to
participants and, as a consequence, are
typically exposed to credit risks that
could lead to default losses.
As a CCP, NSCC is exposed to the
credit risks of its members. The credit
risks borne by NSCC are mitigated, in
part, by the capital maintained by
members, which serves as a lossabsorbing buffer.
In accordance with Section
17A(b)(4)(B) of the Exchange Act,4 a
registered clearing agency such as NSCC
may, among other things, deny
participation to, or condition the
participation of, any person on such
person meeting such standards of
financial responsibility prescribed by
the rules of the registered clearing
agency.
In furtherance of this authority, NSCC
requires applicants and members to
meet the relevant financial
responsibility standards prescribed by
the Rules. These financial responsibility
standards generally require members to
have and maintain certain levels of
capital, as more particularly described
in the Rules and below.
NSCC’s capital requirements for its
members have not been updated in over
20 years. Since that time, there have
been significant changes to the financial
markets that warrant NSCC revisiting its
capital requirements. For example, the
regulatory environment within which
NSCC and its members operate has
undergone various changes. The
4 15
E:\FR\FM\29DEN1.SGM
U.S.C. 78q–1(b)(4)(B).
29DEN1
74186
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
implementation of the Basel III
standards,5 the designation of many
banks as systemically important by the
Financial Stability Board,6 as well as the
designation of NSCC as a systemically
important financial market utility
(‘‘SIFMU’’) by the Financial Stability
Oversight Council,7 have significantly
increased the regulatory requirements,
including capital requirements, of many
financial institutions and CCPs.
Similarly, the Covered Clearing Agency
Standards (‘‘CCAS’’) adopted by the
Commission have raised the regulatory
standards applicable to CCPs such as
NSCC.8
There also have been significant
membership changes over the past 20
years. Numerous mergers, acquisitions,
and new market entrants have created a
diverse NSCC membership that has
expanded the credit-risk profiles that
NSCC must manage. For example, NSCC
has seen an increase in less capitalized
market participants focusing on niche
parts of the market with innovative new
business models.
Additionally, trading activity and
market volatility, each of which present
risk to NSCC, ballooned over the years.9
While NSCC does collect margin from
its members to help address these types
of risk, it is imperative that NSCC
ensure that its members have sufficient
capital to sustain unexpected and/or
sustained increases in margin
requirements. Although the above
factors do not directly require NSCC to
increase capital requirements for its
membership (e.g., there is no specific
regulation or formula that prescribes a
set capital requirement for members of
a CCP such as NSCC), the overarching
and collective focus of the regulatory
changes noted above, in light of the
many heightened risks to the financial
industry, has been to increase the
stability of the financial markets in
5 Basel Committee on Banking Supervision, The
Basel Framework, available at https://www.bis.org/
basel_framework/index.htm?export=pdf (‘‘Basel III
Standards’’).
6 See Financial Stability Board, 2021 list of global
systemically important banks, available at https://
www.fsb.org/wp-content/uploads/P231121.pdf.
7 See U.S. Department of the Treasury,
Designations, Financial Market Utility Designations,
available at https://home.treasury.gov/policyissues/financial-markets-financial-institutions-andfiscal-service/fsoc/designations.
8 17 CFR 240.17Ad–22(e).
9 See, e.g., DTCC Annual Reports, available at
https://www.dtcc.com/about/annual-report. NSCC
is a wholly owned subsidiary of The Depository
Trust & Clearing Corporation (‘‘DTCC’’). The DTCC
Annual Reports highlight and track NSCC clearing
activity year-over-year. See also CBOE Volatility
Index (i.e., the VIX) available at https://
www.cboe.com/tradable_products/vix/. The VIX is
designed to measure market volatility, highlights a
rollercoaster of volatility over the past 14 years,
including historic and near-historic peaks.
VerDate Sep<11>2014
20:20 Dec 28, 2021
Jkt 256001
order to reduce systemic risk. As a selfregulatory organization, a SIFMU, and
being exposed to the new and increased
risks over the past 20 years, NSCC has
a responsibility to do the same.
Enhancing its capital requirements
helps meet that responsibility and
improve NSCC’s credit risk
management. Enhanced capital
requirements also help mitigate other
risks posed directly or indirectly by
members such as legal risk, operational
risk and cyber risk, as better capitalized
members have greater financial
resources in order to mitigate the effects
of these and other risks.
As for setting the specific capital
requirements proposed, again, there is
no regulation or formula that requires or
calculates a specific amount (i.e., there
is no magic number). Instead, NSCC
considered several factors, including
inflation and the capital requirements of
other Financial Market Infrastructures,
both in the U.S. and abroad, to which
the proposed requirements align.10
NSCC also gave much weight to the
historical development of the proposal,
which involved member outreach and
feedback as far back as 2013.
In 2013, NSCC considered increasing
its minimal capital requirements for
members that self-clear and those that
clear for others to much higher, fixed
amounts than what are proposed here.
However, some members expressed
concerns that the amounts were too high
and rigid, and would present undue
burden on less capitalized firms. As
such, NSCC then considered lowering
the amounts considerably, such that the
amounts would more directly reflect
inflation but with an adjustment factor
related to volume activity. In response,
though, members expressed concern
over the volume adjustment, which
NSCC also determined to be too
challenging and costly to implement,
and too complex to monitor for both
10 See The Options Clearing Corporation, OCC
Rules, Rule 301(a), available at https://
www.theocc.com/Company-Information/
Documents-and-Archives/By-Laws-and-Rules
(requiring broker-dealers to have initial net capital
of not less than $2,500,000); Chicago Mercantile
Exchange Inc., CME Rulebook, Rule 970.A.1,
available at https://www.cmegroup.com/rulebook/
CME/I/9/9.pdf (requiring clearing members to
maintain capital of at least $5 million, with banks
required to maintain minimum tier 1 capital of at
least $5 billion); LCH SA, LCH SA Clearing Rule
Book, Section 2.3.2, available at https://
www.lch.com/resources/rulebooks/lch-sa
(requiring, with respect to securities clearing,
capital of at least EUR 10 million for self-clearing
members and at least EUR 25 million for members
clearing for others, subject to partial satisfaction by
a letter of credit) (1 EUR = $0.8150 as of December
31, 2020; see https://www.fiscal.treasury.gov/
reports-statements/treasury-reporting-ratesexchange/current.html (last visited January 14,
2021)).
PO 00000
Frm 00124
Fmt 4703
Sfmt 4703
NSCC and members. Ultimately, NSCC
settled on the current proposal, which it
believes strikes the right balance
between continuing to provide access
for less capitalized firms and the need
to mitigate risk to NSCC and its
members, as described in more detail
below.
NSCC also proposes to redefine the
Watch List, which is a list of members
that are deemed by NSCC to pose a
heightened risk to it and its members
based on credit ratings and other factors.
As part of the redefinition of the Watch
List, NSCC proposes to eliminate the
separate enhanced surveillance list and
implement a new Watch List that
consists of a relatively smaller group of
members that exhibit heightened credit
risk, as described in more detail below.
Finally, NSCC proposes to make
certain other clarification changes in the
Rules.
(ii) Current NSCC Capital Requirements
The Rules currently specify capital
requirements for members based on
their membership type and type of
entity. The current NSCC capital
requirements for members are set forth
in Addendum B (Qualifications and
Standards of Financial Responsibility,
Operational Capability and Business
History),11 as supplemented by
Addendum O (Admission of Non-U.S.
Entities as Direct NSCC Members) 12 in
the case of non-U.S. entities.
Addendum B (Qualifications and
Standards of Financial Responsibility,
Operational Capability and Business
History)
Addendum B is divided into 12
sections, one for each NSCC
membership type. Each section of
Addendum B sets forth the
qualifications, financial responsibility,
operational capability and business
history requirements applicable to the
relevant membership type.
An applicant for a membership type
is required to meet the qualifications,
financial responsibility, operational
capability and business history
requirements applicable to the relevant
membership type, which may vary
based on the applicant’s type of entity
(e.g., a broker-dealer vs. a bank or trust
company). In particular, financial
responsibility requirements for a
membership type, which generally
require the applicant to maintain a
certain level of capital, may vary based
on an applicant’s type of entity and the
11 Addendum B (Qualifications and Standards of
Financial Responsibility, Operational Capability
and Business History), supra note 3.
12 Addendum O (Admission of Non-U.S. Entities
as Direct NSCC Members), supra note 3.
E:\FR\FM\29DEN1.SGM
29DEN1
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
relevant capital measure for such type of
entity.
As relevant to NSCC’s proposal to
enhance its capital requirements for
members:
Section 1
Section 1 of Addendum B sets forth
the qualifications, financial
responsibility, operational capability
and business history requirements
applicable to Members. The financial
responsibility requirements in Section 1
consist of the following capital
requirements:
Section 1.B.1 of Addendum B
provides that a Registered Broker-Dealer
applying to be a Member must have
excess net capital (i.e., capital in excess
of the minimum net capital required by
the Commission or such higher
minimum capital required by its
designated examining authority) in the
amount of $500,000 if the Registered
Broker-Dealer does not clear for others
or $1 million if the Registered BrokerDealer clears for others.
An applicant that is a Municipal
Securities Brokers’ Brokers (as defined
in Rule 15c3–1(a)(8) under the Exchange
Act) 13 is subject to a lower excess net
capital requirement of $100,000.
Section 1.B.2 of Addendum B
provides that a bank applying to be a
Member must (i) have at least $50
million in equity capital (as defined on
the Consolidated Report of Condition
and Income (‘‘Call Report’’)) or (ii) have
furnished to NSCC a guarantee of its
parent bank holding company
respecting the payment of any and all
obligations of the bank applicant, and
such parent bank holding company
must have total consolidated capital of
at least $50 million.
In the case of a trust company
applying to be a Member that is not a
bank but is a member of the Federal
Reserve System or is an institution
insured under the Federal Deposit
Insurance Act, the trust company must
have consolidated capital of at least $10
million and that is adequate to the scope
and character of the business conducted
by such trust company.
Section 1.B.3 of Addendum B
provides that an entity applying to be a
Member other than a Registered BrokerDealer, bank or trust company is
required to satisfy such minimum
standards of financial responsibility as
determined by NSCC.
Section 2
Section 2 of Addendum B sets forth
the qualifications, financial
responsibility, operational capability
13 17
CFR 240.15c3–1(a)(8).
VerDate Sep<11>2014
20:20 Dec 28, 2021
Jkt 256001
and business history requirements
applicable to Mutual Fund/Insurance
Services Members. The financial
responsibility requirements in Section 2
consist of the following capital
requirements:
Section 2.B.1 of Addendum B
provides that a Registered Broker-Dealer
applying to be a Mutual Fund/Insurance
Services Member must have excess net
capital in the amount of $50,000.
Section 2.B.2 of Addendum B
provides that a bank or trust company
applying to be a Mutual Fund/Insurance
Services Member must (i) have a Tier 1
Risk Based Capital (‘‘RBC’’) ratio of 6%
or greater or (ii) with respect to trust
companies which do not calculate a Tier
1 RBC ratio, have at least $2 million in
equity capital.
Section 2.B.3 of Addendum B
provides that an Insurance Company
applying to be a Mutual Fund/Insurance
Services Member must have an RBC
ratio, as derived from annual statutory
financial statements filed by it with its
supervisory or regulatory entity (or,
between filings of such annual statutory
financial statements, an RBC ratio
derived in a similar manner from thencurrent financial data), of 250% or
greater.
Section 2.B.4 of Addendum B
provides that an entity applying to be a
Mutual Fund/Insurance Services
Member other than a Registered BrokerDealer, bank or trust company or
Insurance Company is required to
satisfy such minimum standards of
financial responsibility as determined
by NSCC.
Section 3
Section 3 of Addendum B sets forth
the qualifications, financial
responsibility, operational capability
and business history requirements
applicable to Fund Members. The
financial responsibility requirements in
Section 3 consist of the following
capital requirements:
Section 3.B.1 of Addendum B
provides that a Registered Broker-Dealer
applying to be a Fund Member must
have excess net capital in the amount of
$50,000.
Section 3.B.2 of Addendum B
provides that a bank or trust company
applying to be a Fund Member must (i)
have a Tier 1 RBC ratio of 6% or greater
or (ii) with respect to trust companies
which do not calculate a Tier 1 RBC
ratio, have at least $2 million in equity
capital.
Section 3.B.3 of Addendum B
provides that an investment company
applying to be a Fund Member must
have at least $100,000 in assets under
management.
PO 00000
Frm 00125
Fmt 4703
Sfmt 4703
74187
Section 3.B.4 of Addendum B
provides that an investment adviser
applying to be a Fund Member must
have at least $25,000,000 in assets under
management and $100,000 in total net
worth.
Section 3.B.5 of Addendum B
provides that an Insurance Company
applying to be a Fund Member must
have an RBC ratio, as derived from
annual statutory financial statements
filed by it with its supervisory or
regulatory entity (or, between filings of
such annual statutory financial
statements, an RBC ratio derived in a
similar manner from then-current
financial data), of 250% or greater.
Section 3.B.6 of Addendum B
provides that an entity applying to be a
Fund Member other than a Registered
Broker-Dealer, bank or trust company,
investment company, investment
adviser or Insurance Company is
required to satisfy such minimum
standards of financial responsibility as
determined by NSCC.
Section 4
Section 4 of Addendum B sets forth
the qualifications, financial
responsibility, operational capability
and business history requirements
applicable to Insurance Carrier/
Retirement Services Members. The
financial responsibility requirements in
Section 4 consist of the following
capital requirement:
Section 4.B of Addendum B provides
that an Insurance Company applying to
be an Insurance Carrier/Retirement
Services Member must have an RBC
ratio, as derived from annual statutory
financial statements filed by it with its
supervisory or regulatory entity (or,
between filings of such annual statutory
financial statements, an RBC ratio
derived in a similar manner from thencurrent financial data), of 250% or
greater.
Section 7
Section 7 of Addendum B sets forth
the qualifications, financial
responsibility and operational capability
requirements applicable to Settling
Bank Only Members. The financial
responsibility requirements in Section 7
consist of the following capital
requirement:
Section 7.B of Addendum B provides
that a bank or trust company applying
to be a Settling Bank Only Member is
required to satisfy such minimum
standards of financial responsibility as
determined by NSCC.
E:\FR\FM\29DEN1.SGM
29DEN1
khammond on DSKJM1Z7X2PROD with NOTICES
74188
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
Addendum O (Admission of Non-U.S.
Entities as Direct NSCC Members)
times the otherwise-applicable capital
requirement.
Addendum O (Admission of Non-U.S.
Entities as Direct NSCC Members)
provides that an entity that is organized
in a country other than the United
States and that is not otherwise subject
to U.S. federal or state regulation (a
‘‘non-U.S. entity’’) is eligible to become
a Member, Mutual Fund/Insurance
Services Member, Fund Member or
Insurance Carrier/Retirement Services
Member, subject to certain conditions.
One of the conditions for a non-U.S.
entity to be admitted as a Member,
Mutual Fund/Insurance Services
Member, Fund Member or Insurance
Carrier/Retirement Services Member is
that the entity must provide NSCC, for
financial monitoring purposes, audited
financial statements prepared in
accordance with either U.S. generally
accepted accounting principles (‘‘U.S.
GAAP’’) or other generally accepted
accounting principles that are
satisfactory to NSCC.
In order to address the risk presented
by the acceptance of financial
statements not prepared in accordance
with U.S. GAAP, Addendum O provides
that the minimum financial
requirements applicable to a non-U.S.
entity will be subject to a specified
premium, as follows:
i. For financial statements prepared in
accordance with International Financial
Reporting Standards, the U.K.
Companies Act of 1985 (‘‘U.K. GAAP’’),
or Canadian generally accepted
accounting principles—a premium of
11⁄2 times the minimum financial
requirements;
ii. for financial statements prepared in
accordance with a European Union
country’s generally accepted accounting
principles, other than U.K. GAAP—a
premium of 5 times the minimum
financial requirements; and
iii. for financial statements prepared
in accordance with any other type of
generally accepted accounting
principles—a premium of 7 times the
minimum financial requirements.
Accordingly, a non-U.S. entity that
does not prepare its financial statements
in accordance with U.S. GAAP is
required to meet financial requirements
between 11⁄2 to 7 times the minimum
financial requirements that would
otherwise be applicable to the non-U.S
entity. Given that, as noted above, the
financial responsibility requirements
generally require a member to have a
certain level of capital, Addendum O
has the effect of requiring a non-U.S.
entity that does not prepare its financial
statements in accordance with U.S.
GAAP to have capital between 11⁄2 to 7
(iii) Current NSCC Watch List and
Enhanced Surveillance List
NSCC’s Watch List is a list of
members that are deemed by NSCC to
pose a heightened risk to it and its
members based on credit ratings and
other factors.14
Specifically, the Watch List is the list
of Members with credit ratings derived
from NSCC’s Credit Risk Rating Matrix
(‘‘CRRM’’) 15 of 5, 6 or 7, as well as
members that, based on NSCC’s
consideration of relevant factors,
including those set forth in Section 4(d)
of Rule 2B (Ongoing Membership
Requirements and Monitoring),16 are
deemed by NSCC to pose a heightened
risk to it and its members.
In addition to the Watch List, NSCC
also maintains a separate list of
members subject to enhanced
surveillance in accordance with the
provisions of Rule 2B, as discussed
below. The enhanced surveillance list is
a list of members for which NSCC has
heightened credit concerns, which may
include members that are already, or
may soon be, on the Watch List. As
described below, a member is subject to
the same potential consequences from
being subject to enhanced surveillance
or being placed on the Watch List.
VerDate Sep<11>2014
20:20 Dec 28, 2021
Jkt 256001
Rule 2B (Ongoing Membership
Requirements and Monitoring)
Rule 2B (Ongoing Membership
Requirements and Monitoring) specifies
the ongoing membership requirements
and monitoring applicable to
members.17
Section 2.B.(e) of Rule 2B provides
that NSCC may review the financial
responsibility and operational capability
of a Member and otherwise require from
the Member additional reporting of its
financial or operational condition in
order to make a determination as to
whether such Member should be placed
14 See Rule 1 (Definitions and Descriptions),
supra note 3.
15 NSCC’s CRRM is a matrix of credit ratings of
Members specified in Section 4 of Rule 2B. The
CRRM is developed by NSCC to evaluate the credit
risk Members pose to NSCC and its Members and
is based on factors determined to be relevant by
NSCC from time to time, which factors are designed
to collectively reflect the financial and operational
condition of a Member. These factors include (i)
quantitative factors, such as capital, assets,
earnings, and liquidity, and (ii) qualitative factors,
such as management quality, market position/
environment, and capital and liquidity risk
management. See Rule 1 (Definitions and
Descriptions), supra note 3.
16 Rule 2B (Ongoing Membership Requirements
and Monitoring), Section 4 (Ongoing Monitoring),
supra note 3.
17 Rule 2B (Ongoing Membership Requirements
and Monitoring), supra note 3.
PO 00000
Frm 00126
Fmt 4703
Sfmt 4703
on the Watch List and/or be subject to
enhanced surveillance by NSCC
consistent with the provisions of
Section 4 of Rule 2B.
Section 4(b) of Rule 2B provides that
a Member that is (1) a U.S. bank or trust
company that files a Call Report, (2) a
U.S. broker-dealer that files the
Financial and Operational Combined
Uniform Single Report (‘‘FOCUS
Report’’) or the equivalent with its
regulator, or (3) a non-U.S. bank or trust
company that has audited financial data
that is publicly available, will be
assigned a credit rating by NSCC in
accordance with the CRRM. A Member’s
credit rating is reassessed each time the
Member provides NSCC with requested
information pursuant to Section 2.B.(e)
of Rule 2B or as may be otherwise
required under the Rules.
Section 4(b) further provides that
because the factors used as part of the
CRRM may not identify all risks that a
Member assigned a credit rating by
NSCC may present to NSCC, NSCC may,
in its discretion, override such
Member’s credit rating derived from the
CRRM to downgrade the Member. This
downgrading may result in the Member
being placed on the Watch List and/or
it may subject the Member to enhanced
surveillance based on relevant factors.
Section 4(c) of Rule 2B provides that
Members not assigned a credit rating by
NSCC and Limited Members monitored
and reviewed by NSCC on an ongoing
and periodic basis will not be assigned
a credit rating by the CRRM but may be
placed on the Watch List and/or may be
subject to enhanced surveillance based
on relevant factors.
Section 4(d) of Rule 2B provides that
the factors to be considered by NSCC in
determining whether a member is
placed on the Watch List and/or subject
to enhanced surveillance include (i)
news reports and/or regulatory
observations that raise reasonable
concerns relating to the member, (ii)
reasonable concerns around the
member’s liquidity arrangements, (iii)
material changes to the member’s
organizational structure, (iv) reasonable
concerns about the member’s financial
stability due to particular facts and
circumstances, such as material
litigation or other legal and/or
regulatory risks, (v) failure of the
member to demonstrate satisfactory
financial condition or operational
capability or if NSCC has a reasonable
concern regarding the member’s ability
to maintain applicable membership
standards, and (vi) failure of the
member to provide information required
by NSCC to assess risk exposure posed
by the member’s activity.
E:\FR\FM\29DEN1.SGM
29DEN1
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
Section 4(e) of Rule 2B provides that
NSCC may require a member that has
been placed on the Watch List to make
and maintain a deposit to the Clearing
Fund over and above the amount
determined in accordance with
Procedure XV (Clearing Fund Formula
and Other Matters) (which additional
deposit shall constitute a portion of the
member’s Required Fund Deposit) or
such higher amount as NSCC may deem
necessary for the protection of it or
other members.
Section 4(f) of Rule 2B provides that
a member being subject to enhanced
surveillance or being placed on the
Watch List (1) will result in a more
thorough monitoring of the member’s
financial condition and/or operational
capability, including on-site visits or
additional due diligence information
requests, and (2) may be required make
more frequent financial disclosures to
NSCC. Members and Limited Members
that are placed on the Watch List or
subject to enhanced surveillance are
also reported to NSCC’s management
committees and regularly reviewed by
NSCC senior management.
(iv) Proposed Rule Changes
A. Changes To Enhance NSCC’s Capital
Requirements
As noted earlier, as a CCP, NSCC is
exposed to the credit risks of its
members. The credit risks borne by
NSCC are mitigated, in part, by the
capital maintained by members, which
serves as a loss-absorbing buffer.
NSCC’s financial responsibility
standards for members generally require
members to have and maintain certain
levels of capital.
As described in more detail below,
NSCC proposes to enhance its capital
requirements for members as follows:
Members
U.S. Broker-Dealers
NSCC proposes increasing minimum
excess net capital (‘‘Excess Net Capital’’)
requirements for Members that are U.S.
broker-dealers using a tiered
approach.18 These increases would be
between 2 and 10 times the current
minimum Excess Net Capital
requirements applicable to Members
that are U.S. broker-dealers, depending
on whether the Member self-clears or
clears for others and its VaR Tier, as
described below. As described below,
NSCC proposes to use, in general terms,
calculations from its value-at-risk
(‘‘VaR’’) model and associated Member
charges as a measure of market risk in
order to categorize Members into those
that pose relatively minimal risk
exposure, moderate risk exposure, or
higher risk exposure to NSCC.
Unlike the current capital
requirements applicable to Registered
Value-at-risk tier
(‘‘VaR tier’’)
Clearing status
Self-Clearing ........................................................................
khammond on DSKJM1Z7X2PROD with NOTICES
Clears for Others .................................................................
<$100,000
$100,000–$500,000
>$500,000
<$100,000
$100,000–$500,000
>$500,000
$1 million Excess Net Capital
2.5 million Excess Net Capital
5 million Excess Net Capital
2.5 million Excess Net Capital
5 million Excess Net Capital
10 million Excess Net Capital
Tier five times during the preceding 12month period, in which case the
Member would be moved to the greatest
VaR Tier.
Upon moving to a greater VaR Tier, a
Member would then have 60 calendar
days from the date of the move to meet
the higher required minimum Excess
Net Capital for such VaR Tier. If a
Member fails to meet its higher required
minimum Excess Net Capital within 60
calendar days and maintain it for so
long as such higher required minimum
Excess Net Capital applies, NSCC may
take any and all action against the
Member pursuant to the Rules.
18 As part of the proposal, NSCC proposes to add
the defined term ‘‘Excess Net Capital’’ to the list of
defined terms in Rule 1. Excess Net Capital would
be defined as a broker-dealer’s excess net capital,
calculated in accordance with such broker-dealer’s
regulatory and/or statutory requirements.
21:47 Dec 28, 2021
Jkt 256001
PO 00000
Frm 00127
Fmt 4703
Sfmt 4703
Broker-Dealers, the proposed enhanced
capital requirements for U.S. brokerdealers would result in those Members
whose NSCC activity poses greater risk
to NSCC being required to have and
maintain greater levels of Excess Net
Capital in line with the increased risk.
As is the case with the current capital
requirements applicable to Registered
Broker-Dealers, the enhanced capital
requirements for U.S. broker-dealers
would depend on whether a Member
self-clears or clears for others. A brokerdealer that clears transactions for others
has the potential to present different
and greater risks to NSCC than a brokerdealer that clears transactions only for
itself, and it is therefore appropriate for
such broker-dealer to be subject to
heightened capital requirements versus
a broker-dealer that clears transactions
only for itself.
As described in more detail below,
the proposed minimum Excess Net
Capital increases will help ensure
NSCC’s ongoing compliance with
regulatory requirements and
expectations related to credit risk, such
as those addressed in CCAS Rules
17Ad–22(e)(4)(i) and (e)(18).19
Under the proposal, a Member that is
a U.S. broker-dealer must have and
maintain at all times minimum Excess
Net Capital as follows:
Minimum excess net capital
The VaR Tier in the table above is
based on the daily volatility component
of a Member’s Net Unsettled Positions
calculated as of the start of each
Business Day pursuant to Procedure XV
of the Rules 20 as part of the Member’s
daily Required Fund Deposit. As part of
the tiered approach, a Member’s daily
volatility component may exceed its
then-current VaR Tier four times over a
rolling 12-month period. Upon the fifth
instance of the Member’s daily volatility
component exceeding its then-current
VaR Tier, the Member would be moved
to the next-greatest VaR Tier, unless the
Member’s daily volatility component
also exceeded such next-greatest VaR
VerDate Sep<11>2014
74189
Upon moving to a greater VaR Tier, a
Member would remain in that greater
VaR Tier for no less than one
continuous year from the date of the
move before being eligible to move to a
lesser VaR Tier. This does not in any
way preclude a Member from moving to
an even greater VaR Tier (if any) in
accordance with the requirements of
this proposal.
NSCC believes that allowing a
Member’s daily volatility component to
exceed its then-current VaR Tier four
times over a rolling 12-month period
before the Excess Net Capital
requirement would increase provides
some flexibility for Members in the
19 17
CFR 240.17Ad–22(e)(4)(i) and (e)(18).
XV (Clearing Fund Formula and
Other Matters), supra note 3.
20 Procedure
E:\FR\FM\29DEN1.SGM
29DEN1
khammond on DSKJM1Z7X2PROD with NOTICES
74190
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
event of occasional unexpected market
volatility while also protecting NSCC
from the risks of such increased daily
volatility. NSCC has determined that
giving a Member 60 calendar days from
the date of its move to a higher VaR Tier
to meet its higher required minimum
Excess Net Capital appropriately
balances the financial and other costs
associated with requiring the Member to
satisfy the higher required minimum
Excess Net Capital with the increased
risks posed by the Member’s increased
daily volatility. The 60-calendar day
period also recognizes the practical
limitations for a Member to be able to
immediately increase its capital level,
given that raising additional capital may
require time for the Member to identify
additional sources of capital such as
outside investors, negotiate the terms of
that capital, and execute any required
legal documentation.
A Member would move to a lesser
VaR Tier (if any) when (i) the Member
has remained in its then-current VaR
Tier for no less than one continuous
year, (ii) the Member’s daily volatility
component did not exceed such lesser
VaR Tier on five instances or more over
the preceding 12-month period and (iii)
if at any time the Member’s daily
volatility component did exceed such
lesser VaR Tier on five instances or
more over a rolling 12-month period,
the Member has remained in its thencurrent VaR Tier for no less than one
continuous year from the date of each
such instance.
For example, if a Member’s daily
volatility component exceeds the lesser
VaR Tier for the fifth time over a rolling
12-month period on February 1, 2021,
then the Member would remain in its
then-current VaR Tier until at least
January 31, 2022. If the same Member’s
daily volatility component then exceeds
the lesser VaR Tier for the sixth time
over a rolling 12-month period on
February 15, 2021, then the Member
would remain in its then-current VaR
Tier until at least February 14, 2022.
This does not in any way preclude a
Member from moving to an even greater
VaR Tier (if any) in accordance with the
requirements of this proposal.
Newly admitted Members would be
placed into the applicable middle VaR
Tier in the table above unless NSCC
determines, based on information
provided by or concerning the Member,
that the Member’s anticipated VaR Tier
for its anticipated trading activity would
be the greatest VaR Tier, in which case
the Member would be placed into the
greatest VaR Tier. Any such
determination would be promptly
communicated to, and discussed with,
the Member. A newly admitted Member
VerDate Sep<11>2014
20:20 Dec 28, 2021
Jkt 256001
would remain in its initial VaR Tier
until it moves to a different VaR Tier in
accordance with the requirements of
this proposal.
Based on its historical experience
with the daily volatility components of
newly admitted Members, including
such Members’ own projected trading
activity,21 NSCC believes that it would
be appropriate to place newly admitted
Members into the applicable middle
VaR Tier in the table above for the first
12 months of membership unless NSCC
has determined that the Member’s
anticipated VaR Tier based on its
anticipated trading activity would be
the greatest VaR Tier.
NSCC proposes to move the existing
capital requirements for Members that
are Municipal Securities Brokers’
Brokers or Municipal Securities Brokers’
Broker sponsored account applicants to
the end of Section 1.B.1 of Addendum
B with some clarifying changes to
improve the accessibility and
transparency of these capital
requirements, without substantive
effect.
U.S. Banks and Trust Companies
NSCC proposes to (1) change the
measure of capital requirements for U.S.
banks and trust companies from equity
capital to common equity tier 1 capital
(‘‘CET1 Capital’’),22 (2) raise the
minimum capital requirements for U.S.
banks and trust companies, and (3)
require U.S. banks and trust companies
to be well capitalized (‘‘Well
Capitalized’’) as defined in the capital
adequacy rules and regulations of the
Federal Deposit Insurance Corporation
(‘‘FDIC’’).23
NSCC proposes to change the measure
of capital requirements for U.S. banks
and trust companies from equity capital
to CET1 Capital and raise the minimum
capital requirements for U.S. banks and
trust companies in order to align
NSCC’s capital requirements with
banking regulators’ changes to
regulatory capital requirements over the
past several years, which have
standardized and harmonized the
calculation and measurement of bank
21 For example, if the proposed VaR Tiers had
been in effect for the past two years (but newly
admitted Members were not automatically placed in
at least the middle VaR Tier), only one U.S. brokerdealer applicant would have belonged in the lowest
VaR Tier at admittance, but that firm then had
trading activity that placed it in the middle VaR
Tier in the first month and the highest VaR Tier in
the second month of membership. See Internal
Tiering Analysis, included as a Confidential Exhibit
3 to the filing.
22 Under the proposal, CET1 Capital would be
defined as an entity’s common equity tier 1 capital,
calculated in accordance with such entity’s
regulatory and/or statutory requirements.
23 See 12 CFR 324.403(b)(1).
PO 00000
Frm 00128
Fmt 4703
Sfmt 4703
capital and leverage throughout the
world.24 Consistent with these changes
by banking regulators, NSCC believes
that the appropriate capital measure for
Members that are U.S. banks and trust
companies should be CET1 Capital and
that NSCC’s capital requirements for
Members should be enhanced in light of
these increased regulatory capital
requirements.
In addition, requiring U.S. banks and
trust companies to be Well Capitalized
ensures that Members are well
capitalized while also allowing adjusted
capital to be relative to either the riskweighted assets or average total assets of
the bank or trust company. NSCC
proposes to have the definition of Well
Capitalized expressly tied to the FDIC’s
definition of ‘‘well capitalized’’ to
ensure that the proposed requirement
that U.S. banks and trust companies be
Well Capitalized will keep pace with
future changes to banking regulators’
regulatory capital requirements.
Under the proposal, a Member that is
a U.S. bank or a U.S. trust company that
is a bank must (1) have and maintain at
all times at least $500 million in CET1
Capital and be Well Capitalized at all
times or (2) have furnished to NSCC a
guarantee of its parent bank holding
company respecting the payment of any
and all obligations of the Member, and
such parent bank holding company
must have and maintain at all times
CET1 Capital of at least $500 million
and be Well Capitalized at all times.
NSCC does not propose to change the
existing capital requirements applicable
to a Member that is a U.S. trust
company that is not a bank, although
NSCC is proposing to make some
clarifying and conforming language
changes to improve the accessibility and
transparency of these capital
requirements, without substantive
effect.
NSCC treats U.S. trust companies that
are banks and non-banks differently
because they present different risks
based on the attendant risks of their
business activities, with trust companies
engaging in banking activities (e.g.,
receiving deposits and making loans)
being subject to greater risks than trust
companies that limit their activities to
trust activities (e.g., acting as a trustee,
24 Compare, e.g., 12 CFR 324.20(b) (FDIC’s
definition of CET1 Capital), and Regulation (EU) No
575/2013 of the European Parliament and of the
Council of 26 June 2013 on prudential requirements
for credit institutions and investment firms and
amending Regulation (EU) No 648/2012, Article 26,
available at https://eur-lex.europa.eu/legal-content/
EN/TXT/?uri=CELEX%3A32013R0575 (European
Union’s definition of CET1 Capital), with Basel
Committee on Banking Supervision, Basel III
Standards, CAP10.6, supra note 5 (Basel III
Standards’ definition of CET1 Capital).
E:\FR\FM\29DEN1.SGM
29DEN1
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
other fiduciary or transfer agent/
registrar).
Non-U.S. Broker-Dealers and Banks
NSCC proposes to impose a minimum
capital requirement of $25 million in
total equity capital for Members that are
non-U.S. broker-dealers.
NSCC proposes to require a Member
that is a non-U.S. bank (including a U.S.
branch or agency) to (1) (A) have and
maintain at all times at least $500
million in CET1 Capital and comply at
all times with the minimum capital
requirements (including, but not limited
to, any capital conservation buffer,
countercyclical buffer, and any D–SIB or
G–SIB buffer, if applicable) and capital
ratios required by its home country
regulator, or, if greater, with such
minimum capital requirements or
capital ratios standards promulgated by
the Basel Committee on Banking
Supervision,25 (B) provide an attestation
for itself, its parent bank and its parent
bank holding company (as applicable)
detailing the minimum capital
requirements (including, but not limited
to, any capital conservation buffer,
countercyclical buffer, and any D–SIB or
G–SIB buffer, if applicable) and capital
ratios required by their home country
regulator, (C) provide, no less than
annually and upon request by NSCC, an
attestation for the Member, its parent
bank and its parent bank holding
company (as applicable) detailing the
minimum capital requirements
(including, but not limited to, any
capital conservation buffer,
countercyclical buffer, and any D–SIB or
G–SIB buffer, if applicable) and capital
ratios required by their home country
regulator and (D) notify NSCC: (i)
Within two Business Days of any of
their capital requirements (including,
but not limited to, any capital
conservation buffer, countercyclical
buffer, and any D–SIB or G–SIB buffer,
if applicable) or capital ratios falling
below any minimum required by their
home country regulator; and (ii) within
15 calendar days of any such minimum
capital requirement or capital ratio
changing; or (2) (A) have furnished to
NSCC a guarantee of its parent bank
holding company respecting the
payment of any and all obligations of
the Member, (B) have such parent bank
holding company maintain at all times
CET1 Capital of at least $500 million
and comply at all times with the
minimum capital requirements
(including, but not limited to, any
capital conservation buffer,
countercyclical buffer, and any D–SIB or
25 See Basel Committee on Banking Supervision,
Basel III Standards, supra note 5.
VerDate Sep<11>2014
20:20 Dec 28, 2021
Jkt 256001
G–SIB buffer, if applicable) and capital
ratios required by its home country
regulator, or, if greater, with such
minimum capital requirements or
capital ratios standards promulgated by
the Basel Committee on Banking
Supervision,26 (C) provide an attestation
for itself, its parent bank and its parent
bank holding company (as applicable)
detailing the minimum capital
requirements (including, but not limited
to, any capital conservation buffer,
countercyclical buffer, and any D–SIB or
G–SIB buffer, if applicable) and capital
ratios required by their home country
regulator, (D) provide, no less than
annually and upon request by NSCC, an
attestation for the Member, its parent
bank and its parent bank holding
company (as applicable) detailing the
minimum capital requirements
(including, but not limited to, any
capital conservation buffer,
countercyclical buffer, and any D–SIB or
G–SIB buffer, if applicable) and capital
ratios required by their home country
regulator and (E) notify NSCC: (i)
Within two Business Days of any of
their capital requirements (including,
but not limited to, any capital
conservation buffer, countercyclical
buffer, and any D–SIB or G–SIB buffer,
if applicable) or capital ratios falling
below any minimum required by their
home country regulator, and (ii) within
15 calendar days of any such minimum
capital requirement or capital ratio
changing.
As described above, pursuant to
Addendum O (Admission of Non-U.S.
Entities as Direct NSCC Members),27 the
current minimum capital requirements
for a Member, Mutual Fund/Insurance
Services Member, Fund Member or
Insurance Carrier/Retirement Services
Member that does not prepare its
financial statements in accordance with
U.S. GAAP is subject to a multiplier that
requires such member to have capital
between 11⁄2 to 7 times the otherwiseapplicable capital requirement.
The multiplier was designed to
account for the less transparent nature
of accounting standards other than U.S.
GAAP. However, accounting standards
have converged over the years (namely
International Financial Reporting
Standards (‘‘IFRS’’) and U.S. GAAP).28
26 See
id.
27 Addendum
O applies to all entities that are
organized in a country other than the U.S. and that
are not otherwise subject to U.S. federal or state
regulation (‘‘non-U.S. entities’’), other than
insurance companies.
28 The convergence between IFRS and U.S. GAAP
began with the 2002 Norwalk Agreement.
(Available at https://www.ifrs.org/content/dam/ifrs/
around-the-world/mous/norwalk-agreement2002.pdf.) Under that agreement, the Financial
Accounting Standards Board (‘‘FASB’’) and the
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
74191
As such, NSCC believes the multiplier
is no longer necessary and its retirement
would be a welcomed simplification for
both NSCC and its members.
Accordingly, NSCC proposes to delete
the language in Addendum O providing
that the minimum capital requirements
for a Member, Mutual Fund/Insurance
Services Member, Fund Member or
Insurance Carrier/Retirement Services
Member that does not prepare its
financial statements in accordance with
U.S. GAAP is subject to a multiplier that
requires such members to have capital
between 11⁄2 to 7 times the otherwiseapplicable capital requirement. Instead,
a Member, Mutual Fund/Insurance
Services Member, Fund Member or
Insurance Carrier/Retirement Services
Member would be required to meet the
minimum capital requirements
provided in Addendum B for the
applicable membership.
As described above, NSCC also
proposes that non-U.S. banks be
compliant with the minimum capital
requirements and capital ratios in their
home jurisdiction. Given the difficulty
in knowing and monitoring compliance
with various regulatory minimums for
various jurisdictions, these Members
would be required to provide NSCC
with periodic attestations relating to the
minimum capital requirements and
capital ratios for their home jurisdiction.
NSCC also proposes to make some
clarifying language changes to
Addendum O to replace references to
undefined capitalized terms and
improve the accessibility of Addendum
O, without substantive effect.
International Accounting Standards Board (‘‘IASB’’)
signed a memorandum of understanding on the
convergence of accounting standards. Between 2010
and 2013, FASB and IASB published several
quarterly progress reports on their work to improve
and achieve convergence of U.S. GAAP and IFRS.
In 2013, the International Financial Reporting
Standards Foundation established the Accounting
Standards Advisory Forum (‘‘ASAF’’) to improve
cooperation among worldwide standard setters and
advise the IASB as it developed IFRS. (See https://
www.ifrs.org/groups/accounting-standardsadvisory-forum/.) FASB was selected as one of the
ASAF’s twelve members. FASB’s membership on
the ASAF helps represent U.S. interests in the
IASB’s standard-setting process and continues the
process of improving and converging U.S. GAAP
and IFRS. In February 2013, the Journal of
Accountancy published its view of the success of
the convergence project citing converged or
partially converged standards, including business
combinations, discontinued operations, fair value
measurement, and share-base payments. (Available
at https://www.journalofaccountancy.com/issues/
2013/feb/20126984.html.) Subsequent to the
publication, IASB and FASB converge on revenue
recognition. While IASB and FASB have not
achieved full convergence, NSCC believes the
accounting rules are sufficiently aligned such that
the multiplier is no longer required.
E:\FR\FM\29DEN1.SGM
29DEN1
74192
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
Other Types of Members
NSCC also proposes that (1) a Member
that is (A) a national securities exchange
registered under the Exchange Act and/
or (B) a non-U.S. securities exchange or
multilateral trading facility, must have
and maintain at all times at least $100
million in equity capital, (2) a Member
that is a broker-dealer that is acting as
an Index Receipt Agent must have and
maintain at all times minimum Excess
Net Capital of $100 million, and (3) for
a type of applicant or Member that is
not otherwise addressed above, (A) such
applicant or Member must maintain
compliance with its home country
regulator’s minimum financial
requirements at all times and (B) NSCC
may, based on information provided by
or concerning an applicant or Member,
also assign minimum financial
requirements to such applicant or
Member based on how closely it
resembles another membership type and
its risk profile. Any such assigned
minimum financial requirements would
be promptly communicated to, and
discussed with, the applicant or
Member.
In the case of Index Receipt Agents,
the higher capital requirement for this
subset of Members is being proposed in
order to reflect the systemic risk
presented by the potential failure of an
Index Receipt Agent. The failure of an
Index Receipt Agent could present
systemic risk because such failure could
potentially result in disruptions at the
exchange-traded funds (‘‘ETFs’’) for
which the Index Receipt Agent acts. As
a result of this systemic risk, Members
acting as Index Receipt Agents require
a moderately sized capital base to
support this business function.
Similarly, NSCC proposes to create a
standard capital requirement for
Members that are securities exchanges
due to the systemic importance of these
Members and the need to hold these
Members to a consistent, high standard
to ensure that they have sufficient
capital to fulfill their systemically
important role.
khammond on DSKJM1Z7X2PROD with NOTICES
Limited Members
NSCC proposes that a Mutual Fund/
Insurance Services Member, Fund
Member or Settling Bank Only Member
that is a U.S. bank or trust company
that, in accordance with such entity’s
regulatory and/or statutory
requirements, calculates a Tier 1 RBC
Ratio must have at all times a Tier 1
RBC Ratio equal to or greater than the
Tier 1 RBC Ratio that would be required
for such entity to be Well Capitalized.
As discussed above, NSCC proposes to
have the definition of Well Capitalized
VerDate Sep<11>2014
20:20 Dec 28, 2021
Jkt 256001
expressly tied to the FDIC’s definition of
‘‘well capitalized’’ to ensure that the
proposed requirement that U.S. banks
and trust companies be Well Capitalized
will keep pace with future changes to
banking regulators’ regulatory capital
requirements. Similarly, NSCC proposes
to add a new defined term of ‘‘Tier 1
RBC Ratio’’ to Rule 1 in order to replace
a reference to an undefined term in the
Rules with its intended meaning. Under
the proposal, Tier 1 RBC Ratio would be
defined as the ratio of an entity’s tier 1
capital to its total-risk weighted assets,
calculated in accordance with such
entity’s regulatory and/or statutory
requirements.
NSCC proposes to clarify existing
language providing that a Mutual Fund/
Insurance Services Member or Fund
Member that is a U.S. trust company
that does not calculate a Tier 1 RBC
Ratio must have at least $2 million in
equity capital, without substantive
effect. Relatedly, NSCC proposes to
revise the definition of ‘‘RBC Ratio,’’
which is used in the capital
requirements for Mutual Fund/
Insurance Services Members, Fund
Members and Insurance Carrier/
Retirement Services Members, in the list
of defined terms in Rule 1 for clarity in
order to replace a reference to an
undefined capitalized term with its
intended meaning and to remove
unnecessary limitations on the types of
entities and legal requirements to which
the term RBC Ratio applies.
For a Limited Member that is a nonU.S. entity not described in the section
of Addendum B that applies to such
type of Limited Member, such entity
would be required to satisfy such
minimum standards of financial
responsibility as determined in
accordance with such section of
Addendum B.
Other Proposed Changes to Addendum
B
Introduction and General Changes
NSCC proposes to make it clear
throughout Addendum B that following
an applicant’s admission to membership
it is required to continue meeting the
qualifications, financial responsibility,
operational capability and business
history requirements as applicable to its
membership type.29 Specifically, NSCC
proposes to include references
throughout Addendum B clarifying that
such requirements apply to both
applicants and members. NSCC also
proposes to revise a sentence in the
introduction and Sections 1.B, 2.B, 3.B
29 See Rule 2B (Ongoing Membership
Requirements and Monitoring), Section 1
(Requirements), supra note 3.
PO 00000
Frm 00130
Fmt 4703
Sfmt 4703
and 4.B of Addendum B to correct
language limited to applicant financial
responsibility requirements.
NSCC also proposes to add the word
‘‘requirements’’ in one place in the
introduction to improve readability.
NSCC proposes to clarify, without
substantive effect, the existing language
in Sections 2.B and 3.B of Addendum B
that if a member is not of a type
otherwise addressed in such section, it
will be required to satisfy such
minimum standards of financial
responsibility as determined by NSCC.
Any such assigned minimum financial
requirements would be promptly
communicated to, and discussed with,
the member.
NSCC also proposes to add a sentence
to the end of Sections 5.B and 6.B of
Addendum B that any assigned
minimum standards of financial
responsibility for Municipal
Comparison Only Members and Data
Services Only Members, respectively,
would be promptly communicated to,
and discussed with, such members.
At the end of Sections 1.B, 2.B and
3.B of Addendum B, NSCC proposes to
make explicit that, notwithstanding
anything to the contrary in such section,
an applicant or member must maintain
compliance with its home country
regulator’s minimum financial
requirements at all times.
Section 1
NSCC is proposing to revise the
headings in Section 1.B referring to a
Member’s type of entity to read ‘‘U.S.
Broker-Dealers,’’ ‘‘U.S. Banks and Trust
Companies,’’ ‘‘Non-U.S. Broker-Dealers
and Banks,’’ ‘‘Securities Exchanges,’’
‘‘Index Receipt Agents’’ and ‘‘Others,’’
in conformity with the above-described
changes to Member financial
responsibility requirements.
Section 2
NSCC proposes to clarify and simplify
the language describing the capital
requirement for a Mutual Fund/
Insurance Services Member that is a
Registered Broker-Dealer or an
Insurance Company, without
substantive effect.
NSCC proposes to revise the heading
‘‘Banks and trust companies’’ in Section
2.B to read ‘‘U.S. Banks and Trust
Companies’’ in conformity with the
same change made in Section 1.B.
Section 3
NSCC proposes to clarify and simplify
the language describing the capital
requirement for a Fund Member that is
a Registered Broker-Dealer, investment
company, investment adviser or
E:\FR\FM\29DEN1.SGM
29DEN1
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
Insurance Company, without
substantive effect.
NSCC proposes to revise the heading
‘‘Banks or trust companies’’ in Section
3.B to read ‘‘U.S. Banks and Trust
Companies’’ in conformity with the
same changes made in Sections 1.B and
2.B.
Section 4
NSCC proposes to clarify and simplify
the language describing the capital
requirement for an Insurance Carrier/
Retirement Services Member, without
substantive effect.
khammond on DSKJM1Z7X2PROD with NOTICES
Sections 5 through 12
As noted above, NSCC proposes to
make it clear in Sections 5 through 12
of Addendum B that following an
applicant’s admission to membership it
is required to continue meeting the
qualifications, financial responsibility,
operational capability and business
history requirements as applicable to its
membership type.
B. Changes to NSCC’s Watch List and
Enhanced Surveillance List
NSCC proposes to redefine the Watch
List and eliminate the separate
enhanced surveillance list and instead
implement a new Watch List that
consists of a relatively smaller group of
members that pose heightened risk to
NSCC and its members.
NSCC believes that the current system
of having both a Watch List and an
enhanced surveillance list (which
include some of the same members) has
confused various NSCC stakeholders,
while the proposed approach, as NSCC
understands from its experience, would
be more consistent with industry
practices and understanding of a
‘‘Watch List.’’
The new Watch List would include
Members with a CRRM rating of 6 or 7,
as well as members that are deemed by
NSCC to pose a heightened risk to it and
its members. The separate enhanced
surveillance list would be merged into
the new Watch List and references to
the separate enhanced surveillance list
would be deleted from the Rules.
In sum, the new Watch List would
consist of members on the existing
enhanced surveillance list, Members
with a CRRM rating of 6 or 7, and any
other members that are deemed by
NSCC to pose a heightened risk to it and
its members.
The proposed change will mean that
Members with a CRRM rating of 5
would no longer automatically be
included on the Watch List. Members
with a CRRM rating of 5 represent the
largest single CRRM rating category, but
NSCC does not believe all such
VerDate Sep<11>2014
20:20 Dec 28, 2021
Jkt 256001
Members present heightened credit
concerns.30 Nevertheless, NSCC would
continue to have the authority to place
a Member on the new Watch List if it
is deemed to pose a heightened risk to
NSCC and its Members and/or to
downgrade the CRRM rating of a
Member.
NSCC also proposes to clarify in
Section 4(f) of Rule 2B that members on
the Watch List are reported to NSCC’s
management committees and regularly
reviewed by NSCC’s senior
management.
C. Certain Other Clarification Changes
In connection with the abovedescribed changes to the Rules to
enhance NSCC’s capital requirements
for members and redefine the Watch
List and eliminate the enhanced
surveillance list, NSCC proposes to
make certain other clarification changes
in order to improve the accessibility and
transparency of the Rules, as follows:
NSCC proposes to revise Section 4(g)
of Rule 2B to clarify the relationship
between NSCC and a parent bank
holding company of a Member that has
guaranteed the obligations of the
Member in accordance with Addendum
B, and to delete the unnecessary word
‘‘affiliated’’ when referring to a material
banking subsidiary of such parent bank
holding company.
NSCC proposes to clarify Rule 7,
Section 4 31 to state that a Member
desiring to become an Index Receipt
Agent shall first submit an application
to be reviewed by NSCC.
NSCC also proposes to revise Section
1 of Rule 46 32 to clarify the relationship
between NSCC and a parent bank
holding company of a Member that has
guaranteed the obligations of the
Member in accordance with Addendum
B.
Member Outreach
Beginning in June 2019, NSCC
conducted outreach to various Members
in order to provide them with advance
notice of the proposed enhancements to
NSCC’s capital requirements, the
30 The majority of Members with a CRRM rating
of 5 are either rated ‘‘investment grade’’ by external
rating agencies or, in the absence of external ratings,
NSCC believes are equivalent to investment grade,
as many of these Members are primary dealers and
large foreign banks. A firm with a rating of
‘‘investment grade’’ is understood to be better able
to make its payment obligations compared to a firm
with a lesser rating, such as a rating of
‘‘speculative.’’ As such, among the total population,
firms with investment grade ratings are generally
considered good credit risk along a credit risk scale.
31 Rule 7 (Comparison and Trade Recording
Operation), Section 4 (Index Receipt Agent), supra
note 3.
32 Rule 46 (Restrictions on Access to Services),
Section 1, supra note 3.
PO 00000
Frm 00131
Fmt 4703
Sfmt 4703
74193
proposed redefinition of the Watch List,
and the proposed elimination of the
enhanced surveillance list. NSCC has
been in communication with all
Members whose current capital levels
are either below the proposed minimum
capital requirements or only slightly
above the proposed requirements. Any
such Members have been informed of
the new requirement that would be in
effect 12 months after approval of the
proposed changes. Following approval,
NSCC again would contact any
Members that are either below or only
slightly above the new minimum
requirement to remind them of their
new capital requirement and the 12month grace period in which to come
into compliance with the new
requirement.
NSCC has received some written
feedback from Members on the
proposed enhancements to NSCC’s
capital requirements for certain
Members, which are discussed in Item
4 below. The Commission will be
notified of any additional written
comments received.
NSCC has not conducted outreach to
members providing them with advance
notice of the proposed clarification
changes to the Rules.
Implementation Timeframe
Pending Commission approval, NSCC
would implement the proposed changes
to enhance its capital requirements for
members one year after the
Commission’s approval of this proposed
rule change. During that one-year
period, NSCC would periodically
provide Members with estimates of their
capital requirements, based on the
approved changes, with more outreach
expected for Members impacted by the
changes. NSCC would inform a Member
that is a U.S. broker-dealer (‘‘BD
Member’’) if it exceeded its then-current
VaR Tier, which may lead to the BD
Member moving into a higher VaR Tier
and, thus, being subject to a higher
capital requirement. Same as the
proposed, ongoing practice postimplementation, NSCC would provide
the Member with a grace period of 60
days from the date of implementation to
comply with the higher requirement.
The deferred implementation for all
members and the estimated capital
requirements for Members are designed
to give members the opportunity to
assess the impact of their enhanced
capital requirements on their business
profile and make any changes that they
deem necessary to lower their capital
requirement. All members would be
advised of the implementation date of
these proposed changes through
issuance of an NSCC Important Notice,
E:\FR\FM\29DEN1.SGM
29DEN1
74194
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES
posted to its website. NSCC also would
inform firms applying for participation
of the new capital requirements.
Members and applicants should note
that the methodology/processes used to
set their initial capital requirements
would be the same at implementation of
the proposed changes as it would be on
an ongoing basis.
NSCC expects to implement the
proposed changes to redefine the Watch
List and eliminate the enhanced
surveillance list, as well as the
clarification changes to the Rules,
within 90 days of Commission approval.
All members would be advised of such
implementation through issuance of an
NSCC Important Notice, posted to its
website.
2. Statutory Basis
NSCC believes that the proposed rule
change is consistent with the
requirements of the Exchange Act, and
the rules and regulations thereunder
applicable to a registered clearing
agency. Specifically, NSCC believes that
the proposed rule change is consistent
with Section 17A(b)(3)(F) of the
Exchange Act 33 and Rules 17Ad–
22(b)(7), (e)(4)(i), (e)(18) and (e)(19),34
each as promulgated under the
Exchange Act, for the reasons described
below.
Section 17A(b)(3)(F) of the Exchange
Act requires, in part, that the Rules be
designed to promote the prompt and
accurate clearance and settlement of
securities transactions.35 As described
above, the proposed rule changes would
(1) enhance NSCC’s capital
requirements for members, (2) redefine
the Watch List and eliminate the
enhanced surveillance list, and (3) make
clarification changes to the Rules. NSCC
believes that enhancing its capital
requirements for members, including
continuing to recognize and account for
varying Members and memberships,
would help ensure that members
maintain sufficient capital to absorb
losses arising out of their clearance and
settlement activities at NSCC and
otherwise, and would help NSCC more
effectively manage and mitigate the
credit risks posed by its members,
which would in turn help NSCC be
better able to withstand such credit risks
and continue to meet its clearance and
settlement obligations to its members.
Similarly, NSCC believes that redefining
the Watch List and eliminating the
enhanced surveillance list, as described
above, would help NSCC better allocate
33 15
34 17
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(b)(7), (e)(4)(i), (e)(18) and
(e)(19).
35 15 U.S.C. 78q–1(b)(3)(F).
VerDate Sep<11>2014
20:20 Dec 28, 2021
its resources for monitoring the credit
risks posed by its members, which
would in turn help NSCC more
effectively manage and mitigate such
credit risks so that NSCC is better able
to withstand such credit risks and
continue to meet its clearance and
settlement obligations to its members.
NSCC believes that making clarification
changes to the Rules would help ensure
that the Rules remain clear and
accurate, which would in turn help
facilitate members’ understanding of the
Rules and provide members with
increased predictability and certainty
regarding their rights and obligations
with respect to NSCC’s clearance and
settlement activities. Therefore, NSCC
believes that these proposed rule
changes would promote the prompt and
accurate clearance and settlement of
securities transactions, consistent with
Section 17A(b)(3)(F) of the Exchange
Act.
Rule 17Ad–22(b)(7) under the
Exchange Act requires, in part, that
NSCC establish, implement, maintain
and enforce written policies and
procedures reasonably designed to
provide a person that maintains net
capital equal to or greater than $50
million with the ability to obtain
membership at NSCC, provided that
NSCC may provide for a higher net
capital requirement as a condition for
membership if it demonstrates to the
Commission that such a requirement is
necessary to mitigate risks that could
not otherwise be effectively managed by
other measures.36 As described above,
NSCC proposes to enhance its capital
requirements for members. NSCC
believes that these proposed rule
changes, while referencing capital
measures other than net capital, would
help ensure that members maintain
sufficient capital to absorb losses arising
out of their clearance and settlement
activities at NSCC and otherwise, and
would help NSCC more effectively
manage and mitigate the credit risks
posed by its members while providing
fair and open access to membership at
NSCC. NSCC believes that the proposed
changes would utilize capital measures
that are appropriately matched to the
regulatory and other capital
requirements applicable to the types of
entities that apply for and have
membership at NSCC, which would in
turn help facilitate members’
understanding of and compliance with
NSCC’s enhanced capital requirements.
NSCC also believes that these other
capital measures are more appropriate
measures of the capital available to
members to absorb losses arising out of
36 17
Jkt 256001
PO 00000
CFR 240.17Ad–22(b)(7).
Frm 00132
Fmt 4703
Sfmt 4703
their clearance and settlement activities
at NSCC than simply net capital because
a member’s net capital alone may not be
available to absorb losses arising out of
such activities. Thus, relying on
measures beyond net capital would help
members more effectively understand
and manage the resources available to
mitigate the credit risks they pose to
NSCC. In the case of those proposed
rule changes that may require members
such as U.S. banks and trust companies,
non-U.S. banks, national securities
exchanges, non-U.S. securities
exchanges or multilateral trading
facilities, or Index Receipt Agents to
maintain capital greater than $50
million, NSCC believes that enhanced
capital requirements for such members
are necessary and appropriate in light of
the regulatory and other capital
requirements that such members face
and the credit risks they pose to NSCC,
which would help NSCC more
effectively manage and mitigate such
credit risks. Therefore, NSCC believes
that the enhanced capital requirements
for members are necessary to mitigate
risks that could not otherwise be
effectively managed by other measures,
consistent with Rule 17Ad–22(b)(7)
under the Exchange Act.
Rule 17Ad–22(e)(4)(i) under the
Exchange Act 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.37 As described above,
NSCC proposes to enhance its capital
requirements for members, redefine the
Watch List, and eliminate the enhanced
surveillance list. NSCC believes that
enhancing its capital requirements for
members would help ensure that
members maintain sufficient capital to
absorb losses arising out of their
clearance and settlement activities at
NSCC and otherwise, which would in
turn help NSCC more effectively
manage and mitigate its credit
exposures to its members and thereby
help enhance the ability of NSCC’s
financial resources to cover fully
NSCC’s credit exposures to members
with a high degree of confidence. NSCC
believes that redefining the Watch List
and eliminating the enhanced
surveillance list would help NSCC
better allocate its resources for
monitoring its credit exposures to
37 17
E:\FR\FM\29DEN1.SGM
CFR 240.17Ad–22(e)(4)(i).
29DEN1
khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
members. By helping to better allocate
resources, the proposal would in turn
help NSCC more effectively manage and
mitigate its credit exposures to its
members, thereby helping to enhance
the ability of NSCC’s financial resources
to cover fully NSCC’s credit exposures
to members with a high degree of
confidence. Therefore, NSCC believes
that its proposal to enhance its capital
requirements for members, redefine the
Watch List, and eliminate the enhanced
surveillance list is consistent with Rule
17Ad–22(e)(4)(i) under the Exchange
Act.
Rule 17Ad–22(e)(18) under the
Exchange Act requires that NSCC
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to establish
objective, risk-based, and publicly
disclosed criteria for participation,
which permit fair and open access by
direct and, where relevant, indirect
participants and other financial market
utilities, require participants to have
sufficient financial resources and robust
operational capacity to meet obligations
arising from participation in the clearing
agency, and monitor compliance with
such participation requirements on an
ongoing basis.38 As described above,
NSCC proposes to enhance its capital
requirements for members, redefine the
Watch List, and eliminate the enhanced
surveillance list. NSCC’s proposed
capital requirements would utilize
objective measurements of member
capital that would be fully disclosed in
the Rules. The proposed capital
requirements also would be risk-based
and allow for fair and open access in
that they would be based on the credit
risks imposed by the member, such as
its membership type, type of entity
(including whether it is a non-U.S.
entity), whether it self-clears or clears
for others, and its VaR Tier.
Accordingly, NSCC’s proposed capital
requirements would establish objective,
risk-based and publicly disclosed
criteria for membership, which would
permit fair and open access by
members. The proposed capital
requirements also would ensure that
members maintain sufficient capital to
absorb losses arising out of their
clearance and settlement activities at
NSCC and otherwise, which would help
ensure that they have sufficient
financial resources to meet the
obligations arising from their
membership at NSCC. NSCC’s proposed
redefinition of the Watch List and the
elimination of the enhanced
surveillance list would help NSCC
better allocate its resources for
38 17
CFR 240.17Ad–22(e)(18).
VerDate Sep<11>2014
20:20 Dec 28, 2021
monitoring the credit risks posed by its
members, including their ongoing
compliance with NSCC’s proposed
enhancements to its capital
requirements. Therefore, NSCC believes
that its proposal to enhance its capital
requirements for members, redefine the
Watch List, and eliminate the enhanced
surveillance list is consistent with Rule
17Ad–22(e)(18) under the Exchange Act.
Rule 17Ad–22(e)(19) under the
Exchange Act requires that NSCC
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to identify,
monitor, and manage the material risks
to NSCC arising from arrangements in
which firms that are indirect
participants in NSCC rely on the
services provided by direct participants
to access NSCC’s payment, clearing, or
settlement facilities.39 As described
above, NSCC proposes to enhance its
capital requirements for members,
including U.S. broker-dealer Members
that clear transactions for others. More
specifically, the proposal would subject
U.S. broker-dealer Members that clear
transactions for others to heightened
capital requirements versus U.S. brokerdealer Members that clear transactions
only for themselves. NSCC believes that
a broker-dealer Member that clears
transactions for others (i.e., a direct
participant) can present additional risk
because it could clear for a large number
of correspondent clients (i.e., indirect
participants), which would expand the
scope and volume of risk presented to
NSCC and the direct participant itself
when the indirect participant’s trades
are submitted to NSCC for settlement
via the direct participant. The indirect
nature of this risk exposure also
increases risk to NSCC as there is
generally less transparency into the
indirect activity versus if the direct
participant generated all of the activity
itself. By requiring a U.S. broker-dealer
Member that clears transactions for
others to be subject to heightened
capital requirements versus a U.S.
broker-dealer Member that clears
transactions only for itself, the proposal
would help ensure that NSCC is able to
better manage the material risks to
NSCC arising from arrangements in
which a Member clears transactions for
others through NSCC. Therefore, NSCC
believes that its proposal to enhance its
capital requirements for members is
consistent with Rule 17Ad–22(e)(19)
under the Exchange Act.
39 17
Jkt 256001
PO 00000
CFR 240.17Ad–22(e)(19).
Frm 00133
Fmt 4703
Sfmt 4703
74195
(B) Clearing Agency’s Statement on
Burden on Competition
NSCC believes that the proposed rule
change to enhance its capital
requirements for BD Members could
have an impact upon competition
because some BD Members could be
required to maintain capital in excess of
their current capital levels. That impact
could impose a burden on competition
on some of those BD Members because
they may bear higher costs to raise
capital in order to comply with the
enhanced capital requirements.
Consistent with that belief, NSCC
received three written comments from
three BD Members arguing that the
proposed enhancements to the capital
requirements for BD Members
(‘‘Proposed BD Requirements’’) could
negatively affect smaller BD Members.40
Two of the commenters argue that the
Proposed BD Requirements will unfairly
discriminate against small BD Members
in favor of the largest BD Members,41
with one of the commenters further
arguing that mid-sized BD Member
firms also will be discriminated
against.42 Similarly, a third commenter
argues that, in addition to affecting
small BD Members, the Proposed BD
Requirements will drastically affect
other industry participants and small
companies that do business with and
that rely on such BD Members to raise
capital.43
Two of the commenters argue that the
Proposed BD Requirements will create
barriers to entry.44 Moreover, one of
those commenters argues that the
barriers to entry will cause further
industry consolidation,45 while the
other argues that the barriers are
anticompetitive and, when considered
with the argued effect on smaller brokerdealers, at odds with the goals of the
Exchange Act.46
Regarding the proposed VaR Tiers for
BD Members, one commenter suggests
that the proposed tiering scale should
40 Letter from Bonnie K. Wachtel, Chief Executive
Officer, and Wendie L. Wachtel, Chief Operating
Officer, Wachtel & Co., Inc. (September 16, 2019)
(‘‘Wachtel Letter’’); Email from Samuel F. Lek, Lek
Securities Corporation (September 17, 2019) (‘‘Lek
Email’’); Email from William L. Walker, Chief
Operating Officer, Wilson-Davis & Co., Inc. (October
31, 2019) (‘‘Wilson-Davis Email’’). Copies of the
comments received have been included as Exhibit
2 to the filing, pursuant to the requirements of Form
19b–4 and the General Instructions for Form 19b–
4, available at https://www.sec.gov/about/forms/
form19b-4.pdf.
41 Wachtel Letter, supra note 40; Lek Email, supra
note 40.
42 Wachtel Letter, supra note 40.
43 Wilson-Davis Email, supra note 40.
44 Wachtel Letter, supra note 40; Lek Email, supra
note 40.
45 Wachtel Letter, supra note 40.
46 Lek Email, supra note 40.
E:\FR\FM\29DEN1.SGM
29DEN1
khammond on DSKJM1Z7X2PROD with NOTICES
74196
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
not end at $5 million Excess Net Capital
for a self-clearing BD Member with a
daily volatility component of more than
$500,000 for its Net Unsettled Positions;
rather, the scale should continue
indefinitely.47 Meanwhile, another
commenter suggests that the proposed
$10 million in Excess Net Capital for a
BD Member that clears for others is not
necessary to address the risk presented
by such BD Member because its
required margin will be greater than
$500,000 for its Net Unsettled
Positions.48 That same commenter also
argues that the VaR Tiers are extremely
low, which is an effort to target smaller
BD Members and ignores the greater risk
presented by larger BD Members.49
NSCC values each of its BD Members
and does not wish to create a
competitive burden on any of them or
any of their clients. The Proposed BD
Requirements were not designed to
discriminate against any BD Members
(small, medium, or large), create a
barrier to NSCC membership, or force
any BD Member to clear through
another financial institution or exit the
business completely. Rather, as
discussed above and below, the
Proposed BD Requirements were
designed and tailored to help address
the specific risks presented by BD
Members within the current industry
environment.
Nevertheless, NSCC fully appreciates
that the Proposed BD Requirements may
result in a burden on competition for
some BD Members that would need to
raise or keep more capital on hand in
order to comply with the new
requirements, although NSCC does not
believe that any such burden on
competition would be significant. In any
event, to the extent the Proposed BD
Requirements would be a burden on
competition, NSCC believes that the
burden would be necessary and
appropriate in furtherance of the
purposes of the Exchange Act, as
permitted by Section 17A(b)(3)(I)
thereunder.50
NSCC believes the Proposed BD
Requirements are necessary because, in
short, the current requirements are
outdated. As noted above, the current
minimum capital requirements for
members have not been adjusted in over
20 years. Meanwhile, there have been
significant changes to the industry (e.g.,
market structure, technology, and
regulatory environment) within which
NSCC and all its members operate,
exposing NSCC and its members to
Letter, supra note 40.
48 Lek Email, supra note 40.
49 Id.
50 15 U.S.C. 78q–1(b)(3)(I).
20:20 Dec 28, 2021
51 See
supra note 9.
Stress Testing Analysis, included as a
Confidential Exhibit 3 to the filing.
53 See Commission v. Alpine Sec. Corp., 982 F.3d
68 (2d Cir. 2020) (upholding $12 million civil
penalty against clearing broker-dealer).
52 See
47 Wachtel
VerDate Sep<11>2014
more and different risks than 20 years
ago.
There also have been significant
membership changes over the past 20
years. Numerous mergers, acquisitions,
and new market entrants have created a
diverse NSCC membership that has
expanded the credit-risk profiles that
NSCC must manage. For example, NSCC
has seen an increase in less capitalized
market participants focusing on niche
parts of the market with innovative new
business models.
Additionally, as mentioned above,
trading activity and market volatility,
each of which present risk to NSCC,
ballooned over the years.51 While NSCC
does collect margin from its members to
help address these types of risk, it is
imperative that NSCC ensure that its
members have sufficient capital to
sustain unexpected and/or sustained
increases in margin requirements.
Although the above factors do not
directly require NSCC to increase
capital requirements for its membership
(e.g., there is no specific regulation or
formula that prescribes a set capital
requirement for members of a CCP such
as NSCC), the overarching and
collective focus of the regulatory
changes noted above, in light of the
many heightened risks to the financial
industry, has been to increase the
stability of the financial markets in
order to reduce systemic risk. As a selfregulatory organization, a SIFMU, and
being exposed to the new and increased
risks over the past 20 years, NSCC has
a responsibility to do the same.
Enhancing its capital requirements
helps meet that responsibility and
improve NSCC’s credit risk
management.
Moreover, stress testing has also
highlighted that BD Members with
smaller capital bases are exposed to the
risk of losses exceeding their current
Excess Net Capital requirements under
a stressed scenario.52 There also has
been heightened focus on legal,
operational, and cyber risk, given the
devastating impact that they could have
today. In the case of legal risk, members
can and do face legal exposures that
exceed their required Excess Net
Capital.53 In the case of operational risk,
unexpected operational events could
expose NSCC to an amount in excess of
a firm’s required Excess Net Capital. In
the case of cyber risk, cyber-attacks have
the potential to inflict significant losses
Jkt 256001
PO 00000
Frm 00134
Fmt 4703
Sfmt 4703
that could exceed the current minimum
capital requirements.
Appreciation of these greater risks
have manifested into new regulatory
requirements for certain industry
participants,54 including NSCC,
requiring NSCC to maintain greater
capital amounts and deploy enhanced
risk management tools.55 As to which
BD Members are arguably ‘‘riskier’’ in
today’s environment, NSCC’s internal
stress testing analysis 56 highlights that
BD Members with smaller capital bases
are more likely to experience a loss that
would exceed their current Excess Net
Capital requirements,57 countering the
commenter’s argument that larger BD
Members are riskier.58
Therefore, NSCC believes the
Proposed BD Requirements are
necessary in furtherance of the purposes
of the Exchange Act, as permitted by
Section 17A(b)(3)(I) thereunder,59 as the
proposed changes would help ensure
that all BD Members maintain an
amount of capital that is more
commensurate with the current industry
environment and the risks it presents.
NSCC believes the Proposed BD
Requirements are appropriate for a
variety of reasons. First, the new
requirements are tailored to better
reflect the volatility risk presented by
BD Members. Currently, the minimum
capital requirement for BD Members is
simply an amount of Excess Net Capital
based on membership type (i.e., a
$500,000 Excess Net Capital
requirement for those that self-clear and
a $1 million Excess Net Capital
requirement for those that clear for
others), without considering any other
risks. As described above, NSCC would
not only continue to consider
membership type, but it also proposes to
use the daily volatility component of the
BD Member’s own Net Unsettled
Positions (i.e., a measurement of the risk
that the BD Member’s Net Unsettled
Positions present to NSCC) in order to
more strategically group BD Members
into tiers, with each tier being assigned
a specific minimum capital
requirement. BD Members in a greater
tier would need to maintain higher
capital requirements than those in a
54 See, e.g., Basel Committee on Banking
Supervision, Basel III Standards, supra note 5;
Financial Stability Board, 2020 list of G–SIBs, supra
note 4; U.S. Department of the Treasury,
Designations, Financial Market Utility Designations,
supra note 7.
55 See, e.g., CCAS, supra note 10.
56 See supra note 52.
57 See Letter from Daniel McElligott, Executive
Director, DTCC, to Regional Firms Council (October
24, 2019), included as a Confidential Exhibit 3 to
the filing.
58 Lek Email, supra note 40.
59 15 U.S.C. 78q–1(b)(3)(I).
E:\FR\FM\29DEN1.SGM
29DEN1
khammond on DSKJM1Z7X2PROD with NOTICES
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
lesser tier, commensurate with the
volatility risks that the BD Members in
each tier present to NSCC. As described
above, BD Members could move
between tiers based on sustained
changes to their daily volatility
component, thus allowing BD Members
to have control over the tier in which
they are placed and, in turn, the capital
they need to maintain. NSCC would
track VaR breaches for BD Members on
a daily basis. On the first instance of
breaching a VaR Tier, NSCC would send
a letter to the Member informing it of
the VaR breach and reminding it that
four subsequent breaches within the
next 12 months would result in a higher
capital requirement. On the fifth
instance of breaching a VaR Tier, NSCC
would again send a letter to a Member
informing it of the fifth breach and that
the new, higher capital requirement
would take effect in 60 days and would
remain in effect for at least the next 12
months.
In the case of new applicants for
NSCC membership, as described above,
if the Proposed BD Requirements had
been in effect for the past two years, but
newly admitted BD Members were not
automatically placed in at least the
middle VaR Tier, only one BD Member
would have belonged in the lowest VaR
Tier at admittance, and that firm would
have moved to the middle VaR Tier in
its second month of membership.60 As
a result, requiring new BD Members to
be placed in at least the middle VaR
Tier at admittance would not pose an
unnecessary barrier to entry that such
BD Members would not have had to
meet eventually anyway.
In response to specific comments that
the VaR Tiers begin at too low of a level
and that they should continue
indefinitely,61 NSCC designed the tier
levels to not only consider the volatility
risk that the BD Members present to
NSCC but also to make the tiers easy to
understand and manage. NSCC believes
that adding more tiers at the upper
levels, or splitting existing tiers, would
complicate the structure unnecessarily
and make the logistics in tracking each
BD Member as they moved between
tiers unwieldy, not only for NSCC but
also for the BD Member itself. NSCC
believes the proposed tier structure
strikes the right balance between benefit
and functionality.
Second, while NSCC believes
members must understand the risks that
their capitalization presents to NSCC
and be prepared to monitor their
capitalization and alter their behavior in
60 See
61 Lek
supra note 21.
Email, supra note 40; Wachtel Letter, supra
note 40.
VerDate Sep<11>2014
20:20 Dec 28, 2021
Jkt 256001
order to minimize that risk, as
necessary, NSCC also appreciates and
understands that members must be able
to plan for their capital requirements.
That is why NSCC would not
implement the proposed changes to any
of the enhanced capital requirements
until one year after the Commission’s
approval of the proposal. During that
one-year period, NSCC would
periodically provide Members with
estimates of their capital requirements.
The deferred implementation for all
members and the estimated capital
requirements for Members are designed
to give members the opportunity to
assess the impact of their enhanced
capital requirements on their business
profile and make any changes that they
deem necessary.
Third, in response to the specific
comment that the Proposed BD
Requirements are at odds with the goals
of the Exchange Act,62 NSCC believes
the proposed changes are, in fact,
consistent with and would improve
upon NSCC’s compliance with
applicable regulatory requirements, as
discussed above, including Section
17A(b)(3)(F) of the Exchange Act and
Rules 17Ad–22(b)(7), (e)(4)(i), (e)(18)
and (e)(19) promulgated thereunder.
Finally, NSCC believes that the
Proposed BD Requirements would better
align NSCC’s capital requirements for
members with those of other CCPs, both
in the U.S. and abroad.63
Therefore, NSCC believes the
Proposed BD Requirements are
appropriate in furtherance of the
purposes of the Exchange Act, as
permitted by Section 17A(b)(3)(I)
thereunder,64 as the proposed changes
are purposely tailored and structured,
provide for a one-year implementation
period, are consistent with applicable
provisions of the Exchange Act and
rules thereunder, and better align with
NSCC peers.
NSCC does not believe the proposed
changes to enhance the capital
requirements for its other members
would impact competition because such
members already meet the proposed
requirements. Additionally, NSCC does
not believe that the proposed changes to
(i) redefine the Watch List and eliminate
the enhanced surveillance list and (ii)
make clarification changes to the Rules
would impact competition. Redefining
the Watch List and eliminating the
enhanced surveillance list are simply
intended to streamline and clarify these
monitoring practices. If anything, by no
longer automatically including Members
62 Lek
Email, supra note 40.
supra note 10.
64 15 U.S.C. 78q–1(b)(3)(I).
63 See
PO 00000
Frm 00135
Fmt 4703
Sfmt 4703
74197
with a CRRM rating of 5 on the Watch
List, as proposed, the change could
promote competition for such Members,
as such Members would no longer
automatically be subject to increased
scrutiny by NSCC, including the
possibility of increased financial and
reporting obligations. Meanwhile,
making clarification changes to the
Rules to ensure that they remain
accessible and transparent would help
facilitate members’ understanding of the
Rules and provide members with
increased predictability and certainty
regarding their rights and obligations
with respect to NSCC’s clearance and
settlement activities.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
All written comments received by
NSCC have been summarized and
responded to in Item 4 (Self-Regulatory
Organization’s Statement on Burden on
Competition) above. If any additional
written comments are received, NSCC
will amend this filing to publicly file
such comments as an Exhibit 2 to this
filing, as required by Form 19b–4 and
the General Instructions thereto.
Persons submitting written comments
are cautioned that, according to Section
IV (Solicitation of Comments) of the
Exhibit 1A in the General Instructions to
Form 19b–4, the Commission does not
edit personal identifying information
from comment submissions.
Commenters should submit only
information that they wish to make
available publicly, including their
name, email address, and any other
identifying information.
All prospective commenters should
follow the Commission’s instructions on
How to Submit Comments, available at
https://www.sec.gov/regulatory-actions/
how-to-submit-comments. General
questions regarding the rule filing
process or logistical questions regarding
this filing should be directed to the
Main Office of the Commission’s
Division of Trading and Markets at
tradingandmarkets@sec.gov or 202–
551–5777.
NSCC reserves the right to not
respond to any comments received.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
E:\FR\FM\29DEN1.SGM
29DEN1
74198
Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
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 Exchange
Act. Comments may be submitted by
any of the following methods:
khammond on DSKJM1Z7X2PROD with NOTICES
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–2021–016 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–2021–016. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of NSCC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
VerDate Sep<11>2014
20:20 Dec 28, 2021
Jkt 256001
should refer to File Number SR–NSCC–
2021–016 and should be submitted on
or before January 19, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.65
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–28250 Filed 12–28–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93862; File No. SR–NYSE–
2021–76]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing of Proposed Rule Change To
Amend the NYSE Listed Company
Manual To Amend Certain of Its Listing
and Annual Fees
December 22, 2021.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on December
20, 2021, New York Stock Exchange
LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. 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 amend
Sections 902.02, 902.03 and 902.11 of
the NYSE Listed Company Manual (the
‘‘Manual’’) to amend certain of its listing
fees. The proposed rule change is
available on the Exchange’s website at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization 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
65 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00136
Fmt 4703
Sfmt 4703
of those 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 parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
certain of its listing fees set forth in
Chapter 9 of the Manual. Changes to
initial listing fees will take effect
immediately and changes to annual fees
will take effect from the beginning of the
calendar year commencing on January 1,
2022. The proposed amendments only
reflect changes in the amounts charged
for the initial listing of securities and on
an annual basis thereafter and do not
reflect any change in the services
provided to the issuer in connection
with such listing.
Currently, when an issuer first lists a
class of common shares (i.e., when an
issuer lists a class of common shares
and has no other class of common
shares listed on the Exchange at the
time of such listing), the Exchange
charges listing fees for such class at a
rate of $0.004 per share, subject to a
minimum and maximum fee of
$150,000 and $295,000, respectively.
The Exchange also charges a one-time
special fee of $50,000 which is included
in the minimum and maximum fee. The
Exchange proposes to replace the per
share fee with a flat fee of $295,000
when an issuer first lists a class of
common shares and eliminate the
special one-time charge and minimum
and maximum fee levels. The Exchange
proposes to make conforming changes
throughout Sections 902.02 and 902.03
of the Manual to eliminate references to
the special one-time charge and the
minimum and maximum listing fees. As
the one-time charge is currently
included in the maximum initial listing
fee of $295,000 and all companies will
be paying the maximum fee as a flat fee
going forward, the Exchange is
proposing to eliminate the one-time
charge.4 The Exchange also proposes to:
(i) Revise the rules in several places to
4 The first time an issuer lists an Equity
Investment Tracking Stock (as defined in Section
102.07) that is the issuer’s only class of common
equity securities listed on the Exchange, the fee is
a fixed amount of $100,000, which amount includes
the special charge of $50,000. The proposed
amendment would remove the reference to the
inclusion of the $50,000 special charge from the fee
provision in relation to Equity Investment Tracking
Stocks, as a separate fee for those securities and the
concept will no longer exist elsewhere in the rules.
E:\FR\FM\29DEN1.SGM
29DEN1
]]>Agencies
[Federal Register Volume 86, Number 247 (Wednesday, December 29, 2021)]
[Notices]
[Pages 74185-74198]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-28250]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93856; File No. SR-NSCC-2021-016]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change To Enhance
Capital Requirements and Make Other Changes
December 22, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on December 13, 2021, National Securities Clearing
Corporation (``NSCC'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the
clearing agency. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to the Rules &
Procedures (``Rules'') of NSCC in order to (i) enhance NSCC's capital
requirements for Members and Limited Members (collectively,
``members''), (ii) redefine NSCC's Watch List and eliminate NSCC's
enhanced surveillance list, and (iii) make certain other clarifying,
technical and supplementary changes in the Rules, including
definitional updates, to accomplish items (i) and (ii), as described in
greater detail below.\3\
---------------------------------------------------------------------------
\3\ Capitalized terms not defined herein are defined in the
Rules, available at https://www.dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The purpose of this proposed rule change is to (i) enhance NSCC's
capital requirements for Members and Limited Members (collectively,
``members''), (ii) redefine NSCC's Watch List and eliminate NSCC's
enhanced surveillance list, and (iii) make certain other clarifying,
technical and supplementary changes in the Rules, including
definitional updates, to accomplish items (i) and (ii).
(i) Background
Central counterparties (``CCPs'') play a key role in financial
markets by mitigating counterparty credit risk on transactions of their
participants. CCPs achieve this by providing guaranties to participants
and, as a consequence, are typically exposed to credit risks that could
lead to default losses.
As a CCP, NSCC is exposed to the credit risks of its members. The
credit risks borne by NSCC are mitigated, in part, by the capital
maintained by members, which serves as a loss-absorbing buffer.
In accordance with Section 17A(b)(4)(B) of the Exchange Act,\4\ a
registered clearing agency such as NSCC may, among other things, deny
participation to, or condition the participation of, any person on such
person meeting such standards of financial responsibility prescribed by
the rules of the registered clearing agency.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78q-1(b)(4)(B).
---------------------------------------------------------------------------
In furtherance of this authority, NSCC requires applicants and
members to meet the relevant financial responsibility standards
prescribed by the Rules. These financial responsibility standards
generally require members to have and maintain certain levels of
capital, as more particularly described in the Rules and below.
NSCC's capital requirements for its members have not been updated
in over 20 years. Since that time, there have been significant changes
to the financial markets that warrant NSCC revisiting its capital
requirements. For example, the regulatory environment within which NSCC
and its members operate has undergone various changes. The
[[Page 74186]]
implementation of the Basel III standards,\5\ the designation of many
banks as systemically important by the Financial Stability Board,\6\ as
well as the designation of NSCC as a systemically important financial
market utility (``SIFMU'') by the Financial Stability Oversight
Council,\7\ have significantly increased the regulatory requirements,
including capital requirements, of many financial institutions and
CCPs. Similarly, the Covered Clearing Agency Standards (``CCAS'')
adopted by the Commission have raised the regulatory standards
applicable to CCPs such as NSCC.\8\
---------------------------------------------------------------------------
\5\ Basel Committee on Banking Supervision, The Basel Framework,
available at https://www.bis.org/basel_framework/index.htm?export=pdf (``Basel III Standards'').
\6\ See Financial Stability Board, 2021 list of global
systemically important banks, available at https://www.fsb.org/wp-content/uploads/P231121.pdf.
\7\ See U.S. Department of the Treasury, Designations, Financial
Market Utility Designations, available at https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/designations.
\8\ 17 CFR 240.17Ad-22(e).
---------------------------------------------------------------------------
There also have been significant membership changes over the past
20 years. Numerous mergers, acquisitions, and new market entrants have
created a diverse NSCC membership that has expanded the credit-risk
profiles that NSCC must manage. For example, NSCC has seen an increase
in less capitalized market participants focusing on niche parts of the
market with innovative new business models.
Additionally, trading activity and market volatility, each of which
present risk to NSCC, ballooned over the years.\9\ While NSCC does
collect margin from its members to help address these types of risk, it
is imperative that NSCC ensure that its members have sufficient capital
to sustain unexpected and/or sustained increases in margin
requirements. Although the above factors do not directly require NSCC
to increase capital requirements for its membership (e.g., there is no
specific regulation or formula that prescribes a set capital
requirement for members of a CCP such as NSCC), the overarching and
collective focus of the regulatory changes noted above, in light of the
many heightened risks to the financial industry, has been to increase
the stability of the financial markets in order to reduce systemic
risk. As a self-regulatory organization, a SIFMU, and being exposed to
the new and increased risks over the past 20 years, NSCC has a
responsibility to do the same. Enhancing its capital requirements helps
meet that responsibility and improve NSCC's credit risk management.
Enhanced capital requirements also help mitigate other risks posed
directly or indirectly by members such as legal risk, operational risk
and cyber risk, as better capitalized members have greater financial
resources in order to mitigate the effects of these and other risks.
---------------------------------------------------------------------------
\9\ See, e.g., DTCC Annual Reports, available at https://www.dtcc.com/about/annual-report. NSCC is a wholly owned subsidiary
of The Depository Trust & Clearing Corporation (``DTCC''). The DTCC
Annual Reports highlight and track NSCC clearing activity year-over-
year. See also CBOE Volatility Index (i.e., the VIX) available at
https://www.cboe.com/tradable_products/vix/. The VIX is designed to
measure market volatility, highlights a rollercoaster of volatility
over the past 14 years, including historic and near-historic peaks.
---------------------------------------------------------------------------
As for setting the specific capital requirements proposed, again,
there is no regulation or formula that requires or calculates a
specific amount (i.e., there is no magic number). Instead, NSCC
considered several factors, including inflation and the capital
requirements of other Financial Market Infrastructures, both in the
U.S. and abroad, to which the proposed requirements align.\10\ NSCC
also gave much weight to the historical development of the proposal,
which involved member outreach and feedback as far back as 2013.
---------------------------------------------------------------------------
\10\ See The Options Clearing Corporation, OCC Rules, Rule
301(a), available at https://www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules (requiring broker-dealers
to have initial net capital of not less than $2,500,000); Chicago
Mercantile Exchange Inc., CME Rulebook, Rule 970.A.1, available at
https://www.cmegroup.com/rulebook/CME/I/9/9.pdf (requiring clearing
members to maintain capital of at least $5 million, with banks
required to maintain minimum tier 1 capital of at least $5 billion);
LCH SA, LCH SA Clearing Rule Book, Section 2.3.2, available at
https://www.lch.com/resources/rulebooks/lch-sa (requiring, with
respect to securities clearing, capital of at least EUR 10 million
for self-clearing members and at least EUR 25 million for members
clearing for others, subject to partial satisfaction by a letter of
credit) (1 EUR = $0.8150 as of December 31, 2020; see https://www.fiscal.treasury.gov/reports-statements/treasury-reporting-rates-exchange/current.html (last visited January 14, 2021)).
---------------------------------------------------------------------------
In 2013, NSCC considered increasing its minimal capital
requirements for members that self-clear and those that clear for
others to much higher, fixed amounts than what are proposed here.
However, some members expressed concerns that the amounts were too high
and rigid, and would present undue burden on less capitalized firms. As
such, NSCC then considered lowering the amounts considerably, such that
the amounts would more directly reflect inflation but with an
adjustment factor related to volume activity. In response, though,
members expressed concern over the volume adjustment, which NSCC also
determined to be too challenging and costly to implement, and too
complex to monitor for both NSCC and members. Ultimately, NSCC settled
on the current proposal, which it believes strikes the right balance
between continuing to provide access for less capitalized firms and the
need to mitigate risk to NSCC and its members, as described in more
detail below.
NSCC also proposes to redefine the Watch List, which is a list of
members that are deemed by NSCC to pose a heightened risk to it and its
members based on credit ratings and other factors. As part of the
redefinition of the Watch List, NSCC proposes to eliminate the separate
enhanced surveillance list and implement a new Watch List that consists
of a relatively smaller group of members that exhibit heightened credit
risk, as described in more detail below.
Finally, NSCC proposes to make certain other clarification changes
in the Rules.
(ii) Current NSCC Capital Requirements
The Rules currently specify capital requirements for members based
on their membership type and type of entity. The current NSCC capital
requirements for members are set forth in Addendum B (Qualifications
and Standards of Financial Responsibility, Operational Capability and
Business History),\11\ as supplemented by Addendum O (Admission of Non-
U.S. Entities as Direct NSCC Members) \12\ in the case of non-U.S.
entities.
---------------------------------------------------------------------------
\11\ Addendum B (Qualifications and Standards of Financial
Responsibility, Operational Capability and Business History), supra
note 3.
\12\ Addendum O (Admission of Non-U.S. Entities as Direct NSCC
Members), supra note 3.
---------------------------------------------------------------------------
Addendum B (Qualifications and Standards of Financial Responsibility,
Operational Capability and Business History)
Addendum B is divided into 12 sections, one for each NSCC
membership type. Each section of Addendum B sets forth the
qualifications, financial responsibility, operational capability and
business history requirements applicable to the relevant membership
type.
An applicant for a membership type is required to meet the
qualifications, financial responsibility, operational capability and
business history requirements applicable to the relevant membership
type, which may vary based on the applicant's type of entity (e.g., a
broker-dealer vs. a bank or trust company). In particular, financial
responsibility requirements for a membership type, which generally
require the applicant to maintain a certain level of capital, may vary
based on an applicant's type of entity and the
[[Page 74187]]
relevant capital measure for such type of entity.
As relevant to NSCC's proposal to enhance its capital requirements
for members:
Section 1
Section 1 of Addendum B sets forth the qualifications, financial
responsibility, operational capability and business history
requirements applicable to Members. The financial responsibility
requirements in Section 1 consist of the following capital
requirements:
Section 1.B.1 of Addendum B provides that a Registered Broker-
Dealer applying to be a Member must have excess net capital (i.e.,
capital in excess of the minimum net capital required by the Commission
or such higher minimum capital required by its designated examining
authority) in the amount of $500,000 if the Registered Broker-Dealer
does not clear for others or $1 million if the Registered Broker-Dealer
clears for others.
An applicant that is a Municipal Securities Brokers' Brokers (as
defined in Rule 15c3-1(a)(8) under the Exchange Act) \13\ is subject to
a lower excess net capital requirement of $100,000.
---------------------------------------------------------------------------
\13\ 17 CFR 240.15c3-1(a)(8).
---------------------------------------------------------------------------
Section 1.B.2 of Addendum B provides that a bank applying to be a
Member must (i) have at least $50 million in equity capital (as defined
on the Consolidated Report of Condition and Income (``Call Report''))
or (ii) have furnished to NSCC a guarantee of its parent bank holding
company respecting the payment of any and all obligations of the bank
applicant, and such parent bank holding company must have total
consolidated capital of at least $50 million.
In the case of a trust company applying to be a Member that is not
a bank but is a member of the Federal Reserve System or is an
institution insured under the Federal Deposit Insurance Act, the trust
company must have consolidated capital of at least $10 million and that
is adequate to the scope and character of the business conducted by
such trust company.
Section 1.B.3 of Addendum B provides that an entity applying to be
a Member other than a Registered Broker-Dealer, bank or trust company
is required to satisfy such minimum standards of financial
responsibility as determined by NSCC.
Section 2
Section 2 of Addendum B sets forth the qualifications, financial
responsibility, operational capability and business history
requirements applicable to Mutual Fund/Insurance Services Members. The
financial responsibility requirements in Section 2 consist of the
following capital requirements:
Section 2.B.1 of Addendum B provides that a Registered Broker-
Dealer applying to be a Mutual Fund/Insurance Services Member must have
excess net capital in the amount of $50,000.
Section 2.B.2 of Addendum B provides that a bank or trust company
applying to be a Mutual Fund/Insurance Services Member must (i) have a
Tier 1 Risk Based Capital (``RBC'') ratio of 6% or greater or (ii) with
respect to trust companies which do not calculate a Tier 1 RBC ratio,
have at least $2 million in equity capital.
Section 2.B.3 of Addendum B provides that an Insurance Company
applying to be a Mutual Fund/Insurance Services Member must have an RBC
ratio, as derived from annual statutory financial statements filed by
it with its supervisory or regulatory entity (or, between filings of
such annual statutory financial statements, an RBC ratio derived in a
similar manner from then-current financial data), of 250% or greater.
Section 2.B.4 of Addendum B provides that an entity applying to be
a Mutual Fund/Insurance Services Member other than a Registered Broker-
Dealer, bank or trust company or Insurance Company is required to
satisfy such minimum standards of financial responsibility as
determined by NSCC.
Section 3
Section 3 of Addendum B sets forth the qualifications, financial
responsibility, operational capability and business history
requirements applicable to Fund Members. The financial responsibility
requirements in Section 3 consist of the following capital
requirements:
Section 3.B.1 of Addendum B provides that a Registered Broker-
Dealer applying to be a Fund Member must have excess net capital in the
amount of $50,000.
Section 3.B.2 of Addendum B provides that a bank or trust company
applying to be a Fund Member must (i) have a Tier 1 RBC ratio of 6% or
greater or (ii) with respect to trust companies which do not calculate
a Tier 1 RBC ratio, have at least $2 million in equity capital.
Section 3.B.3 of Addendum B provides that an investment company
applying to be a Fund Member must have at least $100,000 in assets
under management.
Section 3.B.4 of Addendum B provides that an investment adviser
applying to be a Fund Member must have at least $25,000,000 in assets
under management and $100,000 in total net worth.
Section 3.B.5 of Addendum B provides that an Insurance Company
applying to be a Fund Member must have an RBC ratio, as derived from
annual statutory financial statements filed by it with its supervisory
or regulatory entity (or, between filings of such annual statutory
financial statements, an RBC ratio derived in a similar manner from
then-current financial data), of 250% or greater.
Section 3.B.6 of Addendum B provides that an entity applying to be
a Fund Member other than a Registered Broker-Dealer, bank or trust
company, investment company, investment adviser or Insurance Company is
required to satisfy such minimum standards of financial responsibility
as determined by NSCC.
Section 4
Section 4 of Addendum B sets forth the qualifications, financial
responsibility, operational capability and business history
requirements applicable to Insurance Carrier/Retirement Services
Members. The financial responsibility requirements in Section 4 consist
of the following capital requirement:
Section 4.B of Addendum B provides that an Insurance Company
applying to be an Insurance Carrier/Retirement Services Member must
have an RBC ratio, as derived from annual statutory financial
statements filed by it with its supervisory or regulatory entity (or,
between filings of such annual statutory financial statements, an RBC
ratio derived in a similar manner from then-current financial data), of
250% or greater.
Section 7
Section 7 of Addendum B sets forth the qualifications, financial
responsibility and operational capability requirements applicable to
Settling Bank Only Members. The financial responsibility requirements
in Section 7 consist of the following capital requirement:
Section 7.B of Addendum B provides that a bank or trust company
applying to be a Settling Bank Only Member is required to satisfy such
minimum standards of financial responsibility as determined by NSCC.
[[Page 74188]]
Addendum O (Admission of Non-U.S. Entities as Direct NSCC Members)
Addendum O (Admission of Non-U.S. Entities as Direct NSCC Members)
provides that an entity that is organized in a country other than the
United States and that is not otherwise subject to U.S. federal or
state regulation (a ``non-U.S. entity'') is eligible to become a
Member, Mutual Fund/Insurance Services Member, Fund Member or Insurance
Carrier/Retirement Services Member, subject to certain conditions.
One of the conditions for a non-U.S. entity to be admitted as a
Member, Mutual Fund/Insurance Services Member, Fund Member or Insurance
Carrier/Retirement Services Member is that the entity must provide
NSCC, for financial monitoring purposes, audited financial statements
prepared in accordance with either U.S. generally accepted accounting
principles (``U.S. GAAP'') or other generally accepted accounting
principles that are satisfactory to NSCC.
In order to address the risk presented by the acceptance of
financial statements not prepared in accordance with U.S. GAAP,
Addendum O provides that the minimum financial requirements applicable
to a non-U.S. entity will be subject to a specified premium, as
follows:
i. For financial statements prepared in accordance with
International Financial Reporting Standards, the U.K. Companies Act of
1985 (``U.K. GAAP''), or Canadian generally accepted accounting
principles--a premium of 1\1/2\ times the minimum financial
requirements;
ii. for financial statements prepared in accordance with a European
Union country's generally accepted accounting principles, other than
U.K. GAAP--a premium of 5 times the minimum financial requirements; and
iii. for financial statements prepared in accordance with any other
type of generally accepted accounting principles--a premium of 7 times
the minimum financial requirements.
Accordingly, a non-U.S. entity that does not prepare its financial
statements in accordance with U.S. GAAP is required to meet financial
requirements between 1\1/2\ to 7 times the minimum financial
requirements that would otherwise be applicable to the non-U.S entity.
Given that, as noted above, the financial responsibility requirements
generally require a member to have a certain level of capital, Addendum
O has the effect of requiring a non-U.S. entity that does not prepare
its financial statements in accordance with U.S. GAAP to have capital
between 1\1/2\ to 7 times the otherwise-applicable capital requirement.
(iii) Current NSCC Watch List and Enhanced Surveillance List
NSCC's Watch List is a list of members that are deemed by NSCC to
pose a heightened risk to it and its members based on credit ratings
and other factors.\14\
---------------------------------------------------------------------------
\14\ See Rule 1 (Definitions and Descriptions), supra note 3.
---------------------------------------------------------------------------
Specifically, the Watch List is the list of Members with credit
ratings derived from NSCC's Credit Risk Rating Matrix (``CRRM'') \15\
of 5, 6 or 7, as well as members that, based on NSCC's consideration of
relevant factors, including those set forth in Section 4(d) of Rule 2B
(Ongoing Membership Requirements and Monitoring),\16\ are deemed by
NSCC to pose a heightened risk to it and its members.
---------------------------------------------------------------------------
\15\ NSCC's CRRM is a matrix of credit ratings of Members
specified in Section 4 of Rule 2B. The CRRM is developed by NSCC to
evaluate the credit risk Members pose to NSCC and its Members and is
based on factors determined to be relevant by NSCC from time to
time, which factors are designed to collectively reflect the
financial and operational condition of a Member. These factors
include (i) quantitative factors, such as capital, assets, earnings,
and liquidity, and (ii) qualitative factors, such as management
quality, market position/environment, and capital and liquidity risk
management. See Rule 1 (Definitions and Descriptions), supra note 3.
\16\ Rule 2B (Ongoing Membership Requirements and Monitoring),
Section 4 (Ongoing Monitoring), supra note 3.
---------------------------------------------------------------------------
In addition to the Watch List, NSCC also maintains a separate list
of members subject to enhanced surveillance in accordance with the
provisions of Rule 2B, as discussed below. The enhanced surveillance
list is a list of members for which NSCC has heightened credit
concerns, which may include members that are already, or may soon be,
on the Watch List. As described below, a member is subject to the same
potential consequences from being subject to enhanced surveillance or
being placed on the Watch List.
Rule 2B (Ongoing Membership Requirements and Monitoring)
Rule 2B (Ongoing Membership Requirements and Monitoring) specifies
the ongoing membership requirements and monitoring applicable to
members.\17\
---------------------------------------------------------------------------
\17\ Rule 2B (Ongoing Membership Requirements and Monitoring),
supra note 3.
---------------------------------------------------------------------------
Section 2.B.(e) of Rule 2B provides that NSCC may review the
financial responsibility and operational capability of a Member and
otherwise require from the Member additional reporting of its financial
or operational condition in order to make a determination as to whether
such Member should be placed on the Watch List and/or be subject to
enhanced surveillance by NSCC consistent with the provisions of Section
4 of Rule 2B.
Section 4(b) of Rule 2B provides that a Member that is (1) a U.S.
bank or trust company that files a Call Report, (2) a U.S. broker-
dealer that files the Financial and Operational Combined Uniform Single
Report (``FOCUS Report'') or the equivalent with its regulator, or (3)
a non-U.S. bank or trust company that has audited financial data that
is publicly available, will be assigned a credit rating by NSCC in
accordance with the CRRM. A Member's credit rating is reassessed each
time the Member provides NSCC with requested information pursuant to
Section 2.B.(e) of Rule 2B or as may be otherwise required under the
Rules.
Section 4(b) further provides that because the factors used as part
of the CRRM may not identify all risks that a Member assigned a credit
rating by NSCC may present to NSCC, NSCC may, in its discretion,
override such Member's credit rating derived from the CRRM to downgrade
the Member. This downgrading may result in the Member being placed on
the Watch List and/or it may subject the Member to enhanced
surveillance based on relevant factors.
Section 4(c) of Rule 2B provides that Members not assigned a credit
rating by NSCC and Limited Members monitored and reviewed by NSCC on an
ongoing and periodic basis will not be assigned a credit rating by the
CRRM but may be placed on the Watch List and/or may be subject to
enhanced surveillance based on relevant factors.
Section 4(d) of Rule 2B provides that the factors to be considered
by NSCC in determining whether a member is placed on the Watch List
and/or subject to enhanced surveillance include (i) news reports and/or
regulatory observations that raise reasonable concerns relating to the
member, (ii) reasonable concerns around the member's liquidity
arrangements, (iii) material changes to the member's organizational
structure, (iv) reasonable concerns about the member's financial
stability due to particular facts and circumstances, such as material
litigation or other legal and/or regulatory risks, (v) failure of the
member to demonstrate satisfactory financial condition or operational
capability or if NSCC has a reasonable concern regarding the member's
ability to maintain applicable membership standards, and (vi) failure
of the member to provide information required by NSCC to assess risk
exposure posed by the member's activity.
[[Page 74189]]
Section 4(e) of Rule 2B provides that NSCC may require a member
that has been placed on the Watch List to make and maintain a deposit
to the Clearing Fund over and above the amount determined in accordance
with Procedure XV (Clearing Fund Formula and Other Matters) (which
additional deposit shall constitute a portion of the member's Required
Fund Deposit) or such higher amount as NSCC may deem necessary for the
protection of it or other members.
Section 4(f) of Rule 2B provides that a member being subject to
enhanced surveillance or being placed on the Watch List (1) will result
in a more thorough monitoring of the member's financial condition and/
or operational capability, including on-site visits or additional due
diligence information requests, and (2) may be required make more
frequent financial disclosures to NSCC. Members and Limited Members
that are placed on the Watch List or subject to enhanced surveillance
are also reported to NSCC's management committees and regularly
reviewed by NSCC senior management.
(iv) Proposed Rule Changes
A. Changes To Enhance NSCC's Capital Requirements
As noted earlier, as a CCP, NSCC is exposed to the credit risks of
its members. The credit risks borne by NSCC are mitigated, in part, by
the capital maintained by members, which serves as a loss-absorbing
buffer.
NSCC's financial responsibility standards for members generally
require members to have and maintain certain levels of capital.
As described in more detail below, NSCC proposes to enhance its
capital requirements for members as follows:
Members
U.S. Broker-Dealers
NSCC proposes increasing minimum excess net capital (``Excess Net
Capital'') requirements for Members that are U.S. broker-dealers using
a tiered approach.\18\ These increases would be between 2 and 10 times
the current minimum Excess Net Capital requirements applicable to
Members that are U.S. broker-dealers, depending on whether the Member
self-clears or clears for others and its VaR Tier, as described below.
As described below, NSCC proposes to use, in general terms,
calculations from its value-at-risk (``VaR'') model and associated
Member charges as a measure of market risk in order to categorize
Members into those that pose relatively minimal risk exposure, moderate
risk exposure, or higher risk exposure to NSCC.
---------------------------------------------------------------------------
\18\ As part of the proposal, NSCC proposes to add the defined
term ``Excess Net Capital'' to the list of defined terms in Rule 1.
Excess Net Capital would be defined as a broker-dealer's excess net
capital, calculated in accordance with such broker-dealer's
regulatory and/or statutory requirements.
---------------------------------------------------------------------------
Unlike the current capital requirements applicable to Registered
Broker-Dealers, the proposed enhanced capital requirements for U.S.
broker-dealers would result in those Members whose NSCC activity poses
greater risk to NSCC being required to have and maintain greater levels
of Excess Net Capital in line with the increased risk.
As is the case with the current capital requirements applicable to
Registered Broker-Dealers, the enhanced capital requirements for U.S.
broker-dealers would depend on whether a Member self-clears or clears
for others. A broker-dealer that clears transactions for others has the
potential to present different and greater risks to NSCC than a broker-
dealer that clears transactions only for itself, and it is therefore
appropriate for such broker-dealer to be subject to heightened capital
requirements versus a broker-dealer that clears transactions only for
itself.
As described in more detail below, the proposed minimum Excess Net
Capital increases will help ensure NSCC's ongoing compliance with
regulatory requirements and expectations related to credit risk, such
as those addressed in CCAS Rules 17Ad-22(e)(4)(i) and (e)(18).\19\
---------------------------------------------------------------------------
\19\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(18).
---------------------------------------------------------------------------
Under the proposal, a Member that is a U.S. broker-dealer must have
and maintain at all times minimum Excess Net Capital as follows:
----------------------------------------------------------------------------------------------------------------
Value-at-risk tier
Clearing status (``VaR tier'') Minimum excess net capital
----------------------------------------------------------------------------------------------------------------
Self-Clearing.................................. <$100,000 $1 million Excess Net Capital
$100,000-$500,000 2.5 million Excess Net Capital
>$500,000 5 million Excess Net Capital
Clears for Others.............................. <$100,000 2.5 million Excess Net Capital
$100,000-$500,000 5 million Excess Net Capital
>$500,000 10 million Excess Net Capital
----------------------------------------------------------------------------------------------------------------
The VaR Tier in the table above is based on the daily volatility
component of a Member's Net Unsettled Positions calculated as of the
start of each Business Day pursuant to Procedure XV of the Rules \20\
as part of the Member's daily Required Fund Deposit. As part of the
tiered approach, a Member's daily volatility component may exceed its
then-current VaR Tier four times over a rolling 12-month period. Upon
the fifth instance of the Member's daily volatility component exceeding
its then-current VaR Tier, the Member would be moved to the next-
greatest VaR Tier, unless the Member's daily volatility component also
exceeded such next-greatest VaR Tier five times during the preceding
12-month period, in which case the Member would be moved to the
greatest VaR Tier.
---------------------------------------------------------------------------
\20\ Procedure XV (Clearing Fund Formula and Other Matters),
supra note 3.
---------------------------------------------------------------------------
Upon moving to a greater VaR Tier, a Member would then have 60
calendar days from the date of the move to meet the higher required
minimum Excess Net Capital for such VaR Tier. If a Member fails to meet
its higher required minimum Excess Net Capital within 60 calendar days
and maintain it for so long as such higher required minimum Excess Net
Capital applies, NSCC may take any and all action against the Member
pursuant to the Rules.
Upon moving to a greater VaR Tier, a Member would remain in that
greater VaR Tier for no less than one continuous year from the date of
the move before being eligible to move to a lesser VaR Tier. This does
not in any way preclude a Member from moving to an even greater VaR
Tier (if any) in accordance with the requirements of this proposal.
NSCC believes that allowing a Member's daily volatility component
to exceed its then-current VaR Tier four times over a rolling 12-month
period before the Excess Net Capital requirement would increase
provides some flexibility for Members in the
[[Page 74190]]
event of occasional unexpected market volatility while also protecting
NSCC from the risks of such increased daily volatility. NSCC has
determined that giving a Member 60 calendar days from the date of its
move to a higher VaR Tier to meet its higher required minimum Excess
Net Capital appropriately balances the financial and other costs
associated with requiring the Member to satisfy the higher required
minimum Excess Net Capital with the increased risks posed by the
Member's increased daily volatility. The 60-calendar day period also
recognizes the practical limitations for a Member to be able to
immediately increase its capital level, given that raising additional
capital may require time for the Member to identify additional sources
of capital such as outside investors, negotiate the terms of that
capital, and execute any required legal documentation.
A Member would move to a lesser VaR Tier (if any) when (i) the
Member has remained in its then-current VaR Tier for no less than one
continuous year, (ii) the Member's daily volatility component did not
exceed such lesser VaR Tier on five instances or more over the
preceding 12-month period and (iii) if at any time the Member's daily
volatility component did exceed such lesser VaR Tier on five instances
or more over a rolling 12-month period, the Member has remained in its
then-current VaR Tier for no less than one continuous year from the
date of each such instance.
For example, if a Member's daily volatility component exceeds the
lesser VaR Tier for the fifth time over a rolling 12-month period on
February 1, 2021, then the Member would remain in its then-current VaR
Tier until at least January 31, 2022. If the same Member's daily
volatility component then exceeds the lesser VaR Tier for the sixth
time over a rolling 12-month period on February 15, 2021, then the
Member would remain in its then-current VaR Tier until at least
February 14, 2022. This does not in any way preclude a Member from
moving to an even greater VaR Tier (if any) in accordance with the
requirements of this proposal.
Newly admitted Members would be placed into the applicable middle
VaR Tier in the table above unless NSCC determines, based on
information provided by or concerning the Member, that the Member's
anticipated VaR Tier for its anticipated trading activity would be the
greatest VaR Tier, in which case the Member would be placed into the
greatest VaR Tier. Any such determination would be promptly
communicated to, and discussed with, the Member. A newly admitted
Member would remain in its initial VaR Tier until it moves to a
different VaR Tier in accordance with the requirements of this
proposal.
Based on its historical experience with the daily volatility
components of newly admitted Members, including such Members' own
projected trading activity,\21\ NSCC believes that it would be
appropriate to place newly admitted Members into the applicable middle
VaR Tier in the table above for the first 12 months of membership
unless NSCC has determined that the Member's anticipated VaR Tier based
on its anticipated trading activity would be the greatest VaR Tier.
---------------------------------------------------------------------------
\21\ For example, if the proposed VaR Tiers had been in effect
for the past two years (but newly admitted Members were not
automatically placed in at least the middle VaR Tier), only one U.S.
broker-dealer applicant would have belonged in the lowest VaR Tier
at admittance, but that firm then had trading activity that placed
it in the middle VaR Tier in the first month and the highest VaR
Tier in the second month of membership. See Internal Tiering
Analysis, included as a Confidential Exhibit 3 to the filing.
---------------------------------------------------------------------------
NSCC proposes to move the existing capital requirements for Members
that are Municipal Securities Brokers' Brokers or Municipal Securities
Brokers' Broker sponsored account applicants to the end of Section
1.B.1 of Addendum B with some clarifying changes to improve the
accessibility and transparency of these capital requirements, without
substantive effect.
U.S. Banks and Trust Companies
NSCC proposes to (1) change the measure of capital requirements for
U.S. banks and trust companies from equity capital to common equity
tier 1 capital (``CET1 Capital''),\22\ (2) raise the minimum capital
requirements for U.S. banks and trust companies, and (3) require U.S.
banks and trust companies to be well capitalized (``Well Capitalized'')
as defined in the capital adequacy rules and regulations of the Federal
Deposit Insurance Corporation (``FDIC'').\23\
---------------------------------------------------------------------------
\22\ Under the proposal, CET1 Capital would be defined as an
entity's common equity tier 1 capital, calculated in accordance with
such entity's regulatory and/or statutory requirements.
\23\ See 12 CFR 324.403(b)(1).
---------------------------------------------------------------------------
NSCC proposes to change the measure of capital requirements for
U.S. banks and trust companies from equity capital to CET1 Capital and
raise the minimum capital requirements for U.S. banks and trust
companies in order to align NSCC's capital requirements with banking
regulators' changes to regulatory capital requirements over the past
several years, which have standardized and harmonized the calculation
and measurement of bank capital and leverage throughout the world.\24\
Consistent with these changes by banking regulators, NSCC believes that
the appropriate capital measure for Members that are U.S. banks and
trust companies should be CET1 Capital and that NSCC's capital
requirements for Members should be enhanced in light of these increased
regulatory capital requirements.
---------------------------------------------------------------------------
\24\ Compare, e.g., 12 CFR 324.20(b) (FDIC's definition of CET1
Capital), and Regulation (EU) No 575/2013 of the European Parliament
and of the Council of 26 June 2013 on prudential requirements for
credit institutions and investment firms and amending Regulation
(EU) No 648/2012, Article 26, available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32013R0575 (European
Union's definition of CET1 Capital), with Basel Committee on Banking
Supervision, Basel III Standards, CAP10.6, supra note 5 (Basel III
Standards' definition of CET1 Capital).
---------------------------------------------------------------------------
In addition, requiring U.S. banks and trust companies to be Well
Capitalized ensures that Members are well capitalized while also
allowing adjusted capital to be relative to either the risk-weighted
assets or average total assets of the bank or trust company. NSCC
proposes to have the definition of Well Capitalized expressly tied to
the FDIC's definition of ``well capitalized'' to ensure that the
proposed requirement that U.S. banks and trust companies be Well
Capitalized will keep pace with future changes to banking regulators'
regulatory capital requirements.
Under the proposal, a Member that is a U.S. bank or a U.S. trust
company that is a bank must (1) have and maintain at all times at least
$500 million in CET1 Capital and be Well Capitalized at all times or
(2) have furnished to NSCC a guarantee of its parent bank holding
company respecting the payment of any and all obligations of the
Member, and such parent bank holding company must have and maintain at
all times CET1 Capital of at least $500 million and be Well Capitalized
at all times.
NSCC does not propose to change the existing capital requirements
applicable to a Member that is a U.S. trust company that is not a bank,
although NSCC is proposing to make some clarifying and conforming
language changes to improve the accessibility and transparency of these
capital requirements, without substantive effect.
NSCC treats U.S. trust companies that are banks and non-banks
differently because they present different risks based on the attendant
risks of their business activities, with trust companies engaging in
banking activities (e.g., receiving deposits and making loans) being
subject to greater risks than trust companies that limit their
activities to trust activities (e.g., acting as a trustee,
[[Page 74191]]
other fiduciary or transfer agent/registrar).
Non-U.S. Broker-Dealers and Banks
NSCC proposes to impose a minimum capital requirement of $25
million in total equity capital for Members that are non-U.S. broker-
dealers.
NSCC proposes to require a Member that is a non-U.S. bank
(including a U.S. branch or agency) to (1) (A) have and maintain at all
times at least $500 million in CET1 Capital and comply at all times
with the minimum capital requirements (including, but not limited to,
any capital conservation buffer, countercyclical buffer, and any D-SIB
or G-SIB buffer, if applicable) and capital ratios required by its home
country regulator, or, if greater, with such minimum capital
requirements or capital ratios standards promulgated by the Basel
Committee on Banking Supervision,\25\ (B) provide an attestation for
itself, its parent bank and its parent bank holding company (as
applicable) detailing the minimum capital requirements (including, but
not limited to, any capital conservation buffer, countercyclical
buffer, and any D-SIB or G-SIB buffer, if applicable) and capital
ratios required by their home country regulator, (C) provide, no less
than annually and upon request by NSCC, an attestation for the Member,
its parent bank and its parent bank holding company (as applicable)
detailing the minimum capital requirements (including, but not limited
to, any capital conservation buffer, countercyclical buffer, and any D-
SIB or G-SIB buffer, if applicable) and capital ratios required by
their home country regulator and (D) notify NSCC: (i) Within two
Business Days of any of their capital requirements (including, but not
limited to, any capital conservation buffer, countercyclical buffer,
and any D-SIB or G-SIB buffer, if applicable) or capital ratios falling
below any minimum required by their home country regulator; and (ii)
within 15 calendar days of any such minimum capital requirement or
capital ratio changing; or (2) (A) have furnished to NSCC a guarantee
of its parent bank holding company respecting the payment of any and
all obligations of the Member, (B) have such parent bank holding
company maintain at all times CET1 Capital of at least $500 million and
comply at all times with the minimum capital requirements (including,
but not limited to, any capital conservation buffer, countercyclical
buffer, and any D-SIB or G-SIB buffer, if applicable) and capital
ratios required by its home country regulator, or, if greater, with
such minimum capital requirements or capital ratios standards
promulgated by the Basel Committee on Banking Supervision,\26\ (C)
provide an attestation for itself, its parent bank and its parent bank
holding company (as applicable) detailing the minimum capital
requirements (including, but not limited to, any capital conservation
buffer, countercyclical buffer, and any D-SIB or G-SIB buffer, if
applicable) and capital ratios required by their home country
regulator, (D) provide, no less than annually and upon request by NSCC,
an attestation for the Member, its parent bank and its parent bank
holding company (as applicable) detailing the minimum capital
requirements (including, but not limited to, any capital conservation
buffer, countercyclical buffer, and any D-SIB or G-SIB buffer, if
applicable) and capital ratios required by their home country regulator
and (E) notify NSCC: (i) Within two Business Days of any of their
capital requirements (including, but not limited to, any capital
conservation buffer, countercyclical buffer, and any D-SIB or G-SIB
buffer, if applicable) or capital ratios falling below any minimum
required by their home country regulator, and (ii) within 15 calendar
days of any such minimum capital requirement or capital ratio changing.
---------------------------------------------------------------------------
\25\ See Basel Committee on Banking Supervision, Basel III
Standards, supra note 5.
\26\ See id.
---------------------------------------------------------------------------
As described above, pursuant to Addendum O (Admission of Non-U.S.
Entities as Direct NSCC Members),\27\ the current minimum capital
requirements for a Member, Mutual Fund/Insurance Services Member, Fund
Member or Insurance Carrier/Retirement Services Member that does not
prepare its financial statements in accordance with U.S. GAAP is
subject to a multiplier that requires such member to have capital
between 1\1/2\ to 7 times the otherwise-applicable capital requirement.
---------------------------------------------------------------------------
\27\ Addendum O applies to all entities that are organized in a
country other than the U.S. and that are not otherwise subject to
U.S. federal or state regulation (``non-U.S. entities''), other than
insurance companies.
---------------------------------------------------------------------------
The multiplier was designed to account for the less transparent
nature of accounting standards other than U.S. GAAP. However,
accounting standards have converged over the years (namely
International Financial Reporting Standards (``IFRS'') and U.S.
GAAP).\28\ As such, NSCC believes the multiplier is no longer necessary
and its retirement would be a welcomed simplification for both NSCC and
its members.
---------------------------------------------------------------------------
\28\ The convergence between IFRS and U.S. GAAP began with the
2002 Norwalk Agreement. (Available at https://www.ifrs.org/content/dam/ifrs/around-the-world/mous/norwalk-agreement-2002.pdf.) Under
that agreement, the Financial Accounting Standards Board (``FASB'')
and the International Accounting Standards Board (``IASB'') signed a
memorandum of understanding on the convergence of accounting
standards. Between 2010 and 2013, FASB and IASB published several
quarterly progress reports on their work to improve and achieve
convergence of U.S. GAAP and IFRS. In 2013, the International
Financial Reporting Standards Foundation established the Accounting
Standards Advisory Forum (``ASAF'') to improve cooperation among
worldwide standard setters and advise the IASB as it developed IFRS.
(See https://www.ifrs.org/groups/accounting-standards-advisory-forum/.) FASB was selected as one of the ASAF's twelve members.
FASB's membership on the ASAF helps represent U.S. interests in the
IASB's standard-setting process and continues the process of
improving and converging U.S. GAAP and IFRS. In February 2013, the
Journal of Accountancy published its view of the success of the
convergence project citing converged or partially converged
standards, including business combinations, discontinued operations,
fair value measurement, and share-base payments. (Available at
https://www.journalofaccountancy.com/issues/2013/feb/20126984.html.)
Subsequent to the publication, IASB and FASB converge on revenue
recognition. While IASB and FASB have not achieved full convergence,
NSCC believes the accounting rules are sufficiently aligned such
that the multiplier is no longer required.
---------------------------------------------------------------------------
Accordingly, NSCC proposes to delete the language in Addendum O
providing that the minimum capital requirements for a Member, Mutual
Fund/Insurance Services Member, Fund Member or Insurance Carrier/
Retirement Services Member that does not prepare its financial
statements in accordance with U.S. GAAP is subject to a multiplier that
requires such members to have capital between 1\1/2\ to 7 times the
otherwise-applicable capital requirement. Instead, a Member, Mutual
Fund/Insurance Services Member, Fund Member or Insurance Carrier/
Retirement Services Member would be required to meet the minimum
capital requirements provided in Addendum B for the applicable
membership.
As described above, NSCC also proposes that non-U.S. banks be
compliant with the minimum capital requirements and capital ratios in
their home jurisdiction. Given the difficulty in knowing and monitoring
compliance with various regulatory minimums for various jurisdictions,
these Members would be required to provide NSCC with periodic
attestations relating to the minimum capital requirements and capital
ratios for their home jurisdiction.
NSCC also proposes to make some clarifying language changes to
Addendum O to replace references to undefined capitalized terms and
improve the accessibility of Addendum O, without substantive effect.
[[Page 74192]]
Other Types of Members
NSCC also proposes that (1) a Member that is (A) a national
securities exchange registered under the Exchange Act and/or (B) a non-
U.S. securities exchange or multilateral trading facility, must have
and maintain at all times at least $100 million in equity capital, (2)
a Member that is a broker-dealer that is acting as an Index Receipt
Agent must have and maintain at all times minimum Excess Net Capital of
$100 million, and (3) for a type of applicant or Member that is not
otherwise addressed above, (A) such applicant or Member must maintain
compliance with its home country regulator's minimum financial
requirements at all times and (B) NSCC may, based on information
provided by or concerning an applicant or Member, also assign minimum
financial requirements to such applicant or Member based on how closely
it resembles another membership type and its risk profile. Any such
assigned minimum financial requirements would be promptly communicated
to, and discussed with, the applicant or Member.
In the case of Index Receipt Agents, the higher capital requirement
for this subset of Members is being proposed in order to reflect the
systemic risk presented by the potential failure of an Index Receipt
Agent. The failure of an Index Receipt Agent could present systemic
risk because such failure could potentially result in disruptions at
the exchange-traded funds (``ETFs'') for which the Index Receipt Agent
acts. As a result of this systemic risk, Members acting as Index
Receipt Agents require a moderately sized capital base to support this
business function. Similarly, NSCC proposes to create a standard
capital requirement for Members that are securities exchanges due to
the systemic importance of these Members and the need to hold these
Members to a consistent, high standard to ensure that they have
sufficient capital to fulfill their systemically important role.
Limited Members
NSCC proposes that a Mutual Fund/Insurance Services Member, Fund
Member or Settling Bank Only Member that is a U.S. bank or trust
company that, in accordance with such entity's regulatory and/or
statutory requirements, calculates a Tier 1 RBC Ratio must have at all
times a Tier 1 RBC Ratio equal to or greater than the Tier 1 RBC Ratio
that would be required for such entity to be Well Capitalized. As
discussed above, NSCC proposes to have the definition of Well
Capitalized expressly tied to the FDIC's definition of ``well
capitalized'' to ensure that the proposed requirement that U.S. banks
and trust companies be Well Capitalized will keep pace with future
changes to banking regulators' regulatory capital requirements.
Similarly, NSCC proposes to add a new defined term of ``Tier 1 RBC
Ratio'' to Rule 1 in order to replace a reference to an undefined term
in the Rules with its intended meaning. Under the proposal, Tier 1 RBC
Ratio would be defined as the ratio of an entity's tier 1 capital to
its total-risk weighted assets, calculated in accordance with such
entity's regulatory and/or statutory requirements.
NSCC proposes to clarify existing language providing that a Mutual
Fund/Insurance Services Member or Fund Member that is a U.S. trust
company that does not calculate a Tier 1 RBC Ratio must have at least
$2 million in equity capital, without substantive effect. Relatedly,
NSCC proposes to revise the definition of ``RBC Ratio,'' which is used
in the capital requirements for Mutual Fund/Insurance Services Members,
Fund Members and Insurance Carrier/Retirement Services Members, in the
list of defined terms in Rule 1 for clarity in order to replace a
reference to an undefined capitalized term with its intended meaning
and to remove unnecessary limitations on the types of entities and
legal requirements to which the term RBC Ratio applies.
For a Limited Member that is a non-U.S. entity not described in the
section of Addendum B that applies to such type of Limited Member, such
entity would be required to satisfy such minimum standards of financial
responsibility as determined in accordance with such section of
Addendum B.
Other Proposed Changes to Addendum B
Introduction and General Changes
NSCC proposes to make it clear throughout Addendum B that following
an applicant's admission to membership it is required to continue
meeting the qualifications, financial responsibility, operational
capability and business history requirements as applicable to its
membership type.\29\ Specifically, NSCC proposes to include references
throughout Addendum B clarifying that such requirements apply to both
applicants and members. NSCC also proposes to revise a sentence in the
introduction and Sections 1.B, 2.B, 3.B and 4.B of Addendum B to
correct language limited to applicant financial responsibility
requirements.
---------------------------------------------------------------------------
\29\ See Rule 2B (Ongoing Membership Requirements and
Monitoring), Section 1 (Requirements), supra note 3.
---------------------------------------------------------------------------
NSCC also proposes to add the word ``requirements'' in one place in
the introduction to improve readability.
NSCC proposes to clarify, without substantive effect, the existing
language in Sections 2.B and 3.B of Addendum B that if a member is not
of a type otherwise addressed in such section, it will be required to
satisfy such minimum standards of financial responsibility as
determined by NSCC. Any such assigned minimum financial requirements
would be promptly communicated to, and discussed with, the member.
NSCC also proposes to add a sentence to the end of Sections 5.B and
6.B of Addendum B that any assigned minimum standards of financial
responsibility for Municipal Comparison Only Members and Data Services
Only Members, respectively, would be promptly communicated to, and
discussed with, such members.
At the end of Sections 1.B, 2.B and 3.B of Addendum B, NSCC
proposes to make explicit that, notwithstanding anything to the
contrary in such section, an applicant or member must maintain
compliance with its home country regulator's minimum financial
requirements at all times.
Section 1
NSCC is proposing to revise the headings in Section 1.B referring
to a Member's type of entity to read ``U.S. Broker-Dealers,'' ``U.S.
Banks and Trust Companies,'' ``Non-U.S. Broker-Dealers and Banks,''
``Securities Exchanges,'' ``Index Receipt Agents'' and ``Others,'' in
conformity with the above-described changes to Member financial
responsibility requirements.
Section 2
NSCC proposes to clarify and simplify the language describing the
capital requirement for a Mutual Fund/Insurance Services Member that is
a Registered Broker-Dealer or an Insurance Company, without substantive
effect.
NSCC proposes to revise the heading ``Banks and trust companies''
in Section 2.B to read ``U.S. Banks and Trust Companies'' in conformity
with the same change made in Section 1.B.
Section 3
NSCC proposes to clarify and simplify the language describing the
capital requirement for a Fund Member that is a Registered Broker-
Dealer, investment company, investment adviser or
[[Page 74193]]
Insurance Company, without substantive effect.
NSCC proposes to revise the heading ``Banks or trust companies'' in
Section 3.B to read ``U.S. Banks and Trust Companies'' in conformity
with the same changes made in Sections 1.B and 2.B.
Section 4
NSCC proposes to clarify and simplify the language describing the
capital requirement for an Insurance Carrier/Retirement Services
Member, without substantive effect.
Sections 5 through 12
As noted above, NSCC proposes to make it clear in Sections 5
through 12 of Addendum B that following an applicant's admission to
membership it is required to continue meeting the qualifications,
financial responsibility, operational capability and business history
requirements as applicable to its membership type.
B. Changes to NSCC's Watch List and Enhanced Surveillance List
NSCC proposes to redefine the Watch List and eliminate the separate
enhanced surveillance list and instead implement a new Watch List that
consists of a relatively smaller group of members that pose heightened
risk to NSCC and its members.
NSCC believes that the current system of having both a Watch List
and an enhanced surveillance list (which include some of the same
members) has confused various NSCC stakeholders, while the proposed
approach, as NSCC understands from its experience, would be more
consistent with industry practices and understanding of a ``Watch
List.''
The new Watch List would include Members with a CRRM rating of 6 or
7, as well as members that are deemed by NSCC to pose a heightened risk
to it and its members. The separate enhanced surveillance list would be
merged into the new Watch List and references to the separate enhanced
surveillance list would be deleted from the Rules.
In sum, the new Watch List would consist of members on the existing
enhanced surveillance list, Members with a CRRM rating of 6 or 7, and
any other members that are deemed by NSCC to pose a heightened risk to
it and its members.
The proposed change will mean that Members with a CRRM rating of 5
would no longer automatically be included on the Watch List. Members
with a CRRM rating of 5 represent the largest single CRRM rating
category, but NSCC does not believe all such Members present heightened
credit concerns.\30\ Nevertheless, NSCC would continue to have the
authority to place a Member on the new Watch List if it is deemed to
pose a heightened risk to NSCC and its Members and/or to downgrade the
CRRM rating of a Member.
---------------------------------------------------------------------------
\30\ The majority of Members with a CRRM rating of 5 are either
rated ``investment grade'' by external rating agencies or, in the
absence of external ratings, NSCC believes are equivalent to
investment grade, as many of these Members are primary dealers and
large foreign banks. A firm with a rating of ``investment grade'' is
understood to be better able to make its payment obligations
compared to a firm with a lesser rating, such as a rating of
``speculative.'' As such, among the total population, firms with
investment grade ratings are generally considered good credit risk
along a credit risk scale.
---------------------------------------------------------------------------
NSCC also proposes to clarify in Section 4(f) of Rule 2B that
members on the Watch List are reported to NSCC's management committees
and regularly reviewed by NSCC's senior management.
C. Certain Other Clarification Changes
In connection with the above-described changes to the Rules to
enhance NSCC's capital requirements for members and redefine the Watch
List and eliminate the enhanced surveillance list, NSCC proposes to
make certain other clarification changes in order to improve the
accessibility and transparency of the Rules, as follows:
NSCC proposes to revise Section 4(g) of Rule 2B to clarify the
relationship between NSCC and a parent bank holding company of a Member
that has guaranteed the obligations of the Member in accordance with
Addendum B, and to delete the unnecessary word ``affiliated'' when
referring to a material banking subsidiary of such parent bank holding
company.
NSCC proposes to clarify Rule 7, Section 4 \31\ to state that a
Member desiring to become an Index Receipt Agent shall first submit an
application to be reviewed by NSCC.
---------------------------------------------------------------------------
\31\ Rule 7 (Comparison and Trade Recording Operation), Section
4 (Index Receipt Agent), supra note 3.
---------------------------------------------------------------------------
NSCC also proposes to revise Section 1 of Rule 46 \32\ to clarify
the relationship between NSCC and a parent bank holding company of a
Member that has guaranteed the obligations of the Member in accordance
with Addendum B.
---------------------------------------------------------------------------
\32\ Rule 46 (Restrictions on Access to Services), Section 1,
supra note 3.
---------------------------------------------------------------------------
Member Outreach
Beginning in June 2019, NSCC conducted outreach to various Members
in order to provide them with advance notice of the proposed
enhancements to NSCC's capital requirements, the proposed redefinition
of the Watch List, and the proposed elimination of the enhanced
surveillance list. NSCC has been in communication with all Members
whose current capital levels are either below the proposed minimum
capital requirements or only slightly above the proposed requirements.
Any such Members have been informed of the new requirement that would
be in effect 12 months after approval of the proposed changes.
Following approval, NSCC again would contact any Members that are
either below or only slightly above the new minimum requirement to
remind them of their new capital requirement and the 12-month grace
period in which to come into compliance with the new requirement.
NSCC has received some written feedback from Members on the
proposed enhancements to NSCC's capital requirements for certain
Members, which are discussed in Item 4 below. The Commission will be
notified of any additional written comments received.
NSCC has not conducted outreach to members providing them with
advance notice of the proposed clarification changes to the Rules.
Implementation Timeframe
Pending Commission approval, NSCC would implement the proposed
changes to enhance its capital requirements for members one year after
the Commission's approval of this proposed rule change. During that
one-year period, NSCC would periodically provide Members with estimates
of their capital requirements, based on the approved changes, with more
outreach expected for Members impacted by the changes. NSCC would
inform a Member that is a U.S. broker-dealer (``BD Member'') if it
exceeded its then-current VaR Tier, which may lead to the BD Member
moving into a higher VaR Tier and, thus, being subject to a higher
capital requirement. Same as the proposed, ongoing practice post-
implementation, NSCC would provide the Member with a grace period of 60
days from the date of implementation to comply with the higher
requirement.
The deferred implementation for all members and the estimated
capital requirements for Members are designed to give members the
opportunity to assess the impact of their enhanced capital requirements
on their business profile and make any changes that they deem necessary
to lower their capital requirement. All members would be advised of the
implementation date of these proposed changes through issuance of an
NSCC Important Notice,
[[Page 74194]]
posted to its website. NSCC also would inform firms applying for
participation of the new capital requirements. Members and applicants
should note that the methodology/processes used to set their initial
capital requirements would be the same at implementation of the
proposed changes as it would be on an ongoing basis.
NSCC expects to implement the proposed changes to redefine the
Watch List and eliminate the enhanced surveillance list, as well as the
clarification changes to the Rules, within 90 days of Commission
approval. All members would be advised of such implementation through
issuance of an NSCC Important Notice, posted to its website.
2. Statutory Basis
NSCC believes that the proposed rule change is consistent with the
requirements of the Exchange Act, and the rules and regulations
thereunder applicable to a registered clearing agency. Specifically,
NSCC believes that the proposed rule change is consistent with Section
17A(b)(3)(F) of the Exchange Act \33\ and Rules 17Ad-22(b)(7),
(e)(4)(i), (e)(18) and (e)(19),\34\ each as promulgated under the
Exchange Act, for the reasons described below.
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78q-1(b)(3)(F).
\34\ 17 CFR 240.17Ad-22(b)(7), (e)(4)(i), (e)(18) and (e)(19).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Exchange Act requires, in part, that
the Rules be designed to promote the prompt and accurate clearance and
settlement of securities transactions.\35\ As described above, the
proposed rule changes would (1) enhance NSCC's capital requirements for
members, (2) redefine the Watch List and eliminate the enhanced
surveillance list, and (3) make clarification changes to the Rules.
NSCC believes that enhancing its capital requirements for members,
including continuing to recognize and account for varying Members and
memberships, would help ensure that members maintain sufficient capital
to absorb losses arising out of their clearance and settlement
activities at NSCC and otherwise, and would help NSCC more effectively
manage and mitigate the credit risks posed by its members, which would
in turn help NSCC be better able to withstand such credit risks and
continue to meet its clearance and settlement obligations to its
members. Similarly, NSCC believes that redefining the Watch List and
eliminating the enhanced surveillance list, as described above, would
help NSCC better allocate its resources for monitoring the credit risks
posed by its members, which would in turn help NSCC more effectively
manage and mitigate such credit risks so that NSCC is better able to
withstand such credit risks and continue to meet its clearance and
settlement obligations to its members. NSCC believes that making
clarification changes to the Rules would help ensure that the Rules
remain clear and accurate, which would in turn help facilitate members'
understanding of the Rules and provide members with increased
predictability and certainty regarding their rights and obligations
with respect to NSCC's clearance and settlement activities. Therefore,
NSCC believes that these proposed rule changes would promote the prompt
and accurate clearance and settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of the Exchange Act.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Rule 17Ad-22(b)(7) under the Exchange Act requires, in part, that
NSCC establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide a person that maintains net
capital equal to or greater than $50 million with the ability to obtain
membership at NSCC, provided that NSCC may provide for a higher net
capital requirement as a condition for membership if it demonstrates to
the Commission that such a requirement is necessary to mitigate risks
that could not otherwise be effectively managed by other measures.\36\
As described above, NSCC proposes to enhance its capital requirements
for members. NSCC believes that these proposed rule changes, while
referencing capital measures other than net capital, would help ensure
that members maintain sufficient capital to absorb losses arising out
of their clearance and settlement activities at NSCC and otherwise, and
would help NSCC more effectively manage and mitigate the credit risks
posed by its members while providing fair and open access to membership
at NSCC. NSCC believes that the proposed changes would utilize capital
measures that are appropriately matched to the regulatory and other
capital requirements applicable to the types of entities that apply for
and have membership at NSCC, which would in turn help facilitate
members' understanding of and compliance with NSCC's enhanced capital
requirements. NSCC also believes that these other capital measures are
more appropriate measures of the capital available to members to absorb
losses arising out of their clearance and settlement activities at NSCC
than simply net capital because a member's net capital alone may not be
available to absorb losses arising out of such activities. Thus,
relying on measures beyond net capital would help members more
effectively understand and manage the resources available to mitigate
the credit risks they pose to NSCC. In the case of those proposed rule
changes that may require members such as U.S. banks and trust
companies, non-U.S. banks, national securities exchanges, non-U.S.
securities exchanges or multilateral trading facilities, or Index
Receipt Agents to maintain capital greater than $50 million, NSCC
believes that enhanced capital requirements for such members are
necessary and appropriate in light of the regulatory and other capital
requirements that such members face and the credit risks they pose to
NSCC, which would help NSCC more effectively manage and mitigate such
credit risks. Therefore, NSCC believes that the enhanced capital
requirements for members are necessary to mitigate risks that could not
otherwise be effectively managed by other measures, consistent with
Rule 17Ad-22(b)(7) under the Exchange Act.
---------------------------------------------------------------------------
\36\ 17 CFR 240.17Ad-22(b)(7).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(i) under the Exchange Act 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.\37\ As described above, NSCC proposes to enhance its
capital requirements for members, redefine the Watch List, and
eliminate the enhanced surveillance list. NSCC believes that enhancing
its capital requirements for members would help ensure that members
maintain sufficient capital to absorb losses arising out of their
clearance and settlement activities at NSCC and otherwise, which would
in turn help NSCC more effectively manage and mitigate its credit
exposures to its members and thereby help enhance the ability of NSCC's
financial resources to cover fully NSCC's credit exposures to members
with a high degree of confidence. NSCC believes that redefining the
Watch List and eliminating the enhanced surveillance list would help
NSCC better allocate its resources for monitoring its credit exposures
to
[[Page 74195]]
members. By helping to better allocate resources, the proposal would in
turn help NSCC more effectively manage and mitigate its credit
exposures to its members, thereby helping to enhance the ability of
NSCC's financial resources to cover fully NSCC's credit exposures to
members with a high degree of confidence. Therefore, NSCC believes that
its proposal to enhance its capital requirements for members, redefine
the Watch List, and eliminate the enhanced surveillance list is
consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act.
---------------------------------------------------------------------------
\37\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(18) under the Exchange Act requires that NSCC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to establish objective, risk-based, and
publicly disclosed criteria for participation, which permit fair and
open access by direct and, where relevant, indirect participants and
other financial market utilities, require participants to have
sufficient financial resources and robust operational capacity to meet
obligations arising from participation in the clearing agency, and
monitor compliance with such participation requirements on an ongoing
basis.\38\ As described above, NSCC proposes to enhance its capital
requirements for members, redefine the Watch List, and eliminate the
enhanced surveillance list. NSCC's proposed capital requirements would
utilize objective measurements of member capital that would be fully
disclosed in the Rules. The proposed capital requirements also would be
risk-based and allow for fair and open access in that they would be
based on the credit risks imposed by the member, such as its membership
type, type of entity (including whether it is a non-U.S. entity),
whether it self-clears or clears for others, and its VaR Tier.
Accordingly, NSCC's proposed capital requirements would establish
objective, risk-based and publicly disclosed criteria for membership,
which would permit fair and open access by members. The proposed
capital requirements also would ensure that members maintain sufficient
capital to absorb losses arising out of their clearance and settlement
activities at NSCC and otherwise, which would help ensure that they
have sufficient financial resources to meet the obligations arising
from their membership at NSCC. NSCC's proposed redefinition of the
Watch List and the elimination of the enhanced surveillance list would
help NSCC better allocate its resources for monitoring the credit risks
posed by its members, including their ongoing compliance with NSCC's
proposed enhancements to its capital requirements. Therefore, NSCC
believes that its proposal to enhance its capital requirements for
members, redefine the Watch List, and eliminate the enhanced
surveillance list is consistent with Rule 17Ad-22(e)(18) under the
Exchange Act.
---------------------------------------------------------------------------
\38\ 17 CFR 240.17Ad-22(e)(18).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(19) under the Exchange Act requires that NSCC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify, monitor, and manage the
material risks to NSCC arising from arrangements in which firms that
are indirect participants in NSCC rely on the services provided by
direct participants to access NSCC's payment, clearing, or settlement
facilities.\39\ As described above, NSCC proposes to enhance its
capital requirements for members, including U.S. broker-dealer Members
that clear transactions for others. More specifically, the proposal
would subject U.S. broker-dealer Members that clear transactions for
others to heightened capital requirements versus U.S. broker-dealer
Members that clear transactions only for themselves. NSCC believes that
a broker-dealer Member that clears transactions for others (i.e., a
direct participant) can present additional risk because it could clear
for a large number of correspondent clients (i.e., indirect
participants), which would expand the scope and volume of risk
presented to NSCC and the direct participant itself when the indirect
participant's trades are submitted to NSCC for settlement via the
direct participant. The indirect nature of this risk exposure also
increases risk to NSCC as there is generally less transparency into the
indirect activity versus if the direct participant generated all of the
activity itself. By requiring a U.S. broker-dealer Member that clears
transactions for others to be subject to heightened capital
requirements versus a U.S. broker-dealer Member that clears
transactions only for itself, the proposal would help ensure that NSCC
is able to better manage the material risks to NSCC arising from
arrangements in which a Member clears transactions for others through
NSCC. Therefore, NSCC believes that its proposal to enhance its capital
requirements for members is consistent with Rule 17Ad-22(e)(19) under
the Exchange Act.
---------------------------------------------------------------------------
\39\ 17 CFR 240.17Ad-22(e)(19).
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
NSCC believes that the proposed rule change to enhance its capital
requirements for BD Members could have an impact upon competition
because some BD Members could be required to maintain capital in excess
of their current capital levels. That impact could impose a burden on
competition on some of those BD Members because they may bear higher
costs to raise capital in order to comply with the enhanced capital
requirements.
Consistent with that belief, NSCC received three written comments
from three BD Members arguing that the proposed enhancements to the
capital requirements for BD Members (``Proposed BD Requirements'')
could negatively affect smaller BD Members.\40\
---------------------------------------------------------------------------
\40\ Letter from Bonnie K. Wachtel, Chief Executive Officer, and
Wendie L. Wachtel, Chief Operating Officer, Wachtel & Co., Inc.
(September 16, 2019) (``Wachtel Letter''); Email from Samuel F. Lek,
Lek Securities Corporation (September 17, 2019) (``Lek Email'');
Email from William L. Walker, Chief Operating Officer, Wilson-Davis
& Co., Inc. (October 31, 2019) (``Wilson-Davis Email''). Copies of
the comments received have been included as Exhibit 2 to the filing,
pursuant to the requirements of Form 19b-4 and the General
Instructions for Form 19b-4, available at https://www.sec.gov/about/forms/form19b-4.pdf.
---------------------------------------------------------------------------
Two of the commenters argue that the Proposed BD Requirements will
unfairly discriminate against small BD Members in favor of the largest
BD Members,\41\ with one of the commenters further arguing that mid-
sized BD Member firms also will be discriminated against.\42\
Similarly, a third commenter argues that, in addition to affecting
small BD Members, the Proposed BD Requirements will drastically affect
other industry participants and small companies that do business with
and that rely on such BD Members to raise capital.\43\
---------------------------------------------------------------------------
\41\ Wachtel Letter, supra note 40; Lek Email, supra note 40.
\42\ Wachtel Letter, supra note 40.
\43\ Wilson-Davis Email, supra note 40.
---------------------------------------------------------------------------
Two of the commenters argue that the Proposed BD Requirements will
create barriers to entry.\44\ Moreover, one of those commenters argues
that the barriers to entry will cause further industry
consolidation,\45\ while the other argues that the barriers are
anticompetitive and, when considered with the argued effect on smaller
broker-dealers, at odds with the goals of the Exchange Act.\46\
---------------------------------------------------------------------------
\44\ Wachtel Letter, supra note 40; Lek Email, supra note 40.
\45\ Wachtel Letter, supra note 40.
\46\ Lek Email, supra note 40.
---------------------------------------------------------------------------
Regarding the proposed VaR Tiers for BD Members, one commenter
suggests that the proposed tiering scale should
[[Page 74196]]
not end at $5 million Excess Net Capital for a self-clearing BD Member
with a daily volatility component of more than $500,000 for its Net
Unsettled Positions; rather, the scale should continue
indefinitely.\47\ Meanwhile, another commenter suggests that the
proposed $10 million in Excess Net Capital for a BD Member that clears
for others is not necessary to address the risk presented by such BD
Member because its required margin will be greater than $500,000 for
its Net Unsettled Positions.\48\ That same commenter also argues that
the VaR Tiers are extremely low, which is an effort to target smaller
BD Members and ignores the greater risk presented by larger BD
Members.\49\
---------------------------------------------------------------------------
\47\ Wachtel Letter, supra note 40.
\48\ Lek Email, supra note 40.
\49\ Id.
---------------------------------------------------------------------------
NSCC values each of its BD Members and does not wish to create a
competitive burden on any of them or any of their clients. The Proposed
BD Requirements were not designed to discriminate against any BD
Members (small, medium, or large), create a barrier to NSCC membership,
or force any BD Member to clear through another financial institution
or exit the business completely. Rather, as discussed above and below,
the Proposed BD Requirements were designed and tailored to help address
the specific risks presented by BD Members within the current industry
environment.
Nevertheless, NSCC fully appreciates that the Proposed BD
Requirements may result in a burden on competition for some BD Members
that would need to raise or keep more capital on hand in order to
comply with the new requirements, although NSCC does not believe that
any such burden on competition would be significant. In any event, to
the extent the Proposed BD Requirements would be a burden on
competition, NSCC believes that the burden would be necessary and
appropriate in furtherance of the purposes of the Exchange Act, as
permitted by Section 17A(b)(3)(I) thereunder.\50\
---------------------------------------------------------------------------
\50\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
NSCC believes the Proposed BD Requirements are necessary because,
in short, the current requirements are outdated. As noted above, the
current minimum capital requirements for members have not been adjusted
in over 20 years. Meanwhile, there have been significant changes to the
industry (e.g., market structure, technology, and regulatory
environment) within which NSCC and all its members operate, exposing
NSCC and its members to more and different risks than 20 years ago.
There also have been significant membership changes over the past
20 years. Numerous mergers, acquisitions, and new market entrants have
created a diverse NSCC membership that has expanded the credit-risk
profiles that NSCC must manage. For example, NSCC has seen an increase
in less capitalized market participants focusing on niche parts of the
market with innovative new business models.
Additionally, as mentioned above, trading activity and market
volatility, each of which present risk to NSCC, ballooned over the
years.\51\ While NSCC does collect margin from its members to help
address these types of risk, it is imperative that NSCC ensure that its
members have sufficient capital to sustain unexpected and/or sustained
increases in margin requirements. Although the above factors do not
directly require NSCC to increase capital requirements for its
membership (e.g., there is no specific regulation or formula that
prescribes a set capital requirement for members of a CCP such as
NSCC), the overarching and collective focus of the regulatory changes
noted above, in light of the many heightened risks to the financial
industry, has been to increase the stability of the financial markets
in order to reduce systemic risk. As a self-regulatory organization, a
SIFMU, and being exposed to the new and increased risks over the past
20 years, NSCC has a responsibility to do the same. Enhancing its
capital requirements helps meet that responsibility and improve NSCC's
credit risk management.
---------------------------------------------------------------------------
\51\ See supra note 9.
---------------------------------------------------------------------------
Moreover, stress testing has also highlighted that BD Members with
smaller capital bases are exposed to the risk of losses exceeding their
current Excess Net Capital requirements under a stressed scenario.\52\
There also has been heightened focus on legal, operational, and cyber
risk, given the devastating impact that they could have today. In the
case of legal risk, members can and do face legal exposures that exceed
their required Excess Net Capital.\53\ In the case of operational risk,
unexpected operational events could expose NSCC to an amount in excess
of a firm's required Excess Net Capital. In the case of cyber risk,
cyber-attacks have the potential to inflict significant losses that
could exceed the current minimum capital requirements.
---------------------------------------------------------------------------
\52\ See Stress Testing Analysis, included as a Confidential
Exhibit 3 to the filing.
\53\ See Commission v. Alpine Sec. Corp., 982 F.3d 68 (2d Cir.
2020) (upholding $12 million civil penalty against clearing broker-
dealer).
---------------------------------------------------------------------------
Appreciation of these greater risks have manifested into new
regulatory requirements for certain industry participants,\54\
including NSCC, requiring NSCC to maintain greater capital amounts and
deploy enhanced risk management tools.\55\ As to which BD Members are
arguably ``riskier'' in today's environment, NSCC's internal stress
testing analysis \56\ highlights that BD Members with smaller capital
bases are more likely to experience a loss that would exceed their
current Excess Net Capital requirements,\57\ countering the commenter's
argument that larger BD Members are riskier.\58\
---------------------------------------------------------------------------
\54\ See, e.g., Basel Committee on Banking Supervision, Basel
III Standards, supra note 5; Financial Stability Board, 2020 list of
G-SIBs, supra note 4; U.S. Department of the Treasury, Designations,
Financial Market Utility Designations, supra note 7.
\55\ See, e.g., CCAS, supra note 10.
\56\ See supra note 52.
\57\ See Letter from Daniel McElligott, Executive Director,
DTCC, to Regional Firms Council (October 24, 2019), included as a
Confidential Exhibit 3 to the filing.
\58\ Lek Email, supra note 40.
---------------------------------------------------------------------------
Therefore, NSCC believes the Proposed BD Requirements are necessary
in furtherance of the purposes of the Exchange Act, as permitted by
Section 17A(b)(3)(I) thereunder,\59\ as the proposed changes would help
ensure that all BD Members maintain an amount of capital that is more
commensurate with the current industry environment and the risks it
presents.
---------------------------------------------------------------------------
\59\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
NSCC believes the Proposed BD Requirements are appropriate for a
variety of reasons. First, the new requirements are tailored to better
reflect the volatility risk presented by BD Members. Currently, the
minimum capital requirement for BD Members is simply an amount of
Excess Net Capital based on membership type (i.e., a $500,000 Excess
Net Capital requirement for those that self-clear and a $1 million
Excess Net Capital requirement for those that clear for others),
without considering any other risks. As described above, NSCC would not
only continue to consider membership type, but it also proposes to use
the daily volatility component of the BD Member's own Net Unsettled
Positions (i.e., a measurement of the risk that the BD Member's Net
Unsettled Positions present to NSCC) in order to more strategically
group BD Members into tiers, with each tier being assigned a specific
minimum capital requirement. BD Members in a greater tier would need to
maintain higher capital requirements than those in a
[[Page 74197]]
lesser tier, commensurate with the volatility risks that the BD Members
in each tier present to NSCC. As described above, BD Members could move
between tiers based on sustained changes to their daily volatility
component, thus allowing BD Members to have control over the tier in
which they are placed and, in turn, the capital they need to maintain.
NSCC would track VaR breaches for BD Members on a daily basis. On the
first instance of breaching a VaR Tier, NSCC would send a letter to the
Member informing it of the VaR breach and reminding it that four
subsequent breaches within the next 12 months would result in a higher
capital requirement. On the fifth instance of breaching a VaR Tier,
NSCC would again send a letter to a Member informing it of the fifth
breach and that the new, higher capital requirement would take effect
in 60 days and would remain in effect for at least the next 12 months.
In the case of new applicants for NSCC membership, as described
above, if the Proposed BD Requirements had been in effect for the past
two years, but newly admitted BD Members were not automatically placed
in at least the middle VaR Tier, only one BD Member would have belonged
in the lowest VaR Tier at admittance, and that firm would have moved to
the middle VaR Tier in its second month of membership.\60\ As a result,
requiring new BD Members to be placed in at least the middle VaR Tier
at admittance would not pose an unnecessary barrier to entry that such
BD Members would not have had to meet eventually anyway.
---------------------------------------------------------------------------
\60\ See supra note 21.
---------------------------------------------------------------------------
In response to specific comments that the VaR Tiers begin at too
low of a level and that they should continue indefinitely,\61\ NSCC
designed the tier levels to not only consider the volatility risk that
the BD Members present to NSCC but also to make the tiers easy to
understand and manage. NSCC believes that adding more tiers at the
upper levels, or splitting existing tiers, would complicate the
structure unnecessarily and make the logistics in tracking each BD
Member as they moved between tiers unwieldy, not only for NSCC but also
for the BD Member itself. NSCC believes the proposed tier structure
strikes the right balance between benefit and functionality.
---------------------------------------------------------------------------
\61\ Lek Email, supra note 40; Wachtel Letter, supra note 40.
---------------------------------------------------------------------------
Second, while NSCC believes members must understand the risks that
their capitalization presents to NSCC and be prepared to monitor their
capitalization and alter their behavior in order to minimize that risk,
as necessary, NSCC also appreciates and understands that members must
be able to plan for their capital requirements. That is why NSCC would
not implement the proposed changes to any of the enhanced capital
requirements until one year after the Commission's approval of the
proposal. During that one-year period, NSCC would periodically provide
Members with estimates of their capital requirements. The deferred
implementation for all members and the estimated capital requirements
for Members are designed to give members the opportunity to assess the
impact of their enhanced capital requirements on their business profile
and make any changes that they deem necessary.
Third, in response to the specific comment that the Proposed BD
Requirements are at odds with the goals of the Exchange Act,\62\ NSCC
believes the proposed changes are, in fact, consistent with and would
improve upon NSCC's compliance with applicable regulatory requirements,
as discussed above, including Section 17A(b)(3)(F) of the Exchange Act
and Rules 17Ad-22(b)(7), (e)(4)(i), (e)(18) and (e)(19) promulgated
thereunder.
---------------------------------------------------------------------------
\62\ Lek Email, supra note 40.
---------------------------------------------------------------------------
Finally, NSCC believes that the Proposed BD Requirements would
better align NSCC's capital requirements for members with those of
other CCPs, both in the U.S. and abroad.\63\
---------------------------------------------------------------------------
\63\ See supra note 10.
---------------------------------------------------------------------------
Therefore, NSCC believes the Proposed BD Requirements are
appropriate in furtherance of the purposes of the Exchange Act, as
permitted by Section 17A(b)(3)(I) thereunder,\64\ as the proposed
changes are purposely tailored and structured, provide for a one-year
implementation period, are consistent with applicable provisions of the
Exchange Act and rules thereunder, and better align with NSCC peers.
---------------------------------------------------------------------------
\64\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
NSCC does not believe the proposed changes to enhance the capital
requirements for its other members would impact competition because
such members already meet the proposed requirements. Additionally, NSCC
does not believe that the proposed changes to (i) redefine the Watch
List and eliminate the enhanced surveillance list and (ii) make
clarification changes to the Rules would impact competition. Redefining
the Watch List and eliminating the enhanced surveillance list are
simply intended to streamline and clarify these monitoring practices.
If anything, by no longer automatically including Members with a CRRM
rating of 5 on the Watch List, as proposed, the change could promote
competition for such Members, as such Members would no longer
automatically be subject to increased scrutiny by NSCC, including the
possibility of increased financial and reporting obligations.
Meanwhile, making clarification changes to the Rules to ensure that
they remain accessible and transparent would help facilitate members'
understanding of the Rules and provide members with increased
predictability and certainty regarding their rights and obligations
with respect to NSCC's clearance and settlement activities.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
All written comments received by NSCC have been summarized and
responded to in Item 4 (Self-Regulatory Organization's Statement on
Burden on Competition) above. If any additional written comments are
received, NSCC will amend this filing to publicly file such comments as
an Exhibit 2 to this filing, as required by Form 19b-4 and the General
Instructions thereto.
Persons submitting written comments are cautioned that, according
to Section IV (Solicitation of Comments) of the Exhibit 1A in the
General Instructions to Form 19b-4, the Commission does not edit
personal identifying information from comment submissions. Commenters
should submit only information that they wish to make available
publicly, including their name, email address, and any other
identifying information.
All prospective commenters should follow the Commission's
instructions on How to Submit Comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
Commission's Division of Trading and Markets at
[email protected] or 202-551-5777.
NSCC reserves the right to not respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which
[[Page 74198]]
the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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 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-2021-016 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-2021-016. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of NSCC and on
DTCC's website (https://dtcc.com/legal/sec-rule-filings.aspx). All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
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-2021-016 and should be
submitted on or before January 19, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\65\
---------------------------------------------------------------------------
\65\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-28250 Filed 12-28-21; 8:45 am]
BILLING CODE 8011-01-P
