Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Partial Amendment No. 2 and Amendment No. 3 and of Designation of Longer Period for Commission Action on Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To Revise the Excess Capital Premium Charge Order, 75105-75113 [2022-26535]
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Federal Register / Vol. 87, No. 234 / Wednesday, December 7, 2022 / Notices
rule change may become operative upon
filing. The Exchange states that this
proposed rule change could
immediately benefit market participants
by avoiding confusion, as the BX
Options 4 rules are incorporated to ISE’s
Options 4 rules. The Exchange also
states that these rules permit the listing
and trading of options series with
Tuesday and Thursday expirations for
options on SPY and QQQ listed
pursuant to the Short Term Option
Series Program. For these reasons, and
because the proposed rule change does
not raise any novel regulatory issues,
the Commission believes that waiving
the 30-day operative delay is consistent
with the protection of investors and the
public interest. Therefore, the
Commission hereby waives the
operative delay and designates the
proposal operative upon filing.27
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–BX–2022–024 and should
be submitted on or before December 28,
2022.
IV. Solicitation of Comments
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.28
Sherry R. Haywood,
Assistant Secretary.
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BX–2022–024 on the subject line.
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Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BX–2022–024. 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
27 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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[FR Doc. 2022–26534 Filed 12–6–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96426; File No. SR–NSCC–
2022–005]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of Partial
Amendment No. 2 and Amendment No.
3 and of Designation of Longer Period
for Commission Action on
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change To Revise the Excess
Capital Premium Charge Order
December 1, 2022.
On May 20, 2022, National Securities
Clearing Corporation (‘‘NSCC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) proposed
rule change SR–NSCC–2022–005
28 17
PO 00000
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder.2
The proposed rule change was
published for comment in the Federal
Register on June 8, 2022,3 and the
Commission has received comments
regarding the changes proposed in the
proposed rule change.4
On July 11, 2022, pursuant to Section
19(b)(2) of the Act,5 the Commission
designated a longer period within which
to approve, disapprove, or institute
proceedings to determine whether to
approve or disapprove the Proposed
Rule Change.6 On September 1, 2022,
the Commission instituted proceedings,
pursuant to Section 19(b)(2)(B) of the
Act,7 to determine whether to approve
or disapprove the Proposed Rule
Change.8
On July 6, 2022, NSCC filed a partial
amendment (‘‘Amendment No. 2’’) to
modify the proposed rule change.9 On
November 28, 2022, NSCC filed another
amendment (‘‘Amendment No. 3’’) to
modify the proposed rule change as
described in Items I, II and III below,
which Items have been prepared
primarily by the clearing agency.10
1 15
U.S.C. 78s(b)(1).
CFR 240.19b-4.
3 Securities Exchange Act Release No. 95026
(June 2, 2022), 87 FR 34913 (June 8, 2022) (File No.
SR–NSCC–2022–005). The Notice referred to an
incorrect filing date of May 30, 2022; however, the
proposal was filed on May 20, 2022, as indicated
here. Moreover, the Notice reflected the filing of
Amendment No. 1, which made a correction to
Exhibit 5 of the filing, specifically, to insert an
additional cross-reference into a proposed
definition that had been omitted.
4 Comments are available at https://www.sec.gov/
comments/sr-nscc-2022-005/srnscc2022005.htm.
5 15 U.S.C. 78s(b)(2).
6 Securities Exchange Act Release No. 95245 (July
11, 2022), 87 FR 42523 (July 15, 2022) (SR–NSCC–
2022–005).
7 15 U.S.C. 78s(b)(2)(B).
8 Securities Exchange Act Release No. 95656
(Sept. 1, 2022), 87 FR 55058 (Sept. 8, 2022) (File
No. SR–NSCC–2022–005).
9 Amendment No. 2 partially amended the
proposed rule change to update the description of
the impact of the proposal. The contents of that
Amendment are reflected in Section II(A)(1)(vii)
below. In Amendment No. 2, NSCC also provided
a revised version of the confidential impact study
that it included as Exhibit 3a to the proposed rule
change.
10 Amendment No. 3 amends and replaces the
proposed rule change in its entirety. Specifically, it
would clarify the particular circumstances in which
NSCC would retain the ability to waive the ECP
charge, rather than remove NSCC’s discretion to
waive or reduce the charge as was initially
proposed in the proposed rule change. As described
in greater detail below in Section II.(iv), this
Amendment describes why NSCC believes it is
appropriate for NSCC to retain discretion to waive
an ECP charge in certain defined circumstances,
defines the circumstances in which NSCC may
waive the ECP charge, and discloses both the
information that NSCC would review in deciding
whether to waive the ECP charge as well as the
2 17
CFR 200.30–3(a)(12).
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Federal Register / Vol. 87, No. 234 / Wednesday, December 7, 2022 / Notices
The Commission is publishing this
notice to solicit comments on
Amendment Nos. 2 and 3 from
interested persons and to designate a
longer period for Commission action
pursuant to Section 19(b)(2)(B) of the
Act 11 to determine whether to approve
or disapprove the proposed rule change,
as modified by Amendment Nos. 2 and
3 (hereinafter, ‘‘proposed rule change’’).
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change consists of
modifications to Procedure XV (Clearing
Fund Formula and Other Matters) of
NSCC’s Rules & Procedures (‘‘Rules’’) 12
to revise the Excess Capital Premium
(‘‘ECP’’) charge by enhancing the
methodology for calculating the charge
to (1) compare a Member’s applicable
capital amounts with the amount it
contributes to the Clearing Fund that
represents its volatility charge, (2) for
Members that are broker-dealers, use net
capital amounts rather than excess net
capital amounts in the calculation of the
ECP charge; and for all other Members,
use equity capital in the calculation of
the ECP charge, and (3) establish a cap
of 2.0 for the Excess Capital Ratio (as
defined below) that is used in
calculating a Member’s ECP charge.
The proposed changes would also
improve the transparency of the Rules
regarding the ECP charge by (1)
clarifying the capital amounts that are
used in the calculation of the charge by
introducing new defined terms, (2)
clarifying the particular circumstances
in which NSCC retains the ability to
waive the charge, and (3) providing that
NSCC may calculate the charge based on
updated capital information, as
described in greater detail below.
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II. Clearing Agency’s Amended
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 III below. The
governance around the application of such waiver.
In order to implement these proposed changes,
NSCC would amend Section I(B)(2) of Procedure
XV of the Rules to include a new subsection (c) to
describe NSCC’s discretion to waive the ECP
charge.
11 15 U.S.C. 78s(b)(2)(B).
12 Capitalized terms not defined herein are
defined in the Rules, available at https://dtcc.com/
∼/media/Files/Downloads/legal/rules/nscc_
rules.pdf.
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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
Description of Amendment No. 3
This filing constitutes Amendment
No. 3 to proposed rule change SR–
NSCC–2022–005, which was filed with
the Commission on May 20, 2022, and
previously amended on June 1, 2022
and July 6, 2022. This Amendment
amends and replaces the Filing, as
previously amended, in its entirety.
NSCC submits this Amendment in order
to clarify the particular circumstances in
which NSCC would retain the ability to
waive the ECP charge, rather than
remove NSCC’s discretion to waive or
reduce the charge as was proposed in
the Filing.
In particular, and as described in
greater detail below, this Amendment
describes why NSCC believes it is
appropriate for NSCC to retain
discretion to waive an ECP charge in
certain defined circumstances, defines
the circumstances in which NSCC may
waive the ECP charge, and discloses
both the information that NSCC would
review in deciding whether to waive the
ECP charge as well as the governance
around the application of such waiver.
In order to implement these proposed
changes, NSCC would amend Section
I(B)(2) of Procedure XV of the Rules to
include a new subsection (c) to describe
NSCC’s discretion to waive the ECP
charge, as shown in Exhibits 4 and 5 to
this Amendment.
Proposed Rule Change
NSCC is proposing to modify the ECP
charge, which is a component of its
Clearing Fund that NSCC may impose
on a Member when a portion of that
Member’s Required Fund Deposit
(defined in the Rules as the ‘‘Calculated
Amount’’) exceeds its applicable capital
amounts by 1.0 (defined in the Rules as
the ‘‘Excess Capital Ratio’’), as described
in greater detail below.13 The proposed
changes would revise the ECP charge by
enhancing the methodology for
calculating the charge to (1) compare a
Member’s applicable capital amounts
with the amount it contributes to the
Clearing Fund that represents its
volatility charge, (2) for Members that
are broker-dealers, use net capital
amounts rather than excess net capital
amounts in the calculation of the ECP
13 See
PO 00000
Section I(B)(2) of Procedure XV, id.
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charge; and for all other Members, use
equity capital in the calculation of the
ECP charge, and (3) establish a cap of
2.0 for the Excess Capital Ratio that is
used in calculating a Member’s ECP
charge.
The proposed changes would also
improve the transparency of the Rules
regarding the ECP charge by (1)
clarifying the capital amounts that are
used in the calculation of the charge by
introducing new defined terms, (2)
clarifying the particular circumstances
in which NSCC retains the ability to
waive the charge, and (3) providing that
NSCC may calculate the charge based on
updated capital information, as
described in greater detail below.
(i) Overview of the Required Fund
Deposit and NSCC’s Clearing Fund
As part of its market risk management
strategy, NSCC manages its credit
exposure to Members by determining
the appropriate Required Fund Deposits
to the Clearing Fund and monitoring its
sufficiency, as provided for in the
Rules.14 The Required Fund Deposit
serves as each Member’s margin.
The objective of a Member’s Required
Fund Deposit is to mitigate potential
losses to NSCC associated with
liquidating a Member’s portfolio in the
event NSCC ceases to act for that
Member (hereinafter referred to as a
‘‘default’’).15 The aggregate of all
Members’ Required Fund Deposits
constitutes the Clearing Fund of NSCC.
NSCC would access its Clearing Fund
should a defaulting Member’s own
Required Fund Deposit be insufficient
to satisfy losses to NSCC caused by the
liquidation of that Member’s portfolio.
Pursuant to the Rules, each Member’s
Required Fund Deposit consists of a
number of applicable components, each
of which is calculated to address
specific risks faced by NSCC, as
identified within Procedure XV of the
Rules.16
While many components of the
Clearing Fund are designed to measure
risks presented by the net unsettled
positions a Member submits to NSCC to
be cleared and settled, some
components measure and mitigate other
risks that NSCC may face, such as credit
14 See Rule 4 and Procedure XV, supra note 12.
NSCC’s market risk management strategy is
designed to comply with Rule 17Ad–22(e)(4) under
the Act, where these risks are referred to as ‘‘credit
risks.’’ 17 CFR 240.17Ad–22(e)(4).
15 The Rules identify when NSCC may cease to
act for a Member and the types of actions NSCC
may take. For example, NSCC may suspend a firm’s
membership with NSCC or prohibit or limit a
Member’s access to NSCC’s services in the event
that Member defaults on a financial or other
obligation to NSCC. See Rule 46, supra note 12.
16 Supra note 12.
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risks. For example, a Member may be
required to make an additional deposit
to the Clearing Fund pursuant to
Section I(B)(1) of Procedure XV of the
Rules if it is placed on the Watch List,
which is defined in Rule 1 (Definitions
and Descriptions) of the Rules as a list
of Members who NSCC deems to pose
heightened risk to it and its other
Members based on consideration of
relevant factors.17
Similarly, the ECP charge is a
component of the Clearing Fund that is
designed to mitigate the heightened
default risk a Member could pose to
NSCC if it operates with lower capital
levels relative to its margin
requirements. Each Business Day, NSCC
determines if a Member may be subject
to the ECP charge by first determining
its Calculated Amount. The Calculated
Amount is a portion of a Member’s
Required Fund Deposit designed to
represent its margin requirements to
NSCC. A Member’s Calculated Amount
is calculated as its Required Fund
Deposit excluding any applicable
special charge, margin requirement
differential charge, coverage component
charge or margin liquidity adjustment
charge,18 plus any additional amounts
the Member is required to deposit to the
Clearing Fund either due to being
placed on the Watch List 19 or pursuant
to Rule 15 (Assurances of Financial
Responsibility and Operational
Capability) of the Rules.20
NSCC then divides the Member’s
Calculated Amount by its current
capital amount, which is the amount
reported to NSCC pursuant to its
ongoing membership standards, as set
out in Rule 2B (Ongoing Membership
Requirements and Monitoring) and
Addendum B (Qualifications and
Standards of Financial Responsibility,
Operational Capability and Business
History) of the Rules.21 Pursuant to the
current membership standards in
Addendum B of the Rules, Members
17 See Section 4 of Rule 2B, which describes
NSCC’s ongoing monitoring and review of Members
and the factors NSCC considers in assigning
Members a credit rating that could result in a
Member being placed on the Watch List, supra note
12.
18 The special charge is described in Section
I(A)(1)(c) and (2)(c) of Procedure XV, the MRD
charge is described in Section I(A)(1)(e) and (2)(d)
of Procedure XV, the coverage component charge is
described in Section I(A)(1)(f) and (2)(e) of
Procedure XV, and the MLA charge is described in
Section I(A)(1)(g) and (2)(f) of Procedure XV, supra
note 12.
19 Supra note 17.
20 Pursuant to Section 2(b)(iv) of Rule 15, NSCC
may require a Member to provide NSCC with
adequate assurances of that Member’s financial
responsibility in the form of increased Clearing
Fund deposits. Supra note 12.
21 Supra note 12.
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that are broker-dealers are required to
maintain a certain level of excess net
capital, and Members that are banks are
required to maintain a certain level of
equity capital as a requirement for
continued membership with NSCC.22
Pursuant to Section 2 of Rule 2B of the
Rules, Members are required to provide
NSCC with financial information,
including information regarding
Members’ current capital amounts, on a
regular basis and NSCC uses these
reported capital amounts in the
calculation of the ECP charge.23
Pursuant to Section I(B)(2) of
Procedure XV, if a Member’s Calculated
Amount, when divided by its applicable
capital amount, is greater than the
Excess Capital Ratio of 1.0, NSCC may
require that Member to deposit an ECP
charge.24 The applicable ECP charge
may be equal to the product of (1) the
amount by which a Member’s
Calculated Amount exceeds its
applicable capital amount, multiplied
by (2) the Member’s Excess Capital
Ratio. Members are able to access and
view reports regarding their Clearing
Fund and, through these reports,
Members may be alerted when their
Calculated Amount divided by the
applicable capital amount is greater
than 0.5, as an early warning regarding
their capital levels.
Under Section I(B)(2) of Procedure
XV, NSCC may collect a lower ECP
charge than the amount calculated
pursuant to the Rules, may determine
not to collect the ECP charge from a
Member at all, and may return all or a
portion of a collected ECP charge if it
believes the imposition or maintenance
of the ECP charge is not necessary or
appropriate.25 Section I(B)(2) of
Procedure XV describes some
circumstances when NSCC may
determine not to collect an ECP charge
from a Member, which includes, for
example, when an ECP charge results
from trading activity for which the
Member submits later offsetting activity
that lowers its Required Fund Deposit.26
The discretion to adjust, waive or return
an ECP charge was designed to provide
22 See Section 1. B.1. of Addendum B, supra note
12. NSCC has proposed changes to the membership
standards set forth in Addendum B that would
modify the capital requirements for Members. See
Securities Exchange Act Release No. 94068 (January
26, 2022), 21 FR 5544 (February 1, 2022) (SR–
NSCC–2021–016).
23 See Section 2(A) of Rule 2B, supra note 12.
24 Supra note 12.
25 When NSCC determines to collect a lower
amount than that amount calculated pursuant to the
Rules, as provided for under Procedure XV, NSCC
may, for example, calculate that lower amount by
reducing the Excess Capital Ratio used in the
calculation to 2.0. Supra note 12.
26 See footnote 7 of Procedure XV, supra note 12.
PO 00000
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75107
NSCC with the ability to determine
when a calculated ECP charge may not
be necessary or appropriate to mitigate
the risks it was designed to address.27
Since the ECP charge was adopted,
NSCC has calculated and assessed the
ECP charge consistent with the Rules,
and NSCC has exercised its discretion to
both reduce and waive the ECP charge
when NSCC has deemed it necessary or
appropriate. NSCC recently reviewed
the effectiveness of the ECP charge to
identify ways NSCC could enhance both
the calculation of the charge and the
disclosures regarding the charge in the
Rules. In connection with this review,
NSCC discussed the ECP charge and its
proposed enhancements with Members,
NSCC management, and NSCC’s
supervisors at the Commission. As a
result of this review, NSCC is proposing
to make several enhancements to the
ECP charge, as described in greater
detail below.
These enhancements are designed to
improve NSCC’s ability to measure the
increased default risks that are
presented by Members who operate
with lower capital. The proposed
changes would simplify the calculation
of the charge and the description of the
charge in the Rules, making it more
predictable to Members. The proposed
changes are designed to improve the
transparency of the ECP charge to
Members by clarifying the particular
circumstances in which NSCC retains
the ability to waive the charge and
providing that NSCC may calculate the
charge based on updated capital
information. The proposed
improvements to the transparency of the
ECP charge also include clarifying the
descriptions of the capital amounts that
would be used in the calculation of the
charge through new defined terms.
Collectively, the proposal would make
the ECP charge more consistent,
transparent, and predictable to
Members, while maintaining the
effectiveness of NSCC’s risk-based
margining methodology as it relates to
the ECP charge.
(ii) Use Members’ Volatility Component
as the Calculated Amount
NSCC is proposing to replace the
Calculated Amount with the amount
collected as that Member’s volatility
component as determined pursuant to
Sections I(A)(1)(a)(i)-(iii) and (2)(a)(i)(iii) of Procedure XV of the Rules.28
27 See Securities Exchange Act Release No. 54457
(September 15, 2006), 71 FR 55239 (September 21,
2006) (SR–FICC–2006–03 and SR–NSCC–2006–03).
28 The volatility component is designed to capture
the market price risk associated with each
Member’s portfolio at a 99th percentile level of
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In both determining if an ECP charge
is applicable and in calculating an ECP
charge, NSCC currently compares a
Member’s Calculated Amount to its
reported capital levels. As described
above, the Calculated Amount is
defined in Section I(B)(2) of Procedure
XV as a Member’s Required Fund
Deposit, excluding certain components
and including other additional deposits
to the Clearing Fund.29 Because a goal
of the ECP charge is to identify and
mitigate risks presented when a
Member’s capital levels may not be
adequate to meet its margin
requirements to NSCC, the Calculated
Amount is designed to represent a
material portion of those margin
requirements.
As described above, because each
component of the Clearing Fund is
calculated to address specific risks faced
by NSCC, some components are applied
only to certain positions in a Member’s
portfolio. For example, the CNS fails
charge, which is included in the
Calculated Amount, is based on the
market value of only a Member’s CNS
Fails Positions (as defined in the Rules)
of the Member.30 The volatility
component of the Clearing Fund
measures the market price volatility of
all of a Member’s Net Unsettled
Positions and Net Balance Order
Unsettled Positions (as defined in the
Rules). Therefore, the volatility
component is often considered a
comprehensive measurement of the
risks presented by a Member’s clearing
activity and usually comprises the
largest portion of a Member’s Required
Fund Deposit.31 NSCC believes that
replacing the Calculated Amount with a
Member’s volatility charge would
provide an appropriate measure for
purposes of the ECP charge.
Currently, determining a Member’s
Calculated Amount requires a more
confidence. NSCC has two methodologies for
calculating the volatility component—a modelbased volatility-at-risk, or VaR, charge and a
haircut-based calculation, for certain positions that
are excluded from the VaR charge calculation. The
charge that is applied to a Member’s Required Fund
Deposit with respect to the volatility component is
referred to as the volatility charge and is the sum
of the applicable VaR charge and the haircut-based
calculation. Amounts calculated pursuant to
Sections I(A)(1)(a)(iv) and (2)(a)(iv) of Procedure XV
with respect to long positions in Net Unsettled
Positions in Family-Issued Securities are designed
to address wrong-way risk presented by these
positions, not volatility risks, and, as such, are not
a part of a Member’s volatility charge. See Sections
I(A)(1)(a) and (2)(a) of Procedure XV, supra note 12.
29 See supra note 18.
30 See definition of ‘‘CNS Fails Position’’ in Rule
1, and see also Section I(A)(1)(e) of Procedure XV,
supra note 12.
31 See definitions of ‘‘Net Unsettled Position’’ and
‘‘Net Unsettled Balance Order Position’’ in Rule 1,
supra note 12.
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complicated calculation, as it uses a
Member’s Required Fund Deposit,
excludes certain components, and
includes other deposits. The proposal
would simplify this calculation
significantly by using only the volatility
component. One of the tools NSCC
provides to its Members is a calculator
that allows them to determine their
potential volatility charge based on
trading activity. Therefore, this
proposed change would make the
calculation of the ECP charge both
clearer and more predictable for
Members.
NSCC does not expect that any impact
of this proposed change on the number
of ECP charges or the size of the
calculated ECP charges would
materially impact NSCC’s ability to
manage the risks the ECP charge is
designed to address. NSCC believes the
benefits of using a simpler, clearer, and
more predictable calculation that is
based on the most comprehensive
component of the Clearing Fund
outweigh any risk related to the
reduction in the ECP charges NSCC
would collect.
(iii) Use Net Capital for Broker-Dealer
Members and Equity Capital for All
Other Members in the Calculation of the
ECP Charge
In the calculation of the ECP charge,
NSCC is proposing to use net capital
rather than excess net capital for
Members that are broker-dealers, and
equity capital for all other Members. As
described in greater detail below, in
connection with these proposed
changes, NSCC would also improve the
transparency of the Rules by adopting
definitions of ‘‘Net Capital’’ and ‘‘Equity
Capital.’’
As described above, NSCC’s ongoing
membership requirements, set forth in
Rule 2B of the Rules, require Members
to provide NSCC with regular
information regarding their financial
positions, including capital levels.32
This information is provided, in part, to
confirm that Members continue to
maintain the minimum financial
requirements of membership set forth in
Addendum B of the Rules.33 Currently,
NSCC also uses these reported capital
amounts in the calculation of the ECP
charge.
First, NSCC believes it would be
appropriate to revise the capital
measure used to calculate the ECP
32 See Section 2.A of Rule 2B, which requires
Members to provide NSCC with a copy of their
Form X–17–A–5 (Financial and Operational
Combined Uniform Single (‘‘FOCUS’’) Report),
Consolidated Report of Condition and Income
(‘‘Call Report’’), or an equivalent, supra note 12.
33 Supra note 12.
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charge for broker-dealer Members to
replace excess net capital with net
capital. This revision would align the
capital measures used for broker-dealer
Members and other Members, which
would result in more consistent
calculations of the ECP charge across
different types of Members.
In addition to creating consistency in
the calculations for different Members,
NSCC believes that using net capital
rather than excess net capital would
also provide NSCC with a better
measure of the increased default risks
presented when a Member operates at
low net capital levels relative to its
margin requirements. This approach
would be consistent with the rationale
for the Commission’s amendments to
Rule 15c3–1 under the Act (the ‘‘Net
Capital Rule’’), which were designed to
promote a broker-dealer’s capital quality
and require the maintenance of ‘‘net
capital’’ (i.e., capital in excess of
liabilities) in specified amounts as
determined by the type of business
conducted.34 The Net Capital Rule was
designed to ensure the availability of
funds and assets (including securities)
in the event that a broker-dealer’s
liquidation becomes necessary. The Net
Capital Rule represented a net worth
perspective, which is adjusted by
unrealized profit or loss, deferred tax
provisions, and certain liabilities as
detailed in the rule. It also included
deductions and offsets and required that
a broker-dealer demonstrate compliance
with the Net Capital Rule, including
maintaining sufficient net capital at all
times (including intraday).
Similarly, NSCC believes that the Net
Capital Rule is an effective process of
separating liquid and illiquid assets and
computing a broker-dealer’s regulatory
net capital that should replace NSCC’s
existing practice of using excess net
capital in the calculation of the ECP
charge.
Second, NSCC is proposing to revise
the Rules to provide that, for all
Members that are not broker-dealers, it
would use equity capital in calculating
the ECP charge. Currently, the Rules
state that NSCC would use a Member’s
capital amount set forth in the
membership standards in Addendum B
of the Rules.35 Section 1.B of
Addendum B describes the membership
standards of Members, and currently
states that the applicable capital
measure for Members that are banks is
equity capital, for Members that are
trust companies and not banks the
34 17 CFR 240.15c3–1. See Securities Exchange
Act Release No. 70072 (July 30, 2013), 78 FR 51823
(August 21, 2013) (File No. S7–08–07).
35 Supra note 12.
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applicable capital measure is
consolidated capital, and for other legal
entities that are Members the applicable
capital measure is determined by NSCC.
Currently, and historically, NSCC has
had very few Members that are trusts
and not banks. For all Members that are
not banks, non-bank trusts or brokerdealers (which generally include, for
example, exchanges and registered
clearing agencies), NSCC uses those
Members’ reported equity capital in the
calculation of the ECP charge.
Therefore, in practice, the ECP charge is
calculated for the majority of Members
that are not broker-dealers using their
equity capital, and this proposed change
is not expected to have a material
impact on the collection of ECP charges.
The proposal would simplify the
calculation of the ECP charge for
Members that are not broker-dealers by
stating in Section I(B)(2) of Procedure
XV that NSCC would use equity capital
rather than use different measures that
are based on other membership
requirements. This proposed change
would also create consistency in the
calculations across Members.
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(iv) Establish a Cap for the Excess
Capital Ratio
NSCC is proposing to set a maximum
amount of Excess Capital Ratio that is
used in calculating Members’ ECP
charge to 2.0. NSCC believes capping
the multiplier that is used in this
calculation would allow NSCC to
appropriately address the risks it faces
without imposing an overly burdensome
ECP charge. Historically, the Excess
Capital Ratio has rarely exceeded 2.0 in
the calculation of Members’ ECP
charges, and in cases when 2.0 was
exceeded NSCC typically exercised the
discretion provided to it in the Rules to
reduce the applicable charge. NSCC’s
discretion was appropriate in these
circumstances because NSCC believes it
is able to mitigate the risks presented to
it by a Member’s lower capital levels by
collecting an ECP charge calculated
with an Excess Capital Ratio that is at
or below 2.0.
Therefore, and consistent with
NSCC’s proposal to clarify its discretion
to waive the ECP charge, as described
below, NSCC believes capping the
Excess Capital Ratio at 2.0 would
continue to provide NSCC with an
appropriate measure of the risks
presented to it relative to Members’
capital levels. This proposed change
would also provide Members with more
clarity and transparency into the ECP
charge, by allowing them to predict and
estimate the maximum amount of their
potential ECP charge.
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(v) Improve Transparency Regarding the
ECP Charge
NSCC is proposing changes to Section
I(B)(2) of Procedure XV to improve
transparency regarding the ECP charge
by (a) clarifying the description of the
capital amounts that NSCC uses in the
calculation of the ECP charge by
adopting new defined terms, (b)
clarifying the particular circumstances
in which NSCC retains the ability to
waive the charge, and (c) providing that
NSCC may calculate the charge based on
updated capital information.
First, NSCC is proposing to clarify the
description of the capital amounts that
it uses to calculate the ECP charge by
introducing defined terms and
specifying the reporting requirements
that NSCC relies on to obtain that
capital information for Members. As
described above, for Members that are
broker-dealers, NSCC is proposing to
use a Member’s net capital amount, and
for all other Members, NSCC would use
a Member’s equity capital in the
calculation of the ECP charge. In order
to improve the clarity of the Rules,
NSCC is proposing to introduce a
defined term for ‘‘Equity Capital’’ in
Rule 1 and to revise a proposed defined
term for ‘‘Net Capital’’ in order to align
the two defined terms. The proposal
would also revise Section I(B)(2) of
Procedure XV in describing the
calculation of the ECP charge to use
these defined terms where appropriate.
Finally, the proposal would amend
Addendum B to include the new
defined term for Equity Capital.
The definition of Equity Capital
would be, as of a particular date, the
amount equal to the equity capital as
reported on the Member’s or Limited
Member’s most recent Call Report, or, if
the Member or Limited Member is not
required to file a Call Report, then as
reported on its most recent financial
statements or equivalent reporting.
NSCC would also align a proposed
definition of Net Capital to be, as of a
particular date, the amount equal to the
net capital as reported on the Member’s
or Limited Member’s most recent
FOCUS Report, or, if the Member or
Limited Member is not required to file
a FOCUS Report, then as reported on its
most recent financial statements or
equivalent reporting.
In addition to using these new
defined terms, NSCC would also add a
statement to Section I(B)(2) of Procedure
XV to clarify to Members that the
amounts used in the calculation of the
ECP charge would be the amounts
included in their regular reporting that
is provided to NSCC pursuant to the
ongoing membership reporting
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requirements, specifically in their
FOCUS Report or Call Report, as
applicable, or in an equivalent financial
statement or report that is delivered to
NSCC pursuant to the same
requirement. Collectively, these
proposed changes would provide
Members with improved clarity and
certainty regarding the amounts that
would be used in calculating the ECP
charge.
Second, the proposed changes would
clarify the particular circumstances in
which NSCC retains the ability to waive
the ECP charge. NSCC believes that the
proposed changes to the calculation of
the ECP charge described in this filing
would have the collective impact of
eliminating most circumstances in
which NSCC would have exercised this
discretion. For example, the proposal to
cap the Excess Capital Ratio at 2.0 and
the proposal to specify that NSCC may
calculate an ECP charge based on
updated capital amounts, both address
the most common circumstances when
NSCC has either waived or reduced the
ECP charge in the past. However, NSCC
believes that there may still be
circumstances when it may not be
necessary or appropriate to collect an
ECP charge from a Member, for
example, in certain exigent
circumstances when NSCC observes
unexpected changes in market volatility
or trading volumes. Therefore, NSCC is
proposing to retain discretion to waive
an ECP charge in certain defined
circumstances and to disclose the
governance around the application of
such discretion. The proposed changes
would revise Section I(B)(2) of
Procedure XV by adding a new
subsection (c) to provide Members with
transparency regarding this retained
discretion.
The proposed subsection (c) would
describe the exigent circumstances in
which NSCC would retain the ability to
waive an ECP charge. Such exigent
circumstances would constitute
circumstances when NSCC, in its sole
discretion, observes extreme market
conditions or other unexpected changes
in factors such as market volatility,
trading volumes or other similar factors.
As noted above, NSCC believes, based
on a review of past data, that the
proposed changes to the calculation of
the ECP charge would otherwise
eliminate most prior instances when an
ECP charge was waived. However, in
further reviewing such data, NSCC also
observed that there have been instances,
particularly in recent years, when NSCC
has waived the ECP charge in moments
covered by the concept of exigent
circumstances, and that the ECP charge
would have been triggered in such
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circumstances even under the proposed
calculation of the charge. Such moments
occurred multiple times in recent years,
including, for example, during the
extreme market volatility experienced in
early 2020 related to the global outbreak
of the COVID–19 coronavirus and the
meme stock market event in early 2021.
Based upon this further review of the
data, NSCC believes there remains some
ongoing possibility that an unexpected
increase in market volatility, for
example, could cause a relative increase
in a Member’s volatility charge, which
may, in turn, trigger an ECP charge,
even under the proposed new ECP
charge calculation. In such
circumstances, under the proposal,
NSCC would determine if the ECP
charge being triggered at that time is not
primarily caused by the risk presented
by a Member’s capital levels and
whether NSCC can effectively address
the risk exposure presented by that
Member without the collection of the
ECP charge from that Member.
Alternatively, NSCC may determine,
based on its review of the information
available to it, that the ECP charge was
appropriately triggered by a Member’s
capital position or trading activity and
was not driven primarily by the
prevailing market conditions or other
exigent circumstances. Therefore, NSCC
believes it is appropriate to retain a
certain amount of discretion to review
an ECP charge that is triggered in such
circumstances to determine whether a
waiver of the ECP charge may be
appropriate.
In addition to defining the
circumstances in which NSCC may
waive the ECP charge, the proposed
changes would also describe the review
NSCC would conduct in deciding to
waive the charge in the exigent
circumstances, the information NSCC
would consider in such review, and the
governance around a determination by
NSCC to waive the ECP charge. More
specifically, the proposed rule change
provides that NSCC would review all
relevant facts and other information
available to it at the time of its decision,
including the degree to which a
Member’s capital position and trading
activity compare or correlate to the
prevailing exigent circumstances and
whether NSCC can effectively address
the risk exposure presented by a
Member without the collection of the
ECP charge from that Member. For
example, as noted above, if NSCC
believes, based on its review of the
relevant circumstances, that the risk
exposure presented by a Member is
driven by the unexpected increase in
market volatility and not by a Member’s
capital levels, NSCC may determine that
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it is appropriate to address such risk
through the collection of a special
charge from that Member rather than an
ECP charge.36 By describing NSCC’s
review in Procedure XV, the proposed
changes would alert Members that,
while exigent circumstances may permit
NSCC to consider whether to waive an
ECP charge, NSCC would still consider
information available to it at that time
in determining whether a waiver is
appropriate, including NSCC’s ability to
effectively manage the heightened
default risks presented by Members that
operate at lower capital levels.
Finally, the proposed rule change
would provide transparency into the
governance around a decision to waive
an ECP charge by identifying the NSCC
officer who would be authorized to
apply a waiver and requiring that the
decision be documented.37
By clarifying the particular
circumstances in which NSCC retains
the ability to waive the ECP charge, the
proposal would provide Members with
more certainty and transparency in
predicting when an ECP charge may be
waived and how NSCC would make a
determination to apply such a waiver.
Third, NSCC would provide that it
may calculate the ECP charge based on
updated capital information. As
described above, NSCC would use the
net capital or equity capital amounts
that are reported on Members’ most
recent financial reporting or financial
statements delivered to NSCC in
connection with the ongoing
membership reporting requirements.
Under the proposal, if a Member’s
capital amounts change between the
dates when it submits these financial
reports, it may provide NSCC with
updated capital information for
purposes of calculating the ECP charge.
Today, when NSCC exercises its
discretion to waive or reduce the
amount of an applicable ECP charge,
NSCC occasionally does so by applying
updated capital information in its
calculation. Therefore, in connection
with clarifying this discretion, NSCC
would disclose in the Rules that it may
use updated capital information in the
calculation of an ECP charge rather than
require Members to wait until the
issuances of their next financial
reporting or financial statements for
36 See Section I(A)(1)(c) and (2)(c) of Procedure
XV of the Rules, under which NSCC may collect,
as part of Members’ Required Fund Deposit to the
Clearing fund, ‘‘[a]n additional payment (‘‘special
charge’’) from Members in view of price
fluctuations in or volatility or lack of liquidity of
any security.’’ Supra note 12.
37 NSCC would also update its internal
procedures to include waivers of the ECP charge in
NSCC’s regular updates to the Commission.
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changes in their capital positions to be
reflected in an ECP charge calculation.
NSCC is proposing to retain some
discretion in when it would accept
updated capital information for this
purpose. For example, NSCC may
require a Member to provide
documentation of the circumstances
that caused a change in capital
information, and if adequate evidence is
not available or NSCC does not believe
the evidence sufficiently verifies that
the Member’s capital position has
changed, NSCC would continue to
calculate the ECP charge for that
Member based on the prior capital
information available to NSCC until the
next financial reporting or financial
statements are delivered. NSCC believes
it is appropriate to retain some
discretion to allow NSCC to determine
if updated capital information is
adequately verified before it agrees to
rely on that information for this
calculation. NSCC believes the proposal
to disclose that Members would have
the opportunity to provide updated
capital information to NSCC to be used
in an ECP charge calculation would
improve the transparency of the Rules
despite NSCC’s proposal to retain a
certain level of discretion.
(vi) Proposed Changes to Procedure XV
of the Rules
The proposal would amend Section
I(B)(2) of Procedure XV of the Rules to
implement the proposed changes to the
ECP charge. The proposed changes
would organize this section into three
subsections.
The proposed subsections (a) and (b)
would describe the calculation used to
determine if an ECP charge may be
applicable to a Member and, if an ECP
charge is applicable, how that charge
would be calculated. The revised
description of these calculations would
(i) replace the definition of Calculated
Amount with Members’ volatility
charge, (ii) replace references to the
capital amounts used in the calculation
with the new defined terms for Net
Capital and Equity Capital, and (iii)
state that the Excess Capital Ratio used
in calculating an ECP charge is set at a
maximum of 2.0. The proposed change
would also include a statement that the
applicable capital amounts used in the
calculation would be the amounts most
recently reported to NSCC on Members’
FOCUS Reports or Call Reports, as
applicable, or other equivalent financial
reporting submitted to NSCC pursuant
to Section 2 of Rule 2B. The proposal
would also state that NSCC may, in its
sole discretion, accept updated capital
amounts in calculating an ECP charge.
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The proposed subsection (c) would
describe NSCC’s discretion to waive the
ECP charge in certain defined
circumstances, the information NSCC
would consider in deciding to apply
this discretion and the governance
around this decision.
(vii) Impact Study Results
NSCC has provided the Commission
with the results of an impact study that
reviewed the potential impacts of the
proposal during the period of June 1,
2020 through December 31, 2021. The
study showed that the proposed
enhancement would have reduced the
number of ECP charges that would have
been triggered by the calculation by 65
percent, from 347 ECP charges triggered
for 19 Members to 122 ECP charges
triggered for 14 Members. The total
aggregate amount that would have been
triggered by the proposed calculation if
the proposal was effective during that
time would have been reduced from
$51.31 billion (the actual total amount
of ECP charges triggered by the current
calculation during that period) to
approximately $17.44 billion (the total
amount of ECP charges that would have
been triggered during that time by the
proposed calculation). The average
amount that would have been calculated
for each Member would have been
reduced from $147.9 million to
approximately $143.0 million. The
study showed that the proposal would
have had no impact to NSCC’s overall,
or Member-level, end-of-day Clearing
Fund Requirement backtesting coverage.
Over the impact study period, NSCC
waived and adjusted calculated ECP
charges by $38.80 billion. NSCC waived
a total of 33 ECP charges that totaled
approximately $26.12 billion. If the
proposal had been in place at that time,
14 of these charges would have been
collected from Members (although the
amount would have been reduced),
totaling $6.46 billion, 14 charges would
not have been triggered as the calculated
ECP ratio was below 1.0, and NSCC
would have waived 5 of the ECP
charges, mainly following receipt of
updated financial information. NSCC
adjusted the amount of 16 ECP charges
by a total of approximately $12.69
billion. If the proposal had been in place
at that time, 7 of these charges would
have been still collected, totaling $6.48
billion, and 9 charges would not have
been triggered as the calculated ECP
ratio was below 1.0.
(viii) Implementation Timeframe
NSCC would implement the proposed
changes no later than 30 days after the
approval of the proposed rule change by
the Commission. NSCC would
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announce the effective date of the
proposed changes by Important Notice
posted to its website.
2. Statutory Basis
NSCC believes the proposed rule
change is consistent with the
requirements of the Act, and the rules
and regulations thereunder applicable to
a registered clearing agency. In
particular, NSCC believes the proposed
rule change is consistent with Section
17A(b)(3)(F) of the Act,38 and Rules
17Ad–22(e)(4)(i), (e)(6)(i) and (e)(23)(ii),
each promulgated under the Act,39 for
the reasons described below.
Section 17A(b)(3)(F) of the Act
requires that the rules of NSCC be
designed to, among other things,
promote the prompt and accurate
clearance and settlement of securities
transactions and to assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible.40
NSCC believes the proposed changes
are consistent with the requirements of
Section 17A(b)(3)(F) of the Act because
such changes enhance the effectiveness
of the ECP charge by (1) replacing the
Calculated Amount with a Member’s
volatility component, (2) replacing
excess net capital with net capital for
broker-dealer Members and using equity
capital for all other Members, and (3)
establishing a cap for the Excess Capital
Ratio. As described above, NSCC
believes these proposed changes would
create a simpler, clearer calculation of
the ECP charge that is based on more
consistent metrics, while allowing
NSCC to continue to effectively address
the heightened default risks presented
by Members that operate at lower
capital levels.
The Clearing Fund is a key tool that
NSCC uses to mitigate potential losses
to NSCC associated with liquidating a
Member’s portfolio in the event of
Member default. Each of the proposed
enhancements described above are
designed to collectively improve
NSCC’s ability to collect amounts that
reflect the risks posed by its Members.
The proposal to enhance the calculation
of the ECP charge by replacing the
Calculated Amounts with Members’
volatility charges would make the
calculation clearer and more predictable
to Members. The proposal to use net
capital for broker-dealer Members and
equity capital for all other Members in
the calculation of the ECP charge would
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(4)(i), (e)(6)(i) and
(e)(23)(ii).
40 15 U.S.C. 78q–1(b)(3)(F).
result in a more consistent calculation
across different types of Members. The
proposal to cap the Excess Capital Ratio
at 2.0 would allow NSCC to
appropriately address the risks it faces
without imposing an overly burdensome
ECP charge and would reduce the
circumstances in which NSCC may
waive the charge, resulting in a more
transparent margining methodology.
Together, by improving the
consistency and predictability of the
ECP charge, the proposed enhancements
would also improve NSCC’s ability to
collect amounts that reflect the risks
posed by its Members such that, in the
event of Member default, NSCC’s
operations would not be disrupted, and
non-defaulting Members would not be
exposed to losses they cannot anticipate
or control. In this way, the proposed
rule change is designed to assure the
safeguarding of securities and funds
which are in the custody or control of
NSCC or for which it is responsible,
consistent with Section 17A(b)(3)(F) of
the Act.41
The proposed changes are also
designed to improve the transparency of
the Rules regarding the ECP charge, for
example, by introducing new defined
terms regarding the capital amounts
used in the charge and by clarifying the
exigent circumstances in which NSCC
may waive the charge. By enhancing the
clarity and transparency of the Rules,
the proposed changes would allow
Members to better anticipate their
margin charges, which would allow
them to more efficiently and effectively
conduct their business in accordance
with the Rules. In this way, NSCC
believes the proposed changes would
promote the prompt and accurate
clearance and settlement of securities
transactions, consistent with Section
17A(b)(3)(F) of the Act.42
Rule 17Ad–22(e)(4)(i) under the 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.43
As described above, NSCC believes
the proposed rule change would enable
NSCC to better identify, measure,
monitor, and, through the collection of
Members’ Required Fund Deposits,
38 15
39 17
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41 Id.
42 Id.
43 17
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manage its credit exposures to Members
by maintaining sufficient resources to
cover those credit exposures fully with
a high degree of confidence.
Specifically, NSCC believes that the
proposed enhancements to the
calculation of the ECP charge to use the
volatility charge rather than the
Calculated Amount, and to use net
capital and equity capital, as
appropriate, would collectively make
the calculation clearer and more
predictable to Members. The proposal to
use net capital rather than excess net
capital for broker-dealer Members, and
equity capital for all other Members,
would also result in a more consistent
calculation across different types of
Members. Additionally, the proposal to
cap the Excess Capital Ratio at 2.0
would allow NSCC to appropriately
address the risks it faces without
imposing an overly burdensome ECP
charge and would reduce the
circumstances in which NSCC may
waive the charge, resulting in a more
transparent margining methodology.
Finally, the proposed change to clarify
NSCC’s discretion to waive the ECP
charge would enable NSCC to better
identify, measure, monitor, and manage
its credit exposures to Members by
permitting NSCC to determine, in
certain exigent circumstances, when it
is necessary to collect an ECP charge
and when it is appropriate to waive an
ECP charge.
Overall, NSCC believes the proposal
would improve the clarity and
predictability of the ECP charge and, in
this way, would enhance NSCC’s ability
to effectively identify, measure and
monitor its credit exposures, and would
enhance NSCC’s ability to maintain
sufficient financial resources to cover
NSCC’s credit exposure to each
participant fully with a high degree of
confidence. As such, NSCC believes the
proposed rule change is consistent with
Rule 17Ad–22(e)(4)(i) under the Act.44
Rule 17Ad–22(e)(6)(i) under the Act
requires that NSCC establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, considers, and
produces margin levels commensurate
with, the risks and particular attributes
of each relevant product, portfolio, and
market.45
The Required Fund Deposits are made
up of risk-based components (as margin)
that are calculated and assessed daily to
limit NSCC’s exposures to Members.
44 Id.
45 17
NSCC’s proposed changes to use the
volatility charge rather than the
Calculated Amount, and to use net
capital and equity capital, as
appropriate, in the calculation of the
ECP charge would collectively make the
calculation clearer and more predictable
to Members, while continuing to apply
an appropriate risk-based charge
designed to mitigate the risks presented
to NSCC. Similarly, the proposal to cap
the Excess Capital Ratio at 2.0 would
allow NSCC to appropriately address
the risks it faces without imposing an
overly burdensome ECP charge and
would reduce the circumstances in
which NSCC may waive the charge,
resulting in a more transparent
margining methodology. Finally, the
proposed rule change would clarify the
exigent circumstances when NSCC may
determine that it is appropriate to waive
the ECP charge. Overall, these proposed
changes would improve the
effectiveness of the calculation of the
ECP charge and, therefore, allow NSCC
to more effectively address the
increased default risks presented by
Members that operate with lower capital
levels relative to their margin
requirements. In this way, the proposed
changes enhance the ability of the ECP
charge to produce margin levels
commensurate with the risks NSCC
faces related to its Members’ operating
capital levels. Therefore, NSCC believes
the proposed rule change is consistent
with Rule 17Ad–22(e)(6)(i) under the
Act.46
Rule 17Ad–22(e)(23)(ii) under the Act
requires that NSCC establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide for
providing sufficient information to
enable participants to identify and
evaluate the risks, fees, and other
material costs they incur by
participating in NSCC.47 NSCC is
proposing to improve the clarity and
transparency of the Rules related to its
calculation of the ECP charge in a
number of ways described in this filing.
The proposed changes would clarify the
description of the capital amounts that
NSCC uses in the calculation of the ECP
charge by adopting new defined terms,
clarify NSCC’s discretion to waive the
charge, and provide that NSCC may
calculate the charge based on updated
capital information. Additionally, as
described above, the proposed changes
to use the volatility charge rather than
the Calculated Amount, and to use net
capital and equity capital, as
appropriate, in the calculation of the
ECP charge, would collectively make
the calculation clearer and more
predictable to Members. Finally, the
proposed rule change would provide
clarity and transparency around the
circumstances in which NSCC may
waive the ECP charge, the information
NSCC would consider in making this
determination and the governance
around such a decision. Through these
proposed amendments to the Rules, the
proposal would assist NSCC in
providing its Members with sufficient
information to identify and evaluate the
risks and costs, in the form of Required
Fund Deposits to the Clearing Fund,
that they incur by participating in
NSCC. In this way, NSCC believes the
proposed changes are consistent with
Rule 17Ad–22(e)(23)(ii) under the Act.48
(B) Clearing Agency’s Statement on
Burden on Competition
NSCC does not believe the proposed
rule change to enhance the calculation
of the ECP charge would impact
competition because the proposed
changes are designed to create a clearer
and simpler calculation that is based on
more consistent metrics and is likely to
result in lower and less frequent ECP
charges than are applied under the
current methodology. More specifically,
the replacement of the Calculated
Amount with the volatility charge,
which is currently a portion of the
Calculated Amount, when used in the
calculation to determine if an ECP
charge is applicable, is likely to result
in fewer triggered ECP charges, as
evidenced by the impact study
referenced above. Additionally, the
replacement of excess net capital with
net capital for broker-dealer Members,
and using equity capital for all other
Members, would create more consistent
calculations of the ECP charge across
types of Members, reducing any burden
on competition that the existing
calculation could have presented.
Finally, the proposal to cap the Excess
Capital Ratio to 2.0 in the calculation of
the ECP charge would limit the total
amount a Member could be charged,
and would provide all Members with
more certainty and transparency into
their potential margin requirements.
Therefore, by creating a simpler and
clearer calculation that uses more
consistent metrics, the proposals would
improve NSCC’s ability to apply the
ECP charge more consistently across its
Members and reduce the impact this
charge could have on competition. As
noted above, in the impact study results,
the proposed changes are also expected
46 Id.
CFR 240.17Ad–22(e)(6)(i).
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Federal Register / Vol. 87, No. 234 / Wednesday, December 7, 2022 / Notices
to result in fewer and lower ECP
charges.
Further, NSCC does not believe the
proposed rule change to improve the
clarity and predictability of the
calculation of the ECP charge would
impact competition because this
proposed change would not impact the
calculation of Members’ Required Fund
Deposits. Therefore, this proposed
change would not affect NSCC’s
operations or the rights and obligations
of membership. As such, NSCC believes
the proposed rule change to improve the
transparency of the Rules would not
have any impact on competition.
ddrumheller on DSK6VXHR33PROD with NOTICES
C. Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
NSCC has not received or solicited
any written comments relating to this
proposal. If any written comments are
received, they will be publicly filed as
an Exhibit 2 to this filing, as required by
Form 19b–4 and the General
Instructions thereto.
Persons submitting 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
Section 19(b)(2) of the Act 49 provides
that proceedings to determine whether
to approve or disapprove a proposed
rule change must be concluded within
180 days of the date of publication of
notice of filing of the proposed rule
change. The time for conclusion of the
proceedings may be extended for up to
60 days if the Commission determines
that a longer period is appropriate and
publishes the reasons for such
determination.50 The 180th day after
publication of the Notice in the Federal
Register is December 5, 2022.
The Commission is extending the
period for Commission action on the
Proposed Rule Change. The Commission
finds that it is appropriate to designate
a longer period within which to take
action on the Proposed Rule Change so
that the Commission has sufficient time
to consider the issues raised by the
Proposed Rule Change and to take
action on the Proposed Rule Change.
Accordingly, pursuant to Section
19(b)(2)(B)(ii)(II) of the Act,51 the
Commission designates February 3,
2023, as the date by which the
Commission should either approve or
disapprove the Proposed Rule Change
SR–NSCC–2022–005.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NSCC–2022–005 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NSCC–2022–005. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
U.S.C. 78s(b)(2).
VerDate Sep<11>2014
19:54 Dec 06, 2022
U.S.C. 78s(b)(2)(B)(ii)(II).
51 Id.
Jkt 259001
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/secrulefilings.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–
2022–005 and should be submitted on
or before December 22, 2022. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal on or before December 28,
2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.52
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022–26535 Filed 12–6–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96433; File No. SR–
NYSECHX–2022–27]
Self-Regulatory Organizations; NYSE
Chicago, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend the Fee
Schedule of NYSE Chicago, Inc. To
Reflect the Fee for Directed Orders
Routed by the Exchange to an
Alternative Trading System
December 1, 2022.
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
November 21, 2022, the NYSE Chicago,
Inc. (‘‘NYSE Chicago’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
52 17
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
50 15
49 15
PO 00000
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]]>Agencies
[Federal Register Volume 87, Number 234 (Wednesday, December 7, 2022)]
[Notices]
[Pages 75105-75113]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26535]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96426; File No. SR-NSCC-2022-005]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Partial Amendment No. 2 and Amendment
No. 3 and of Designation of Longer Period for Commission Action on
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change To Revise the Excess Capital Premium Charge Order
December 1, 2022.
On May 20, 2022, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2022-005 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder.\2\ The proposed rule change was published
for comment in the Federal Register on June 8, 2022,\3\ and the
Commission has received comments regarding the changes proposed in the
proposed rule change.\4\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 95026 (June 2, 2022), 87
FR 34913 (June 8, 2022) (File No. SR-NSCC-2022-005). The Notice
referred to an incorrect filing date of May 30, 2022; however, the
proposal was filed on May 20, 2022, as indicated here. Moreover, the
Notice reflected the filing of Amendment No. 1, which made a
correction to Exhibit 5 of the filing, specifically, to insert an
additional cross-reference into a proposed definition that had been
omitted.
\4\ Comments are available at https://www.sec.gov/comments/sr-nscc-2022-005/srnscc2022005.htm.
---------------------------------------------------------------------------
On July 11, 2022, pursuant to Section 19(b)(2) of the Act,\5\ the
Commission designated a longer period within which to approve,
disapprove, or institute proceedings to determine whether to approve or
disapprove the Proposed Rule Change.\6\ On September 1, 2022, the
Commission instituted proceedings, pursuant to Section 19(b)(2)(B) of
the Act,\7\ to determine whether to approve or disapprove the Proposed
Rule Change.\8\
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78s(b)(2).
\6\ Securities Exchange Act Release No. 95245 (July 11, 2022),
87 FR 42523 (July 15, 2022) (SR-NSCC-2022-005).
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ Securities Exchange Act Release No. 95656 (Sept. 1, 2022),
87 FR 55058 (Sept. 8, 2022) (File No. SR-NSCC-2022-005).
---------------------------------------------------------------------------
On July 6, 2022, NSCC filed a partial amendment (``Amendment No.
2'') to modify the proposed rule change.\9\ On November 28, 2022, NSCC
filed another amendment (``Amendment No. 3'') to modify the proposed
rule change as described in Items I, II and III below, which Items have
been prepared primarily by the clearing agency.\10\
---------------------------------------------------------------------------
\9\ Amendment No. 2 partially amended the proposed rule change
to update the description of the impact of the proposal. The
contents of that Amendment are reflected in Section II(A)(1)(vii)
below. In Amendment No. 2, NSCC also provided a revised version of
the confidential impact study that it included as Exhibit 3a to the
proposed rule change.
\10\ Amendment No. 3 amends and replaces the proposed rule
change in its entirety. Specifically, it would clarify the
particular circumstances in which NSCC would retain the ability to
waive the ECP charge, rather than remove NSCC's discretion to waive
or reduce the charge as was initially proposed in the proposed rule
change. As described in greater detail below in Section II.(iv),
this Amendment describes why NSCC believes it is appropriate for
NSCC to retain discretion to waive an ECP charge in certain defined
circumstances, defines the circumstances in which NSCC may waive the
ECP charge, and discloses both the information that NSCC would
review in deciding whether to waive the ECP charge as well as the
governance around the application of such waiver. In order to
implement these proposed changes, NSCC would amend Section I(B)(2)
of Procedure XV of the Rules to include a new subsection (c) to
describe NSCC's discretion to waive the ECP charge.
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[[Page 75106]]
The Commission is publishing this notice to solicit comments on
Amendment Nos. 2 and 3 from interested persons and to designate a
longer period for Commission action pursuant to Section 19(b)(2)(B) of
the Act \11\ to determine whether to approve or disapprove the proposed
rule change, as modified by Amendment Nos. 2 and 3 (hereinafter,
``proposed rule change'').
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of modifications to Procedure XV
(Clearing Fund Formula and Other Matters) of NSCC's Rules & Procedures
(``Rules'') \12\ to revise the Excess Capital Premium (``ECP'') charge
by enhancing the methodology for calculating the charge to (1) compare
a Member's applicable capital amounts with the amount it contributes to
the Clearing Fund that represents its volatility charge, (2) for
Members that are broker-dealers, use net capital amounts rather than
excess net capital amounts in the calculation of the ECP charge; and
for all other Members, use equity capital in the calculation of the ECP
charge, and (3) establish a cap of 2.0 for the Excess Capital Ratio (as
defined below) that is used in calculating a Member's ECP charge.
---------------------------------------------------------------------------
\12\ Capitalized terms not defined herein are defined in the
Rules, available at https://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
---------------------------------------------------------------------------
The proposed changes would also improve the transparency of the
Rules regarding the ECP charge by (1) clarifying the capital amounts
that are used in the calculation of the charge by introducing new
defined terms, (2) clarifying the particular circumstances in which
NSCC retains the ability to waive the charge, and (3) providing that
NSCC may calculate the charge based on updated capital information, as
described in greater detail below.
II. Clearing Agency's Amended 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 III 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
Description of Amendment No. 3
This filing constitutes Amendment No. 3 to proposed rule change SR-
NSCC-2022-005, which was filed with the Commission on May 20, 2022, and
previously amended on June 1, 2022 and July 6, 2022. This Amendment
amends and replaces the Filing, as previously amended, in its entirety.
NSCC submits this Amendment in order to clarify the particular
circumstances in which NSCC would retain the ability to waive the ECP
charge, rather than remove NSCC's discretion to waive or reduce the
charge as was proposed in the Filing.
In particular, and as described in greater detail below, this
Amendment describes why NSCC believes it is appropriate for NSCC to
retain discretion to waive an ECP charge in certain defined
circumstances, defines the circumstances in which NSCC may waive the
ECP charge, and discloses both the information that NSCC would review
in deciding whether to waive the ECP charge as well as the governance
around the application of such waiver. In order to implement these
proposed changes, NSCC would amend Section I(B)(2) of Procedure XV of
the Rules to include a new subsection (c) to describe NSCC's discretion
to waive the ECP charge, as shown in Exhibits 4 and 5 to this
Amendment.
Proposed Rule Change
NSCC is proposing to modify the ECP charge, which is a component of
its Clearing Fund that NSCC may impose on a Member when a portion of
that Member's Required Fund Deposit (defined in the Rules as the
``Calculated Amount'') exceeds its applicable capital amounts by 1.0
(defined in the Rules as the ``Excess Capital Ratio''), as described in
greater detail below.\13\ The proposed changes would revise the ECP
charge by enhancing the methodology for calculating the charge to (1)
compare a Member's applicable capital amounts with the amount it
contributes to the Clearing Fund that represents its volatility charge,
(2) for Members that are broker-dealers, use net capital amounts rather
than excess net capital amounts in the calculation of the ECP charge;
and for all other Members, use equity capital in the calculation of the
ECP charge, and (3) establish a cap of 2.0 for the Excess Capital Ratio
that is used in calculating a Member's ECP charge.
---------------------------------------------------------------------------
\13\ See Section I(B)(2) of Procedure XV, id.
---------------------------------------------------------------------------
The proposed changes would also improve the transparency of the
Rules regarding the ECP charge by (1) clarifying the capital amounts
that are used in the calculation of the charge by introducing new
defined terms, (2) clarifying the particular circumstances in which
NSCC retains the ability to waive the charge, and (3) providing that
NSCC may calculate the charge based on updated capital information, as
described in greater detail below.
(i) Overview of the Required Fund Deposit and NSCC's Clearing Fund
As part of its market risk management strategy, NSCC manages its
credit exposure to Members by determining the appropriate Required Fund
Deposits to the Clearing Fund and monitoring its sufficiency, as
provided for in the Rules.\14\ The Required Fund Deposit serves as each
Member's margin.
---------------------------------------------------------------------------
\14\ See Rule 4 and Procedure XV, supra note 12. NSCC's market
risk management strategy is designed to comply with Rule 17Ad-
22(e)(4) under the Act, where these risks are referred to as
``credit risks.'' 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------
The objective of a Member's Required Fund Deposit is to mitigate
potential losses to NSCC associated with liquidating a Member's
portfolio in the event NSCC ceases to act for that Member (hereinafter
referred to as a ``default'').\15\ The aggregate of all Members'
Required Fund Deposits constitutes the Clearing Fund of NSCC. NSCC
would access its Clearing Fund should a defaulting Member's own
Required Fund Deposit be insufficient to satisfy losses to NSCC caused
by the liquidation of that Member's portfolio. Pursuant to the Rules,
each Member's Required Fund Deposit consists of a number of applicable
components, each of which is calculated to address specific risks faced
by NSCC, as identified within Procedure XV of the Rules.\16\
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\15\ The Rules identify when NSCC may cease to act for a Member
and the types of actions NSCC may take. For example, NSCC may
suspend a firm's membership with NSCC or prohibit or limit a
Member's access to NSCC's services in the event that Member defaults
on a financial or other obligation to NSCC. See Rule 46, supra note
12.
\16\ Supra note 12.
---------------------------------------------------------------------------
While many components of the Clearing Fund are designed to measure
risks presented by the net unsettled positions a Member submits to NSCC
to be cleared and settled, some components measure and mitigate other
risks that NSCC may face, such as credit
[[Page 75107]]
risks. For example, a Member may be required to make an additional
deposit to the Clearing Fund pursuant to Section I(B)(1) of Procedure
XV of the Rules if it is placed on the Watch List, which is defined in
Rule 1 (Definitions and Descriptions) of the Rules as a list of Members
who NSCC deems to pose heightened risk to it and its other Members
based on consideration of relevant factors.\17\
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\17\ See Section 4 of Rule 2B, which describes NSCC's ongoing
monitoring and review of Members and the factors NSCC considers in
assigning Members a credit rating that could result in a Member
being placed on the Watch List, supra note 12.
---------------------------------------------------------------------------
Similarly, the ECP charge is a component of the Clearing Fund that
is designed to mitigate the heightened default risk a Member could pose
to NSCC if it operates with lower capital levels relative to its margin
requirements. Each Business Day, NSCC determines if a Member may be
subject to the ECP charge by first determining its Calculated Amount.
The Calculated Amount is a portion of a Member's Required Fund Deposit
designed to represent its margin requirements to NSCC. A Member's
Calculated Amount is calculated as its Required Fund Deposit excluding
any applicable special charge, margin requirement differential charge,
coverage component charge or margin liquidity adjustment charge,\18\
plus any additional amounts the Member is required to deposit to the
Clearing Fund either due to being placed on the Watch List \19\ or
pursuant to Rule 15 (Assurances of Financial Responsibility and
Operational Capability) of the Rules.\20\
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\18\ The special charge is described in Section I(A)(1)(c) and
(2)(c) of Procedure XV, the MRD charge is described in Section
I(A)(1)(e) and (2)(d) of Procedure XV, the coverage component charge
is described in Section I(A)(1)(f) and (2)(e) of Procedure XV, and
the MLA charge is described in Section I(A)(1)(g) and (2)(f) of
Procedure XV, supra note 12.
\19\ Supra note 17.
\20\ Pursuant to Section 2(b)(iv) of Rule 15, NSCC may require a
Member to provide NSCC with adequate assurances of that Member's
financial responsibility in the form of increased Clearing Fund
deposits. Supra note 12.
---------------------------------------------------------------------------
NSCC then divides the Member's Calculated Amount by its current
capital amount, which is the amount reported to NSCC pursuant to its
ongoing membership standards, as set out in Rule 2B (Ongoing Membership
Requirements and Monitoring) and Addendum B (Qualifications and
Standards of Financial Responsibility, Operational Capability and
Business History) of the Rules.\21\ Pursuant to the current membership
standards in Addendum B of the Rules, Members that are broker-dealers
are required to maintain a certain level of excess net capital, and
Members that are banks are required to maintain a certain level of
equity capital as a requirement for continued membership with NSCC.\22\
Pursuant to Section 2 of Rule 2B of the Rules, Members are required to
provide NSCC with financial information, including information
regarding Members' current capital amounts, on a regular basis and NSCC
uses these reported capital amounts in the calculation of the ECP
charge.\23\
---------------------------------------------------------------------------
\21\ Supra note 12.
\22\ See Section 1. B.1. of Addendum B, supra note 12. NSCC has
proposed changes to the membership standards set forth in Addendum B
that would modify the capital requirements for Members. See
Securities Exchange Act Release No. 94068 (January 26, 2022), 21 FR
5544 (February 1, 2022) (SR-NSCC-2021-016).
\23\ See Section 2(A) of Rule 2B, supra note 12.
---------------------------------------------------------------------------
Pursuant to Section I(B)(2) of Procedure XV, if a Member's
Calculated Amount, when divided by its applicable capital amount, is
greater than the Excess Capital Ratio of 1.0, NSCC may require that
Member to deposit an ECP charge.\24\ The applicable ECP charge may be
equal to the product of (1) the amount by which a Member's Calculated
Amount exceeds its applicable capital amount, multiplied by (2) the
Member's Excess Capital Ratio. Members are able to access and view
reports regarding their Clearing Fund and, through these reports,
Members may be alerted when their Calculated Amount divided by the
applicable capital amount is greater than 0.5, as an early warning
regarding their capital levels.
---------------------------------------------------------------------------
\24\ Supra note 12.
---------------------------------------------------------------------------
Under Section I(B)(2) of Procedure XV, NSCC may collect a lower ECP
charge than the amount calculated pursuant to the Rules, may determine
not to collect the ECP charge from a Member at all, and may return all
or a portion of a collected ECP charge if it believes the imposition or
maintenance of the ECP charge is not necessary or appropriate.\25\
Section I(B)(2) of Procedure XV describes some circumstances when NSCC
may determine not to collect an ECP charge from a Member, which
includes, for example, when an ECP charge results from trading activity
for which the Member submits later offsetting activity that lowers its
Required Fund Deposit.\26\ The discretion to adjust, waive or return an
ECP charge was designed to provide NSCC with the ability to determine
when a calculated ECP charge may not be necessary or appropriate to
mitigate the risks it was designed to address.\27\
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\25\ When NSCC determines to collect a lower amount than that
amount calculated pursuant to the Rules, as provided for under
Procedure XV, NSCC may, for example, calculate that lower amount by
reducing the Excess Capital Ratio used in the calculation to 2.0.
Supra note 12.
\26\ See footnote 7 of Procedure XV, supra note 12.
\27\ See Securities Exchange Act Release No. 54457 (September
15, 2006), 71 FR 55239 (September 21, 2006) (SR-FICC-2006-03 and SR-
NSCC-2006-03).
---------------------------------------------------------------------------
Since the ECP charge was adopted, NSCC has calculated and assessed
the ECP charge consistent with the Rules, and NSCC has exercised its
discretion to both reduce and waive the ECP charge when NSCC has deemed
it necessary or appropriate. NSCC recently reviewed the effectiveness
of the ECP charge to identify ways NSCC could enhance both the
calculation of the charge and the disclosures regarding the charge in
the Rules. In connection with this review, NSCC discussed the ECP
charge and its proposed enhancements with Members, NSCC management, and
NSCC's supervisors at the Commission. As a result of this review, NSCC
is proposing to make several enhancements to the ECP charge, as
described in greater detail below.
These enhancements are designed to improve NSCC's ability to
measure the increased default risks that are presented by Members who
operate with lower capital. The proposed changes would simplify the
calculation of the charge and the description of the charge in the
Rules, making it more predictable to Members. The proposed changes are
designed to improve the transparency of the ECP charge to Members by
clarifying the particular circumstances in which NSCC retains the
ability to waive the charge and providing that NSCC may calculate the
charge based on updated capital information. The proposed improvements
to the transparency of the ECP charge also include clarifying the
descriptions of the capital amounts that would be used in the
calculation of the charge through new defined terms. Collectively, the
proposal would make the ECP charge more consistent, transparent, and
predictable to Members, while maintaining the effectiveness of NSCC's
risk-based margining methodology as it relates to the ECP charge.
(ii) Use Members' Volatility Component as the Calculated Amount
NSCC is proposing to replace the Calculated Amount with the amount
collected as that Member's volatility component as determined pursuant
to Sections I(A)(1)(a)(i)-(iii) and (2)(a)(i)-(iii) of Procedure XV of
the Rules.\28\
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\28\ The volatility component is designed to capture the market
price risk associated with each Member's portfolio at a 99th
percentile level of confidence. NSCC has two methodologies for
calculating the volatility component--a model-based volatility-at-
risk, or VaR, charge and a haircut-based calculation, for certain
positions that are excluded from the VaR charge calculation. The
charge that is applied to a Member's Required Fund Deposit with
respect to the volatility component is referred to as the volatility
charge and is the sum of the applicable VaR charge and the haircut-
based calculation. Amounts calculated pursuant to Sections
I(A)(1)(a)(iv) and (2)(a)(iv) of Procedure XV with respect to long
positions in Net Unsettled Positions in Family-Issued Securities are
designed to address wrong-way risk presented by these positions, not
volatility risks, and, as such, are not a part of a Member's
volatility charge. See Sections I(A)(1)(a) and (2)(a) of Procedure
XV, supra note 12.
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[[Page 75108]]
In both determining if an ECP charge is applicable and in
calculating an ECP charge, NSCC currently compares a Member's
Calculated Amount to its reported capital levels. As described above,
the Calculated Amount is defined in Section I(B)(2) of Procedure XV as
a Member's Required Fund Deposit, excluding certain components and
including other additional deposits to the Clearing Fund.\29\ Because a
goal of the ECP charge is to identify and mitigate risks presented when
a Member's capital levels may not be adequate to meet its margin
requirements to NSCC, the Calculated Amount is designed to represent a
material portion of those margin requirements.
---------------------------------------------------------------------------
\29\ See supra note 18.
---------------------------------------------------------------------------
As described above, because each component of the Clearing Fund is
calculated to address specific risks faced by NSCC, some components are
applied only to certain positions in a Member's portfolio. For example,
the CNS fails charge, which is included in the Calculated Amount, is
based on the market value of only a Member's CNS Fails Positions (as
defined in the Rules) of the Member.\30\ The volatility component of
the Clearing Fund measures the market price volatility of all of a
Member's Net Unsettled Positions and Net Balance Order Unsettled
Positions (as defined in the Rules). Therefore, the volatility
component is often considered a comprehensive measurement of the risks
presented by a Member's clearing activity and usually comprises the
largest portion of a Member's Required Fund Deposit.\31\ NSCC believes
that replacing the Calculated Amount with a Member's volatility charge
would provide an appropriate measure for purposes of the ECP charge.
---------------------------------------------------------------------------
\30\ See definition of ``CNS Fails Position'' in Rule 1, and see
also Section I(A)(1)(e) of Procedure XV, supra note 12.
\31\ See definitions of ``Net Unsettled Position'' and ``Net
Unsettled Balance Order Position'' in Rule 1, supra note 12.
---------------------------------------------------------------------------
Currently, determining a Member's Calculated Amount requires a more
complicated calculation, as it uses a Member's Required Fund Deposit,
excludes certain components, and includes other deposits. The proposal
would simplify this calculation significantly by using only the
volatility component. One of the tools NSCC provides to its Members is
a calculator that allows them to determine their potential volatility
charge based on trading activity. Therefore, this proposed change would
make the calculation of the ECP charge both clearer and more
predictable for Members.
NSCC does not expect that any impact of this proposed change on the
number of ECP charges or the size of the calculated ECP charges would
materially impact NSCC's ability to manage the risks the ECP charge is
designed to address. NSCC believes the benefits of using a simpler,
clearer, and more predictable calculation that is based on the most
comprehensive component of the Clearing Fund outweigh any risk related
to the reduction in the ECP charges NSCC would collect.
(iii) Use Net Capital for Broker-Dealer Members and Equity Capital for
All Other Members in the Calculation of the ECP Charge
In the calculation of the ECP charge, NSCC is proposing to use net
capital rather than excess net capital for Members that are broker-
dealers, and equity capital for all other Members. As described in
greater detail below, in connection with these proposed changes, NSCC
would also improve the transparency of the Rules by adopting
definitions of ``Net Capital'' and ``Equity Capital.''
As described above, NSCC's ongoing membership requirements, set
forth in Rule 2B of the Rules, require Members to provide NSCC with
regular information regarding their financial positions, including
capital levels.\32\ This information is provided, in part, to confirm
that Members continue to maintain the minimum financial requirements of
membership set forth in Addendum B of the Rules.\33\ Currently, NSCC
also uses these reported capital amounts in the calculation of the ECP
charge.
---------------------------------------------------------------------------
\32\ See Section 2.A of Rule 2B, which requires Members to
provide NSCC with a copy of their Form X-17-A-5 (Financial and
Operational Combined Uniform Single (``FOCUS'') Report),
Consolidated Report of Condition and Income (``Call Report''), or an
equivalent, supra note 12.
\33\ Supra note 12.
---------------------------------------------------------------------------
First, NSCC believes it would be appropriate to revise the capital
measure used to calculate the ECP charge for broker-dealer Members to
replace excess net capital with net capital. This revision would align
the capital measures used for broker-dealer Members and other Members,
which would result in more consistent calculations of the ECP charge
across different types of Members.
In addition to creating consistency in the calculations for
different Members, NSCC believes that using net capital rather than
excess net capital would also provide NSCC with a better measure of the
increased default risks presented when a Member operates at low net
capital levels relative to its margin requirements. This approach would
be consistent with the rationale for the Commission's amendments to
Rule 15c3-1 under the Act (the ``Net Capital Rule''), which were
designed to promote a broker-dealer's capital quality and require the
maintenance of ``net capital'' (i.e., capital in excess of liabilities)
in specified amounts as determined by the type of business
conducted.\34\ The Net Capital Rule was designed to ensure the
availability of funds and assets (including securities) in the event
that a broker-dealer's liquidation becomes necessary. The Net Capital
Rule represented a net worth perspective, which is adjusted by
unrealized profit or loss, deferred tax provisions, and certain
liabilities as detailed in the rule. It also included deductions and
offsets and required that a broker-dealer demonstrate compliance with
the Net Capital Rule, including maintaining sufficient net capital at
all times (including intraday).
---------------------------------------------------------------------------
\34\ 17 CFR 240.15c3-1. See Securities Exchange Act Release No.
70072 (July 30, 2013), 78 FR 51823 (August 21, 2013) (File No. S7-
08-07).
---------------------------------------------------------------------------
Similarly, NSCC believes that the Net Capital Rule is an effective
process of separating liquid and illiquid assets and computing a
broker-dealer's regulatory net capital that should replace NSCC's
existing practice of using excess net capital in the calculation of the
ECP charge.
Second, NSCC is proposing to revise the Rules to provide that, for
all Members that are not broker-dealers, it would use equity capital in
calculating the ECP charge. Currently, the Rules state that NSCC would
use a Member's capital amount set forth in the membership standards in
Addendum B of the Rules.\35\ Section 1.B of Addendum B describes the
membership standards of Members, and currently states that the
applicable capital measure for Members that are banks is equity
capital, for Members that are trust companies and not banks the
[[Page 75109]]
applicable capital measure is consolidated capital, and for other legal
entities that are Members the applicable capital measure is determined
by NSCC. Currently, and historically, NSCC has had very few Members
that are trusts and not banks. For all Members that are not banks, non-
bank trusts or broker-dealers (which generally include, for example,
exchanges and registered clearing agencies), NSCC uses those Members'
reported equity capital in the calculation of the ECP charge.
Therefore, in practice, the ECP charge is calculated for the majority
of Members that are not broker-dealers using their equity capital, and
this proposed change is not expected to have a material impact on the
collection of ECP charges. The proposal would simplify the calculation
of the ECP charge for Members that are not broker-dealers by stating in
Section I(B)(2) of Procedure XV that NSCC would use equity capital
rather than use different measures that are based on other membership
requirements. This proposed change would also create consistency in the
calculations across Members.
---------------------------------------------------------------------------
\35\ Supra note 12.
---------------------------------------------------------------------------
(iv) Establish a Cap for the Excess Capital Ratio
NSCC is proposing to set a maximum amount of Excess Capital Ratio
that is used in calculating Members' ECP charge to 2.0. NSCC believes
capping the multiplier that is used in this calculation would allow
NSCC to appropriately address the risks it faces without imposing an
overly burdensome ECP charge. Historically, the Excess Capital Ratio
has rarely exceeded 2.0 in the calculation of Members' ECP charges, and
in cases when 2.0 was exceeded NSCC typically exercised the discretion
provided to it in the Rules to reduce the applicable charge. NSCC's
discretion was appropriate in these circumstances because NSCC believes
it is able to mitigate the risks presented to it by a Member's lower
capital levels by collecting an ECP charge calculated with an Excess
Capital Ratio that is at or below 2.0.
Therefore, and consistent with NSCC's proposal to clarify its
discretion to waive the ECP charge, as described below, NSCC believes
capping the Excess Capital Ratio at 2.0 would continue to provide NSCC
with an appropriate measure of the risks presented to it relative to
Members' capital levels. This proposed change would also provide
Members with more clarity and transparency into the ECP charge, by
allowing them to predict and estimate the maximum amount of their
potential ECP charge.
(v) Improve Transparency Regarding the ECP Charge
NSCC is proposing changes to Section I(B)(2) of Procedure XV to
improve transparency regarding the ECP charge by (a) clarifying the
description of the capital amounts that NSCC uses in the calculation of
the ECP charge by adopting new defined terms, (b) clarifying the
particular circumstances in which NSCC retains the ability to waive the
charge, and (c) providing that NSCC may calculate the charge based on
updated capital information.
First, NSCC is proposing to clarify the description of the capital
amounts that it uses to calculate the ECP charge by introducing defined
terms and specifying the reporting requirements that NSCC relies on to
obtain that capital information for Members. As described above, for
Members that are broker-dealers, NSCC is proposing to use a Member's
net capital amount, and for all other Members, NSCC would use a
Member's equity capital in the calculation of the ECP charge. In order
to improve the clarity of the Rules, NSCC is proposing to introduce a
defined term for ``Equity Capital'' in Rule 1 and to revise a proposed
defined term for ``Net Capital'' in order to align the two defined
terms. The proposal would also revise Section I(B)(2) of Procedure XV
in describing the calculation of the ECP charge to use these defined
terms where appropriate. Finally, the proposal would amend Addendum B
to include the new defined term for Equity Capital.
The definition of Equity Capital would be, as of a particular date,
the amount equal to the equity capital as reported on the Member's or
Limited Member's most recent Call Report, or, if the Member or Limited
Member is not required to file a Call Report, then as reported on its
most recent financial statements or equivalent reporting. NSCC would
also align a proposed definition of Net Capital to be, as of a
particular date, the amount equal to the net capital as reported on the
Member's or Limited Member's most recent FOCUS Report, or, if the
Member or Limited Member is not required to file a FOCUS Report, then
as reported on its most recent financial statements or equivalent
reporting.
In addition to using these new defined terms, NSCC would also add a
statement to Section I(B)(2) of Procedure XV to clarify to Members that
the amounts used in the calculation of the ECP charge would be the
amounts included in their regular reporting that is provided to NSCC
pursuant to the ongoing membership reporting requirements, specifically
in their FOCUS Report or Call Report, as applicable, or in an
equivalent financial statement or report that is delivered to NSCC
pursuant to the same requirement. Collectively, these proposed changes
would provide Members with improved clarity and certainty regarding the
amounts that would be used in calculating the ECP charge.
Second, the proposed changes would clarify the particular
circumstances in which NSCC retains the ability to waive the ECP
charge. NSCC believes that the proposed changes to the calculation of
the ECP charge described in this filing would have the collective
impact of eliminating most circumstances in which NSCC would have
exercised this discretion. For example, the proposal to cap the Excess
Capital Ratio at 2.0 and the proposal to specify that NSCC may
calculate an ECP charge based on updated capital amounts, both address
the most common circumstances when NSCC has either waived or reduced
the ECP charge in the past. However, NSCC believes that there may still
be circumstances when it may not be necessary or appropriate to collect
an ECP charge from a Member, for example, in certain exigent
circumstances when NSCC observes unexpected changes in market
volatility or trading volumes. Therefore, NSCC is proposing to retain
discretion to waive an ECP charge in certain defined circumstances and
to disclose the governance around the application of such discretion.
The proposed changes would revise Section I(B)(2) of Procedure XV by
adding a new subsection (c) to provide Members with transparency
regarding this retained discretion.
The proposed subsection (c) would describe the exigent
circumstances in which NSCC would retain the ability to waive an ECP
charge. Such exigent circumstances would constitute circumstances when
NSCC, in its sole discretion, observes extreme market conditions or
other unexpected changes in factors such as market volatility, trading
volumes or other similar factors. As noted above, NSCC believes, based
on a review of past data, that the proposed changes to the calculation
of the ECP charge would otherwise eliminate most prior instances when
an ECP charge was waived. However, in further reviewing such data, NSCC
also observed that there have been instances, particularly in recent
years, when NSCC has waived the ECP charge in moments covered by the
concept of exigent circumstances, and that the ECP charge would have
been triggered in such
[[Page 75110]]
circumstances even under the proposed calculation of the charge. Such
moments occurred multiple times in recent years, including, for
example, during the extreme market volatility experienced in early 2020
related to the global outbreak of the COVID-19 coronavirus and the meme
stock market event in early 2021.
Based upon this further review of the data, NSCC believes there
remains some ongoing possibility that an unexpected increase in market
volatility, for example, could cause a relative increase in a Member's
volatility charge, which may, in turn, trigger an ECP charge, even
under the proposed new ECP charge calculation. In such circumstances,
under the proposal, NSCC would determine if the ECP charge being
triggered at that time is not primarily caused by the risk presented by
a Member's capital levels and whether NSCC can effectively address the
risk exposure presented by that Member without the collection of the
ECP charge from that Member. Alternatively, NSCC may determine, based
on its review of the information available to it, that the ECP charge
was appropriately triggered by a Member's capital position or trading
activity and was not driven primarily by the prevailing market
conditions or other exigent circumstances. Therefore, NSCC believes it
is appropriate to retain a certain amount of discretion to review an
ECP charge that is triggered in such circumstances to determine whether
a waiver of the ECP charge may be appropriate.
In addition to defining the circumstances in which NSCC may waive
the ECP charge, the proposed changes would also describe the review
NSCC would conduct in deciding to waive the charge in the exigent
circumstances, the information NSCC would consider in such review, and
the governance around a determination by NSCC to waive the ECP charge.
More specifically, the proposed rule change provides that NSCC would
review all relevant facts and other information available to it at the
time of its decision, including the degree to which a Member's capital
position and trading activity compare or correlate to the prevailing
exigent circumstances and whether NSCC can effectively address the risk
exposure presented by a Member without the collection of the ECP charge
from that Member. For example, as noted above, if NSCC believes, based
on its review of the relevant circumstances, that the risk exposure
presented by a Member is driven by the unexpected increase in market
volatility and not by a Member's capital levels, NSCC may determine
that it is appropriate to address such risk through the collection of a
special charge from that Member rather than an ECP charge.\36\ By
describing NSCC's review in Procedure XV, the proposed changes would
alert Members that, while exigent circumstances may permit NSCC to
consider whether to waive an ECP charge, NSCC would still consider
information available to it at that time in determining whether a
waiver is appropriate, including NSCC's ability to effectively manage
the heightened default risks presented by Members that operate at lower
capital levels.
---------------------------------------------------------------------------
\36\ See Section I(A)(1)(c) and (2)(c) of Procedure XV of the
Rules, under which NSCC may collect, as part of Members' Required
Fund Deposit to the Clearing fund, ``[a]n additional payment
(``special charge'') from Members in view of price fluctuations in
or volatility or lack of liquidity of any security.'' Supra note 12.
---------------------------------------------------------------------------
Finally, the proposed rule change would provide transparency into
the governance around a decision to waive an ECP charge by identifying
the NSCC officer who would be authorized to apply a waiver and
requiring that the decision be documented.\37\
---------------------------------------------------------------------------
\37\ NSCC would also update its internal procedures to include
waivers of the ECP charge in NSCC's regular updates to the
Commission.
---------------------------------------------------------------------------
By clarifying the particular circumstances in which NSCC retains
the ability to waive the ECP charge, the proposal would provide Members
with more certainty and transparency in predicting when an ECP charge
may be waived and how NSCC would make a determination to apply such a
waiver.
Third, NSCC would provide that it may calculate the ECP charge
based on updated capital information. As described above, NSCC would
use the net capital or equity capital amounts that are reported on
Members' most recent financial reporting or financial statements
delivered to NSCC in connection with the ongoing membership reporting
requirements. Under the proposal, if a Member's capital amounts change
between the dates when it submits these financial reports, it may
provide NSCC with updated capital information for purposes of
calculating the ECP charge. Today, when NSCC exercises its discretion
to waive or reduce the amount of an applicable ECP charge, NSCC
occasionally does so by applying updated capital information in its
calculation. Therefore, in connection with clarifying this discretion,
NSCC would disclose in the Rules that it may use updated capital
information in the calculation of an ECP charge rather than require
Members to wait until the issuances of their next financial reporting
or financial statements for changes in their capital positions to be
reflected in an ECP charge calculation.
NSCC is proposing to retain some discretion in when it would accept
updated capital information for this purpose. For example, NSCC may
require a Member to provide documentation of the circumstances that
caused a change in capital information, and if adequate evidence is not
available or NSCC does not believe the evidence sufficiently verifies
that the Member's capital position has changed, NSCC would continue to
calculate the ECP charge for that Member based on the prior capital
information available to NSCC until the next financial reporting or
financial statements are delivered. NSCC believes it is appropriate to
retain some discretion to allow NSCC to determine if updated capital
information is adequately verified before it agrees to rely on that
information for this calculation. NSCC believes the proposal to
disclose that Members would have the opportunity to provide updated
capital information to NSCC to be used in an ECP charge calculation
would improve the transparency of the Rules despite NSCC's proposal to
retain a certain level of discretion.
(vi) Proposed Changes to Procedure XV of the Rules
The proposal would amend Section I(B)(2) of Procedure XV of the
Rules to implement the proposed changes to the ECP charge. The proposed
changes would organize this section into three subsections.
The proposed subsections (a) and (b) would describe the calculation
used to determine if an ECP charge may be applicable to a Member and,
if an ECP charge is applicable, how that charge would be calculated.
The revised description of these calculations would (i) replace the
definition of Calculated Amount with Members' volatility charge, (ii)
replace references to the capital amounts used in the calculation with
the new defined terms for Net Capital and Equity Capital, and (iii)
state that the Excess Capital Ratio used in calculating an ECP charge
is set at a maximum of 2.0. The proposed change would also include a
statement that the applicable capital amounts used in the calculation
would be the amounts most recently reported to NSCC on Members' FOCUS
Reports or Call Reports, as applicable, or other equivalent financial
reporting submitted to NSCC pursuant to Section 2 of Rule 2B. The
proposal would also state that NSCC may, in its sole discretion, accept
updated capital amounts in calculating an ECP charge.
[[Page 75111]]
The proposed subsection (c) would describe NSCC's discretion to
waive the ECP charge in certain defined circumstances, the information
NSCC would consider in deciding to apply this discretion and the
governance around this decision.
(vii) Impact Study Results
NSCC has provided the Commission with the results of an impact
study that reviewed the potential impacts of the proposal during the
period of June 1, 2020 through December 31, 2021. The study showed that
the proposed enhancement would have reduced the number of ECP charges
that would have been triggered by the calculation by 65 percent, from
347 ECP charges triggered for 19 Members to 122 ECP charges triggered
for 14 Members. The total aggregate amount that would have been
triggered by the proposed calculation if the proposal was effective
during that time would have been reduced from $51.31 billion (the
actual total amount of ECP charges triggered by the current calculation
during that period) to approximately $17.44 billion (the total amount
of ECP charges that would have been triggered during that time by the
proposed calculation). The average amount that would have been
calculated for each Member would have been reduced from $147.9 million
to approximately $143.0 million. The study showed that the proposal
would have had no impact to NSCC's overall, or Member-level, end-of-day
Clearing Fund Requirement backtesting coverage.
Over the impact study period, NSCC waived and adjusted calculated
ECP charges by $38.80 billion. NSCC waived a total of 33 ECP charges
that totaled approximately $26.12 billion. If the proposal had been in
place at that time, 14 of these charges would have been collected from
Members (although the amount would have been reduced), totaling $6.46
billion, 14 charges would not have been triggered as the calculated ECP
ratio was below 1.0, and NSCC would have waived 5 of the ECP charges,
mainly following receipt of updated financial information. NSCC
adjusted the amount of 16 ECP charges by a total of approximately
$12.69 billion. If the proposal had been in place at that time, 7 of
these charges would have been still collected, totaling $6.48 billion,
and 9 charges would not have been triggered as the calculated ECP ratio
was below 1.0.
(viii) Implementation Timeframe
NSCC would implement the proposed changes no later than 30 days
after the approval of the proposed rule change by the Commission. NSCC
would announce the effective date of the proposed changes by Important
Notice posted to its website.
2. Statutory Basis
NSCC believes the proposed rule change is consistent with the
requirements of the Act, and the rules and regulations thereunder
applicable to a registered clearing agency. In particular, NSCC
believes the proposed rule change is consistent with Section
17A(b)(3)(F) of the Act,\38\ and Rules 17Ad-22(e)(4)(i), (e)(6)(i) and
(e)(23)(ii), each promulgated under the Act,\39\ for the reasons
described below.
---------------------------------------------------------------------------
\38\ 15 U.S.C. 78q-1(b)(3)(F).
\39\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act requires that the rules of NSCC be
designed to, among other things, promote the prompt and accurate
clearance and settlement of securities transactions and to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible.\40\
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
NSCC believes the proposed changes are consistent with the
requirements of Section 17A(b)(3)(F) of the Act because such changes
enhance the effectiveness of the ECP charge by (1) replacing the
Calculated Amount with a Member's volatility component, (2) replacing
excess net capital with net capital for broker-dealer Members and using
equity capital for all other Members, and (3) establishing a cap for
the Excess Capital Ratio. As described above, NSCC believes these
proposed changes would create a simpler, clearer calculation of the ECP
charge that is based on more consistent metrics, while allowing NSCC to
continue to effectively address the heightened default risks presented
by Members that operate at lower capital levels.
The Clearing Fund is a key tool that NSCC uses to mitigate
potential losses to NSCC associated with liquidating a Member's
portfolio in the event of Member default. Each of the proposed
enhancements described above are designed to collectively improve
NSCC's ability to collect amounts that reflect the risks posed by its
Members. The proposal to enhance the calculation of the ECP charge by
replacing the Calculated Amounts with Members' volatility charges would
make the calculation clearer and more predictable to Members. The
proposal to use net capital for broker-dealer Members and equity
capital for all other Members in the calculation of the ECP charge
would result in a more consistent calculation across different types of
Members. The proposal to cap the Excess Capital Ratio at 2.0 would
allow NSCC to appropriately address the risks it faces without imposing
an overly burdensome ECP charge and would reduce the circumstances in
which NSCC may waive the charge, resulting in a more transparent
margining methodology.
Together, by improving the consistency and predictability of the
ECP charge, the proposed enhancements would also improve NSCC's ability
to collect amounts that reflect the risks posed by its Members such
that, in the event of Member default, NSCC's operations would not be
disrupted, and non-defaulting Members would not be exposed to losses
they cannot anticipate or control. In this way, the proposed rule
change is designed to assure the safeguarding of securities and funds
which are in the custody or control of NSCC or for which it is
responsible, consistent with Section 17A(b)(3)(F) of the Act.\41\
---------------------------------------------------------------------------
\41\ Id.
---------------------------------------------------------------------------
The proposed changes are also designed to improve the transparency
of the Rules regarding the ECP charge, for example, by introducing new
defined terms regarding the capital amounts used in the charge and by
clarifying the exigent circumstances in which NSCC may waive the
charge. By enhancing the clarity and transparency of the Rules, the
proposed changes would allow Members to better anticipate their margin
charges, which would allow them to more efficiently and effectively
conduct their business in accordance with the Rules. In this way, NSCC
believes the proposed changes would promote the prompt and accurate
clearance and settlement of securities transactions, consistent with
Section 17A(b)(3)(F) of the Act.\42\
---------------------------------------------------------------------------
\42\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(i) under the 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.\43\
---------------------------------------------------------------------------
\43\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
As described above, NSCC believes the proposed rule change would
enable NSCC to better identify, measure, monitor, and, through the
collection of Members' Required Fund Deposits,
[[Page 75112]]
manage its credit exposures to Members by maintaining sufficient
resources to cover those credit exposures fully with a high degree of
confidence. Specifically, NSCC believes that the proposed enhancements
to the calculation of the ECP charge to use the volatility charge
rather than the Calculated Amount, and to use net capital and equity
capital, as appropriate, would collectively make the calculation
clearer and more predictable to Members. The proposal to use net
capital rather than excess net capital for broker-dealer Members, and
equity capital for all other Members, would also result in a more
consistent calculation across different types of Members. Additionally,
the proposal to cap the Excess Capital Ratio at 2.0 would allow NSCC to
appropriately address the risks it faces without imposing an overly
burdensome ECP charge and would reduce the circumstances in which NSCC
may waive the charge, resulting in a more transparent margining
methodology. Finally, the proposed change to clarify NSCC's discretion
to waive the ECP charge would enable NSCC to better identify, measure,
monitor, and manage its credit exposures to Members by permitting NSCC
to determine, in certain exigent circumstances, when it is necessary to
collect an ECP charge and when it is appropriate to waive an ECP
charge.
Overall, NSCC believes the proposal would improve the clarity and
predictability of the ECP charge and, in this way, would enhance NSCC's
ability to effectively identify, measure and monitor its credit
exposures, and would enhance NSCC's ability to maintain sufficient
financial resources to cover NSCC's credit exposure to each participant
fully with a high degree of confidence. As such, NSCC believes the
proposed rule change is consistent with Rule 17Ad-22(e)(4)(i) under the
Act.\44\
---------------------------------------------------------------------------
\44\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(i) under the Act requires that NSCC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to cover its credit exposures to its participants
by establishing a risk-based margin system that, at a minimum,
considers, and produces margin levels commensurate with, the risks and
particular attributes of each relevant product, portfolio, and
market.\45\
---------------------------------------------------------------------------
\45\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
The Required Fund Deposits are made up of risk-based components (as
margin) that are calculated and assessed daily to limit NSCC's
exposures to Members. NSCC's proposed changes to use the volatility
charge rather than the Calculated Amount, and to use net capital and
equity capital, as appropriate, in the calculation of the ECP charge
would collectively make the calculation clearer and more predictable to
Members, while continuing to apply an appropriate risk-based charge
designed to mitigate the risks presented to NSCC. Similarly, the
proposal to cap the Excess Capital Ratio at 2.0 would allow NSCC to
appropriately address the risks it faces without imposing an overly
burdensome ECP charge and would reduce the circumstances in which NSCC
may waive the charge, resulting in a more transparent margining
methodology. Finally, the proposed rule change would clarify the
exigent circumstances when NSCC may determine that it is appropriate to
waive the ECP charge. Overall, these proposed changes would improve the
effectiveness of the calculation of the ECP charge and, therefore,
allow NSCC to more effectively address the increased default risks
presented by Members that operate with lower capital levels relative to
their margin requirements. In this way, the proposed changes enhance
the ability of the ECP charge to produce margin levels commensurate
with the risks NSCC faces related to its Members' operating capital
levels. Therefore, NSCC believes the proposed rule change is consistent
with Rule 17Ad-22(e)(6)(i) under the Act.\46\
---------------------------------------------------------------------------
\46\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(23)(ii) under the Act requires that NSCC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for providing sufficient information to
enable participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in NSCC.\47\ NSCC is
proposing to improve the clarity and transparency of the Rules related
to its calculation of the ECP charge in a number of ways described in
this filing. The proposed changes would clarify the description of the
capital amounts that NSCC uses in the calculation of the ECP charge by
adopting new defined terms, clarify NSCC's discretion to waive the
charge, and provide that NSCC may calculate the charge based on updated
capital information. Additionally, as described above, the proposed
changes to use the volatility charge rather than the Calculated Amount,
and to use net capital and equity capital, as appropriate, in the
calculation of the ECP charge, would collectively make the calculation
clearer and more predictable to Members. Finally, the proposed rule
change would provide clarity and transparency around the circumstances
in which NSCC may waive the ECP charge, the information NSCC would
consider in making this determination and the governance around such a
decision. Through these proposed amendments to the Rules, the proposal
would assist NSCC in providing its Members with sufficient information
to identify and evaluate the risks and costs, in the form of Required
Fund Deposits to the Clearing Fund, that they incur by participating in
NSCC. In this way, NSCC believes the proposed changes are consistent
with Rule 17Ad-22(e)(23)(ii) under the Act.\48\
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\47\ 17 CFR 240.17Ad-22(e)(23)(ii).
\48\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
NSCC does not believe the proposed rule change to enhance the
calculation of the ECP charge would impact competition because the
proposed changes are designed to create a clearer and simpler
calculation that is based on more consistent metrics and is likely to
result in lower and less frequent ECP charges than are applied under
the current methodology. More specifically, the replacement of the
Calculated Amount with the volatility charge, which is currently a
portion of the Calculated Amount, when used in the calculation to
determine if an ECP charge is applicable, is likely to result in fewer
triggered ECP charges, as evidenced by the impact study referenced
above. Additionally, the replacement of excess net capital with net
capital for broker-dealer Members, and using equity capital for all
other Members, would create more consistent calculations of the ECP
charge across types of Members, reducing any burden on competition that
the existing calculation could have presented. Finally, the proposal to
cap the Excess Capital Ratio to 2.0 in the calculation of the ECP
charge would limit the total amount a Member could be charged, and
would provide all Members with more certainty and transparency into
their potential margin requirements.
Therefore, by creating a simpler and clearer calculation that uses
more consistent metrics, the proposals would improve NSCC's ability to
apply the ECP charge more consistently across its Members and reduce
the impact this charge could have on competition. As noted above, in
the impact study results, the proposed changes are also expected
[[Page 75113]]
to result in fewer and lower ECP charges.
Further, NSCC does not believe the proposed rule change to improve
the clarity and predictability of the calculation of the ECP charge
would impact competition because this proposed change would not impact
the calculation of Members' Required Fund Deposits. Therefore, this
proposed change would not affect NSCC's operations or the rights and
obligations of membership. As such, NSCC believes the proposed rule
change to improve the transparency of the Rules would not have any
impact on competition.
C. Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
NSCC has not received or solicited any written comments relating to
this proposal. If any written comments are received, they will be
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
Persons submitting 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
Section 19(b)(2) of the Act \49\ provides that proceedings to
determine whether to approve or disapprove a proposed rule change must
be concluded within 180 days of the date of publication of notice of
filing of the proposed rule change. The time for conclusion of the
proceedings may be extended for up to 60 days if the Commission
determines that a longer period is appropriate and publishes the
reasons for such determination.\50\ The 180th day after publication of
the Notice in the Federal Register is December 5, 2022.
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\49\ 15 U.S.C. 78s(b)(2).
\50\ 15 U.S.C. 78s(b)(2)(B)(ii)(II).
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The Commission is extending the period for Commission action on the
Proposed Rule Change. The Commission finds that it is appropriate to
designate a longer period within which to take action on the Proposed
Rule Change so that the Commission has sufficient time to consider the
issues raised by the Proposed Rule Change and to take action on the
Proposed Rule Change. Accordingly, pursuant to Section
19(b)(2)(B)(ii)(II) of the Act,\51\ the Commission designates February
3, 2023, as the date by which the Commission should either approve or
disapprove the Proposed Rule Change SR-NSCC-2022-005.
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\51\ Id.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NSCC-2022-005 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-NSCC-2022-005. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of NSCC and on DTCC's website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NSCC-2022-005 and should be submitted on
or before December 22, 2022. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal on or before
December 28, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\52\
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\52\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-26535 Filed 12-6-22; 8:45 am]
BILLING CODE 8011-01-P
