Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Advance Notice Related to Certain Enhancements to the Gap Risk Measure and the VaR Charge, 78175-78183 [2022-27658]

Download as PDF Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices submissions should refer to File Number SR–BOX–2022–31 and should be submitted on or before January 11, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.38 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2022–27649 Filed 12–20–22; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–96513; File No. SR–NSCC– 2022–802] Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Advance Notice Related to Certain Enhancements to the Gap Risk Measure and the VaR Charge December 15, 2022. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–96505; File No. SR– PEARL–2022–47] Self-Regulatory Organizations; MIAX PEARL, LLC; Notice of Withdrawal of Proposed Rule Change To Amend the MIAX PEARL Options Fee Schedule To Remove a Monthly Credit Associated With Trading Permit Fees December 15, 2022. On November 2, 2022, MIAX PEARL, LLC (‘‘MIAX Pearl’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 1 and Rule 19b–4 thereunder,2 a proposed rule change to remove a monthly credit associated with trading permit fees. The proposed rule change was published for comment in the Federal Register on November 14, 2022.3 On December 14, 2022, MIAX Pearl withdrew the proposed rule change (SR–PEARL–2022–47). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.4 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2022–27652 Filed 12–20–22; 8:45 am] BILLING CODE 8011–01–P 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 (‘‘Clearing Supervision Act’’) 1 and Rule 19b–4(n)(1)(i) under the Securities Exchange Act of 1934 (‘‘Act’’),2 notice is hereby given that on December 2, 2022, National Securities Clearing Corporation (‘‘NSCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the advance notice 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 advance notice from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Advance Notice This advance notice 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 Valueat-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 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 1 12 U.S.C. 5465(e)(1). CFR 240.19b–4(n)(1)(i). 3 NSCC filed this advance notice as a proposed rule change (SR–NSCC–2022–015) with the Commission pursuant to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b–4 thereunder, 17 CFR 240.19b–4. A copy of the proposed rule change is available at https://www.dtcc.com/legal/sec-rulefilings.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. lotter on DSK11XQN23PROD with NOTICES1 2 17 38 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 96249 (November 7, 2022), 87 FR 68217. 4 17 CFR 200.30–3(a)(12). 1 15 VerDate Sep<11>2014 19:56 Dec 20, 2022 Jkt 259001 PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 78175 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 Advance Notice In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the advance notice and discussed any comments it received on the advance notice. 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 and B below, of the most significant aspects of such statements. (A) Clearing Agency’s Statement on Comments on the Advance Notice Received From Members, Participants, or Others NSCC has not received or solicited any written comments relating to this proposal. NSCC will notify the Securities and Exchange Commission (‘‘Commission’’) of any written comments received by NSCC. (B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing Supervision Act Description of Proposed Changes 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 E:\FR\FM\21DEN1.SGM 21DEN1 lotter on DSK11XQN23PROD with NOTICES1 78176 Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices 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. VerDate Sep<11>2014 19:56 Dec 20, 2022 Jkt 259001 (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. PO 00000 Frm 00135 Fmt 4703 Sfmt 4703 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. E:\FR\FM\21DEN1.SGM 21DEN1 Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices lotter on DSK11XQN23PROD with NOTICES1 (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. VerDate Sep<11>2014 19:56 Dec 20, 2022 Jkt 259001 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. PO 00000 Frm 00136 Fmt 4703 Sfmt 4703 78177 (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 E:\FR\FM\21DEN1.SGM 21DEN1 lotter on DSK11XQN23PROD with NOTICES1 78178 Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices 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 4. See also Initial Filing, supra note 11. VerDate Sep<11>2014 19:56 Dec 20, 2022 Jkt 259001 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. PO 00000 Frm 00137 Fmt 4703 Sfmt 4703 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. E:\FR\FM\21DEN1.SGM 21DEN1 Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices lotter on DSK11XQN23PROD with NOTICES1 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. VerDate Sep<11>2014 19:56 Dec 20, 2022 Jkt 259001 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 4. See also Initial Filing, supra note 11. 23 Id. 24 Rule 56, supra note 4. PO 00000 Frm 00138 Fmt 4703 Sfmt 4703 78179 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. 26 See E:\FR\FM\21DEN1.SGM 21DEN1 78180 Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices 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. lotter on DSK11XQN23PROD with NOTICES1 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 no objection to the advance notice and approval of the proposed rule change 28 by the 28 NSCC filed this advance notice as a proposed rule change (File No. SR–NSCC–2022–015) with the Commission pursuant to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b–4 thereunder, 17 CFR 240.19b–4. A copy of the proposed rule change is available at https://www.dtcc.com/legal/sec-rulefilings.aspx. VerDate Sep<11>2014 19:56 Dec 20, 2022 Jkt 259001 Commission. NSCC would announce the effective date of the proposed changes by Important Notice posted to its website. Expected Effect on and Management of Risk NSCC believes that the proposed changes to enhance the Gap Risk Measure as described above would enable NSCC to better limit its risk exposures to Members arising out of their Net Unsettled Positions. As stated above, the Gap Risk Measure is designed to limit NSCC’s exposures to the risks presented by a portfolios that are more susceptible to the effects of gap risk events due to the idiosyncratic nature of the Net Unsettled Positions in those portfolios. The proposal to enhance the Gap Risk Measure would improve NSCC’s ability to measure and mitigate such risks by allowing it to (1) collect the amount that results from a calculation of the Gap Risk Measure every time the concentration threshold is met by making the Gap Risk Measure additive, (2) 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, (3) provide more coverage of the Gap Risk Measure by adjusting the Gap Risk Measure trigger and calculation to target the largest two non-diversified Net Unsettled Positions in a portfolio and (4) better calibrate and set appropriate gap risk haircuts and concentration thresholds. The proposed changes would allow NSCC to improve its ability to collect sufficient financial resources to cover the exposure that it may face increased market impact costs in liquidating portfolios that are more susceptible to the effects of gap risk events. By providing NSCC with a more effective measurement of its exposures, as described above, the proposed change would also mitigate risk for Members because lowering the risk profile for NSCC would in turn lower the risk exposure that Members may have with respect to NSCC in its role as a central counterparty. Consistency With the Clearing Supervision Act Although the Title VIII of the DoddFrank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Clearing Supervision Act’’) does not specify a standard of review for an advance notice, its stated purpose is instructive: to mitigate PO 00000 Frm 00139 Fmt 4703 Sfmt 4703 systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for systemically important financial market utilities and strengthening the liquidity of systemically important financial market utilities.29 NSCC believes that the proposal is consistent with the Clearing Supervision Act, specifically with the risk management objectives and principles of Section 805(b), and with certain of the risk management standards adopted by the Commission pursuant to Section 805(a)(2), for the reasons described below.30 (i) Consistency With Section 805(b) of the Clearing Supervision Act For the reasons described below, NSCC believes that the proposed changes in this advance notice are consistent with the objectives and principles of these risk management standards as described in Section 805(b) of the Clearing Supervision Act.31 As discussed above, 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 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 volatility charge is one of the components of its Members’ Required Fund 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 consistent 29 See 12 U.S.C. 5461(b). U.S.C. 5464(a)(2) and (b). 31 12 U.S.C. 5464(b). 30 12 E:\FR\FM\21DEN1.SGM 21DEN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices with promoting robust risk management because they are designed to enable NSCC to better limit its exposure to Members in the event of a Member default. 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 nondefaulting 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 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. Furthermore, NSCC believes that the changes proposed in this advance notice are consistent with promoting safety and soundness, which, in turn, is consistent with reducing systemic risks and supporting the stability of the broader financial system, consistent with Section 805(b) of the Clearing VerDate Sep<11>2014 19:56 Dec 20, 2022 Jkt 259001 Supervision Act.32 The proposed changes are designed to better limit NSCC’s exposures to Members in the event of Member default. As discussed above, the proposed enhancements to Gap Risk Measure are designed to allow NSCC to improve its ability to collect sufficient financial resources to cover the exposure that it may face increased market impact costs in liquidating portfolios that are more susceptible to the effects of gap risk events. The proposed enhancements to the Gap Risk Measure would allow NSCC to collect margin at levels that better reflect the risk presented by these portfolios and would help NSCC limit its exposures to Members. By better limiting NSCC’s exposures to Members in the event of a Member default, the proposed changes are consistent with promoting safety and soundness, which, in turn, is consistent with reducing systemic risks and supporting the stability of the broader financial system. As a result, NSCC believes the proposal would be consistent with the objectives and principles of Section 805(b) of the Clearing Supervision Act, which specify the promotion of robust risk management, promotion of safety and soundness, reduction of systemic risks and support of the stability of the broader financial system.33 (ii) Consistency With Section 805(a)(2) of the Clearing Supervision Act Section 805(a)(2) of the Clearing Supervision Act authorizes the Commission to prescribe risk management standards for the payment, clearing and settlement activities of designated clearing entities, like NSCC, and financial institutions engaged in designated activities for which the Commission is the supervisory agency or the appropriate financial regulator.34 The Commission has accordingly adopted risk management standards under Section 805(a)(2) of the Clearing Supervision Act and Section 17A of the Exchange Act (‘‘Covered Clearing Agency Standards’’).35 The Covered Clearing Agency Standards require registered clearing agencies to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for their operations and risk management practices on an ongoing basis.36 NSCC believes that the 32 12 U.S.C. 5464(b). 78181 proposed changes are consistent with Rules 17Ad–22(e)(4)(i), (e)(6)(i) and (e)(23)(ii), each promulgated under the Act.37 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.38 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 33 Id. 34 12 35 17 U.S.C. 5464(a)(2). CFR 240.17Ad–22(e). 36 Id. PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 37 17 CFR 240.17Ad–22(e)(4)(i), (e)(6)(i) and (e)(23)(ii). 38 17 CFR 240.17Ad–22(e)(4)(i). E:\FR\FM\21DEN1.SGM 21DEN1 lotter on DSK11XQN23PROD with NOTICES1 78182 Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices 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. 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.39 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.40 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 39 Id. 40 17 CFR 240.17Ad–22(e)(6)(i). VerDate Sep<11>2014 19:56 Dec 20, 2022 Jkt 259001 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 PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 the proposed change is consistent with Rule 17Ad–22(e)(6)(i) under the Act.41 Rule 17Ad–22(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.42 By making 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, 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– 22(e)(23)(ii).43 III. Date of Effectiveness of the Advance Notice, and Timing for Commission Action The proposed change may be implemented if the Commission does not object to the proposed change within 60 days of the later of (i) the date that the proposed change was filed with the Commission or (ii) the date that any additional information requested by the Commission is received. The clearing agency shall not implement the proposed change if the Commission has any objection to the proposed change. The Commission may extend the period for review by an additional 60 41 Id. 42 17 CFR 240.17Ad–22(e)(23)(ii). 43 Id. E:\FR\FM\21DEN1.SGM 21DEN1 Federal Register / Vol. 87, No. 244 / Wednesday, December 21, 2022 / Notices days if the proposed change raises novel or complex issues, subject to the Commission providing the clearing agency with prompt written notice of the extension. A proposed change may be implemented in less than 60 days from the date the advance notice is filed, or the date further information requested by the Commission is received, if the Commission notifies the clearing agency in writing that it does not object to the proposed change and authorizes the clearing agency to implement the proposed change on an earlier date, subject to any conditions imposed by the Commission. The clearing agency shall post notice on its website of proposed changes that are implemented. 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 advance notice is consistent with the Clearing Supervision Act. Comments may be submitted by any of the following methods: lotter on DSK11XQN23PROD with NOTICES1 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–2022–802 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. All submissions should refer to File Number SR–NSCC–2022–802. 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 advance notice that are filed with the Commission, and all written communications relating to the advance notice 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 VerDate Sep<11>2014 19:56 Dec 20, 2022 Jkt 259001 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– 2022–802 and should be submitted on or before January 11, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.44 Sherry R. Haywood, Assistant Secretary. 78183 material that may be included in import restrictions: https://eca.state.gov/ highlight/cultural-property-advisorycommittee-meeting-January-30February-02-2023. This notice is published pursuant to authority vested in the Assistant Secretary of State for Educational and Cultural Affairs and pursuant to 19 U.S.C. 2602(f)(1). Allison Davis, Executive Director, Cultural Property Advisory Committee, Bureau of Educational and Cultural Affairs, Department of State. [FR Doc. 2022–27735 Filed 12–20–22; 8:45 am] BILLING CODE 4710–05–P DEPARTMENT OF STATE [Public Notice 11947] DEPARTMENT OF STATE Notice of Receipt of Request From the Government of the Republic of North Macedonia Under Article 9 of the 1970 UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property [Public Notice 11945] SUMMARY: [FR Doc. 2022–27658 Filed 12–20–22; 8:45 am] BILLING CODE 8011–01–P Notice of Receipt of Request From the Government of the Republic of Uzbekistan Under Article 9 of the 1970 UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property Notice of receipt of request from Uzbekistan for cultural property protection. SUMMARY: FOR FURTHER INFORMATION CONTACT: Anne Compton, Cultural Heritage Center, Bureau of Educational and Cultural Affairs: 202–632–6301; culprop@state.gov; include ‘‘Uzbekistan’’ in the subject line. SUPPLEMENTARY INFORMATION: The Government of the Republic of Uzbekistan made a request to the Government of the United States on July 13, 2022, under Article 9 of the 1970 UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property. Uzbekistan’s request seeks U.S. import restrictions on archaeological and ethnological materials representing Uzbekistan’s cultural patrimony. The Cultural Heritage Center website provides instructions for public comment and additional information on the request, including categories of 44 17 PO 00000 Notice of receipt of request from North Macedonia for cultural property protection. FOR FURTHER INFORMATION CONTACT: Chelsea Freeland, Cultural Heritage Center, Bureau of Educational and Cultural Affairs: (202) 714–8403; culprop@state.gov; include ‘‘North Macedonia’’ in the subject line. The Government of the Republic of North Macedonia made a request to the Government of the United States on July 29, 2022, under Article 9 of the 1970 UNESCO Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property. North Macedonia’s request seeks U.S. import restrictions on archaeological and ethnological materials representing North Macedonia’s cultural patrimony. The Cultural Heritage Center website provides instructions for public comment and additional information on the request, including categories of material that may be included in import restrictions: https://eca.state.gov/ highlight/cultural-property-advisorycommittee-meeting-January-30February-02-2023. This notice is published pursuant to authority vested in the Assistant Secretary of State for SUPPLEMENTARY INFORMATION: CFR 200.30–3(a)(91). Frm 00142 Fmt 4703 Sfmt 4703 E:\FR\FM\21DEN1.SGM 21DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 87, Number 244 (Wednesday, December 21, 2022)]
[Notices]
[Pages 78175-78183]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-27658]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96513; File No. SR-NSCC-2022-802]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Advance Notice Related to Certain 
Enhancements to the Gap Risk Measure and the VaR Charge

December 15, 2022.
    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 (``Clearing 
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities 
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on 
December 2, 2022, National Securities Clearing Corporation (``NSCC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
advance notice 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 advance notice from 
interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ NSCC filed this advance notice as a proposed rule change 
(SR-NSCC-2022-015) with the Commission pursuant to Section 19(b)(1) 
of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder, 17 CFR 
240.19b-4. A copy of the proposed rule change is available at 
https://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This advance notice 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 
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.
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    \4\ Capitalized terms not defined herein are defined in the 
Rules, available at https://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the advance notice 
and discussed any comments it received on the advance notice. 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 and B below, of the most significant aspects of such 
statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
Received From Members, Participants, or Others

    NSCC has not received or solicited any written comments relating to 
this proposal. NSCC will notify the Securities and Exchange Commission 
(``Commission'') of any written comments received by NSCC.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing 
Supervision Act

Description of Proposed Changes
    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

[[Page 78176]]

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 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.
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    \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.
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    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.

[[Page 78177]]

(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.
(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

[[Page 78178]]

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 4. 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 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

[[Page 78179]]

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 4. See also Initial Filing, 
supra note 11.
    \23\ Id.
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    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 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

[[Page 78180]]

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 no objection to the advance notice and 
approval of the proposed rule change \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 advance notice as a proposed rule change 
(File No. SR-NSCC-2022-015) with the Commission pursuant to Section 
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder, 
17 CFR 240.19b-4. A copy of the proposed rule change is available at 
https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------

Expected Effect on and Management of Risk
    NSCC believes that the proposed changes to enhance the Gap Risk 
Measure as described above would enable NSCC to better limit its risk 
exposures to Members arising out of their Net Unsettled Positions.
    As stated above, the Gap Risk Measure is designed to limit NSCC's 
exposures to the risks presented by a portfolios that are more 
susceptible to the effects of gap risk events due to the idiosyncratic 
nature of the Net Unsettled Positions in those portfolios. The proposal 
to enhance the Gap Risk Measure would improve NSCC's ability to measure 
and mitigate such risks by allowing it to (1) collect the amount that 
results from a calculation of the Gap Risk Measure every time the 
concentration threshold is met by making the Gap Risk Measure additive, 
(2) 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, (3) provide more coverage of the Gap Risk Measure by 
adjusting the Gap Risk Measure trigger and calculation to target the 
largest two non-diversified Net Unsettled Positions in a portfolio and 
(4) better calibrate and set appropriate gap risk haircuts and 
concentration thresholds. The proposed changes would allow NSCC to 
improve its ability to collect sufficient financial resources to cover 
the exposure that it may face increased market impact costs in 
liquidating portfolios that are more susceptible to the effects of gap 
risk events.
    By providing NSCC with a more effective measurement of its 
exposures, as described above, the proposed change would also mitigate 
risk for Members because lowering the risk profile for NSCC would in 
turn lower the risk exposure that Members may have with respect to NSCC 
in its role as a central counterparty.
Consistency With the Clearing Supervision Act
    Although the Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act entitled the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act'') does not specify 
a standard of review for an advance notice, its stated purpose is 
instructive: to mitigate systemic risk in the financial system and 
promote financial stability by, among other things, promoting uniform 
risk management standards for systemically important financial market 
utilities and strengthening the liquidity of systemically important 
financial market utilities.\29\
---------------------------------------------------------------------------

    \29\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    NSCC believes that the proposal is consistent with the Clearing 
Supervision Act, specifically with the risk management objectives and 
principles of Section 805(b), and with certain of the risk management 
standards adopted by the Commission pursuant to Section 805(a)(2), for 
the reasons described below.\30\
---------------------------------------------------------------------------

    \30\ 12 U.S.C. 5464(a)(2) and (b).
---------------------------------------------------------------------------

(i) Consistency With Section 805(b) of the Clearing Supervision Act
    For the reasons described below, NSCC believes that the proposed 
changes in this advance notice are consistent with the objectives and 
principles of these risk management standards as described in Section 
805(b) of the Clearing Supervision Act.\31\
---------------------------------------------------------------------------

    \31\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    As discussed above, 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 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 volatility charge is 
one of the components of its Members' Required Fund 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 consistent

[[Page 78181]]

with promoting robust risk management because they are designed to 
enable NSCC to better limit its exposure to Members in the event of a 
Member default.
    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.
    Furthermore, NSCC believes that the changes proposed in this 
advance notice are consistent with promoting safety and soundness, 
which, in turn, is consistent with reducing systemic risks and 
supporting the stability of the broader financial system, consistent 
with Section 805(b) of the Clearing Supervision Act.\32\ The proposed 
changes are designed to better limit NSCC's exposures to Members in the 
event of Member default. As discussed above, the proposed enhancements 
to Gap Risk Measure are designed to allow NSCC to improve its ability 
to collect sufficient financial resources to cover the exposure that it 
may face increased market impact costs in liquidating portfolios that 
are more susceptible to the effects of gap risk events. The proposed 
enhancements to the Gap Risk Measure would allow NSCC to collect margin 
at levels that better reflect the risk presented by these portfolios 
and would help NSCC limit its exposures to Members.
---------------------------------------------------------------------------

    \32\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    By better limiting NSCC's exposures to Members in the event of a 
Member default, the proposed changes are consistent with promoting 
safety and soundness, which, in turn, is consistent with reducing 
systemic risks and supporting the stability of the broader financial 
system.
    As a result, NSCC believes the proposal would be consistent with 
the objectives and principles of Section 805(b) of the Clearing 
Supervision Act, which specify the promotion of robust risk management, 
promotion of safety and soundness, reduction of systemic risks and 
support of the stability of the broader financial system.\33\
---------------------------------------------------------------------------

    \33\ Id.
---------------------------------------------------------------------------

(ii) Consistency With Section 805(a)(2) of the Clearing Supervision Act
    Section 805(a)(2) of the Clearing Supervision Act authorizes the 
Commission to prescribe risk management standards for the payment, 
clearing and settlement activities of designated clearing entities, 
like NSCC, and financial institutions engaged in designated activities 
for which the Commission is the supervisory agency or the appropriate 
financial regulator.\34\ The Commission has accordingly adopted risk 
management standards under Section 805(a)(2) of the Clearing 
Supervision Act and Section 17A of the Exchange Act (``Covered Clearing 
Agency Standards'').\35\
---------------------------------------------------------------------------

    \34\ 12 U.S.C. 5464(a)(2).
    \35\ 17 CFR 240.17Ad-22(e).
---------------------------------------------------------------------------

    The Covered Clearing Agency Standards require registered clearing 
agencies to establish, implement, maintain, and enforce written 
policies and procedures that are reasonably designed to meet certain 
minimum requirements for their operations and risk management practices 
on an ongoing basis.\36\ NSCC believes that the proposed changes are 
consistent with Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii), each 
promulgated under the Act.\37\
---------------------------------------------------------------------------

    \36\ Id.
    \37\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii).
---------------------------------------------------------------------------

    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.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    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

[[Page 78182]]

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. 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.\39\
---------------------------------------------------------------------------

    \39\ Id.
---------------------------------------------------------------------------

    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.\40\
---------------------------------------------------------------------------

    \40\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

    The Required Fund Deposits are made up of risk-based components (as 
margin) that are calculated and assessed daily to limit NSCC's 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.\41\
---------------------------------------------------------------------------

    \41\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(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.\42\ By making 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, 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-22(e)(23)(ii).\43\
---------------------------------------------------------------------------

    \42\ 17 CFR 240.17Ad-22(e)(23)(ii).
    \43\ Id.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Advance Notice, and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The clearing agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60

[[Page 78183]]

days if the proposed change raises novel or complex issues, subject to 
the Commission providing the clearing agency with prompt written notice 
of the extension. A proposed change may be implemented in less than 60 
days from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies the clearing agency in writing that it does not object to the 
proposed change and authorizes the clearing agency to implement the 
proposed change on an earlier date, subject to any conditions imposed 
by the Commission.
    The clearing agency shall post notice on its website of proposed 
changes that are implemented.
    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 advance 
notice is consistent with the Clearing Supervision 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-2022-802 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-NSCC-2022-802. 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 advance notice that are filed with the 
Commission, and all written communications relating to the advance 
notice 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-2022-802 and should be submitted on 
or before January 11, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\44\
---------------------------------------------------------------------------

    \44\ 17 CFR 200.30-3(a)(91).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-27658 Filed 12-20-22; 8:45 am]
BILLING CODE 8011-01-P

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