Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing a Proposed Rule Change To Make Certain Enhancements to the Gap Risk Measure and the VaR Charge, 78157-78166 [2022-27657]
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Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices
to maintain their registrations and
ongoing quoting obligations in nonNasdaq listed securities while
decreasing the waiting period to reregister in a Nasdaq-listed security
would decrease the burden on Market
Makers.
Moreover, the Exchange does not
believe that the removal of references to
Primary and Secondary MPID will
impose any burden on competition
because to the extent a Nasdaq member
wishes to engage in passive market
making or enter a stabilizing bid on the
Exchange, it must continue to comply
with all Nasdaq (Equity 2, Sections 6
and 10), FINRA and SEC rules that
govern passive market making and
stabilizing bids.
Additionally, as discussed above,
similar notification provisions for
termination of Market Maker
registration and voluntary termination
of registration in a specific security
currently exist on another exchange.
These notification requirements are
intended to better allow the Exchange to
enforce Market Maker compliance with
applicable rules.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (i) significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 18 and Rule 19b–
4(f)(6) thereunder.19
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is: (i) necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) otherwise in
furtherance of the purposes of the Act.
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18 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). In addition, Rule 19b–
4(f)(6)(iii) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change, along with a brief
description and text of the proposed rule change,
at least five business days prior to the date of filing
of the proposed rule change, or such shorter time
as designated by the Commission. The Exchange
has satisfied this requirement.
19 17
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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 rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2022–073 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–NASDAQ–2022–073. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NASDAQ–2022–073, and
should be submitted on or before
January 11, 2023.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022–27654 Filed 12–20–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96511; File No. SR–NSCC–
2022–015]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing a
Proposed Rule Change To Make
Certain Enhancements to the Gap Risk
Measure and the VaR Charge
December 15, 2022.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
2, 2022, National Securities Clearing
Corporation (‘‘NSCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the clearing agency.3 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
(a) The proposed rule change of NSCC
consists of modifications to NSCC’s
Rules & Procedures (‘‘Rules’’) 4 in order
to enhance the calculation of the
volatility component of the Clearing
Fund formula that utilizes a parametric
Value-at-Risk (‘‘VaR’’) model (‘‘VaR
Charge’’) by (1) making the result of the
gap risk measure (‘‘Gap Risk Measure’’)
calculation an additive component of
the VaR Charge when it is applicable,
rather than being applied as the
applicable VaR Charge when it is the
largest of three separate calculations, (2)
modifying the language relating to
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 NSCC filed this proposed rule change as an
advance notice (SR–NSCC–2022–802) with the
Commission pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010,
12 U.S.C. 5465(e)(1), and Rule 19b–4(n)(1)(i) under
the Act, 17 CFR 240.19b–4(n)(1)(i). A copy of the
advance notice is available at https://
www.dtcc.com/legal/sec-rule-filings.aspx.
4 Capitalized terms not defined herein are defined
in the Rules, available at https://dtcc.com/∼/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
1 15
2 17
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Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices
which ETF (as defined below) positions
are excluded from the Gap Risk
Measure, (3) adjusting both the trigger
for applying the Gap Risk Measure and
the calculation of the Gap Risk Measure
to be based on the two largest positions
in a portfolio, rather than based on the
single largest position, (4)(a) removing
the description of the methodology in
the Rules for calculating the gap risk
haircut, (b) providing that, like the
concentration threshold, gap risk
haircuts would be calibrated from time
to time based on backtesting and impact
analysis and (c) changing the floor of the
gap risk haircut from 10 percent to 5
percent for the largest position and
adding a floor of the gap risk haircut of
2.5 percent for the second largest
position subject to the Gap Risk
Measure and (5) making certain
clarifications to the description of Gap
Risk Measure, as described in greater
detail below.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
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(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
NSCC is proposing to enhance the
calculation of the VaR Charge by (1)
making the result of the Gap Risk
Measure calculation an additive
component of the VaR Charge when it
is applicable, rather than being applied
as the applicable VaR Charge when it is
the largest of three separate calculations,
(2) modifying the language relating to
which ETF positions are excluded from
the Gap Risk Measure, (3) adjusting both
the trigger for applying the Gap Risk
Measure and the calculation of the Gap
Risk Measure to be based on the two
largest positions in a portfolio, rather
than based on the single largest
position, (4)(a) removing the description
of the methodology in the Rules for
calculating the gap risk haircut, (b)
providing that, like the concentration
threshold, gap risk haircuts would be
calibrated from time to time based on
backtesting and impact analysis and (c)
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changing the floor of the gap risk haircut
from 10 percent to 5 percent for the
largest position and adding a floor of the
gap risk haircut of 2.5 percent for the
second largest position subject to the
Gap Risk Measure and (5) making
certain clarifications to the description
of Gap Risk Measure, as described in
greater detail below.
The proposed changes would enhance
the flexibility of the Gap Risk Measure
to broaden the scope of gap risk event
coverage and result in more frequent
gap risk charges. NSCC conducted an
impact study for the period January 1,
2021 through December 31, 2021
(‘‘Impact Study’’) which reviewed the
overall impact of the proposed changes
on the VaR Charge amounts, the
Clearing Fund amounts (at the NSCC
level and Member level) and the effect
on the Members during the Impact
Study period. The Impact Study looked
at the impacts during the Impact Study
period as if all of the proposed changes
had been made and did not look at the
impacts of each of the proposed changes
individually. The Impact Study
indicated that the proposed changes
would have resulted in a 10.66%
increase for the daily total VaR Charge
on average and would have resulted in
a 4.04% increase in the daily total
Clearing Fund on average during that
period.
The three Members with the largest
average daily VaR Charge increases in
dollar amount during the Impact Study
period would have had increases of
$60,113,514, $30,054,385 and
$22,237,892 representing an average
daily increase for such Members of
31.68%, 14.97% and 28.11%,
respectively. The three Members with
the largest average daily VaR Charge
increases as a percentage of production
Clearing Fund paid by such Members
during the Impact Study period would
have had an average daily increase of
31.78%, 29.07% and 28.99%,
respectively, had the proposed changes
been in place. Approximately 14% of
Members would have had either a
decrease or an increase of less than 1%
in their average daily VaR Charge had
the proposed changes been in place.
Prior to implementation of the
proposed changes, NSCC would
conduct Member outreach to discuss the
proposed changes and the impact of the
proposed changes on the Members.
Following implementation, NSCC
would also incorporate the proposed
changes into the NSCC Risk Client
Portal and VaR Calculator.
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(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.5 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’’).6 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.
The volatility component of each
Member’s Required Fund Deposit is
designed to measure market price
volatility of the start of day portfolio
and is calculated for Members’ Net
Unsettled Positions and Net Unsettled
Balance Order Positions (hereinafter
collectively referred to as ‘‘Net
Unsettled Positions’’).7 The volatility
component is designed to capture the
market price risk 8 associated with each
Member’s portfolio at a 99th percentile
level of confidence. NSCC has two
methodologies for calculating the
volatility component—a ‘‘VaR Charge’’
and a haircut-based calculation. The
VaR Charge applies to the majority of
Net Unsettled Positions and is
calculated as the greater of: (1) the larger
of two separate calculations that utilize
a parametric Value at Risk (‘‘VaR’’)
model (‘‘Core Parametric Estimation’’);
(2) the calculation of the Gap Risk
Measure, which is based on the
5 See Rule 4 (Clearing Fund) and Procedure XV
(Clearing Fund Formula and Other Matters), supra
note 4. 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).
6 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 (Restrictions on
Access to Services) of the Rules, supra note 4.
7 Net Unsettled Positions refer to net positions
that have not yet passed their settlement date or did
not settle on their settlement date. See Procedure
XV (Clearing Fund Formula and Other Matters) of
the Rules, supra note 4.
8 Market price risk refers to the risk that volatility
in the market causes the price of a security to
change between the execution of a trade and
settlement of that trade. This risk is also referred to
herein as market risk and volatility risk.
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Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices
concentration threshold of the largest
non-index position in a portfolio, as
described in greater detail below; and
(3) a portfolio margin floor calculation
based on the market values of the long
and short positions in the portfolio
(‘‘Portfolio Margin Floor’’).9 The VaR
Charge usually comprises the largest
portion of a Member’s Required Fund
Deposit.
Certain Net Unsettled Positions are
excluded from the calculation of the
VaR Charge pursuant to Sections
I(A)(1)(a)(ii) and I(A)(2)(a)(ii) of
Procedure XV and are instead subject to
a haircut-based calculation.10 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.
NSCC regularly assesses the risks it
may face as a central counterparty as
such risks relate to its margining
methodologies to evaluate whether
margin levels are commensurate with
the particular risk attributes of each
relevant product, portfolio and market.
In connection with this assessment,
NSCC is proposing to enhance the Gap
Risk Measure calculation. These
proposed enhancements have been
developed in response to regulatory
feedback and in light of recent market
events that led to a reconsideration of
the idiosyncratic risks that the Gap Risk
Measure is designed to mitigate, as
described in greater detail below.
The proposed changes would enhance
the calculation of the VaR Charge by
making the result of the Gap Risk
Measure calculation an additive
component of the VaR Charge, rather
than being applied as the VaR Charge
only when it is the largest of three
separate calculations. The proposed
changes would modify the language
relating to which positions are excluded
from the Gap Risk Measure. The
proposed changes would also adjust
both the trigger for applying the Gap
Risk Measure and the calculation of the
Gap Risk Measure, when applicable, to
be based on the two largest positions in
a portfolio, rather than based on the
single largest position. The proposed
changes would also adjust the
calculation and description of the gap
risk haircut and make certain other
clarifications discussed below.
9 Procedure XV, Sections I(A)(1)(a)(i) and
I(A)(2)(a)(i) of the Rules, supra note 4.
10 Procedure XV, Sections I(A)(1)(a)(ii) and
I(A)(2)(a)(ii) of the Rules, supra note 4.
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(ii) Overview of Idiosyncratic Risks and
the Gap Risk Measure
The Gap Risk Measure was designed
to address the risks presented by a
portfolio that is more susceptible to the
effects of gap risk events due to the
idiosyncratic nature of the Net
Unsettled Positions in that portfolio
(such risks may be referred to as
idiosyncratic risks).11 Gap risk events
have been generally understood as
idiosyncratic issuer events (for example,
earning reports, management changes,
merger announcements, insolvency, or
other unexpected, issuer-specific
events) that cause a rapid shift in
general market price volatility levels.
The Gap Risk Measure is designed to
address the risk that a gap risk event
affects the price of a security in which
a portfolio holds a Net Unsettled
Position that represents more than a
certain percent of the entire portfolio’s
value, such that the event could impact
the entire portfolio’s value. Currently,
the Gap Risk Measure serves as a
substitution to the calculation of the
Core Parametric Estimation in case the
Gap Risk Measure is greater in
magnitude.
The risk of large, unexpected price
movements, particularly those caused
by a gap risk event, are more likely to
have a greater impact on portfolios with
large Net Unsettled Positions in
securities that are susceptible to those
events. Generally, index-based
exchange-traded funds (‘‘ETFs’’) that
track closely to diversified indices are
less prone to the effects of gap risk
events. As such, if the concentration
threshold is met, NSCC currently
calculates the Gap Risk Measure for Net
Unsettled Positions in the portfolio
other than positions in ETFs that track
diversified indices, as determined by
NSCC from time to time (‘‘non-index
Net Unsettled Positions’’).
The Gap Risk Measure is only applied
for a Member if the non-index Net
Unsettled Position with the largest
absolute market value in the portfolio
represents more than a certain percent
of the entire portfolio’s value
(‘‘concentration threshold’’). The
concentration threshold was initially set
at 30 percent of a Member’s entire
portfolio value.12 The concentration
threshold can be set no higher than 30
percent and is evaluated periodically
based on Members’ backtesting results
11 See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 4. See also
Securities Exchange Act Release Nos. 82780
(February 26, 2018), 83 FR 9035 (March 2, 2018)
(SR–NSCC–2017–808); 82781 (February 26, 2018),
83 FR 9042 (March 2, 2018) (SR–NSCC–2017–020)
(‘‘Initial Filing’’).
12 See Id.
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78159
over a twelve month look-back period to
determine if it may be appropriate to
lower the threshold.13 Currently, the
concentration threshold is set at 5%.14
When applicable, NSCC calculates the
Gap Risk Measure by multiplying the
gross market value of the largest nonindex Net Unsettled Position in the
portfolio by a percent of not less than
10 percent (‘‘gap risk haircut’’).15
Currently, NSCC determines the gap risk
haircut empirically as no less than the
larger of the 1st and 99th percentiles of
three-day returns of a set of CUSIPs that
are subject to the VaR Charge pursuant
to the Rules, giving equal rank to each
to determine which has the highest
movement over that three-day period.
NSCC uses a look-back period of not
less than ten years that includes a oneyear stress period. If the one-year stress
period overlaps with the look-back
period, only the non-overlapping period
would be combined with the look-back
period. The result is then rounded up to
the nearest whole percentage.
NSCC is proposing changes to the
calculation of the Gap Risk Measure that
are designed to allow NSCC to apply
this charge based on more than one
position and more frequently. Recent
extreme market events, including both
the impacts of the COVID–19 pandemic
and volatility caused by social media
sentiments (referred to as the ‘‘meme
stock events’’), have led NSCC to
reconsider the causes and
characteristics of idiosyncratic risks that
the Gap Risk Measure was designed to
mitigate. More specifically, these events
have indicated that price changes due to
gap risk events seem to occur more
frequently and in higher severity; and
may not be isolated to issuer events but
driven by new mechanisms that drive
concurrent market price moves
involving unconventionally correlated
securities. The Gap Risk Measure
provides an insurance against various
permutations of idiosyncratic risk
moves, however, it is not targeted to
capture and cover all such instances,
especially when they are extreme,
including certain meme stock events.
NSCC believes the proposed
enhancements to the Gap Risk Measure
calculation, described below, would
improve its ability to measure and
mitigate against these idiosyncratic
risks.
13 Id.
14 See Important Notice a9055, dated September
27, 2021, at https://www.dtcc.com/-/media/Files/
pdf/2021/9/27/a9055.pdf (notifying Members that
the concentration threshold had been changed from
10% to 5%).
15 See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV, supra note 4.
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(iii) Proposed Changes To Enhance the
Gap Risk Measure and Enhance
Transparency
With a goal of enhancing the Gap Risk
Measure to broaden the scope of gap
risk event coverage, NSCC explored a
number of alternatives in particular by
(1) using the Gap Risk Measure as an
additive component rather than a
substitutive component of the VaR
Charge and (2) applying the Gap Risk
Measure to one or more positions in a
portfolio. NSCC also conducted impact
studies based on various permutations
of the parameters and NSCC is
proposing enhancements to the Gap
Risk Measure that would improve
NSCC’s ability to mitigate against
idiosyncratic risks as described below.
NSCC is also proposing enhancements
to the transparency of the Rules by
making certain clarifications to the
description of the Gap Risk Measure.
NSCC is proposing to make the
following enhancements to the Gap Risk
Measure: (1) make the Gap Risk Measure
an additive component of the Member’s
total VaR Charge when it is applicable,
rather than being applied as the
applicable VaR Charge when it is the
largest of three separate calculations, (2)
modify the language relating to which
ETF positions are excluded from the
Gap Risk Measure, (3) adjust both the
trigger for applying the Gap Risk
Measure and the calculation of the Gap
Risk Measure to be based on the two
largest positions in a portfolio, rather
than based on the single largest
position,(4)(a) remove the description of
the methodology in the Rules for
calculating the gap risk haircut, (b)
provide that, like the concentration
threshold, gap risk haircuts would be
calibrated from time to time based on
backtesting and impact analysis and (c)
change the floor of the gap risk haircut
from 10 percent to 5 percent for the
largest position and add a floor of the
gap risk haircut of 2.5 percent for the
second largest position subject to the
Gap Risk Measure, and (5) make certain
clarifications to the description of the
Gap Risk Measure.
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Proposed Changes to Application and
Calculation of the Gap Risk Measure
First, NSCC is proposing to make the
result of the Gap Risk Measure
calculation an additive component of
Members’ total VaR Charge, rather than
applicable as the VaR Charge only when
it is the highest result of three
calculations. Following implementation
of this proposed change, the total VaR
Charge would be equal to the sum of (1)
the greater of (a) the Core Parametric
Estimation and (b) the Portfolio Margin
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Floor calculation; and (2) the Gap Risk
Measure calculation. This proposed
change would allow NSCC to collect the
amount that results from a calculation of
the Gap Risk Measure every time the
concentration threshold is met which
could improve NSCC’s ability to
mitigate idiosyncratic risks that it could
face through the collection of the VaR
Charge. Rather than being applied only
if the Gap Risk Measure calculation
exceeds the Core Parametric Estimation
and the Portfolio Margin Floor
calculation, the Gap Risk Measure
calculation would apply every time the
top two positions exceed the
concentration threshold. Based on
impact studies, NSCC believes this
broader application together with the
other proposed changes outlined below
would better protect against more
idiosyncratic risk scenarios than the
current methodology.
Second, NSCC is proposing to modify
the Rules regarding the ETF positions
that are excluded from the Gap Risk
Measure calculation. The Rules
currently state that only ‘‘non-index’’
positions are included in the Gap Risk
Measure.16 NSCC is proposing to
replace the reference to ‘‘non-index’’
positions with a reference to ‘‘nondiversified’’ positions and add a
footnote to Sections I(A)(1)(a)(i) and
I(A)(2)(a)(i) of Procedure XV of the
Rules to state that NSCC would exclude
ETF positions from the calculation if the
ETFs have characteristics that indicate
that such positions are less prone to the
effects of gap risk events, as determined
by NSCC from time to time. NSCC has
determined that certain ETFs, both
index based and non-index based, are
less prone to the effects of gap risk
events as a result of having certain
characteristics and, therefore, are less
likely to pose idiosyncratic risks that the
Gap Risk Measure is designed to
mitigate. Such characteristics include
whether the ETF tracks to an index that
is linked to a broad based market index,
contains a diversified underlying basket,
is unleveraged or tracks an asset class
that is less prone to gap risk. For
instance, NSCC has determined to
include certain commodity ETFs from
the Gap Risk Measure that track to an
index but that are not linked to a broadbased diversified commodity index. The
proposed change would result in these
commodity ETFs that track to an index
but that are not linked to a broad-based
diversified commodity index to be
subject to the Gap Risk Measure
whereas they are currently excluded.
16 See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 6. See also
Initial Filing, supra note 11.
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NSCC has determined to exclude certain
non-index based ETFs from the Gap
Risk Measure that track to an asset that
are less prone to gap risk, such as
unleveraged U.S. dollar based ETFs. The
proposed change would result in certain
non-index based ETFs being excluded
from the Gap Risk Measure whereas
they are currently included.
NSCC currently identifies those
positions that are less likely to pose
idiosyncratic risks and excludes those
positions from the calculation of the
Gap Risk Measure.17 The proposed
change would provide Members with
further transparency regarding which
positions are excluded from this
calculation by reflecting that certain
non-index ETFs that have
characteristics that indicate that such
positions are less prone to the effects of
gap risk events would be excluded and
by reflecting that index based ETFs
would only be excluded if they have
characteristics that indicate that such
positions are less prone to the effects of
gap risk events. NSCC would also
indicate in the Rules that such
characteristics include whether the ETF
tracks to an index that is linked to a
broad based market index, contains a
diversified underlying basket, is
unleveraged or tracks an asset class that
is less prone to gap risk.
Third, NSCC is proposing to adjust
the trigger of the Gap Risk Measure to
be based on the sum of the absolute
values of the two largest non-diversified
Net Unsettled Positions in a portfolio,
rather than based on the absolute value
of the single largest non-diversified Net
Unsettled Position. More specifically,
the Gap Risk Measure would be
applicable if the sum of the absolute
values of the two largest non-diversified
Net Unsettled Positions in the portfolio
represents more than the concentration
threshold determined by NSCC from
time to time.
In addition, the Gap Risk Measure
would be calculated using the two
largest non-diversified Net Unsettled
Positions by multiplying each of the
positions with a gap risk haircut and
adding the sum of the resulting
products. By applying the Gap Risk
Measure to the two largest nondiversified positions in the portfolio, the
Gap Risk Measure calculation would
cover concurrent gap moves involving
more than one concentrated position
adding more flexibility and coverage to
the Gap Risk Measure. The Gap Risk
Measure charge for the two largest
17 NSCC uses a third-party market provider to
identify ETFs that meet its defined criteria of being
diversified. ETFs that do not meet the criteria
specified by NSCC are not included the Gap Risk
Measure calculation.
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positions would also provide coverage
for gap events for smaller positions in
the portfolio.
Fourth, NSCC would be adjusting the
calculation of the gap risk haircut and
replacing the current description with a
description like the description of the
calculation for the concentration
threshold. Currently, the gap risk
haircut is determined by selecting the
largest of the 1st and 99th percentiles of
three day returns of a composite set of
equities, using a look-back period of not
less than 10 years that includes a one
year stress period.18 With the current
methodology, there is implicit
overlapping of the risk covered by the
core Parametric VaR and the Gap Risk
Measure. Because NSCC would be using
the Gap Risk Measure as an additive
component to the VaR Charge rather
than a substitutive component, NSCC
does not believe that the current
methodology for the gap risk haircut
would result in an appropriate level.
Instead of using the current
methodology to calculate the gap risk
haircut, NSCC would determine and
calibrate the concentration threshold
and the gap risk haircut from time to
time based on backtesting and impact
analysis. More specifically, the
concentration threshold and the gap risk
haircuts would be selected from various
combinations of concentration
thresholds and gap risk haircuts based
on backtesting and impact analysis
across all member portfolios initially
over a five year look-back period. This
would provide more flexibility to set the
parameters from time to time to provide
improved backtesting performance,
broader coverage for idiosyncratic risk
scenarios and flexibility for model
tuning to balance performance and cost
considerations.
In connection with the proposed
expansion of the calculation of the Gap
Risk Measure to be based on the two
largest non-diversified Net Unsettled
Positions in the portfolio, NSCC is also
proposing to lower the gap risk haircut
that would be applied to the largest nondiversified Net Unsettled Position to be
a percent that is no less than 5 percent.
Currently, the percent that is applied to
the largest non-index Net Unsettled
Positions in the portfolio is no less than
10 percent.19 Given the proposed
expansion of the calculation of the Gap
Risk Measure to cover the two largest
non-diversified Net Unsettled Positions,
rather than only the single largest nondiversified Net Unsettled Position,
NSCC believes it is appropriate to set a
lower floor for the gap risk haircut that
18 Id.
19 Id.
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applies to the largest of those two
positions. Given that the Gap Risk
Measure would be additive rather than
a substitutive component of the VaR
Charge and would be triggered more
frequently, NSCC believes that the
flexibility to set a lower floor for the
largest position would be appropriate.
The gap risk haircut that would be
applied to the second largest nondiversified Net Unsettled Position in the
portfolio would be no larger than the
gap risk haircut that would be applied
to the largest non-diversified Net
Unsettled Position and would be subject
to a floor of 2.5 percent.
Initially, upon implementation, NSCC
would set the concentration threshold at
10%, apply a gap risk haircut on the
largest Net Unsettled Position of 10%
and a gap risk haircut on the second
largest Net Unsettled Position of 5%.
NSCC would set the concentration
threshold and the gap risk haircuts
based on backtesting and impact
analysis from time to time in accordance
with NSCC’s model risk management
practices and governance set forth in the
Model Risk Management Framework
(‘‘Model Risk Management
Framework’’).20 NSCC’s model risk
management governance procedures
include daily backtesting of model
performance, periodic sensitivity
analyses of models and annual
validation of models. NSCC would
review the concentration threshold and
the gap risk haircuts at least annually.
NSCC would provide notice to Members
by important notice of the concentration
threshold and gap risk haircuts that it
would be applying and changes to the
concentration threshold and to the gap
risk haircuts.
Therefore, upon implementation, to
determine the Gap Risk Measure for
each portfolio, NSCC would determine
the two largest non-diversified positions
in the portfolio. If the sum of the gross
market values of those two positions
represent more than the concentration
threshold of 10% of the gross market
value of the portfolio, NSCC would add
(i) an amount equal to 10% of the gross
market value of the largest position and
(ii) an amount equal to 5% of the gross
market value of the second largest
20 See Securities Exchange Act Release Nos.
81485 (August 25, 2017), 82 FR 41433 (August 31,
2017) (File No. SR–NSCC–2017–008); 84458
(October 19, 2018), 83 FR 53925 (October 25, 2018)
(File No. SR–NSCC–2018–009), 88911 (May 20,
2020), 85 FR 31828 (May 27, 2020) (File No. SR–
NSCC–2020–008), 92381 (July 13, 2021), 86 FR
38163 (July 19, 2021) (File No. SR–NSCC–2021–
008), and 94272 (February 17, 2022), 87 FR 10419
(February 24, 2022) (File No. SR–NSCC–2022–001).
The Model Risk Management Framework sets forth
the model risk management practices adopted by
NSCC.
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78161
position. The sum amount would be
included in the volatility component of
the Required Fund Deposit for that
portfolio.
As described in the Initial Filing, the
Gap Risk Measure is designed to
measure concentration of positions in a
portfolio, which is an important
indicator of that portfolio’s vulnerability
to idiosyncratic risks. By expanding the
applicability of the Gap Risk Measure to
each time the concentration threshold is
met, the proposed changes to enhance
the calculation of the Gap Risk Measure,
described above, would improve the
effectiveness of the VaR Charge in
mitigating against those risks.
Proposed Changes To Improve
Transparency
Fifth, NSCC would make the
following clarification changes to
improve transparency in the Rules.
NSCC is proposing to remove the
specific references to the concentration
threshold as 30 percent in the definition
to reflect that NSCC may adjust the
concentration threshold from time to
time, as determined by NSCC based on
the backtesting results and impact
analysis over a look-back period of no
less than the previous 12 months.21 The
Rules currently define the concentration
threshold as more than 30 percent of the
value of the entire portfolio.22 The Rules
also provide that the concentration
threshold would be no more than 30
percent and would be determined by
NSCC from time to time.23 The
proposed changes would clarify that the
concentration threshold is not fixed at
30 percent by defining concentration
threshold as a percentage designated by
the Corporation of the value of the
entire portfolio which is determined by
NSCC from time to time. The Rules
would continue to state that the
concentration threshold would be no
more than 30 percent. NSCC believes
this proposed change will help clarify
that the concentration threshold could
change from time to time but could not
be set to be more than 30 percent.
NSCC would revise language relating
to the application of the Gap Risk
Measure to Securities Financing
Transactions (‘‘SFTs’’). Rule 56 governs
the SFT Clearing Service.24 Section
12(c) of Rule 56 (‘‘Section 12(c)’’)
provides that NSCC shall calculate the
amount of each SFT Member’s required
deposit for SFT Positions by applying
the Clearing Fund Formula for CNS
21 Id.
22 See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 6. See also
Initial Filing, supra note 11.
23 Id.
24 Rule 56, supra note 4.
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Transactions set forth in certain sections
in Procedure XV.25 Footnote 1
(‘‘Footnote 1’’) in Section 12(c) provides
that for purposes of applying the VaR
Charge with respect to SFT Positions,
NSCC shall apply the Gap Risk Measure
as an additive component of the VaR
Charge, which is consistent with how
Net Unsettled Positions would be
treated by the proposed changes.26
Pursuant to Footnote 1, NSCC has been
applying the Gap Risk Measure as an
additive component of the VaR Charge
with respect to SFT Positions but
applying the Gap Risk Measure to other
Net Unsettled Positions as a substitutive
component as currently set forth in
Procedure XV of the Rules. If the
proposed changes contemplated by this
filing were implemented, it would be
unnecessary to distinguish how the Gap
Risk Measure is calculated for SFT
Positions because the Gap Risk Measure
would be applied to SFT Positions in
the same manner as it would be applied
to other Net Unsettled Positions. As a
result, NSCC is proposing to remove
Footnote 1.
NSCC is also proposing to change the
reference from ‘‘positions’’ to ‘‘Net
Unsettled Positions’’ or ‘‘Net Balance
Order Unsettled Positions’’, as
applicable, to clarify that the positions
subject to the Gap Risk Measure are Net
Unsettled Positions. NSCC would also
remove ‘‘the portfolio’s’’ from the
provision relating to how the
concentration threshold and gap risk
haircuts would be determined and
calibrated because the reference is
unnecessary. The same concentration
threshold and gap risk haircuts would
apply to all portfolios and would be
calibrated based on backtesting and
impact analysis of multiple portfolios.
In addition, in accordance with the
Model Risk Management Framework,27
NSCC conducts periodic impact
analysis of its models, including
impacts on NSCC and impacts on
Members. As such, NSCC is proposing
to include ‘‘impact analysis’’ in addition
to backtesting results as a measure of
what NSCC would review to determine
and calibrate the concentration
threshold and gap risk haircuts. NSCC is
also proposing to replace ‘‘would’’ with
‘‘shall’’ in four places to reflect that it
25 Section
12(c) of Rule 56, supra note 4.
Footnote 1, supra note 4, which states ‘‘For
the purpose of applying Section I.(A)(1)(a)(i) of
Procedure XV (Value-at-Risk (VaR) charge), the
volatility of an SFT Member’s SFT Positions shall
be the sum of (a) the highest resultant value
between Section I.(A)(1)(a)(i)I. (Core Parametric
Estimation) and Section I.(A)(1)(a)(i)III. (Margin
Floor) and (b) the resultant value of Section
I.(A)(1)(a)(i)II. (Gap Risk Measure).’’
27 See Model Risk Management Framework, supra
note 20.
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is referring to future actions. NSCC
would add ‘‘gross market’’ in front of
‘‘value’’ in two places and replace
‘‘absolute’’ with ‘‘gross market’’ in two
places to clarify that NSCC would be
using the gross market value of the
positions and the portfolio in the Gap
Risk Measure calculations. NSCC would
also add a sentence in the Gap Risk
Measure sections indicating that NSCC
would announce updates of the
concentration threshold and gap risk
haircuts by Important Notice.
Proposed Changes to NSCC Rules
The proposed changes described
above would be implemented by
amending the description of the VaR
Charge in Sections I(A)(1)(a)(i) and
I(A)(2)(a)(i) of Procedure XV of the
Rules. The proposed changes would
also move the descriptions of the
Portfolio Margin Floor and the Gap Risk
Measure to Sections I(A)(1)(a)(i)II and
I(A)(2)(a)(i)II and Sections I(A)(1)(a)(i)III
and I(A)(2)(a)(i)III of Procedure XV,
respectively.
The proposed changes would amend
the description of the VaR Charge to
state that it would be equal to the sum
of (1) the highest resultant value among
Sections I(A)(1)(a)(i)I and I(A)(2)(a)(i)I
(which describe the Core Parametric
Estimation) and Sections I(A)(1)(a)(i)II
and I(A)(2)(a)(i)II (which would describe
the Portfolio Margin Floor); and (2) the
resultant value of Sections I(A)(1)(a)(i)III
and I(A)(2)(a)(i)III (which would
describe the Gap Risk Measure).
The proposed changes would amend
the description of the Gap Risk Measure
to refer to the two largest nondiversified Net Unsettled Positions in
the portfolio, rather than the largest
non-index position, as described above,
would include a footnote in this
description to clarify which positions
are excluded from the calculation of the
Gap Risk Measure and make the other
changes described above in proposed
Sections I(A)(1)(a)(i)III and
I(A)(2)(a)(i)III.
The proposed changes would also
remove Footnote 1 from Rule 56 as
described above.
(iv) Implementation Timeframe
NSCC would implement the proposed
changes no later than 60 Business Days
after the later of the approval of the
proposed rule change and the no
objection to the advance notice 28 by the
28 NSCC filed this proposed rule change as an
advance notice (File No. SR–NSCC–2022–802) with
the Commission pursuant to Section 806(e)(1) of
Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010,
12 U.S.C. 5465(e)(1), and Rule 19b–4(n)(1)(i) under
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Commission. NSCC would announce
the effective date of the proposed
changes by Important Notice posted to
its website.
2. Statutory Basis
NSCC believes that the proposed
changes are 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
changes are consistent with Section
17A(b)(3)(F) of the Act,29 and Rules
17Ad–22(e)(4)(i), (e)(6)(i) and (e)(23)(ii),
each promulgated under the Act,30 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, assure
the safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible and promote the prompt
and accurate clearance and settlement of
securities transactions.31 As discussed
above, NSCC is proposing
enhancements to the Gap Risk Measure
portion of the VaR Charge, one of the
components of its Members’ Required
Deposits—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. NSCC believes the proposed
changes are designed to assure the
safeguarding of securities and funds
which are in its custody or control or for
which it is responsible because they are
designed to enable NSCC to better limit
its exposure to Members in the event of
a Member default. More specifically, the
proposal would expand the
applicability of the Gap Risk Measure
and NSCC’s ability to collect amounts
calculated through this component,
which is designed to mitigate
idiosyncratic risks that NSCC may face.
In its review of the Gap Risk Measure,
NSCC conducted impact studies
adjusting differing parameters and
thresholds to determine a model that
would provide improved backtesting
performance, broader coverage for
idiosyncratic risk scenarios and
flexibility for model tuning to balance
performance and cost considerations to
Members. Based on the impact studies,
NSCC determined that the following
enhancements to the Gap Risk Measure
described above would enhance the
flexibility of the Gap Risk Measure to
the Act, 17 CFR 240.19b–4(n)(1)(i). A copy of the
advance notice is available at https://
www.dtcc.com/legal/sec-rule-filings.aspx.
29 15 U.S.C. 78q–1(b)(3)(F).
30 17 CFR 240.17Ad–22(e)(4)(i), (e)(6)(i) and
(e)(23)(ii).
31 15 U.S.C. 78q–1(b)(3)(F).
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broaden the scope of gap risk event
coverage and to use parameters to allow
for coverage of larger gap moves: (1)
making the Gap Risk Measure an
additive component of the Member’s
total VaR Charge when it is applicable,
rather than being applied as the
applicable VaR Charge when it is the
largest of three separate calculations, (2)
modifying the language relating to
which ETF positions are excluded from
the Gap Risk Measure, (3) adjusting both
the trigger for applying the Gap Risk
Measure and the calculation of the Gap
Risk Measure to be based on the two
largest positions in a portfolio, rather
than based on the single largest position
and (4)(a) removing the description of
the methodology in the Rules for
calculating the gap risk haircut, (b)
providing that, like the concentration
threshold, gap risk haircuts would be
calibrated from time to time based on
backtesting and impact analysis and (c)
changing the floor of the gap risk haircut
from 10 percent to 5 percent for the
largest position and adding a floor of the
gap risk haircut of 2.5 percent for the
second largest position subject to the
Gap Risk Measure (‘‘Gap Risk Measure
Enhancements’’).
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. Therefore, the Gap Risk
Measure Enhancements would enable
NSCC to better address the potential
idiosyncratic risks that it may face when
liquidating a portfolio that contains a
concentration of positions, 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 particular, making the Gap
Risk Measure additive would allow
NSCC to collect the amount that results
from a calculation of the Gap Risk
Measure every time the concentration
threshold is met which would improve
NSCC’s ability to mitigate idiosyncratic
risks that it could face through the
collection of the VaR Charge and better
protect against more idiosyncratic risk
scenarios than the current methodology.
Modifying ETF positions that are subject
to the Gap Risk Measure based on
whether they are non-diversified rather
than whether they are non-index would
allow NSCC to more accurately
determine which ETFs should be
included and excluded from the Gap
Risk Measure based on characteristics
that indicate that such ETFs are more or
less prone to the effects of gap risk
events. Adjusting the Gap Risk Measure
trigger and calculation to target the
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largest two non-diversified Net
Unsettled Positions in a portfolio would
cover concurrent gap moves involving
more than one concentrated position
providing more coverage of the Gap Risk
Measure. Removing specific
methodology metrics relating to the gap
risk haircuts and adding that gap risk
haircuts would be calibrated from time
to time based on backtesting and impact
analysis, lowering the floor for the gap
risk haircut that applies to the largest of
the two largest non-diversified Net
Unsettled Positions and setting a floor of
2.5 percent for the second largest nondiversified Net Unsettled Positions
would allow NSCC to calibrate and set
appropriate gap risk haircuts based on
the Gap Risk Measure being additive
rather than a substitutive component to
the VaR Charge. In this way, the
proposed rule change to introduce the
Gap Risk Measure Enhancements are
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.32
NSCC also believes the proposed
changes to provide transparency to the
Rules by (a) removing the references to
30 percent as the concentration
threshold to reflect that it is adjusted
from time, (b) removing Footnote 1
relating to the application of Gap Risk
Measure for SFT Positions from Rule 56,
(c) changing the reference from
‘‘positions’’ to ‘‘Net Unsettled
Positions’’ or ‘‘Net Balance Order
Unsettled Positions’’, as applicable, (d)
removing the unnecessary reference to
‘‘the portfolio’s’’ in reference to
backtesting results, (e) including a
reference to ‘‘impact analysis’’ as a
measure of what NSCC would review to
determine and calibrate the
concentration threshold and gap risk
haircuts, (f) replacing ‘‘would’’ with
‘‘shall’’ in four places, (g) clarifying that
the calculations would be referring to
the gross market value of the positions
and portfolios, and (h) adding a
sentence indicating that NSCC would
announce updates of the concentration
threshold and gap risk haircuts by
Important Notice (‘‘Transparency
Enhancements’’) are consistent with the
requirements of Section 17A(b)(3)(F) of
the Act.33 Specifically, by enhancing the
transparency of the Rules, the proposed
changes would allow Members to more
efficiently and effectively conduct their
business in accordance with the Rules,
which NSCC believes would promote
the prompt and accurate clearance and
settlement of securities transactions.
Rule 17Ad–22(e)(4)(i) under the Act
requires, in part, 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.34
As described above, NSCC believes
that the proposed changes would enable
it to better identify, measure, monitor,
and, through the collection of Members’
Required Fund Deposits, 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 Gap
Risk Measure Enhancements would
provide improved backtesting
performance, broader coverage for
idiosyncratic risk scenarios and
flexibility for model tuning to balance
performance and cost considerations to
Members, and would address the
potential increased risks NSCC may face
related to its ability to liquidate a
portfolio that is susceptible to such risks
in the event of a Member default. In
particular, making the Gap Risk
Measure additive would allow NSCC to
collect the amount that results from a
calculation of the Gap Risk Measure
every time the concentration threshold
is met which would improve NSCC’s
ability to mitigate idiosyncratic risks
that it could face through the collection
of the VaR Charge and better protect
against more idiosyncratic risk scenarios
than the current methodology.
Modifying ETF positions that are subject
to the Gap Risk Measure based on
whether they are non-diversified rather
than whether they are non-index would
allow NSCC to more accurately
determine which ETFs should be
included and excluded from the Gap
Risk Measure based on characteristics
that indicate that such ETFs are more or
less prone to the effects of gap risk
events. Adjusting the Gap Risk Measure
trigger and calculation to target the
largest two non-diversified Net
Unsettled Positions in a portfolio would
cover concurrent gap moves involving
more than one concentrated position
providing more coverage of the Gap Risk
Measure. Removing specific
methodology metrics relating to the gap
risk haircuts and adding that gap risk
32 Id.
33 Id.
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haircuts would be calibrated from time
to time based on backtesting and impact
analysis, lowering the floor for the gap
risk haircut that applies to the largest of
the two largest non-diversified Net
Unsettled Positions and setting a floor of
2.5 percent for the second largest nondiversified Net Unsettled Positions
would allow NSCC to calibrate and set
appropriate gap risk haircuts based on
the Gap Risk Measure being additive
rather than a substitutive component to
the VaR Charge. NSCC compared a
number of different models for the Gap
Risk Measure with different parameters
and thresholds, including the Gap Risk
Measure Enhancements and determined
that the Gap Risk Measure
Enhancements improved backtesting
performance, provided broader coverage
for idiosyncratic risk scenarios and
flexibility for model tuning to balance
performance and cost considerations to
Members.
Therefore, NSCC believes that the
proposal would enhance NSCC’s ability
to effectively identify, measure and
monitor its credit exposures and would
enhance its ability to maintain sufficient
financial resources to cover its credit
exposure to each participant fully with
a high degree of confidence. As such,
NSCC believes the proposed changes are
consistent with Rule 17Ad–22(e)(4)(i)
under the Act.35
Rule 17Ad–22(e)(6)(i) under the Act
requires, in part, 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.36
The Required Fund Deposits are made
up of risk-based components (as margin)
that are calculated and assessed daily to
limit NSCC’s credit exposures to
Members, including the VaR Charge.
NSCC’s proposed Gap Risk Measure
Enhancements are designed to more
effectively address the risks presented
by a portfolio that meets the
concentration threshold and, therefore,
is more susceptible to the impacts of
idiosyncratic risks. NSCC believes the
enhanced VaR Charge, as a result of the
Gap Risk Measure Enhancements would
enable NSCC to assess a more
appropriate level of margin that
accounts for these risks. In particular,
making the Gap Risk Measure additive
would allow NSCC to collect the
amount that results from a calculation of
the Gap Risk Measure every time the
concentration threshold is met which
would improve NSCC’s ability to
mitigate idiosyncratic risks that it could
face through the collection of the VaR
Charge and better protect against more
idiosyncratic risk scenarios than the
current methodology. Rather than being
applied only if the Gap Risk Measure
calculation exceeds the Core Parametric
Estimation and the Portfolio Margin
Floor calculation, the Gap Risk Measure
calculation would apply every time the
top two positions exceed the
concentration threshold. Based on
impact studies, NSCC believes this
broader application together with the
other proposed changes outlined below
would better protect against more
idiosyncratic risk scenarios than the
current methodology Modifying ETF
positions that are subject to the Gap
Risk Measure based on whether they are
non-diversified rather than whether
they are non-index would allow NSCC
to more accurately determine which
ETFs should be included and excluded
from the Gap Risk Measure based on
characteristics that indicate that such
ETFs are more or less prone to the
effects of gap risk events. Adjusting the
Gap Risk Measure trigger and
calculation to target the largest two nondiversified Net Unsettled Positions in a
portfolio would cover concurrent gap
moves involving more than one
concentrated position providing more
coverage of the Gap Risk Measure.
Removing specific methodology metrics
relating to the gap risk haircuts and
adding that gap risk haircuts would be
calibrated from time to time based on
backtesting and impact analysis,
lowering the floor for the gap risk
haircut that applies to the largest of the
two largest non-diversified Net
Unsettled Positions and setting a floor of
2.5 percent for the second largest nondiversified Net Unsettled Positions
would allow NSCC to calibrate and set
appropriate gap risk haircuts based on
the Gap Risk Measure being additive
rather than a substitutive component to
the VaR Charge. These proposed
changes are designed to assist NSCC in
maintaining a risk-based margin system
that considers, and produces margin
levels commensurate with, the risks and
particular attributes of portfolios that
meet the concentration threshold, as
applied through the current
methodology. Therefore, NSCC believes
the proposed change is consistent with
Rule 17Ad–22(e)(6)(i) under the Act.37
Rule 17A–d22(e)(23)(ii) under the Act
requires, in part, that NSCC establish,
35 Id.
36 17
implement, maintain and enforce
written policies and procedures
reasonably designed to provide for
sufficient information to enable
participants to identify and evaluate the
risks, fees, and other material costs they
incur by participating in the covered
clearing agency.38 By making the
proposed Transparency Enhancements,
the proposed changes would improve
the transparency of the Rules. By
providing Members with additional
information that would enable them to
evaluate the risks and material costs
they incur by participating in NSCC,
NSCC believes the proposed change is
consistent with the requirements of Rule
17Ad–e)(23)(ii).39
(B) Clearing Agency’s Statement on
Burden on Competition
NSCC does not believe the proposed
Transparency Enhancements would
impact competition. These proposed
rule changes would merely enhance the
transparency of the Rules. Therefore,
this proposed changes would not affect
NSCC’s operations or the rights and
obligations of Members. As such, NSCC
believes this proposed rule change to
improve the transparency of the Rules
would not have any impact on
competition.
NSCC believes that the Gap Risk
Measure Enhancements could have an
impact on competition. Specifically,
NSCC believes the proposed changes
could burden competition because they
would result in larger Required Fund
Deposit amounts for Members when the
additional charges are applicable and
result in a Required Fund Deposit that
is greater than the amount calculated
pursuant to the current formula.
When the proposal results in a larger
Required Fund Deposit, the Gap Risk
Measure Enhancements could burden
competition for Members that have
lower operating margins or higher costs
of capital compared to other Members.
However, the increase in Required Fund
Deposit would be in direct relation to
the specific risks presented by each
Member’s Net Unsettled Positions, and
each Member’s Required Fund Deposit
would continue to be calculated with
the same parameters and at the same
confidence level for each Member.
Therefore, Members that present similar
Net Unsettled Positions, regardless of
the type of Member, would have similar
impacts on their Required Fund Deposit
amounts. As such NSCC believes that
any burden on competition imposed by
the proposed changes would not be
significant and, further, would be both
38 17
CFR 240.17Ad–22(e)(6)(i).
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necessary and appropriate in
furtherance of NSCC’s efforts to mitigate
risks and meet the requirements of the
Act, as described in this filing and
further below.
NSCC believes the above described
burden on competition that may be
created by the proposed enhancement of
the VaR Charge through the expansion
of the Gap Risk Measure would be
necessary in furtherance of the Act,
specifically Section 17A(b)(3)(F) of the
Act.40 As stated above, the proposed
Gap Risk Measure Enhancements would
improve NSCC’s ability to mitigate
against idiosyncratic risks that are
presented by portfolios that meet the
concentration threshold, including the
risks related to gap risk events that are
not driven by issuer events. Therefore,
NSCC believes this proposed change is
consistent with the requirements of
Section 17A(b)(3)(F) of the Act, which
requires that the Rules be designed to
assure the safeguarding of securities and
funds that are in NSCC’s custody or
control or which it is responsible.41
NSCC believes these proposed
changes would also support NSCC’s
compliance with Rules 17Ad–22(e)(4)(i)
and Rule 17Ad–22(e)(6)(i) under the
Act, which require NSCC to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to (x) 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; and (y) 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.42
As described above, NSCC believes
the proposed Gap Risk Measure
Enhancements would allow NSCC to
employ a risk-based methodology to
address the increased idiosyncratic risks
presented by the occurrence of gap risk
events that are presented by portfolios
that meet the concentration threshold.
Therefore, the proposed changes would
better limit NSCC’s credit exposures to
Members, consistent with the
requirements of Rules 17A–d22(e)(4)(i)
and Rule 17Ad22–(e)(6)(i) under the
Act.43
40 15
U.S.C. 78q–1(b)(3)(F).
NSCC believes that the abovedescribed burden on competition that
could be created by the proposed
changes would be appropriate in
furtherance of the Act because such
changes have been appropriately
designed to assure the safeguarding of
securities and funds which are in the
custody or control of NSCC or for which
it is responsible, as described in detail
above. The proposed enhancement to
the VaR Charge through the expansion
of the Gap Risk Measure would enable
NSCC to produce margin levels more
commensurate with the risks and
particular attributes of each Member’s
portfolio.
The proposed changes would do this
by continuing to apply the Gap Risk
Measure only when the concentration
threshold is met. The proposed change
to expand the sensitivity of the charge
to refer to the two largest nondiversified Net Unsettled Positions in
the portfolio would provide NSCC with
a better measure of the various and
unexpected idiosyncratic risks it may
face, in light of the recent gap risk
events that did not derive from issuer
events. Therefore, because the proposed
changes are designed to provide NSCC
with an appropriate measure of the risks
(i.e., risks related to gap risk events)
presented by Members’ portfolios, NSCC
believes the proposal is appropriately
designed to meet its risk management
goals and its regulatory obligations.
NSCC believes that it has designed the
proposed changes in an appropriate way
in order to meet compliance with its
obligations under the Act. Specifically,
the proposals would improve the riskbased margining methodology that
NSCC employs to set margin
requirements and better limit NSCC’s
credit exposures to its Members.
Therefore, as described above, NSCC
believes the proposed changes are
necessary and appropriate in
furtherance of NSCC’s obligations under
the Act, specifically Section
17A(b)(3)(F) of the Act 44 and Rule
17Ad–22(e)(4)(i) and Rule 17Ad–
22(e)(6)(i) under the Act.45
(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.
41 Id.
42 17
CFR 240.17Ad–22(e)(4)(i), (e)(6)(i).
43 Id.
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45 17
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78165
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 not to
respond to any comments received.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) by order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
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–2022–015 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
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Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices
Commission, 100 F Street NE,
Washington, DC 20549.
SECURITIES AND EXCHANGE
COMMISSION
All submissions should refer to File
Number SR–NSCC–2022–015. 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–
2022–015 and should be submitted on
or before January 11, 2023.
[Release No. 34–96509; File No. SR–
NASDAQ–2022–057]
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.46
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022–27657 Filed 12–20–22; 8:45 am]
lotter on DSK11XQN23PROD with NOTICES1
BILLING CODE 8011–01–P
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Designation of a Longer Period for
Commission Action on a Proposed
Rule Change To Adopt Listing Rule
5732 To Provide Listing Standards for
Contingent Value Rights on Nasdaq
Global Market
December 15, 2022.
On October 17, 2022, The Nasdaq
Stock Market LLC (‘‘Nasdaq’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
adopt Listing Rule 5732 to provide
listing standards for Contingent Value
Rights on Nasdaq Global Market. The
proposed rule change was published for
comment in the Federal Register on
November 3, 2022.3 The Commission
has received no comments on the
proposed rule change.
Section 19(b)(2) of the Act 4 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding, or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
disapproved. The 45th day after
publication of the notice for this
proposed rule change is December 18,
2022. The Commission is extending this
45-day time period.
The Commission finds it appropriate
to designate a longer period within
which to take action on the proposed
rule change so that it has sufficient time
to consider the proposed rule change.
Accordingly, the Commission, pursuant
to Section 19(b)(2) of the Act,5
designates February 1, 2023 as the date
by which the Commission shall either
approve or disapprove, or institute
proceedings to determine whether to
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 96176
(October 28, 2022), 87 FR 66337 (November 3,
2022).
4 15 U.S.C. 78s(b)(2).
5 Id.
2 17
46 17
CFR 200.30–3(a)(12).
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disapprove, the proposed rule change
(File No. SR–NASDAQ–2022–057).
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022–27655 Filed 12–20–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96504; File No. SR–
NYSEARCA–2022–82]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Amend Rule 6.40P–O
December 15, 2022.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on December
14, 2022, NYSE Arca, Inc. (‘‘NYSE
Arca’’ or the ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 6.40P–O (Pre-Trade and ActivityBased Risk Controls) pertaining to pretrade risk controls to make additional
pre-trade risk controls available to
Entering Firms. The proposed rule
change is available on the Exchange’s
website at www.nyse.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
6 17
CFR 200.30–3(a)(31).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
1 15
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]]>Agencies
[Federal Register Volume 87, Number 244 (Wednesday, December 21, 2022)]
[Notices]
[Pages 78157-78166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27657]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96511; File No. SR-NSCC-2022-015]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing a Proposed Rule Change To Make Certain
Enhancements to the Gap Risk Measure and the VaR Charge
December 15, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 2, 2022, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the clearing
agency.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ NSCC filed this proposed rule change as an advance notice
(SR-NSCC-2022-802) with the Commission pursuant to Section 806(e)(1)
of Title VIII of the Dodd-Frank Wall Street Reform and Consumer
Protection Act entitled the Payment, Clearing, and Settlement
Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b-
4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of the
advance notice is available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
(a) The proposed rule change of NSCC consists of modifications to
NSCC's Rules & Procedures (``Rules'') \4\ in order to enhance the
calculation of the volatility component of the Clearing Fund formula
that utilizes a parametric Value-at-Risk (``VaR'') model (``VaR
Charge'') by (1) making the result of the gap risk measure (``Gap Risk
Measure'') calculation an additive component of the VaR Charge when it
is applicable, rather than being applied as the applicable VaR Charge
when it is the largest of three separate calculations, (2) modifying
the language relating to
[[Page 78158]]
which ETF (as defined below) positions are excluded from the Gap Risk
Measure, (3) adjusting both the trigger for applying the Gap Risk
Measure and the calculation of the Gap Risk Measure to be based on the
two largest positions in a portfolio, rather than based on the single
largest position, (4)(a) removing the description of the methodology in
the Rules for calculating the gap risk haircut, (b) providing that,
like the concentration threshold, gap risk haircuts would be calibrated
from time to time based on backtesting and impact analysis and (c)
changing the floor of the gap risk haircut from 10 percent to 5 percent
for the largest position and adding a floor of the gap risk haircut of
2.5 percent for the second largest position subject to the Gap Risk
Measure and (5) making certain clarifications to the description of Gap
Risk Measure, as described in greater detail below.
---------------------------------------------------------------------------
\4\ Capitalized terms not defined herein are defined in the
Rules, available at https://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
NSCC is proposing to enhance the calculation of the VaR Charge by
(1) making the result of the Gap Risk Measure calculation an additive
component of the VaR Charge when it is applicable, rather than being
applied as the applicable VaR Charge when it is the largest of three
separate calculations, (2) modifying the language relating to which ETF
positions are excluded from the Gap Risk Measure, (3) adjusting both
the trigger for applying the Gap Risk Measure and the calculation of
the Gap Risk Measure to be based on the two largest positions in a
portfolio, rather than based on the single largest position, (4)(a)
removing the description of the methodology in the Rules for
calculating the gap risk haircut, (b) providing that, like the
concentration threshold, gap risk haircuts would be calibrated from
time to time based on backtesting and impact analysis and (c) changing
the floor of the gap risk haircut from 10 percent to 5 percent for the
largest position and adding a floor of the gap risk haircut of 2.5
percent for the second largest position subject to the Gap Risk Measure
and (5) making certain clarifications to the description of Gap Risk
Measure, as described in greater detail below.
The proposed changes would enhance the flexibility of the Gap Risk
Measure to broaden the scope of gap risk event coverage and result in
more frequent gap risk charges. NSCC conducted an impact study for the
period January 1, 2021 through December 31, 2021 (``Impact Study'')
which reviewed the overall impact of the proposed changes on the VaR
Charge amounts, the Clearing Fund amounts (at the NSCC level and Member
level) and the effect on the Members during the Impact Study period.
The Impact Study looked at the impacts during the Impact Study period
as if all of the proposed changes had been made and did not look at the
impacts of each of the proposed changes individually. The Impact Study
indicated that the proposed changes would have resulted in a 10.66%
increase for the daily total VaR Charge on average and would have
resulted in a 4.04% increase in the daily total Clearing Fund on
average during that period.
The three Members with the largest average daily VaR Charge
increases in dollar amount during the Impact Study period would have
had increases of $60,113,514, $30,054,385 and $22,237,892 representing
an average daily increase for such Members of 31.68%, 14.97% and
28.11%, respectively. The three Members with the largest average daily
VaR Charge increases as a percentage of production Clearing Fund paid
by such Members during the Impact Study period would have had an
average daily increase of 31.78%, 29.07% and 28.99%, respectively, had
the proposed changes been in place. Approximately 14% of Members would
have had either a decrease or an increase of less than 1% in their
average daily VaR Charge had the proposed changes been in place.
Prior to implementation of the proposed changes, NSCC would conduct
Member outreach to discuss the proposed changes and the impact of the
proposed changes on the Members. Following implementation, NSCC would
also incorporate the proposed changes into the NSCC Risk Client Portal
and VaR Calculator.
(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.\5\ The Required Fund Deposit serves as each
Member's margin.
---------------------------------------------------------------------------
\5\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters), supra note 4. 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'').\6\ 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.
---------------------------------------------------------------------------
\6\ 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
(Restrictions on Access to Services) of the Rules, supra note 4.
---------------------------------------------------------------------------
The volatility component of each Member's Required Fund Deposit is
designed to measure market price volatility of the start of day
portfolio and is calculated for Members' Net Unsettled Positions and
Net Unsettled Balance Order Positions (hereinafter collectively
referred to as ``Net Unsettled Positions'').\7\ The volatility
component is designed to capture the market price risk \8\ associated
with each Member's portfolio at a 99th percentile level of confidence.
NSCC has two methodologies for calculating the volatility component--a
``VaR Charge'' and a haircut-based calculation. The VaR Charge applies
to the majority of Net Unsettled Positions and is calculated as the
greater of: (1) the larger of two separate calculations that utilize a
parametric Value at Risk (``VaR'') model (``Core Parametric
Estimation''); (2) the calculation of the Gap Risk Measure, which is
based on the
[[Page 78159]]
concentration threshold of the largest non-index position in a
portfolio, as described in greater detail below; and (3) a portfolio
margin floor calculation based on the market values of the long and
short positions in the portfolio (``Portfolio Margin Floor'').\9\ The
VaR Charge usually comprises the largest portion of a Member's Required
Fund Deposit.
---------------------------------------------------------------------------
\7\ Net Unsettled Positions refer to net positions that have not
yet passed their settlement date or did not settle on their
settlement date. See Procedure XV (Clearing Fund Formula and Other
Matters) of the Rules, supra note 4.
\8\ Market price risk refers to the risk that volatility in the
market causes the price of a security to change between the
execution of a trade and settlement of that trade. This risk is also
referred to herein as market risk and volatility risk.
\9\ Procedure XV, Sections I(A)(1)(a)(i) and I(A)(2)(a)(i) of
the Rules, supra note 4.
---------------------------------------------------------------------------
Certain Net Unsettled Positions are excluded from the calculation
of the VaR Charge pursuant to Sections I(A)(1)(a)(ii) and
I(A)(2)(a)(ii) of Procedure XV and are instead subject to a haircut-
based calculation.\10\ 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.
---------------------------------------------------------------------------
\10\ Procedure XV, Sections I(A)(1)(a)(ii) and I(A)(2)(a)(ii) of
the Rules, supra note 4.
---------------------------------------------------------------------------
NSCC regularly assesses the risks it may face as a central
counterparty as such risks relate to its margining methodologies to
evaluate whether margin levels are commensurate with the particular
risk attributes of each relevant product, portfolio and market. In
connection with this assessment, NSCC is proposing to enhance the Gap
Risk Measure calculation. These proposed enhancements have been
developed in response to regulatory feedback and in light of recent
market events that led to a reconsideration of the idiosyncratic risks
that the Gap Risk Measure is designed to mitigate, as described in
greater detail below.
The proposed changes would enhance the calculation of the VaR
Charge by making the result of the Gap Risk Measure calculation an
additive component of the VaR Charge, rather than being applied as the
VaR Charge only when it is the largest of three separate calculations.
The proposed changes would modify the language relating to which
positions are excluded from the Gap Risk Measure. The proposed changes
would also adjust both the trigger for applying the Gap Risk Measure
and the calculation of the Gap Risk Measure, when applicable, to be
based on the two largest positions in a portfolio, rather than based on
the single largest position. The proposed changes would also adjust the
calculation and description of the gap risk haircut and make certain
other clarifications discussed below.
(ii) Overview of Idiosyncratic Risks and the Gap Risk Measure
The Gap Risk Measure was designed to address the risks presented by
a portfolio that is more susceptible to the effects of gap risk events
due to the idiosyncratic nature of the Net Unsettled Positions in that
portfolio (such risks may be referred to as idiosyncratic risks).\11\
Gap risk events have been generally understood as idiosyncratic issuer
events (for example, earning reports, management changes, merger
announcements, insolvency, or other unexpected, issuer-specific events)
that cause a rapid shift in general market price volatility levels. The
Gap Risk Measure is designed to address the risk that a gap risk event
affects the price of a security in which a portfolio holds a Net
Unsettled Position that represents more than a certain percent of the
entire portfolio's value, such that the event could impact the entire
portfolio's value. Currently, the Gap Risk Measure serves as a
substitution to the calculation of the Core Parametric Estimation in
case the Gap Risk Measure is greater in magnitude.
---------------------------------------------------------------------------
\11\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 4. See also Securities
Exchange Act Release Nos. 82780 (February 26, 2018), 83 FR 9035
(March 2, 2018) (SR-NSCC-2017-808); 82781 (February 26, 2018), 83 FR
9042 (March 2, 2018) (SR-NSCC-2017-020) (``Initial Filing'').
---------------------------------------------------------------------------
The risk of large, unexpected price movements, particularly those
caused by a gap risk event, are more likely to have a greater impact on
portfolios with large Net Unsettled Positions in securities that are
susceptible to those events. Generally, index-based exchange-traded
funds (``ETFs'') that track closely to diversified indices are less
prone to the effects of gap risk events. As such, if the concentration
threshold is met, NSCC currently calculates the Gap Risk Measure for
Net Unsettled Positions in the portfolio other than positions in ETFs
that track diversified indices, as determined by NSCC from time to time
(``non-index Net Unsettled Positions'').
The Gap Risk Measure is only applied for a Member if the non-index
Net Unsettled Position with the largest absolute market value in the
portfolio represents more than a certain percent of the entire
portfolio's value (``concentration threshold''). The concentration
threshold was initially set at 30 percent of a Member's entire
portfolio value.\12\ The concentration threshold can be set no higher
than 30 percent and is evaluated periodically based on Members'
backtesting results over a twelve month look-back period to determine
if it may be appropriate to lower the threshold.\13\ Currently, the
concentration threshold is set at 5%.\14\
---------------------------------------------------------------------------
\12\ See Id.
\13\ Id.
\14\ See Important Notice a9055, dated September 27, 2021, at
https://www.dtcc.com/-/media/Files/pdf/2021/9/27/a9055.pdf
(notifying Members that the concentration threshold had been changed
from 10% to 5%).
---------------------------------------------------------------------------
When applicable, NSCC calculates the Gap Risk Measure by
multiplying the gross market value of the largest non-index Net
Unsettled Position in the portfolio by a percent of not less than 10
percent (``gap risk haircut'').\15\ Currently, NSCC determines the gap
risk haircut empirically as no less than the larger of the 1st and 99th
percentiles of three-day returns of a set of CUSIPs that are subject to
the VaR Charge pursuant to the Rules, giving equal rank to each to
determine which has the highest movement over that three-day period.
NSCC uses a look-back period of not less than ten years that includes a
one-year stress period. If the one-year stress period overlaps with the
look-back period, only the non-overlapping period would be combined
with the look-back period. The result is then rounded up to the nearest
whole percentage.
---------------------------------------------------------------------------
\15\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV, supra note 4.
---------------------------------------------------------------------------
NSCC is proposing changes to the calculation of the Gap Risk
Measure that are designed to allow NSCC to apply this charge based on
more than one position and more frequently. Recent extreme market
events, including both the impacts of the COVID-19 pandemic and
volatility caused by social media sentiments (referred to as the ``meme
stock events''), have led NSCC to reconsider the causes and
characteristics of idiosyncratic risks that the Gap Risk Measure was
designed to mitigate. More specifically, these events have indicated
that price changes due to gap risk events seem to occur more frequently
and in higher severity; and may not be isolated to issuer events but
driven by new mechanisms that drive concurrent market price moves
involving unconventionally correlated securities. The Gap Risk Measure
provides an insurance against various permutations of idiosyncratic
risk moves, however, it is not targeted to capture and cover all such
instances, especially when they are extreme, including certain meme
stock events. NSCC believes the proposed enhancements to the Gap Risk
Measure calculation, described below, would improve its ability to
measure and mitigate against these idiosyncratic risks.
[[Page 78160]]
(iii) Proposed Changes To Enhance the Gap Risk Measure and Enhance
Transparency
With a goal of enhancing the Gap Risk Measure to broaden the scope
of gap risk event coverage, NSCC explored a number of alternatives in
particular by (1) using the Gap Risk Measure as an additive component
rather than a substitutive component of the VaR Charge and (2) applying
the Gap Risk Measure to one or more positions in a portfolio. NSCC also
conducted impact studies based on various permutations of the
parameters and NSCC is proposing enhancements to the Gap Risk Measure
that would improve NSCC's ability to mitigate against idiosyncratic
risks as described below. NSCC is also proposing enhancements to the
transparency of the Rules by making certain clarifications to the
description of the Gap Risk Measure.
NSCC is proposing to make the following enhancements to the Gap
Risk Measure: (1) make the Gap Risk Measure an additive component of
the Member's total VaR Charge when it is applicable, rather than being
applied as the applicable VaR Charge when it is the largest of three
separate calculations, (2) modify the language relating to which ETF
positions are excluded from the Gap Risk Measure, (3) adjust both the
trigger for applying the Gap Risk Measure and the calculation of the
Gap Risk Measure to be based on the two largest positions in a
portfolio, rather than based on the single largest position,(4)(a)
remove the description of the methodology in the Rules for calculating
the gap risk haircut, (b) provide that, like the concentration
threshold, gap risk haircuts would be calibrated from time to time
based on backtesting and impact analysis and (c) change the floor of
the gap risk haircut from 10 percent to 5 percent for the largest
position and add a floor of the gap risk haircut of 2.5 percent for the
second largest position subject to the Gap Risk Measure, and (5) make
certain clarifications to the description of the Gap Risk Measure.
Proposed Changes to Application and Calculation of the Gap Risk Measure
First, NSCC is proposing to make the result of the Gap Risk Measure
calculation an additive component of Members' total VaR Charge, rather
than applicable as the VaR Charge only when it is the highest result of
three calculations. Following implementation of this proposed change,
the total VaR Charge would be equal to the sum of (1) the greater of
(a) the Core Parametric Estimation and (b) the Portfolio Margin Floor
calculation; and (2) the Gap Risk Measure calculation. This proposed
change would allow NSCC to collect the amount that results from a
calculation of the Gap Risk Measure every time the concentration
threshold is met which could improve NSCC's ability to mitigate
idiosyncratic risks that it could face through the collection of the
VaR Charge. Rather than being applied only if the Gap Risk Measure
calculation exceeds the Core Parametric Estimation and the Portfolio
Margin Floor calculation, the Gap Risk Measure calculation would apply
every time the top two positions exceed the concentration threshold.
Based on impact studies, NSCC believes this broader application
together with the other proposed changes outlined below would better
protect against more idiosyncratic risk scenarios than the current
methodology.
Second, NSCC is proposing to modify the Rules regarding the ETF
positions that are excluded from the Gap Risk Measure calculation. The
Rules currently state that only ``non-index'' positions are included in
the Gap Risk Measure.\16\ NSCC is proposing to replace the reference to
``non-index'' positions with a reference to ``non-diversified''
positions and add a footnote to Sections I(A)(1)(a)(i) and
I(A)(2)(a)(i) of Procedure XV of the Rules to state that NSCC would
exclude ETF positions from the calculation if the ETFs have
characteristics that indicate that such positions are less prone to the
effects of gap risk events, as determined by NSCC from time to time.
NSCC has determined that certain ETFs, both index based and non-index
based, are less prone to the effects of gap risk events as a result of
having certain characteristics and, therefore, are less likely to pose
idiosyncratic risks that the Gap Risk Measure is designed to mitigate.
Such characteristics include whether the ETF tracks to an index that is
linked to a broad based market index, contains a diversified underlying
basket, is unleveraged or tracks an asset class that is less prone to
gap risk. For instance, NSCC has determined to include certain
commodity ETFs from the Gap Risk Measure that track to an index but
that are not linked to a broad-based diversified commodity index. The
proposed change would result in these commodity ETFs that track to an
index but that are not linked to a broad-based diversified commodity
index to be subject to the Gap Risk Measure whereas they are currently
excluded. NSCC has determined to exclude certain non-index based ETFs
from the Gap Risk Measure that track to an asset that are less prone to
gap risk, such as unleveraged U.S. dollar based ETFs. The proposed
change would result in certain non-index based ETFs being excluded from
the Gap Risk Measure whereas they are currently included.
---------------------------------------------------------------------------
\16\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 6. See also Initial Filing,
supra note 11.
---------------------------------------------------------------------------
NSCC currently identifies those positions that are less likely to
pose idiosyncratic risks and excludes those positions from the
calculation of the Gap Risk Measure.\17\ The proposed change would
provide Members with further transparency regarding which positions are
excluded from this calculation by reflecting that certain non-index
ETFs that have characteristics that indicate that such positions are
less prone to the effects of gap risk events would be excluded and by
reflecting that index based ETFs would only be excluded if they have
characteristics that indicate that such positions are less prone to the
effects of gap risk events. NSCC would also indicate in the Rules that
such characteristics include whether the ETF tracks to an index that is
linked to a broad based market index, contains a diversified underlying
basket, is unleveraged or tracks an asset class that is less prone to
gap risk.
---------------------------------------------------------------------------
\17\ NSCC uses a third-party market provider to identify ETFs
that meet its defined criteria of being diversified. ETFs that do
not meet the criteria specified by NSCC are not included the Gap
Risk Measure calculation.
---------------------------------------------------------------------------
Third, NSCC is proposing to adjust the trigger of the Gap Risk
Measure to be based on the sum of the absolute values of the two
largest non-diversified Net Unsettled Positions in a portfolio, rather
than based on the absolute value of the single largest non-diversified
Net Unsettled Position. More specifically, the Gap Risk Measure would
be applicable if the sum of the absolute values of the two largest non-
diversified Net Unsettled Positions in the portfolio represents more
than the concentration threshold determined by NSCC from time to time.
In addition, the Gap Risk Measure would be calculated using the two
largest non-diversified Net Unsettled Positions by multiplying each of
the positions with a gap risk haircut and adding the sum of the
resulting products. By applying the Gap Risk Measure to the two largest
non-diversified positions in the portfolio, the Gap Risk Measure
calculation would cover concurrent gap moves involving more than one
concentrated position adding more flexibility and coverage to the Gap
Risk Measure. The Gap Risk Measure charge for the two largest
[[Page 78161]]
positions would also provide coverage for gap events for smaller
positions in the portfolio.
Fourth, NSCC would be adjusting the calculation of the gap risk
haircut and replacing the current description with a description like
the description of the calculation for the concentration threshold.
Currently, the gap risk haircut is determined by selecting the largest
of the 1st and 99th percentiles of three day returns of a composite set
of equities, using a look-back period of not less than 10 years that
includes a one year stress period.\18\ With the current methodology,
there is implicit overlapping of the risk covered by the core
Parametric VaR and the Gap Risk Measure. Because NSCC would be using
the Gap Risk Measure as an additive component to the VaR Charge rather
than a substitutive component, NSCC does not believe that the current
methodology for the gap risk haircut would result in an appropriate
level. Instead of using the current methodology to calculate the gap
risk haircut, NSCC would determine and calibrate the concentration
threshold and the gap risk haircut from time to time based on
backtesting and impact analysis. More specifically, the concentration
threshold and the gap risk haircuts would be selected from various
combinations of concentration thresholds and gap risk haircuts based on
backtesting and impact analysis across all member portfolios initially
over a five year look-back period. This would provide more flexibility
to set the parameters from time to time to provide improved backtesting
performance, broader coverage for idiosyncratic risk scenarios and
flexibility for model tuning to balance performance and cost
considerations.
---------------------------------------------------------------------------
\18\ Id.
---------------------------------------------------------------------------
In connection with the proposed expansion of the calculation of the
Gap Risk Measure to be based on the two largest non-diversified Net
Unsettled Positions in the portfolio, NSCC is also proposing to lower
the gap risk haircut that would be applied to the largest non-
diversified Net Unsettled Position to be a percent that is no less than
5 percent. Currently, the percent that is applied to the largest non-
index Net Unsettled Positions in the portfolio is no less than 10
percent.\19\ Given the proposed expansion of the calculation of the Gap
Risk Measure to cover the two largest non-diversified Net Unsettled
Positions, rather than only the single largest non-diversified Net
Unsettled Position, NSCC believes it is appropriate to set a lower
floor for the gap risk haircut that applies to the largest of those two
positions. Given that the Gap Risk Measure would be additive rather
than a substitutive component of the VaR Charge and would be triggered
more frequently, NSCC believes that the flexibility to set a lower
floor for the largest position would be appropriate. The gap risk
haircut that would be applied to the second largest non-diversified Net
Unsettled Position in the portfolio would be no larger than the gap
risk haircut that would be applied to the largest non-diversified Net
Unsettled Position and would be subject to a floor of 2.5 percent.
---------------------------------------------------------------------------
\19\ Id.
---------------------------------------------------------------------------
Initially, upon implementation, NSCC would set the concentration
threshold at 10%, apply a gap risk haircut on the largest Net Unsettled
Position of 10% and a gap risk haircut on the second largest Net
Unsettled Position of 5%. NSCC would set the concentration threshold
and the gap risk haircuts based on backtesting and impact analysis from
time to time in accordance with NSCC's model risk management practices
and governance set forth in the Model Risk Management Framework
(``Model Risk Management Framework'').\20\ NSCC's model risk management
governance procedures include daily backtesting of model performance,
periodic sensitivity analyses of models and annual validation of
models. NSCC would review the concentration threshold and the gap risk
haircuts at least annually. NSCC would provide notice to Members by
important notice of the concentration threshold and gap risk haircuts
that it would be applying and changes to the concentration threshold
and to the gap risk haircuts.
---------------------------------------------------------------------------
\20\ See Securities Exchange Act Release Nos. 81485 (August 25,
2017), 82 FR 41433 (August 31, 2017) (File No. SR-NSCC-2017-008);
84458 (October 19, 2018), 83 FR 53925 (October 25, 2018) (File No.
SR-NSCC-2018-009), 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020)
(File No. SR-NSCC-2020-008), 92381 (July 13, 2021), 86 FR 38163
(July 19, 2021) (File No. SR-NSCC-2021-008), and 94272 (February 17,
2022), 87 FR 10419 (February 24, 2022) (File No. SR-NSCC-2022-001).
The Model Risk Management Framework sets forth the model risk
management practices adopted by NSCC.
---------------------------------------------------------------------------
Therefore, upon implementation, to determine the Gap Risk Measure
for each portfolio, NSCC would determine the two largest non-
diversified positions in the portfolio. If the sum of the gross market
values of those two positions represent more than the concentration
threshold of 10% of the gross market value of the portfolio, NSCC would
add (i) an amount equal to 10% of the gross market value of the largest
position and (ii) an amount equal to 5% of the gross market value of
the second largest position. The sum amount would be included in the
volatility component of the Required Fund Deposit for that portfolio.
As described in the Initial Filing, the Gap Risk Measure is
designed to measure concentration of positions in a portfolio, which is
an important indicator of that portfolio's vulnerability to
idiosyncratic risks. By expanding the applicability of the Gap Risk
Measure to each time the concentration threshold is met, the proposed
changes to enhance the calculation of the Gap Risk Measure, described
above, would improve the effectiveness of the VaR Charge in mitigating
against those risks.
Proposed Changes To Improve Transparency
Fifth, NSCC would make the following clarification changes to
improve transparency in the Rules.
NSCC is proposing to remove the specific references to the
concentration threshold as 30 percent in the definition to reflect that
NSCC may adjust the concentration threshold from time to time, as
determined by NSCC based on the backtesting results and impact analysis
over a look-back period of no less than the previous 12 months.\21\ The
Rules currently define the concentration threshold as more than 30
percent of the value of the entire portfolio.\22\ The Rules also
provide that the concentration threshold would be no more than 30
percent and would be determined by NSCC from time to time.\23\ The
proposed changes would clarify that the concentration threshold is not
fixed at 30 percent by defining concentration threshold as a percentage
designated by the Corporation of the value of the entire portfolio
which is determined by NSCC from time to time. The Rules would continue
to state that the concentration threshold would be no more than 30
percent. NSCC believes this proposed change will help clarify that the
concentration threshold could change from time to time but could not be
set to be more than 30 percent.
---------------------------------------------------------------------------
\21\ Id.
\22\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 6. See also Initial Filing,
supra note 11.
\23\ Id.
---------------------------------------------------------------------------
NSCC would revise language relating to the application of the Gap
Risk Measure to Securities Financing Transactions (``SFTs''). Rule 56
governs the SFT Clearing Service.\24\ Section 12(c) of Rule 56
(``Section 12(c)'') provides that NSCC shall calculate the amount of
each SFT Member's required deposit for SFT Positions by applying the
Clearing Fund Formula for CNS
[[Page 78162]]
Transactions set forth in certain sections in Procedure XV.\25\
Footnote 1 (``Footnote 1'') in Section 12(c) provides that for purposes
of applying the VaR Charge with respect to SFT Positions, NSCC shall
apply the Gap Risk Measure as an additive component of the VaR Charge,
which is consistent with how Net Unsettled Positions would be treated
by the proposed changes.\26\ Pursuant to Footnote 1, NSCC has been
applying the Gap Risk Measure as an additive component of the VaR
Charge with respect to SFT Positions but applying the Gap Risk Measure
to other Net Unsettled Positions as a substitutive component as
currently set forth in Procedure XV of the Rules. If the proposed
changes contemplated by this filing were implemented, it would be
unnecessary to distinguish how the Gap Risk Measure is calculated for
SFT Positions because the Gap Risk Measure would be applied to SFT
Positions in the same manner as it would be applied to other Net
Unsettled Positions. As a result, NSCC is proposing to remove Footnote
1.
---------------------------------------------------------------------------
\24\ Rule 56, supra note 4.
\25\ Section 12(c) of Rule 56, supra note 4.
\26\ See Footnote 1, supra note 4, which states ``For the
purpose of applying Section I.(A)(1)(a)(i) of Procedure XV (Value-
at-Risk (VaR) charge), the volatility of an SFT Member's SFT
Positions shall be the sum of (a) the highest resultant value
between Section I.(A)(1)(a)(i)I. (Core Parametric Estimation) and
Section I.(A)(1)(a)(i)III. (Margin Floor) and (b) the resultant
value of Section I.(A)(1)(a)(i)II. (Gap Risk Measure).''
---------------------------------------------------------------------------
NSCC is also proposing to change the reference from ``positions''
to ``Net Unsettled Positions'' or ``Net Balance Order Unsettled
Positions'', as applicable, to clarify that the positions subject to
the Gap Risk Measure are Net Unsettled Positions. NSCC would also
remove ``the portfolio's'' from the provision relating to how the
concentration threshold and gap risk haircuts would be determined and
calibrated because the reference is unnecessary. The same concentration
threshold and gap risk haircuts would apply to all portfolios and would
be calibrated based on backtesting and impact analysis of multiple
portfolios. In addition, in accordance with the Model Risk Management
Framework,\27\ NSCC conducts periodic impact analysis of its models,
including impacts on NSCC and impacts on Members. As such, NSCC is
proposing to include ``impact analysis'' in addition to backtesting
results as a measure of what NSCC would review to determine and
calibrate the concentration threshold and gap risk haircuts. NSCC is
also proposing to replace ``would'' with ``shall'' in four places to
reflect that it is referring to future actions. NSCC would add ``gross
market'' in front of ``value'' in two places and replace ``absolute''
with ``gross market'' in two places to clarify that NSCC would be using
the gross market value of the positions and the portfolio in the Gap
Risk Measure calculations. NSCC would also add a sentence in the Gap
Risk Measure sections indicating that NSCC would announce updates of
the concentration threshold and gap risk haircuts by Important Notice.
---------------------------------------------------------------------------
\27\ See Model Risk Management Framework, supra note 20.
---------------------------------------------------------------------------
Proposed Changes to NSCC Rules
The proposed changes described above would be implemented by
amending the description of the VaR Charge in Sections I(A)(1)(a)(i)
and I(A)(2)(a)(i) of Procedure XV of the Rules. The proposed changes
would also move the descriptions of the Portfolio Margin Floor and the
Gap Risk Measure to Sections I(A)(1)(a)(i)II and I(A)(2)(a)(i)II and
Sections I(A)(1)(a)(i)III and I(A)(2)(a)(i)III of Procedure XV,
respectively.
The proposed changes would amend the description of the VaR Charge
to state that it would be equal to the sum of (1) the highest resultant
value among Sections I(A)(1)(a)(i)I and I(A)(2)(a)(i)I (which describe
the Core Parametric Estimation) and Sections I(A)(1)(a)(i)II and
I(A)(2)(a)(i)II (which would describe the Portfolio Margin Floor); and
(2) the resultant value of Sections I(A)(1)(a)(i)III and
I(A)(2)(a)(i)III (which would describe the Gap Risk Measure).
The proposed changes would amend the description of the Gap Risk
Measure to refer to the two largest non-diversified Net Unsettled
Positions in the portfolio, rather than the largest non-index position,
as described above, would include a footnote in this description to
clarify which positions are excluded from the calculation of the Gap
Risk Measure and make the other changes described above in proposed
Sections I(A)(1)(a)(i)III and I(A)(2)(a)(i)III.
The proposed changes would also remove Footnote 1 from Rule 56 as
described above.
(iv) Implementation Timeframe
NSCC would implement the proposed changes no later than 60 Business
Days after the later of the approval of the proposed rule change and
the no objection to the advance notice \28\ by the Commission. NSCC
would announce the effective date of the proposed changes by Important
Notice posted to its website.
---------------------------------------------------------------------------
\28\ NSCC filed this proposed rule change as an advance notice
(File No. SR-NSCC-2022-802) with the Commission pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act entitled the Payment, Clearing, and
Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule
19b-4(n)(1)(i) under the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of
the advance notice is available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------
2. Statutory Basis
NSCC believes that the proposed changes are 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 changes are consistent with Section 17A(b)(3)(F)
of the Act,\29\ and Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii),
each promulgated under the Act,\30\ for the reasons described below.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78q-1(b)(3)(F).
\30\ 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, assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible and promote the prompt and accurate
clearance and settlement of securities transactions.\31\ As discussed
above, NSCC is proposing enhancements to the Gap Risk Measure portion
of the VaR Charge, one of the components of its Members' Required
Deposits--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. NSCC believes the proposed changes are designed to
assure the safeguarding of securities and funds which are in its
custody or control or for which it is responsible because they are
designed to enable NSCC to better limit its exposure to Members in the
event of a Member default. More specifically, the proposal would expand
the applicability of the Gap Risk Measure and NSCC's ability to collect
amounts calculated through this component, which is designed to
mitigate idiosyncratic risks that NSCC may face.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
In its review of the Gap Risk Measure, NSCC conducted impact
studies adjusting differing parameters and thresholds to determine a
model that would provide improved backtesting performance, broader
coverage for idiosyncratic risk scenarios and flexibility for model
tuning to balance performance and cost considerations to Members. Based
on the impact studies, NSCC determined that the following enhancements
to the Gap Risk Measure described above would enhance the flexibility
of the Gap Risk Measure to
[[Page 78163]]
broaden the scope of gap risk event coverage and to use parameters to
allow for coverage of larger gap moves: (1) making the Gap Risk Measure
an additive component of the Member's total VaR Charge when it is
applicable, rather than being applied as the applicable VaR Charge when
it is the largest of three separate calculations, (2) modifying the
language relating to which ETF positions are excluded from the Gap Risk
Measure, (3) adjusting both the trigger for applying the Gap Risk
Measure and the calculation of the Gap Risk Measure to be based on the
two largest positions in a portfolio, rather than based on the single
largest position and (4)(a) removing the description of the methodology
in the Rules for calculating the gap risk haircut, (b) providing that,
like the concentration threshold, gap risk haircuts would be calibrated
from time to time based on backtesting and impact analysis and (c)
changing the floor of the gap risk haircut from 10 percent to 5 percent
for the largest position and adding a floor of the gap risk haircut of
2.5 percent for the second largest position subject to the Gap Risk
Measure (``Gap Risk Measure Enhancements'').
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. Therefore, the Gap Risk
Measure Enhancements would enable NSCC to better address the potential
idiosyncratic risks that it may face when liquidating a portfolio that
contains a concentration of positions, 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 particular, making the Gap Risk Measure
additive would allow NSCC to collect the amount that results from a
calculation of the Gap Risk Measure every time the concentration
threshold is met which would improve NSCC's ability to mitigate
idiosyncratic risks that it could face through the collection of the
VaR Charge and better protect against more idiosyncratic risk scenarios
than the current methodology. Modifying ETF positions that are subject
to the Gap Risk Measure based on whether they are non-diversified
rather than whether they are non-index would allow NSCC to more
accurately determine which ETFs should be included and excluded from
the Gap Risk Measure based on characteristics that indicate that such
ETFs are more or less prone to the effects of gap risk events.
Adjusting the Gap Risk Measure trigger and calculation to target the
largest two non-diversified Net Unsettled Positions in a portfolio
would cover concurrent gap moves involving more than one concentrated
position providing more coverage of the Gap Risk Measure. Removing
specific methodology metrics relating to the gap risk haircuts and
adding that gap risk haircuts would be calibrated from time to time
based on backtesting and impact analysis, lowering the floor for the
gap risk haircut that applies to the largest of the two largest non-
diversified Net Unsettled Positions and setting a floor of 2.5 percent
for the second largest non-diversified Net Unsettled Positions would
allow NSCC to calibrate and set appropriate gap risk haircuts based on
the Gap Risk Measure being additive rather than a substitutive
component to the VaR Charge. In this way, the proposed rule change to
introduce the Gap Risk Measure Enhancements are 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.\32\
---------------------------------------------------------------------------
\32\ Id.
---------------------------------------------------------------------------
NSCC also believes the proposed changes to provide transparency to
the Rules by (a) removing the references to 30 percent as the
concentration threshold to reflect that it is adjusted from time, (b)
removing Footnote 1 relating to the application of Gap Risk Measure for
SFT Positions from Rule 56, (c) changing the reference from
``positions'' to ``Net Unsettled Positions'' or ``Net Balance Order
Unsettled Positions'', as applicable, (d) removing the unnecessary
reference to ``the portfolio's'' in reference to backtesting results,
(e) including a reference to ``impact analysis'' as a measure of what
NSCC would review to determine and calibrate the concentration
threshold and gap risk haircuts, (f) replacing ``would'' with ``shall''
in four places, (g) clarifying that the calculations would be referring
to the gross market value of the positions and portfolios, and (h)
adding a sentence indicating that NSCC would announce updates of the
concentration threshold and gap risk haircuts by Important Notice
(``Transparency Enhancements'') are consistent with the requirements of
Section 17A(b)(3)(F) of the Act.\33\ Specifically, by enhancing the
transparency of the Rules, the proposed changes would allow Members to
more efficiently and effectively conduct their business in accordance
with the Rules, which NSCC believes would promote the prompt and
accurate clearance and settlement of securities transactions.
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\33\ Id.
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Rule 17Ad-22(e)(4)(i) under the Act requires, in part, 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.\34\
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\34\ 17 CFR 240.17Ad-22(e)(4)(i).
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As described above, NSCC believes that the proposed changes would
enable it to better identify, measure, monitor, and, through the
collection of Members' Required Fund Deposits, 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 Gap Risk Measure Enhancements would provide
improved backtesting performance, broader coverage for idiosyncratic
risk scenarios and flexibility for model tuning to balance performance
and cost considerations to Members, and would address the potential
increased risks NSCC may face related to its ability to liquidate a
portfolio that is susceptible to such risks in the event of a Member
default. In particular, making the Gap Risk Measure additive would
allow NSCC to collect the amount that results from a calculation of the
Gap Risk Measure every time the concentration threshold is met which
would improve NSCC's ability to mitigate idiosyncratic risks that it
could face through the collection of the VaR Charge and better protect
against more idiosyncratic risk scenarios than the current methodology.
Modifying ETF positions that are subject to the Gap Risk Measure based
on whether they are non-diversified rather than whether they are non-
index would allow NSCC to more accurately determine which ETFs should
be included and excluded from the Gap Risk Measure based on
characteristics that indicate that such ETFs are more or less prone to
the effects of gap risk events. Adjusting the Gap Risk Measure trigger
and calculation to target the largest two non-diversified Net Unsettled
Positions in a portfolio would cover concurrent gap moves involving
more than one concentrated position providing more coverage of the Gap
Risk Measure. Removing specific methodology metrics relating to the gap
risk haircuts and adding that gap risk
[[Page 78164]]
haircuts would be calibrated from time to time based on backtesting and
impact analysis, lowering the floor for the gap risk haircut that
applies to the largest of the two largest non-diversified Net Unsettled
Positions and setting a floor of 2.5 percent for the second largest
non-diversified Net Unsettled Positions would allow NSCC to calibrate
and set appropriate gap risk haircuts based on the Gap Risk Measure
being additive rather than a substitutive component to the VaR Charge.
NSCC compared a number of different models for the Gap Risk Measure
with different parameters and thresholds, including the Gap Risk
Measure Enhancements and determined that the Gap Risk Measure
Enhancements improved backtesting performance, provided broader
coverage for idiosyncratic risk scenarios and flexibility for model
tuning to balance performance and cost considerations to Members.
Therefore, NSCC believes that the proposal would enhance NSCC's
ability to effectively identify, measure and monitor its credit
exposures and would enhance its ability to maintain sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence. As such, NSCC believes the
proposed changes are consistent with Rule 17Ad-22(e)(4)(i) under the
Act.\35\
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\35\ Id.
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Rule 17Ad-22(e)(6)(i) under the Act requires, in part, 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.\36\
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\36\ 17 CFR 240.17Ad-22(e)(6)(i).
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The Required Fund Deposits are made up of risk-based components (as
margin) that are calculated and assessed daily to limit NSCC's credit
exposures to Members, including the VaR Charge. NSCC's proposed Gap
Risk Measure Enhancements are designed to more effectively address the
risks presented by a portfolio that meets the concentration threshold
and, therefore, is more susceptible to the impacts of idiosyncratic
risks. NSCC believes the enhanced VaR Charge, as a result of the Gap
Risk Measure Enhancements would enable NSCC to assess a more
appropriate level of margin that accounts for these risks. In
particular, making the Gap Risk Measure additive would allow NSCC to
collect the amount that results from a calculation of the Gap Risk
Measure every time the concentration threshold is met which would
improve NSCC's ability to mitigate idiosyncratic risks that it could
face through the collection of the VaR Charge and better protect
against more idiosyncratic risk scenarios than the current methodology.
Rather than being applied only if the Gap Risk Measure calculation
exceeds the Core Parametric Estimation and the Portfolio Margin Floor
calculation, the Gap Risk Measure calculation would apply every time
the top two positions exceed the concentration threshold. Based on
impact studies, NSCC believes this broader application together with
the other proposed changes outlined below would better protect against
more idiosyncratic risk scenarios than the current methodology
Modifying ETF positions that are subject to the Gap Risk Measure based
on whether they are non-diversified rather than whether they are non-
index would allow NSCC to more accurately determine which ETFs should
be included and excluded from the Gap Risk Measure based on
characteristics that indicate that such ETFs are more or less prone to
the effects of gap risk events. Adjusting the Gap Risk Measure trigger
and calculation to target the largest two non-diversified Net Unsettled
Positions in a portfolio would cover concurrent gap moves involving
more than one concentrated position providing more coverage of the Gap
Risk Measure. Removing specific methodology metrics relating to the gap
risk haircuts and adding that gap risk haircuts would be calibrated
from time to time based on backtesting and impact analysis, lowering
the floor for the gap risk haircut that applies to the largest of the
two largest non-diversified Net Unsettled Positions and setting a floor
of 2.5 percent for the second largest non-diversified Net Unsettled
Positions would allow NSCC to calibrate and set appropriate gap risk
haircuts based on the Gap Risk Measure being additive rather than a
substitutive component to the VaR Charge. These proposed changes are
designed to assist NSCC in maintaining a risk-based margin system that
considers, and produces margin levels commensurate with, the risks and
particular attributes of portfolios that meet the concentration
threshold, as applied through the current methodology. Therefore, NSCC
believes the proposed change is consistent with Rule 17Ad-22(e)(6)(i)
under the Act.\37\
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\37\ Id.
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Rule 17A-d22(e)(23)(ii) under the Act requires, in part, that NSCC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for sufficient information to
enable participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in the covered clearing
agency.\38\ By making the proposed Transparency Enhancements, the
proposed changes would improve the transparency of the Rules. By
providing Members with additional information that would enable them to
evaluate the risks and material costs they incur by participating in
NSCC, NSCC believes the proposed change is consistent with the
requirements of Rule 17Ad-e)(23)(ii).\39\
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\38\ 17 CFR 240.17Ad-22(e)(23)(ii).
\39\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
NSCC does not believe the proposed Transparency Enhancements would
impact competition. These proposed rule changes would merely enhance
the transparency of the Rules. Therefore, this proposed changes would
not affect NSCC's operations or the rights and obligations of Members.
As such, NSCC believes this proposed rule change to improve the
transparency of the Rules would not have any impact on competition.
NSCC believes that the Gap Risk Measure Enhancements could have an
impact on competition. Specifically, NSCC believes the proposed changes
could burden competition because they would result in larger Required
Fund Deposit amounts for Members when the additional charges are
applicable and result in a Required Fund Deposit that is greater than
the amount calculated pursuant to the current formula.
When the proposal results in a larger Required Fund Deposit, the
Gap Risk Measure Enhancements could burden competition for Members that
have lower operating margins or higher costs of capital compared to
other Members. However, the increase in Required Fund Deposit would be
in direct relation to the specific risks presented by each Member's Net
Unsettled Positions, and each Member's Required Fund Deposit would
continue to be calculated with the same parameters and at the same
confidence level for each Member. Therefore, Members that present
similar Net Unsettled Positions, regardless of the type of Member,
would have similar impacts on their Required Fund Deposit amounts. As
such NSCC believes that any burden on competition imposed by the
proposed changes would not be significant and, further, would be both
[[Page 78165]]
necessary and appropriate in furtherance of NSCC's efforts to mitigate
risks and meet the requirements of the Act, as described in this filing
and further below.
NSCC believes the above described burden on competition that may be
created by the proposed enhancement of the VaR Charge through the
expansion of the Gap Risk Measure would be necessary in furtherance of
the Act, specifically Section 17A(b)(3)(F) of the Act.\40\ As stated
above, the proposed Gap Risk Measure Enhancements would improve NSCC's
ability to mitigate against idiosyncratic risks that are presented by
portfolios that meet the concentration threshold, including the risks
related to gap risk events that are not driven by issuer events.
Therefore, NSCC believes this proposed change is consistent with the
requirements of Section 17A(b)(3)(F) of the Act, which requires that
the Rules be designed to assure the safeguarding of securities and
funds that are in NSCC's custody or control or which it is
responsible.\41\
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\40\ 15 U.S.C. 78q-1(b)(3)(F).
\41\ Id.
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NSCC believes these proposed changes would also support NSCC's
compliance with Rules 17Ad-22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under
the Act, which require NSCC to establish, implement, maintain and
enforce written policies and procedures reasonably designed to (x)
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; and (y) 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.\42\
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\42\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
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As described above, NSCC believes the proposed Gap Risk Measure
Enhancements would allow NSCC to employ a risk-based methodology to
address the increased idiosyncratic risks presented by the occurrence
of gap risk events that are presented by portfolios that meet the
concentration threshold. Therefore, the proposed changes would better
limit NSCC's credit exposures to Members, consistent with the
requirements of Rules 17A-d22(e)(4)(i) and Rule 17Ad22-(e)(6)(i) under
the Act.\43\
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\43\ Id.
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NSCC believes that the above-described burden on competition that
could be created by the proposed changes would be appropriate in
furtherance of the Act because such changes have been appropriately
designed to assure the safeguarding of securities and funds which are
in the custody or control of NSCC or for which it is responsible, as
described in detail above. The proposed enhancement to the VaR Charge
through the expansion of the Gap Risk Measure would enable NSCC to
produce margin levels more commensurate with the risks and particular
attributes of each Member's portfolio.
The proposed changes would do this by continuing to apply the Gap
Risk Measure only when the concentration threshold is met. The proposed
change to expand the sensitivity of the charge to refer to the two
largest non-diversified Net Unsettled Positions in the portfolio would
provide NSCC with a better measure of the various and unexpected
idiosyncratic risks it may face, in light of the recent gap risk events
that did not derive from issuer events. Therefore, because the proposed
changes are designed to provide NSCC with an appropriate measure of the
risks (i.e., risks related to gap risk events) presented by Members'
portfolios, NSCC believes the proposal is appropriately designed to
meet its risk management goals and its regulatory obligations.
NSCC believes that it has designed the proposed changes in an
appropriate way in order to meet compliance with its obligations under
the Act. Specifically, the proposals would improve the risk-based
margining methodology that NSCC employs to set margin requirements and
better limit NSCC's credit exposures to its Members. Therefore, as
described above, NSCC believes the proposed changes are necessary and
appropriate in furtherance of NSCC's obligations under the Act,
specifically Section 17A(b)(3)(F) of the Act \44\ and Rule 17Ad-
22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under the Act.\45\
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\44\ 15 U.S.C. 78q-1(b)(3)(F).
\45\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
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(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 not to respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
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-2022-015 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange
[[Page 78166]]
Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-NSCC-2022-015. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of NSCC and on DTCC's website
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NSCC-2022-015 and should be submitted on
or before January 11, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\46\
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\46\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-27657 Filed 12-20-22; 8:45 am]
BILLING CODE 8011-01-P
