Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change To Adopt Intraday Volatility Charge and Eliminate Intraday Backtesting Charge, 16681-16687 [2023-05447]
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Federal Register / Vol. 88, No. 53 / Monday, March 20, 2023 / Notices
As discussed, the proposed fees would
apply to all similarly situated recipient
firms of C2 Options Top on an equal
and non-discriminatory basis. The
Exchange believes the differentiated fees
for Professional and Non-Professional
Users of C2 Options Top is appropriate
given Professional Users are categorized
as such based on their employment and
participation in financial markets, and
thus, are compensated to participate in
the markets. Non-Professional Users too
can receive significant financial benefits
through their participation in the
markets, however the Exchange believes
it is reasonable to charge more to those
Users who are more directly engaged in
the markets. The Exchange therefore
believes that the proposed fee neither
favors nor penalizes one or more
categories of market participants in a
manner that would impose an undue
burden on competition.
The Exchange believes that the
proposed fees do not impose a burden
on competition or on other SROs that is
not necessary or appropriate in
furtherance of the purposes of the Act.
In particular, market participants are not
forced to subscribe to C2 Options Top
Data, or any of the Exchange’s data
feeds, as described above. As noted, the
quote and last sale data contained in the
Exchange’s C2 Option Top feed is
identical to the data sent to OPRA for
redistribution to the public.
Accordingly, Exchange top-of-book data
is widely available today from a number
of different sources.
Because market data customers can
find suitable substitute feeds, an
exchange that overprices its market data
products stands a high risk that users
may substitute another product. These
competitive pressures ensure that no
one exchange’s market data fees can
impose an undue burden on
competition, and the Exchange’s
proposed fees do not do so here.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any written
comments from members or other
interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 22 and paragraph (f) of Rule
22 15
U.S.C. 78s(b)(3)(A).
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17:19 Mar 17, 2023
19b–4 23 thereunder. At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
C2–2023–007 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–C2–2023–007. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
23 17
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CFR 240.19b–4(f).
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16681
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–C2–2023–007 and should
be submitted on or before April 10,
2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.24
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–05541 Filed 3–17–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97129; File No. SR–NSCC–
2022–009]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Order Approving
Proposed Rule Change To Adopt
Intraday Volatility Charge and
Eliminate Intraday Backtesting Charge
March 13, 2023.
I. Introduction
On July 7, 2022, National Securities
Clearing Corporation (‘‘NSCC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) proposed
rule change SR–NSCC–2022–009 (the
‘‘Proposed Rule Change’’) pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder.2 The Proposed Rule
Change was published for comment in
the Federal Register on July 20, 2022,3
and the Commission has received
comments on the Proposed Rule
Change.4
On September 1, 2022, pursuant to
Section 19(b)(2) of the Act,5 the
Commission designated a longer period
within which to approve, disapprove, or
institute proceedings to determine
whether to approve or disapprove the
Proposed Rule Change.6 On October 14,
24 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. 95286
(July 14, 2022), 87 FR 43355 (July 20, 2022) (File
No. SR–NSCC–2022–009) (‘‘Notice of Filing’’).
4 Comments are available at https://www.sec.gov/
comments/sr-nscc-2022-009/srnscc2022009.htm.
5 15 U.S.C. 78s(b)(2).
6 Securities Exchange Act Release No. 95650
(Sept. 1, 2022), 87 FR 55054 (Sept. 8, 2022) (File
No. SR–NSCC–2022–009).
1 15
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Federal Register / Vol. 88, No. 53 / Monday, March 20, 2023 / Notices
2022, the Commission instituted
proceedings, pursuant to Section
19(b)(2)(B) of the Act,7 to determine
whether to approve or disapprove the
Proposed Rule Change.8 On January 10,
2023, the Commission designated a
longer period for Commission action on
the proceedings to determine whether to
approve or disapprove the Proposed
Rule Change.9
For the reasons discussed below, the
Commission is approving the Proposed
Rule Change.10
II. Description of the Proposed Rule
Change
NSCC provides clearing, settlement,
risk management, central counterparty
services, and a guarantee of completion
for virtually all broker-to-broker trades
involving equity securities, corporate
and municipal debt securities, and unit
investment trust transactions in the U.S.
markets. A key tool that NSCC uses to
manage its credit exposure to its
members is collecting an appropriate
Required Fund Deposit (i.e., margin)
from each member.11 A member’s
margin is designed to mitigate potential
losses to NSCC associated with
liquidation of the member’s portfolio in
the event of that member’s default.12
The aggregate of all NSCC members’
margin deposits (together with certain
other deposits required under the Rules)
constitutes NSCC’s clearing fund, which
NSCC would access should a member
default and that member’s margin, upon
liquidation, be insufficient to satisfy
NSCC’s losses.13
A member’s margin consists of a
number of applicable components, each
of which addresses specific risks faced
by NSCC.14 Each member’s start of day
required margin is calculated overnight,
based on the member’s prior end-of-day
net unsettled positions, and notified to
members early the following morning to
be deposited by approximately 10:00
7 15
U.S.C. 78s(b)(2)(B).
Exchange Act Release No. 96088 (Oct.
14, 2022), 87 FR 63845 (Oct. 20, 2022) (File No. SR–
NSCC–2022–009).
9 Securities Exchange Act Release No. 96621 (Jan.
10, 2023), 88 FR 2688 (Jan. 17, 2023) (File No. SR–
NSCC–2022–009).
10 Capitalized terms not defined herein are
defined in NSCC’s Rules & Procedures (‘‘Rules’’),
available at https://www.dtcc.com/∼/media/Files/
Downloads/legal/rules/nscc_rules.pdf.
11 See Rule 4 and Procedure XV of the Rules,
supra note 10.
12 Under NSCC’s Rules, a default would generally
be referred to as a ‘‘cease to act’’ and could
encompass a number of circumstances, such as a
member’s failure to make a margin deposit in a
timely fashion. See Rule 46, supra note 10.
13 See id.
14 See Procedure XV of the Rules, supra note 10.
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8 Securities
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a.m.15 In this Proposed Rule Change,
NSCC would make two changes to its
margin methodology.
First, NSCC would add an intraday
volatility charge to its margin
requirement, which would increase the
margin it collects from members whose
trading portfolios experience large and
unexpected intraday volatility. NSCC
performed an impact study with respect
to this change that reviewed member
positions at 4:00 p.m. between January
3, 2020 and May 28, 2021. The study
showed that the proposal would have
resulted in approximately eight intraday
volatility charges collected on an
average day during that time period, at
an average of $31.6 million, ranging in
size from $251,000 to $1.35 billion.16
Second, NSCC would amend its
margin requirement to eliminate the
intraday backtesting charge because the
charge relies upon an assumption that
may lead to undercounting potential
backtesting deficiencies.17 NSCC will
retain the backtesting charge it collects
as margin at the start of each business
day.18 The proposed changes to its
margin requirements are the result of
NSCC’s regular review of its margin
methodology to evaluate whether
margin levels are commensurate with
the particular risk attributes of each
relevant product, portfolio, and
market.19 NSCC performed an impact
analysis looking at both the proposal’s
impact on end of day backtesting and
intraday backtesting between February
2021 and February 2022, during which
time period NSCC collected a daily
average of $30 million from 15 members
in intraday backtesting charges.
Although NSCC would not have
collected these amounts under the
proposal, the study showed that the end
of day backtesting would have remained
above the 99% coverage target during
that time period, and this aspect of the
proposal would have had an immaterial
impact on intraday backtesting results,
causing backtesting to drop below the
99% coverage target slightly in only two
instances.20
A. Background Regarding Specific
Aspects of NSCC’s Margin Methodology
Volatility Component: Generally, the
largest portion of an NSCC member’s
15 See Procedure XV, Sections II(B) of the Rules,
supra note 10. The Rules provide that required
deposits to the clearing fund are due within one
hour of demand, unless otherwise determined by
NSCC.
16 See Notice of Filing, supra note 3, at 43360–
61.
17 See id. at 43357.
18 See Procedure XV, Section I.B(3) of the Rules,
supra note 10.
19 See Notice of Filing, supra note 3, at 43357.
20 See id. at 43361.
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margin is the volatility component. The
volatility component is designed to
reflect the amount of money that could
be lost on a portfolio over a given period
within a 99th percentile level of
confidence. This component represents
the amount assumed necessary for
NSCC to absorb losses while liquidating
the member’s portfolio.
NSCC’s methodology for calculating
the volatility component of a member’s
required margin depends on the type of
security and whether the security has
sufficient pricing or trading history for
NSCC to robustly estimate the volatility
component using statistical techniques.
Generally, for most securities (that is,
equity securities), NSCC calculates the
volatility component using, among other
things, a parametric Value at Risk
(‘‘VaR’’) model, which results in a ‘‘VaR
Charge.’’ 21 In addition, for securities
that do not have sufficient pricing or
trading history to perform the statistical
analysis employed in the VaR model,
NSCC applies a haircut to calculate the
volatility component, in lieu of the VaRbased calculation.22 The volatility
component of a member’s required
margin is the sum of the VaR-based and
the haircut-based calculations.
Margin requirement differential
(‘‘MRD’’) charge: NSCC may assess an
MRD charge, which is designed to
capture the unpredictability of a
member’s historical trading activity, as
measured, in part, by the variability in
a member’s volatility charge over a 100day lookback period.23
Backtesting charge: NSCC employs
daily backtesting to determine the
sufficiency of each member’s margin, by
simulating the liquidation gains or
losses using the actual unsettled
positions in the member’s portfolio, and
21 Specifically, NSCC calculates the VaR Charge
as the greatest of (1) the larger of two separate
calculations that utilize the VaR model, (2) a gap
risk measure calculation based on the largest nonindex position in a portfolio that exceeds a
concentration threshold, which addresses
concentration risk that can be present in a member’s
portfolio, or (3) a portfolio margin floor calculation
based on the market values of the long and short
positions in the portfolio, which addresses risks
that might not be adequately addressed with the
other volatility component calculations. See
Procedure XV, Sections I(A)(1)(a)(i) and I(A)(2)(a)(i)
of the Rules, supra note 10.
22 Securities that are subject to the haircut-based
calculation include unit investment trusts,
corporate and municipal bonds and Illiquid
Securities. See Rule 1 and Procedure XV, Sections
I(A)(1)(a)(iii) and (2)(a)(iii) of the Rules, supra note
10.
23 Specifically, MRD is calculated as the sum of
an exponentially weighted moving average
(‘‘EWMA’’) of positive day over day changes over
a 100-day look back period in member’s (1) markto-market charge and (2) volatility charge, times a
multiplier calibrated based on backtesting results.
See Procedure XV, Sections I(A)(1)(e) and (2)(d) of
the Rules, supra note 10.
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the actual historical returns for each
security held in the portfolio.24 A
backtesting deficiency would result if
the liquidation losses were greater than
the member’s margin. NSCC investigates
the causes of any backtesting
deficiencies, paying particular attention
to members with backtesting
deficiencies that bring the results for
that member below the 99 percent
confidence target (i.e., greater than two
backtesting deficiency days in a rolling
twelve-month period) to determine if
there is an identifiable cause of repeat
backtesting deficiencies.25 NSCC also
evaluates whether multiple members
may experience backtesting deficiencies
for the same underlying reason.26
Based on that daily testing, NSCC may
assess a backtesting charge, which is
designed to collect additional margin
generally from any member whose 12month trailing backtesting coverage falls
below or risks falling below the 99
percent confidence level.27 Currently,
this charge may be assessed on an
intraday or regular basis.28 If assessed,
a member’s start-of-day backtesting
charge is generally equal to that
member’s third largest deficiency,29 and
a member’s intraday backtesting charge
is generally equal to that member’s fifth
largest deficiency, that occurred during
the previous 12 months.30 NSCC
calculates the backtesting charge
monthly and, based on those
calculations, may either continue to
impose an existing backtesting charge,
impose a new or remove an existing
backtesting charge, or it may either
increase or decrease a member’s existing
backtesting charge as necessary to
maintain its target backtesting
coverage.31
B. Proposed Intraday Volatility Charge
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NSCC proposes to implement an
intraday volatility charge that would be
part of its members’ margin requirement
to better address the volatility risks
presented by members’ intraday net
unsettled positions between the
collections of margin at the start of each
24 Backtesting is an ex-post comparison of actual
outcomes with expected outcomes derived from the
use of margin models. See 17 CFR 240.17Ad–
22(a)(1).
25 See Notice of Filing, supra note 3, at 43356.
26 See id.
27 See Procedure XV, Section I(B)(3) of the Rules,
supra note 10. See also Securities Exchange Act
Release No. 79167 (Oct. 26, 2016), 81 FR 75883
(Nov. 1, 2016) (File Nos. SR–FICC–2016–006; SR–
NSCC–2016–004).
28 See Procedure XV, Section I(B)(3) of the Rules,
supra note 10.
29 See id.
30 See id.
31 See id.
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business day.32 NSCC states that
through its regular monitoring, it has
occasionally observed significant
intraday changes to market price
volatility and significant changes to the
size and composition of members’
portfolios of net unsettled positions that
could cause the amount collected as the
volatility charge at the start of that
business day (‘‘start of day volatility
charge’’) to no longer be sufficient to
mitigate the volatility risks that such
positions present to NSCC.33 The
proposed intraday volatility charge
would be designed to address this risk.
Application of the intraday volatility
charge: An intraday volatility charge
generally would apply when the
difference between a member’s start of
day volatility charge and a calculation
of the volatility charge based on that
member’s intraday net unsettled
positions exceeds 100 percent, and
when the amount of the charge is greater
than $250,000.
NSCC states that, on days when there
is increased volatility in the market, it
would provide notice to its members
that an intraday volatility charge may be
collected. If NSCC determines to collect
an intraday volatility charge, NSCC
would issue a notice by electronic mail
to those members who are subject to
that charge, who would be able to view
the amount to be collected in NSCC’s
clearing fund management system.34
This notification and collection process
would be identical to the current
process that is followed for the
notification and collection of the
intraday mark-to-market charges.35
Members who receive that notice would
be required to fund the amount of the
intraday volatility charge within one
hour of that notice, pursuant to Section
II(B) of Procedure XV of the Rules.36
Calculation of the intraday volatility
charge: The amount of intraday
volatility charge would be equal to the
difference between the start of day
volatility charge and the intraday
calculation of that volatility charge,
32 NSCC states that it did not believe that an
intraday volatility charge was necessary in 2017,
when it accelerated the time of its trade guarantee
(from midnight of one day after trade date to either
the point of trade comparison and validation, for
bilateral submissions, or the point of trade
validation, for locked-in submissions), because it
did not believe that such a charge was necessary to
address the risks presented by the accelerated trade
guarantee. See Notice of Filing, supra note 3, at
43357. See also Securities Exchange Act Release
No. 79598 (Dec. 19, 2016), 81 FR 94462 (Dec. 23,
2016) (File No. SR–NSCC–2016–005); Addendum K
of the Rules, supra note 10.
33 See Notice of Filing, supra note 3, at 43357.
34 See id. at 43359.
35 See id.
36 See Procedure XV, Section II(B) of the Rules,
supra note 10.
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16683
reduced by the volatility portion of the
MRD charge collected from that member
at the start of the business day.37 NSCC
states that, although the MRD charge is
intended to capture the same type of
risk (i.e., variability in the volatility
charge), it believes the proposed
intraday volatility charge would provide
it with a better measure of the
significant intraday volatility swings in
a member’s positions, which may be
inconsistent with a member’s historical
trading activity.38 NSCC states,
therefore, it would not be necessary for
NSCC to collect as part of the intraday
volatility charge any amounts that it has
already collected as the volatility
portion of the MRD charge for that
business day.39
When calculating the intraday
volatility charge, NSCC proposes to
adjust the net unsettled positions by
excluding any position for which shares
have either been delivered to the CNS
System which is used by NSCC to
account for and settle transactions or
received by the member from the CNS
System to satisfy all or any portion of
that position. NSCC states it believes
that, for purposes of this calculation, it
would be appropriate to assume the
positions for which the shares have
been delivered and received would
settle at the end of the day, so that the
calculation would be more effectively
driven by any significant intraday
changes to the volatility risks presented
by members’ adjusted intraday net
unsettled positions.40
Thresholds in Applying the Charge:
As described above, NSCC proposes to
only assess an intraday volatility charge
if two thresholds are met (1) when the
difference between the two calculations
of the volatility charge exceeds 100
percent, and (2) the amount that would
be calculated as an intraday volatility
charge is greater than $250,000. NSCC
states it believes the 100 percent
threshold is appropriate because, in
normal market conditions, intraday
changes in volatility that are lower than
this threshold are more likely due to
normal market fluctuations, and NSCC
believes that, based on past
observations, only an increase that is
larger than 100 percent of the start of
day volatility charge and that is greater
37 To avoid doublecounting the risks captured by
any intraday mark-to-market charges NSCC may
assess (see Procedure XV, Section I(B)(5) of the
Rules, supra note 10), NSCC would use the same
end of day price returns as used in the start of day
volatility charge.
38 See Notice of Filing, supra note 3, at 43358.
39 See id.
40 See id.
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than $250,000 would require mitigation
through the intraday volatility charge.41
NSCC proposes to retain the
discretion within its Rules to lower this
threshold if it determines that a
reduction would be appropriate to
mitigate risks to NSCC, for example,
during volatile market conditions or
market events that cause increases in
trading volume, or when NSCC believes
a lower threshold is appropriate to
mitigate risks presented by members
whose portfolios may present relatively
greater risks to NSCC on an overnight
basis.42 In circumstances when NSCC
determines it is appropriate to reduce
the threshold, the reduced threshold
would apply to all members. NSCC
states that this discretion would allow
NSCC to collect an intraday volatility
charge earlier in light of increased levels
of volatility risks, and in these
circumstances, a lower threshold would
allow NSCC to more proactively
preserve the coverage of its required
fund deposit.43
Exceptions to Collecting an Intraday
Volatility Charge: NSCC proposes two
exceptions to collecting an intraday
volatility charge from a particular
member or members, which are
instances where (a) trades submitted
later in the day would offset trades
submitted earlier in the day, such that
the thresholds would not have been met
if such activity had been submitted
earlier in the day, or (b) the threshold
was met due to the submission of an
erroneous trade that can be corrected.
NSCC monitors volatility in 15minute increments throughout the
business day.44 When the threshold is
exceeded during normal market
conditions earlier in the trading day,
NSCC states it would typically not
collect an intraday volatility charge
until later in the day when members
have had an opportunity to submit
trading activity that would be expected
to offset trades submitted earlier in the
day that caused the thresholds to be
met,45 or a system issue or other error
41 NSCC states it believes amounts below this
threshold, which is the minimum required deposit
to the clearing fund, would be immaterial to
address any increased risk. See id.
42 See id.
43 See id. As part of the Proposed Rule Change,
NSCC filed Exhibit 3c—NSCC Market Risk
Management Procedures (marked excerpt), which
includes NSCC’s internal criteria that would be
applied to determine whether to adjust the
threshold. Pursuant to 17 CFR 240.24b–2, NSCC
requested confidential treatment of Exhibit 3c.
Based on its review of those materials, the
Commission understands that NSCC would provide
notice to its members of any changes to the
threshold.
44 See Notice of Filing, supra note 3, at 43357.
45 NSCC further states that off-setting trading
activity may be submitted to NSCC later in the day
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could cause a delay in the submission
of activity.46 NSCC states that it believes
an intraday volatility charge would not
be necessary in these circumstances
because the risk presented by the
temporary increase in volatility would
be expected to be mitigated by other
clearing activity or corrected
submissions later in the day.47
In determining whether to collect an
intraday volatility charge, after the
occurrence of a threshold trigger, NSCC
would utilize the same escalation
procedures that are currently in place
when making similar determinations
with respect to its current authority to
impose intraday mark-to-market
charges. Specifically, NSCC would
utilize a predetermined escalation
matrix that identifies the level of the
required approver within the NSCC
Market Risk group based on the amount
of the calculated intraday volatility
charge that would be collected.48 A
decision to collect the charge would be
made based on documentation provided
to the required approver regarding the
circumstances of the calculated
charge.49
Application to Positions in Securities
Financing Transactions: NSCC has
established a clearing service for
securities financing transactions to
make central clearing available at NSCC
for equity securities financing
transactions (‘‘SFTs’’).50 NSCC proposes
to include the intraday volatility charge
among the margin charges that are
applicable to SFT positions cleared
through NSCC.
C. Proposed Elimination of the Intraday
Backtesting Charge
NSCC is also proposing to eliminate
the intraday backtesting charge. NSCC
states that, in connection with recent
regulatory feedback, it has determined
that the current methodology for
calculating the intraday backtesting
charge relies upon an assumption that
NSCC would cease to act for a member
that has paid all of its intraday margin
requirements, when it is possible that
would not be the case.51 That is, NSCC
could cease to act for a member that has
in connection with a member’s business model or
trading practices. See id. at 43359.
46 See id.
47 See id.
48 As part of the Proposed Rule Change, NSCC
filed Exhibit 3c—NSCC Market Risk Management
Procedures (marked excerpt), which includes
NSCC’s internal escalation procedures that will be
applicable to a determination to waive a member’s
intraday volatility charge or to alter the applicable
threshold. Pursuant to 17 CFR 240.24b–2, NSCC
requested confidential treatment of Exhibit 3c.
49 See Notice of Filing, supra note 3, at 43359.
50 See Rule 56, supra note 10.
51 See Notice of Filing, supra note 3, at 43360.
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not paid all of its intraday margin
requirements, meaning that the member
would have provided less margin to
NSCC and may therefore present
additional losses. As a result, this
methodology may underestimate a
member’s backtesting losses and
undercount potential backtesting
deficiencies, whereas a calculation that
disregards intraday margin collections
would penalize members for making
intraday margin deposits and be
considered double margining.52
More specifically, if NSCC collects
margin from a member intraday, but
does not include that amount as part of
the member’s margin when backtesting,
resulting in a backtesting deficiency and
a subsequent intraday backtesting
charge, that member would have
covered its risk to NSCC twice—first as
intraday margin collected from that
member and second as an intraday
backtesting charge.53 Therefore, given
these deficiencies and in light of the
proposed intraday volatility charge,
NSCC proposes to eliminate the
intraday backtesting charge.
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 54
directs the Commission to approve a
proposed rule change of a selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Act and
rules and regulations thereunder
applicable to such organization. After
carefully considering the Proposed Rule
Change, the Commission finds that the
Proposed Rule Change is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to NSCC. In particular, the
Commission finds that the Proposed
Rule Change is consistent with Section
17A(b)(3)(F) 55 of the Act and Rules
17Ad–22(e)(4)(i), (e)(6)(i), and (e)(23)(ii)
thereunder.56
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act 57
requires that the rules of a clearing
agency, such as NSCC, be designed to,
among other things, promote the prompt
and accurate clearance and settlement of
securities transactions and assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
52 See
id.
id.
54 15 U.S.C. 78s(b)(2)(C).
55 15 U.S.C. 78q–1(b)(3)(F).
56 17 CFR 240.17Ad–22(e)(4)(i), (e)(6)(i), and
(e)(23)(ii).
57 15 U.S.C. 78q–1(b)(3)(F).
53 See
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responsible.58 The Commission believes
that the proposal is consistent with
Section 17A(b)(3)(F) of the Act for the
reasons stated below.
As described above in Section II.B,
NSCC proposes to add an intraday
volatility charge to its margin
requirements that NSCC may collect
when certain thresholds are met. As
discussed in more detail in Section III.C
infra, the Commission believes that this
proposed change to NSCC’s margin
methodology would help NSCC ensure
that it collects sufficient margin to cover
its credit exposure to its members in
times of intraday market volatility.
Moreover, as described above in
Section II.C, NSCC proposes to
eliminate the intraday backtesting
charge because it is based on an
unreasonable assumption and is not
necessary, in light of the proposed
intraday volatility charge, for NSCC to
address its intraday market risk
exposures and backtesting coverage
metrics. NSCC provided information
regarding the impact of the proposed
intraday backtesting charge elimination
on its backtesting coverage.59 The
results of the analysis showed that,
despite not collecting intraday
backtesting charges, NSCC’s end of day
backtesting would have remained above
the 99 percent coverage target during
that time period, and that this aspect of
the proposal would have had an
immaterial impact on intraday
backtesting results, causing backtesting
to drop below the 99 percent coverage
target slightly in only two instances.60
The Commission has reviewed NSCC’s
analysis and agrees that its results
indicate that NSCC’s proposal to
eliminate the intraday backtesting
charge would not materially impact
NSCC’s margin coverage, and because
the proposed intraday volatility charge
would, when applicable, allow NSCC to
collect additional amounts which would
more accurately reflect the intraday
changes to market volatility or the size
of a member’s portfolio.
With respect to both aspects of this
proposal, the Commission believes that,
by allowing NSCC to collect sufficient
margin, the proposal should help ensure
that, in the event of a member default,
NSCC’s operation of its critical
clearance and settlement services would
not be disrupted because of insufficient
58 Id.
59 As part of the Proposed Rule Change, NSCC
filed Exhibit 3b—NSCC Intraday Backtesting Charge
Impact Study Data, comparing the current and
proposed margin collections. Pursuant to 17 CFR
240.24b–2, NSCC requested confidential treatment
of Exhibit 3b. The confidential information
provided more granular support for this analysis.
60 See id.
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16685
financial resources. Accordingly, the
Commission finds that NSCC’s proposal
should help NSCC to continue
providing prompt and accurate
clearance and settlement of securities
transactions, consistent with Section
17A(b)(3)(F) of the Act.
Moreover, as described in Section II
above, NSCC would access the
mutualized clearing fund should a
defaulted member’s own margin be
insufficient to satisfy losses to NSCC
caused by the liquidation of that
member’s portfolio. Because NSCC’s
proposal to adopt an intraday volatility
charge should help ensure that NSCC
has collected sufficient margin from
members, the proposed changes would
also help minimize the likelihood that
NSCC would have to access the clearing
fund, thereby limiting non-defaulting
members’ exposure to mutualized
losses. The Commission believes that by
helping to limit the exposure of NSCC’s
non-defaulting members to mutualized
losses, the proposed changes should
help NSCC assure the safeguarding of
securities and funds which are in its
custody or control, consistent with
Section 17A(b)(3)(F) of the Act.61
member’s portfolio following that
member’s default.
Moreover, the proposed change to
eliminate the intraday backtesting
charge set forth in Section II.C would
eliminate a charge that is currently
calculated based on an unreasonable
assumption and is not necessary for
NSCC to address its intraday market risk
exposures and backtesting coverage
metrics. As discussed above,64 the
Commission has reviewed and analyzed
the results of NSCC’s backtesting
analysis and believes that this proposal
would allow NSCC to continue to
collect margin to meet its coverage
requirements.
Therefore, for the reasons discussed
above, the Commission finds that the
Proposed Rule Change is reasonably
designed to enable NSCC to effectively
identify, measure, monitor, and manage
its credit exposure to members, and
those arising from its payment, clearing,
and settlement processes, including by
maintaining sufficient financial
resources to cover its credit exposure to
each member fully with a high degree of
confidence consistent with Rule 17Ad–
22(e)(4)(i).65
B. Consistency With Rule 17Ad–
22(e)(4)(i) Under the Act
Rule 17Ad–22(e)(4)(i) under the Act
requires that each covered clearing
agency, such as 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.62 The Commission
believes that the proposal is consistent
with Rule 17Ad–22(e)(4)(i) under the
Act for the reasons stated below.63
The proposed change to adopt an
intraday volatility charge would allow
NSCC to better manage its credit
exposures to members by maintaining
sufficient resources to cover those credit
exposures fully with a high degree of
confidence. Specifically, and as
discussed further in Section III.C infra,
the proposed intraday volatility charge
would allow NSCC to collect additional
margin on an intraday basis to help
NSCC effectively mitigate the risks
related to intraday increases in volatility
and would address the increased risks
NSCC may face related to liquidating a
C. Consistency With Rule 17Ad–
22(e)(6)(i) Under the Act
Rule 17Ad–22(e)(6)(i) under the Act
requires that each covered clearing
agency that provides central
counterparty services, like 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.66
As described above in Section II, each
member’s margin consists of a number
of applicable components, each of
which is calculated to address specific
risks faced by NSCC. The Commission
agrees that the proposal to adopt an
intraday volatility charge set forth in
Section II.B should enable NSCC to
more effectively address the risks
presented by significant intraday
changes to market volatility or a
member’s portfolio of net unsettled
positions. NSCC provided information
regarding the impact of the proposed
intraday volatility charge on its margin
collection.67 Specifically, a recent
61 15
62 17
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(4)(i).
64 See
notes 59–60 supra and accompanying text.
CFR 240.17Ad–22(e)(4)(i).
66 17 CFR 240.17Ad–22(e)(6)(i).
67 As part of the Proposed Rule Change, NSCC
filed Exhibit 3a—NSCC Intraday Volatility Charge
65 17
63 Id.
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impact study shows that the proposal
would have resulted in approximately
eight intraday volatility charges
collected on an average day during that
time period, and such charges would
have been an average of $31.6 million,
ranging in size from $251,000 to $1.35
billion.68 The Commission has reviewed
NSCC’s analysis and agrees that its
results indicate that NSCC’s proposal
results in margin levels commensurate
with the credit exposures to better
reflect the intraday changes to market
volatility or the size of a member’s
portfolio.
One commenter raised concerns with
respect to the analysis cited by NSCC in
the Proposed Rule Change, stating that
NSCC did not provide any data to
support its assertion that it occasionally
observed significant intraday changes to
market price volatility.69 Consistent
with NSCC’s statement regarding
observing volatility, the Commission
notes that this time period includes
periods of significant intraday market
volatility, including, for example, the
initial Covid–19 volatility in March
2020 and the meme stock trading in
January 2021. Moreover, the
Commission believes that the
information submitted by NSCC
confidentially provides an overview of
how the proposed charge would have
helped NSCC address any intraday
exposures related to such market
volatility. For each trading date during
the January 2020 through March 2021
time period, the data provided to the
Commission indicates the start of day
VaR collected by NSCC across all
members, what the intraday VaR need is
for all of NSCC as of 4 p.m., the MRD
offset, what the intraday volatility
charge would have been, and the
number of members affected by a call.
Based on its review of this data, which
indicates what NSCC’s intraday
exposures would have been during this
timeframe by comparing the start of day
VaR amounts to the intraday VaR charge
based on the day’s trading activity, the
Commission believes that the proposed
intraday volatility charge would help
NSCC address significant intraday
exposures. Moreover, the commenter
indicates that its own analysis showed
that it would have incurred an intraday
Impact Study Data, comparing the current and
proposed margin collections. Pursuant to 17 CFR
240.24b–2, NSCC requested confidential treatment
of Exhibit 3a. The confidential information
provided more granular support for this analysis.
68 See id. and Notice of Filing, supra note 3, at
43361.
69 Letter from John S. Markle, VP and Deputy
General Counsel, Robinhood Securities LLC, at 2
(Aug. 23, 2022), available at https://www.sec.gov/
comments/sr-nscc-2022-009/srnscc202200920137444-307937.pdf (‘‘Robinhood Letter’’).
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volatility charge approximately once per
week.70 The Commission does not
disagree that such a frequency could be
possible depending on the commenter’s
portfolio and any intraday market
volatility, and the Commission does not
believe that this information renders the
proposed intraday volatility charge
unreasonable.
As set forth in the proposed rule text
filed with this Proposed Rule Change,71
the proposed intraday volatility charge
would provide NSCC the authority to
reduce the applicable threshold of 100
percent ‘‘if [NSCC] determines that a
reduction of the threshold is appropriate
to mitigate risks to [NSCC] by
accelerating the collection of anticipated
additional margin from those Members
whose portfolios may present relatively
larger risks to [NSCC] on an overnight
basis,’’ including, for example, during
volatile market conditions or market
events that cause increases in trading
volumes. The Commission believes that
this ability is reasonable and consistent
with NSCC’s need to manage the risks
arising from intraday volatility because
it would allow NSCC to respond to
market stress in a manner appropriate to
the circumstances.
One commenter stated that the
proposal did not specify how far NSCC
could reduce the intraday volatility
charge threshold.72 The Commission
does not believe that the lack of a floor
for the threshold is unreasonable. NSCC
could only lower the threshold, if NSCC
determines that a reduction of the
threshold is appropriate to mitigate risks
to NSCC by accelerating the collection
of anticipated additional margin from
members whose portfolios may present
relatively larger risks to NSCC on an
overnight basis, for example, during
volatile market conditions or market
events that cause increases in trading
volumes, and as approved consistent
with its internal procedures, which the
Commission has reviewed as part of the
materials submitted confidentially.73
and the Commission does not believe
that a floor is necessary to ensure
transparency. In addition, the
Commission understands that members
would be informed of any changes to
the threshold, based on its review of the
confidential materials submitted in
connection with this Proposed Rule
Change.74 The Commission also notes
that NSCC has similar authority with
respect to its intraday mark-to-market
70 Robinhood
Letter at 2, supra note 69.
proposed Section I(B)(6) of Procedure XV,
available at https://www.sec.gov/rules/sro/nscc/
2022/34-95286-ex5.pdf.
72 Robinhood Letter at 2, supra note 69.
73 See notes 48 and 71 supra.
74 See note 43 supra.
71 See
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charge in its existing Rules.75 Moreover,
as discussed in Section III.D infra, the
Commission believes that the increased
transparency arising from the Proposed
Rule Change with respect to intraday
volatility should overall improve a
member’s ability to understand the
potential charges to which it may be
subject.
Moreover, given the deficiencies in
the current calculation of the intraday
backtesting charge, the Commission
believes NSCC’s proposal to eliminate
the intraday backtesting charge would
continue to allow NSCC to maintain a
risk-based margin system that considers,
and produces margin levels
commensurate with the risks of its
members’ portfolios.
Accordingly, the Commission finds
the proposal is consistent with Rule
17Ad–22(e)(6)(i) under the Act because
it is designed to assist NSCC in
maintaining a risk-based margin system
that considers, and produces margin
levels commensurate with, the risks of
portfolios that experience significant
volatility on an intraday basis.76
D. Consistency With Rule 17Ad–
22(e)(23)(ii) Under the Act
Rule 17Ad–22(e)(23)(ii) under the Act
requires that each covered clearing
agency, like NSCC, establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide
sufficient information to enable
participants to identify and evaluate the
risks, fees, and other material costs they
incur by participating in NSCC.77 The
Commission believes that the proposal
is consistent with Rule 17Ad–
22(e)(23)(ii) under the Act for the reason
stated below.
As described above in Section II.B,
NSCC is proposing to amend its Rules
to include a description of the intraday
volatility charge, including the
thresholds that would trigger the
collection of the charge, the exceptions
to the collection of the charge when the
thresholds are met, the method by
which NSCC would calculate that
charge, and NSCC’s discretion to reduce
the percent threshold that triggers the
collection of the charge, including the
circumstances when NSCC may exercise
this discretion. Additionally, NSCC
represents that members would be able
to continue to use existing tools,
including the ability to view the
calculated volatility charge in 15-minute
increments throughout the business day
75 See Procedure XV, Section I(B)(5) of the Rules,
supra note 10.
76 17 CFR 240.17Ad–22(e)(6)(i).
77 17 CFR 240.17Ad–22(e)(23)(ii).
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and the VaR margin calculator available
on NSCC’s Risk Client Portal, to monitor
their positions and anticipate any
potential intraday charges. For these
reasons, the Commission believes the
Proposed Rule Change would provide
members with sufficient information
regarding when and how NSCC may
collect additional amounts to address
the risks of portfolios that experience
significant volatility on an intraday
basis. The Commission also believes
that the specificity regarding how and
when NSCC would calculate the
intraday volatility charge provides
additional transparency over the
‘‘special charge’’ in NSCC’s Rules that
allows NSCC to collect a special charge
in times of market volatility or price
fluctuations. As NSCC states, ‘‘[w]hen
the intraday volatility charge is
triggered, a special charge would not
also be required from a Member to
address the same volatility risks.’’ 78
Finally, one commenter asserted that
the proposal failed to provide any
information regarding what would
happen if a member fails to meet an
intraday volatility charge.79 However,
NSCC’s Rules address a member’s
requirement to meet its obligations with
respect to required margin, as
determined by NSCC, and set forth
NSCC’s authority if a member does not
meet its obligations.80 Therefore, the
Commission disagrees that this proposal
should have provided more information
on what happens if a member does not
meet this type of margin call.
Accordingly, the Commission finds
that the Proposed Rule Change would
enable NSCC to establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
provide sufficient information to enable
members to identify and evaluate the
risks, fees, and other material costs they
incur as NSCC members, consistent
with Rule 17Ad–22(e)(23)(ii).
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the Proposed
Rule Change is consistent with the
requirements of the Act and in
particular with the requirements of
Section 17A of the Act 81 and the rules
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78 See
Notice of Filing, supra note 3, at 43359–
60.
79 Robinhood
Letter at 2–3, supra note 69.
Rule 4, Section 1 and Procedure XV,
Section II(B) of the Rules, supra note 10. See also
Letter from Timothy Hulse, Managing Director,
DTCC, at 1–2 (Sept. 27, 2022), available at https://
www.sec.gov/comments/sr-nscc-2022-009/
srnscc2022009-20144273-309218.pdf.
81 15 U.S.C. 78q–1.
80 See
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and regulations promulgated
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 82 that
proposed rule change SR–NSCC–2022–
009, be, and hereby is, approved.83
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.84
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–05447 Filed 3–17–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meeting
Notice is hereby given,
pursuant to the provisions of the
Government in the Sunshine Act, Public
Law 94–409, that the Securities and
Exchange Commission will hold an
Open Meeting on Wednesday, March
22, 2023 at 10:00 a.m.
PLACE: The meeting will be webcast on
the Commission’s website at
www.sec.gov.
STATUS: The meeting will begin at 10:00
a.m. (ET) and will be open to the public
via webcast on the Commission’s
website at www.sec.gov.
MATTERS TO BE CONSIDERED:
1. The Commission will consider
whether to adopt amendments to Form
PF, the confidential reporting form for
certain registered investment advisers to
private funds, to require current
reporting for certain private fund
advisers and revise certain reporting
requirements.
2. The Commission will consider
whether to:
a. Propose to require the electronic
filing or submission on the
Commission’s Electronic Data
Gathering, Analysis, and Retrieval
(EDGAR) system, using structured data
where appropriate, of several forms,
notices, and reports required under the
Exchange Act;
b. Propose to rescind Form 19b–4(e)
and require the information currently
contained in Form 19b–4(e) instead to
be publicly posted on the listing selfregulatory organization’s website; and
remove the requirement in Form 19b–4
for a manual signature and the related
manual signature retention requirement;
c. Propose to amend the
Commission’s Informal and Other
TIME AND DATE:
82 15
U.S.C. 78s(b)(2).
approving the Proposed Rule Change, the
Commission considered its impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
84 17 CFR 200.30–3(a)(12).
83 In
PO 00000
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16687
Procedures to reflect that Form 1 and
Form 1–N would be submitted
electronically and to make certain
technical revisions;
d. Propose to amend the requirement
for supplemental materials for registered
clearing agencies to require that a
clearing agency post to its website the
required supplemental information,
rather than submit such material in
paper copy to the Commission;
e. Propose to allow electronic
signatures in certain broker-dealer
filings and proposing amendments
regarding the Financial and Operational
Combined Uniform Single Report (Form
X–17A–5) to harmonize with other
rules, make technical corrections, and
provide clarifications; and
f. Propose to require that notices made
pursuant to Rule 3a71–3(d)(1)(vi) be
withdrawn in specified circumstances.
CONTACT PERSON FOR MORE INFORMATION:
For further information and to ascertain
what, if any, matters have been added,
deleted or postponed, please contact
Vanessa A. Countryman from the Office
of the Secretary at (202) 551–5400.
Authority: 5 U.S.C. 552b.
Dated: March 15, 2023.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–05694 Filed 3–16–23; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97136; File No. SR–
CboeEDGX–2023–020]
Self-Regulatory Organizations; Cboe
EDGX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Amend Its
Fee Schedule
March 14, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 10,
2023, Cboe EDGX Exchange, Inc.
(‘‘Exchange’’ or ‘‘EDGX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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]]>Agencies
[Federal Register Volume 88, Number 53 (Monday, March 20, 2023)]
[Notices]
[Pages 16681-16687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-05447]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97129; File No. SR-NSCC-2022-009]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change To Adopt Intraday
Volatility Charge and Eliminate Intraday Backtesting Charge
March 13, 2023.
I. Introduction
On July 7, 2022, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2022-009 (the ``Proposed
Rule Change'') pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed
Rule Change was published for comment in the Federal Register on July
20, 2022,\3\ and the Commission has received comments on the Proposed
Rule Change.\4\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 95286 (July 14,
2022), 87 FR 43355 (July 20, 2022) (File No. SR-NSCC-2022-009)
(``Notice of Filing'').
\4\ Comments are available at https://www.sec.gov/comments/sr-nscc-2022-009/srnscc2022009.htm.
---------------------------------------------------------------------------
On September 1, 2022, pursuant to Section 19(b)(2) of the Act,\5\
the Commission designated a longer period within which to approve,
disapprove, or institute proceedings to determine whether to approve or
disapprove the Proposed Rule Change.\6\ On October 14,
[[Page 16682]]
2022, the Commission instituted proceedings, pursuant to Section
19(b)(2)(B) of the Act,\7\ to determine whether to approve or
disapprove the Proposed Rule Change.\8\ On January 10, 2023, the
Commission designated a longer period for Commission action on the
proceedings to determine whether to approve or disapprove the Proposed
Rule Change.\9\
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78s(b)(2).
\6\ Securities Exchange Act Release No. 95650 (Sept. 1, 2022),
87 FR 55054 (Sept. 8, 2022) (File No. SR-NSCC-2022-009).
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ Securities Exchange Act Release No. 96088 (Oct. 14, 2022),
87 FR 63845 (Oct. 20, 2022) (File No. SR-NSCC-2022-009).
\9\ Securities Exchange Act Release No. 96621 (Jan. 10, 2023),
88 FR 2688 (Jan. 17, 2023) (File No. SR-NSCC-2022-009).
---------------------------------------------------------------------------
For the reasons discussed below, the Commission is approving the
Proposed Rule Change.\10\
---------------------------------------------------------------------------
\10\ Capitalized terms not defined herein are defined in NSCC's
Rules & Procedures (``Rules''), available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
NSCC provides clearing, settlement, risk management, central
counterparty services, and a guarantee of completion for virtually all
broker-to-broker trades involving equity securities, corporate and
municipal debt securities, and unit investment trust transactions in
the U.S. markets. A key tool that NSCC uses to manage its credit
exposure to its members is collecting an appropriate Required Fund
Deposit (i.e., margin) from each member.\11\ A member's margin is
designed to mitigate potential losses to NSCC associated with
liquidation of the member's portfolio in the event of that member's
default.\12\ The aggregate of all NSCC members' margin deposits
(together with certain other deposits required under the Rules)
constitutes NSCC's clearing fund, which NSCC would access should a
member default and that member's margin, upon liquidation, be
insufficient to satisfy NSCC's losses.\13\
---------------------------------------------------------------------------
\11\ See Rule 4 and Procedure XV of the Rules, supra note 10.
\12\ Under NSCC's Rules, a default would generally be referred
to as a ``cease to act'' and could encompass a number of
circumstances, such as a member's failure to make a margin deposit
in a timely fashion. See Rule 46, supra note 10.
\13\ See id.
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A member's margin consists of a number of applicable components,
each of which addresses specific risks faced by NSCC.\14\ Each member's
start of day required margin is calculated overnight, based on the
member's prior end-of-day net unsettled positions, and notified to
members early the following morning to be deposited by approximately
10:00 a.m.\15\ In this Proposed Rule Change, NSCC would make two
changes to its margin methodology.
---------------------------------------------------------------------------
\14\ See Procedure XV of the Rules, supra note 10.
\15\ See Procedure XV, Sections II(B) of the Rules, supra note
10. The Rules provide that required deposits to the clearing fund
are due within one hour of demand, unless otherwise determined by
NSCC.
---------------------------------------------------------------------------
First, NSCC would add an intraday volatility charge to its margin
requirement, which would increase the margin it collects from members
whose trading portfolios experience large and unexpected intraday
volatility. NSCC performed an impact study with respect to this change
that reviewed member positions at 4:00 p.m. between January 3, 2020 and
May 28, 2021. The study showed that the proposal would have resulted in
approximately eight intraday volatility charges collected on an average
day during that time period, at an average of $31.6 million, ranging in
size from $251,000 to $1.35 billion.\16\
---------------------------------------------------------------------------
\16\ See Notice of Filing, supra note 3, at 43360-61.
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Second, NSCC would amend its margin requirement to eliminate the
intraday backtesting charge because the charge relies upon an
assumption that may lead to undercounting potential backtesting
deficiencies.\17\ NSCC will retain the backtesting charge it collects
as margin at the start of each business day.\18\ The proposed changes
to its margin requirements are the result of NSCC's regular review of
its margin methodology to evaluate whether margin levels are
commensurate with the particular risk attributes of each relevant
product, portfolio, and market.\19\ NSCC performed an impact analysis
looking at both the proposal's impact on end of day backtesting and
intraday backtesting between February 2021 and February 2022, during
which time period NSCC collected a daily average of $30 million from 15
members in intraday backtesting charges. Although NSCC would not have
collected these amounts under the proposal, the study showed that the
end of day backtesting would have remained above the 99% coverage
target during that time period, and this aspect of the proposal would
have had an immaterial impact on intraday backtesting results, causing
backtesting to drop below the 99% coverage target slightly in only two
instances.\20\
---------------------------------------------------------------------------
\17\ See id. at 43357.
\18\ See Procedure XV, Section I.B(3) of the Rules, supra note
10.
\19\ See Notice of Filing, supra note 3, at 43357.
\20\ See id. at 43361.
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A. Background Regarding Specific Aspects of NSCC's Margin Methodology
Volatility Component: Generally, the largest portion of an NSCC
member's margin is the volatility component. The volatility component
is designed to reflect the amount of money that could be lost on a
portfolio over a given period within a 99th percentile level of
confidence. This component represents the amount assumed necessary for
NSCC to absorb losses while liquidating the member's portfolio.
NSCC's methodology for calculating the volatility component of a
member's required margin depends on the type of security and whether
the security has sufficient pricing or trading history for NSCC to
robustly estimate the volatility component using statistical
techniques. Generally, for most securities (that is, equity
securities), NSCC calculates the volatility component using, among
other things, a parametric Value at Risk (``VaR'') model, which results
in a ``VaR Charge.'' \21\ In addition, for securities that do not have
sufficient pricing or trading history to perform the statistical
analysis employed in the VaR model, NSCC applies a haircut to calculate
the volatility component, in lieu of the VaR-based calculation.\22\ The
volatility component of a member's required margin is the sum of the
VaR-based and the haircut-based calculations.
---------------------------------------------------------------------------
\21\ Specifically, NSCC calculates the VaR Charge as the
greatest of (1) the larger of two separate calculations that utilize
the VaR model, (2) a gap risk measure calculation based on the
largest non-index position in a portfolio that exceeds a
concentration threshold, which addresses concentration risk that can
be present in a member's portfolio, or (3) a portfolio margin floor
calculation based on the market values of the long and short
positions in the portfolio, which addresses risks that might not be
adequately addressed with the other volatility component
calculations. See Procedure XV, Sections I(A)(1)(a)(i) and
I(A)(2)(a)(i) of the Rules, supra note 10.
\22\ Securities that are subject to the haircut-based
calculation include unit investment trusts, corporate and municipal
bonds and Illiquid Securities. See Rule 1 and Procedure XV, Sections
I(A)(1)(a)(iii) and (2)(a)(iii) of the Rules, supra note 10.
---------------------------------------------------------------------------
Margin requirement differential (``MRD'') charge: NSCC may assess
an MRD charge, which is designed to capture the unpredictability of a
member's historical trading activity, as measured, in part, by the
variability in a member's volatility charge over a 100-day lookback
period.\23\
---------------------------------------------------------------------------
\23\ Specifically, MRD is calculated as the sum of an
exponentially weighted moving average (``EWMA'') of positive day
over day changes over a 100-day look back period in member's (1)
mark-to-market charge and (2) volatility charge, times a multiplier
calibrated based on backtesting results. See Procedure XV, Sections
I(A)(1)(e) and (2)(d) of the Rules, supra note 10.
---------------------------------------------------------------------------
Backtesting charge: NSCC employs daily backtesting to determine the
sufficiency of each member's margin, by simulating the liquidation
gains or losses using the actual unsettled positions in the member's
portfolio, and
[[Page 16683]]
the actual historical returns for each security held in the
portfolio.\24\ A backtesting deficiency would result if the liquidation
losses were greater than the member's margin. NSCC investigates the
causes of any backtesting deficiencies, paying particular attention to
members with backtesting deficiencies that bring the results for that
member below the 99 percent confidence target (i.e., greater than two
backtesting deficiency days in a rolling twelve-month period) to
determine if there is an identifiable cause of repeat backtesting
deficiencies.\25\ NSCC also evaluates whether multiple members may
experience backtesting deficiencies for the same underlying reason.\26\
---------------------------------------------------------------------------
\24\ Backtesting is an ex-post comparison of actual outcomes
with expected outcomes derived from the use of margin models. See 17
CFR 240.17Ad-22(a)(1).
\25\ See Notice of Filing, supra note 3, at 43356.
\26\ See id.
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Based on that daily testing, NSCC may assess a backtesting charge,
which is designed to collect additional margin generally from any
member whose 12-month trailing backtesting coverage falls below or
risks falling below the 99 percent confidence level.\27\ Currently,
this charge may be assessed on an intraday or regular basis.\28\ If
assessed, a member's start-of-day backtesting charge is generally equal
to that member's third largest deficiency,\29\ and a member's intraday
backtesting charge is generally equal to that member's fifth largest
deficiency, that occurred during the previous 12 months.\30\ NSCC
calculates the backtesting charge monthly and, based on those
calculations, may either continue to impose an existing backtesting
charge, impose a new or remove an existing backtesting charge, or it
may either increase or decrease a member's existing backtesting charge
as necessary to maintain its target backtesting coverage.\31\
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\27\ See Procedure XV, Section I(B)(3) of the Rules, supra note
10. See also Securities Exchange Act Release No. 79167 (Oct. 26,
2016), 81 FR 75883 (Nov. 1, 2016) (File Nos. SR-FICC-2016-006; SR-
NSCC-2016-004).
\28\ See Procedure XV, Section I(B)(3) of the Rules, supra note
10.
\29\ See id.
\30\ See id.
\31\ See id.
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B. Proposed Intraday Volatility Charge
NSCC proposes to implement an intraday volatility charge that would
be part of its members' margin requirement to better address the
volatility risks presented by members' intraday net unsettled positions
between the collections of margin at the start of each business
day.\32\ NSCC states that through its regular monitoring, it has
occasionally observed significant intraday changes to market price
volatility and significant changes to the size and composition of
members' portfolios of net unsettled positions that could cause the
amount collected as the volatility charge at the start of that business
day (``start of day volatility charge'') to no longer be sufficient to
mitigate the volatility risks that such positions present to NSCC.\33\
The proposed intraday volatility charge would be designed to address
this risk.
---------------------------------------------------------------------------
\32\ NSCC states that it did not believe that an intraday
volatility charge was necessary in 2017, when it accelerated the
time of its trade guarantee (from midnight of one day after trade
date to either the point of trade comparison and validation, for
bilateral submissions, or the point of trade validation, for locked-
in submissions), because it did not believe that such a charge was
necessary to address the risks presented by the accelerated trade
guarantee. See Notice of Filing, supra note 3, at 43357. See also
Securities Exchange Act Release No. 79598 (Dec. 19, 2016), 81 FR
94462 (Dec. 23, 2016) (File No. SR-NSCC-2016-005); Addendum K of the
Rules, supra note 10.
\33\ See Notice of Filing, supra note 3, at 43357.
---------------------------------------------------------------------------
Application of the intraday volatility charge: An intraday
volatility charge generally would apply when the difference between a
member's start of day volatility charge and a calculation of the
volatility charge based on that member's intraday net unsettled
positions exceeds 100 percent, and when the amount of the charge is
greater than $250,000.
NSCC states that, on days when there is increased volatility in the
market, it would provide notice to its members that an intraday
volatility charge may be collected. If NSCC determines to collect an
intraday volatility charge, NSCC would issue a notice by electronic
mail to those members who are subject to that charge, who would be able
to view the amount to be collected in NSCC's clearing fund management
system.\34\ This notification and collection process would be identical
to the current process that is followed for the notification and
collection of the intraday mark-to-market charges.\35\ Members who
receive that notice would be required to fund the amount of the
intraday volatility charge within one hour of that notice, pursuant to
Section II(B) of Procedure XV of the Rules.\36\
---------------------------------------------------------------------------
\34\ See id. at 43359.
\35\ See id.
\36\ See Procedure XV, Section II(B) of the Rules, supra note
10.
---------------------------------------------------------------------------
Calculation of the intraday volatility charge: The amount of
intraday volatility charge would be equal to the difference between the
start of day volatility charge and the intraday calculation of that
volatility charge, reduced by the volatility portion of the MRD charge
collected from that member at the start of the business day.\37\ NSCC
states that, although the MRD charge is intended to capture the same
type of risk (i.e., variability in the volatility charge), it believes
the proposed intraday volatility charge would provide it with a better
measure of the significant intraday volatility swings in a member's
positions, which may be inconsistent with a member's historical trading
activity.\38\ NSCC states, therefore, it would not be necessary for
NSCC to collect as part of the intraday volatility charge any amounts
that it has already collected as the volatility portion of the MRD
charge for that business day.\39\
---------------------------------------------------------------------------
\37\ To avoid doublecounting the risks captured by any intraday
mark-to-market charges NSCC may assess (see Procedure XV, Section
I(B)(5) of the Rules, supra note 10), NSCC would use the same end of
day price returns as used in the start of day volatility charge.
\38\ See Notice of Filing, supra note 3, at 43358.
\39\ See id.
---------------------------------------------------------------------------
When calculating the intraday volatility charge, NSCC proposes to
adjust the net unsettled positions by excluding any position for which
shares have either been delivered to the CNS System which is used by
NSCC to account for and settle transactions or received by the member
from the CNS System to satisfy all or any portion of that position.
NSCC states it believes that, for purposes of this calculation, it
would be appropriate to assume the positions for which the shares have
been delivered and received would settle at the end of the day, so that
the calculation would be more effectively driven by any significant
intraday changes to the volatility risks presented by members' adjusted
intraday net unsettled positions.\40\
---------------------------------------------------------------------------
\40\ See id.
---------------------------------------------------------------------------
Thresholds in Applying the Charge: As described above, NSCC
proposes to only assess an intraday volatility charge if two thresholds
are met (1) when the difference between the two calculations of the
volatility charge exceeds 100 percent, and (2) the amount that would be
calculated as an intraday volatility charge is greater than $250,000.
NSCC states it believes the 100 percent threshold is appropriate
because, in normal market conditions, intraday changes in volatility
that are lower than this threshold are more likely due to normal market
fluctuations, and NSCC believes that, based on past observations, only
an increase that is larger than 100 percent of the start of day
volatility charge and that is greater
[[Page 16684]]
than $250,000 would require mitigation through the intraday volatility
charge.\41\
---------------------------------------------------------------------------
\41\ NSCC states it believes amounts below this threshold, which
is the minimum required deposit to the clearing fund, would be
immaterial to address any increased risk. See id.
---------------------------------------------------------------------------
NSCC proposes to retain the discretion within its Rules to lower
this threshold if it determines that a reduction would be appropriate
to mitigate risks to NSCC, for example, during volatile market
conditions or market events that cause increases in trading volume, or
when NSCC believes a lower threshold is appropriate to mitigate risks
presented by members whose portfolios may present relatively greater
risks to NSCC on an overnight basis.\42\ In circumstances when NSCC
determines it is appropriate to reduce the threshold, the reduced
threshold would apply to all members. NSCC states that this discretion
would allow NSCC to collect an intraday volatility charge earlier in
light of increased levels of volatility risks, and in these
circumstances, a lower threshold would allow NSCC to more proactively
preserve the coverage of its required fund deposit.\43\
---------------------------------------------------------------------------
\42\ See id.
\43\ See id. As part of the Proposed Rule Change, NSCC filed
Exhibit 3c--NSCC Market Risk Management Procedures (marked excerpt),
which includes NSCC's internal criteria that would be applied to
determine whether to adjust the threshold. Pursuant to 17 CFR
240.24b-2, NSCC requested confidential treatment of Exhibit 3c.
Based on its review of those materials, the Commission understands
that NSCC would provide notice to its members of any changes to the
threshold.
---------------------------------------------------------------------------
Exceptions to Collecting an Intraday Volatility Charge: NSCC
proposes two exceptions to collecting an intraday volatility charge
from a particular member or members, which are instances where (a)
trades submitted later in the day would offset trades submitted earlier
in the day, such that the thresholds would not have been met if such
activity had been submitted earlier in the day, or (b) the threshold
was met due to the submission of an erroneous trade that can be
corrected.
NSCC monitors volatility in 15-minute increments throughout the
business day.\44\ When the threshold is exceeded during normal market
conditions earlier in the trading day, NSCC states it would typically
not collect an intraday volatility charge until later in the day when
members have had an opportunity to submit trading activity that would
be expected to offset trades submitted earlier in the day that caused
the thresholds to be met,\45\ or a system issue or other error could
cause a delay in the submission of activity.\46\ NSCC states that it
believes an intraday volatility charge would not be necessary in these
circumstances because the risk presented by the temporary increase in
volatility would be expected to be mitigated by other clearing activity
or corrected submissions later in the day.\47\
---------------------------------------------------------------------------
\44\ See Notice of Filing, supra note 3, at 43357.
\45\ NSCC further states that off-setting trading activity may
be submitted to NSCC later in the day in connection with a member's
business model or trading practices. See id. at 43359.
\46\ See id.
\47\ See id.
---------------------------------------------------------------------------
In determining whether to collect an intraday volatility charge,
after the occurrence of a threshold trigger, NSCC would utilize the
same escalation procedures that are currently in place when making
similar determinations with respect to its current authority to impose
intraday mark-to-market charges. Specifically, NSCC would utilize a
predetermined escalation matrix that identifies the level of the
required approver within the NSCC Market Risk group based on the amount
of the calculated intraday volatility charge that would be
collected.\48\ A decision to collect the charge would be made based on
documentation provided to the required approver regarding the
circumstances of the calculated charge.\49\
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\48\ As part of the Proposed Rule Change, NSCC filed Exhibit
3c--NSCC Market Risk Management Procedures (marked excerpt), which
includes NSCC's internal escalation procedures that will be
applicable to a determination to waive a member's intraday
volatility charge or to alter the applicable threshold. Pursuant to
17 CFR 240.24b-2, NSCC requested confidential treatment of Exhibit
3c.
\49\ See Notice of Filing, supra note 3, at 43359.
---------------------------------------------------------------------------
Application to Positions in Securities Financing Transactions: NSCC
has established a clearing service for securities financing
transactions to make central clearing available at NSCC for equity
securities financing transactions (``SFTs'').\50\ NSCC proposes to
include the intraday volatility charge among the margin charges that
are applicable to SFT positions cleared through NSCC.
---------------------------------------------------------------------------
\50\ See Rule 56, supra note 10.
---------------------------------------------------------------------------
C. Proposed Elimination of the Intraday Backtesting Charge
NSCC is also proposing to eliminate the intraday backtesting
charge. NSCC states that, in connection with recent regulatory
feedback, it has determined that the current methodology for
calculating the intraday backtesting charge relies upon an assumption
that NSCC would cease to act for a member that has paid all of its
intraday margin requirements, when it is possible that would not be the
case.\51\ That is, NSCC could cease to act for a member that has not
paid all of its intraday margin requirements, meaning that the member
would have provided less margin to NSCC and may therefore present
additional losses. As a result, this methodology may underestimate a
member's backtesting losses and undercount potential backtesting
deficiencies, whereas a calculation that disregards intraday margin
collections would penalize members for making intraday margin deposits
and be considered double margining.\52\
---------------------------------------------------------------------------
\51\ See Notice of Filing, supra note 3, at 43360.
\52\ See id.
---------------------------------------------------------------------------
More specifically, if NSCC collects margin from a member intraday,
but does not include that amount as part of the member's margin when
backtesting, resulting in a backtesting deficiency and a subsequent
intraday backtesting charge, that member would have covered its risk to
NSCC twice--first as intraday margin collected from that member and
second as an intraday backtesting charge.\53\ Therefore, given these
deficiencies and in light of the proposed intraday volatility charge,
NSCC proposes to eliminate the intraday backtesting charge.
---------------------------------------------------------------------------
\53\ See id.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \54\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After carefully considering the Proposed Rule
Change, the Commission finds that the Proposed Rule Change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to NSCC. In particular, the
Commission finds that the Proposed Rule Change is consistent with
Section 17A(b)(3)(F) \55\ of the Act and Rules 17Ad-22(e)(4)(i),
(e)(6)(i), and (e)(23)(ii) thereunder.\56\
---------------------------------------------------------------------------
\54\ 15 U.S.C. 78s(b)(2)(C).
\55\ 15 U.S.C. 78q-1(b)(3)(F).
\56\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(23)(ii).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act \57\ requires that the rules of a
clearing agency, such as NSCC, be designed to, among other things,
promote the prompt and accurate clearance and settlement of securities
transactions and assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
[[Page 16685]]
responsible.\58\ The Commission believes that the proposal is
consistent with Section 17A(b)(3)(F) of the Act for the reasons stated
below.
---------------------------------------------------------------------------
\57\ 15 U.S.C. 78q-1(b)(3)(F).
\58\ Id.
---------------------------------------------------------------------------
As described above in Section II.B, NSCC proposes to add an
intraday volatility charge to its margin requirements that NSCC may
collect when certain thresholds are met. As discussed in more detail in
Section III.C infra, the Commission believes that this proposed change
to NSCC's margin methodology would help NSCC ensure that it collects
sufficient margin to cover its credit exposure to its members in times
of intraday market volatility.
Moreover, as described above in Section II.C, NSCC proposes to
eliminate the intraday backtesting charge because it is based on an
unreasonable assumption and is not necessary, in light of the proposed
intraday volatility charge, for NSCC to address its intraday market
risk exposures and backtesting coverage metrics. NSCC provided
information regarding the impact of the proposed intraday backtesting
charge elimination on its backtesting coverage.\59\ The results of the
analysis showed that, despite not collecting intraday backtesting
charges, NSCC's end of day backtesting would have remained above the 99
percent coverage target during that time period, and that this aspect
of the proposal would have had an immaterial impact on intraday
backtesting results, causing backtesting to drop below the 99 percent
coverage target slightly in only two instances.\60\ The Commission has
reviewed NSCC's analysis and agrees that its results indicate that
NSCC's proposal to eliminate the intraday backtesting charge would not
materially impact NSCC's margin coverage, and because the proposed
intraday volatility charge would, when applicable, allow NSCC to
collect additional amounts which would more accurately reflect the
intraday changes to market volatility or the size of a member's
portfolio.
---------------------------------------------------------------------------
\59\ As part of the Proposed Rule Change, NSCC filed Exhibit
3b--NSCC Intraday Backtesting Charge Impact Study Data, comparing
the current and proposed margin collections. Pursuant to 17 CFR
240.24b-2, NSCC requested confidential treatment of Exhibit 3b. The
confidential information provided more granular support for this
analysis.
\60\ See id.
---------------------------------------------------------------------------
With respect to both aspects of this proposal, the Commission
believes that, by allowing NSCC to collect sufficient margin, the
proposal should help ensure that, in the event of a member default,
NSCC's operation of its critical clearance and settlement services
would not be disrupted because of insufficient financial resources.
Accordingly, the Commission finds that NSCC's proposal should help NSCC
to continue providing prompt and accurate clearance and settlement of
securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.
Moreover, as described in Section II above, NSCC would access the
mutualized clearing fund should a defaulted member's own margin be
insufficient to satisfy losses to NSCC caused by the liquidation of
that member's portfolio. Because NSCC's proposal to adopt an intraday
volatility charge should help ensure that NSCC has collected sufficient
margin from members, the proposed changes would also help minimize the
likelihood that NSCC would have to access the clearing fund, thereby
limiting non-defaulting members' exposure to mutualized losses. The
Commission believes that by helping to limit the exposure of NSCC's
non-defaulting members to mutualized losses, the proposed changes
should help NSCC assure the safeguarding of securities and funds which
are in its custody or control, consistent with Section 17A(b)(3)(F) of
the Act.\61\
---------------------------------------------------------------------------
\61\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(4)(i) Under the Act
Rule 17Ad-22(e)(4)(i) under the Act requires that each covered
clearing agency, such as 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.\62\ The Commission believes that the
proposal is consistent with Rule 17Ad-22(e)(4)(i) under the Act for the
reasons stated below.\63\
---------------------------------------------------------------------------
\62\ 17 CFR 240.17Ad-22(e)(4)(i).
\63\ Id.
---------------------------------------------------------------------------
The proposed change to adopt an intraday volatility charge would
allow NSCC to better manage its credit exposures to members by
maintaining sufficient resources to cover those credit exposures fully
with a high degree of confidence. Specifically, and as discussed
further in Section III.C infra, the proposed intraday volatility charge
would allow NSCC to collect additional margin on an intraday basis to
help NSCC effectively mitigate the risks related to intraday increases
in volatility and would address the increased risks NSCC may face
related to liquidating a member's portfolio following that member's
default.
Moreover, the proposed change to eliminate the intraday backtesting
charge set forth in Section II.C would eliminate a charge that is
currently calculated based on an unreasonable assumption and is not
necessary for NSCC to address its intraday market risk exposures and
backtesting coverage metrics. As discussed above,\64\ the Commission
has reviewed and analyzed the results of NSCC's backtesting analysis
and believes that this proposal would allow NSCC to continue to collect
margin to meet its coverage requirements.
---------------------------------------------------------------------------
\64\ See notes 59-60 supra and accompanying text.
---------------------------------------------------------------------------
Therefore, for the reasons discussed above, the Commission finds
that the Proposed Rule Change is reasonably designed to enable NSCC to
effectively identify, measure, monitor, and manage its credit exposure
to members, and those arising from its payment, clearing, and
settlement processes, including by maintaining sufficient financial
resources to cover its credit exposure to each member fully with a high
degree of confidence consistent with Rule 17Ad-22(e)(4)(i).\65\
---------------------------------------------------------------------------
\65\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(6)(i) Under the Act
Rule 17Ad-22(e)(6)(i) under the Act requires that each covered
clearing agency that provides central counterparty services, like 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.\66\
---------------------------------------------------------------------------
\66\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
As described above in Section II, each member's margin consists of
a number of applicable components, each of which is calculated to
address specific risks faced by NSCC. The Commission agrees that the
proposal to adopt an intraday volatility charge set forth in Section
II.B should enable NSCC to more effectively address the risks presented
by significant intraday changes to market volatility or a member's
portfolio of net unsettled positions. NSCC provided information
regarding the impact of the proposed intraday volatility charge on its
margin collection.\67\ Specifically, a recent
[[Page 16686]]
impact study shows that the proposal would have resulted in
approximately eight intraday volatility charges collected on an average
day during that time period, and such charges would have been an
average of $31.6 million, ranging in size from $251,000 to $1.35
billion.\68\ The Commission has reviewed NSCC's analysis and agrees
that its results indicate that NSCC's proposal results in margin levels
commensurate with the credit exposures to better reflect the intraday
changes to market volatility or the size of a member's portfolio.
---------------------------------------------------------------------------
\67\ As part of the Proposed Rule Change, NSCC filed Exhibit
3a--NSCC Intraday Volatility Charge Impact Study Data, comparing the
current and proposed margin collections. Pursuant to 17 CFR 240.24b-
2, NSCC requested confidential treatment of Exhibit 3a. The
confidential information provided more granular support for this
analysis.
\68\ See id. and Notice of Filing, supra note 3, at 43361.
---------------------------------------------------------------------------
One commenter raised concerns with respect to the analysis cited by
NSCC in the Proposed Rule Change, stating that NSCC did not provide any
data to support its assertion that it occasionally observed significant
intraday changes to market price volatility.\69\ Consistent with NSCC's
statement regarding observing volatility, the Commission notes that
this time period includes periods of significant intraday market
volatility, including, for example, the initial Covid-19 volatility in
March 2020 and the meme stock trading in January 2021. Moreover, the
Commission believes that the information submitted by NSCC
confidentially provides an overview of how the proposed charge would
have helped NSCC address any intraday exposures related to such market
volatility. For each trading date during the January 2020 through March
2021 time period, the data provided to the Commission indicates the
start of day VaR collected by NSCC across all members, what the
intraday VaR need is for all of NSCC as of 4 p.m., the MRD offset, what
the intraday volatility charge would have been, and the number of
members affected by a call. Based on its review of this data, which
indicates what NSCC's intraday exposures would have been during this
timeframe by comparing the start of day VaR amounts to the intraday VaR
charge based on the day's trading activity, the Commission believes
that the proposed intraday volatility charge would help NSCC address
significant intraday exposures. Moreover, the commenter indicates that
its own analysis showed that it would have incurred an intraday
volatility charge approximately once per week.\70\ The Commission does
not disagree that such a frequency could be possible depending on the
commenter's portfolio and any intraday market volatility, and the
Commission does not believe that this information renders the proposed
intraday volatility charge unreasonable.
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\69\ Letter from John S. Markle, VP and Deputy General Counsel,
Robinhood Securities LLC, at 2 (Aug. 23, 2022), available at https://www.sec.gov/comments/sr-nscc-2022-009/srnscc2022009-20137444-307937.pdf (``Robinhood Letter'').
\70\ Robinhood Letter at 2, supra note 69.
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As set forth in the proposed rule text filed with this Proposed
Rule Change,\71\ the proposed intraday volatility charge would provide
NSCC the authority to reduce the applicable threshold of 100 percent
``if [NSCC] determines that a reduction of the threshold is appropriate
to mitigate risks to [NSCC] by accelerating the collection of
anticipated additional margin from those Members whose portfolios may
present relatively larger risks to [NSCC] on an overnight basis,''
including, for example, during volatile market conditions or market
events that cause increases in trading volumes. The Commission believes
that this ability is reasonable and consistent with NSCC's need to
manage the risks arising from intraday volatility because it would
allow NSCC to respond to market stress in a manner appropriate to the
circumstances.
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\71\ See proposed Section I(B)(6) of Procedure XV, available at
https://www.sec.gov/rules/sro/nscc/2022/34-95286-ex5.pdf.
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One commenter stated that the proposal did not specify how far NSCC
could reduce the intraday volatility charge threshold.\72\ The
Commission does not believe that the lack of a floor for the threshold
is unreasonable. NSCC could only lower the threshold, if NSCC
determines that a reduction of the threshold is appropriate to mitigate
risks to NSCC by accelerating the collection of anticipated additional
margin from members whose portfolios may present relatively larger
risks to NSCC on an overnight basis, for example, during volatile
market conditions or market events that cause increases in trading
volumes, and as approved consistent with its internal procedures, which
the Commission has reviewed as part of the materials submitted
confidentially.\73\ and the Commission does not believe that a floor is
necessary to ensure transparency. In addition, the Commission
understands that members would be informed of any changes to the
threshold, based on its review of the confidential materials submitted
in connection with this Proposed Rule Change.\74\ The Commission also
notes that NSCC has similar authority with respect to its intraday
mark-to-market charge in its existing Rules.\75\ Moreover, as discussed
in Section III.D infra, the Commission believes that the increased
transparency arising from the Proposed Rule Change with respect to
intraday volatility should overall improve a member's ability to
understand the potential charges to which it may be subject.
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\72\ Robinhood Letter at 2, supra note 69.
\73\ See notes 48 and 71 supra.
\74\ See note 43 supra.
\75\ See Procedure XV, Section I(B)(5) of the Rules, supra note
10.
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Moreover, given the deficiencies in the current calculation of the
intraday backtesting charge, the Commission believes NSCC's proposal to
eliminate the intraday backtesting charge would continue to allow NSCC
to maintain a risk-based margin system that considers, and produces
margin levels commensurate with the risks of its members' portfolios.
Accordingly, the Commission finds the proposal is consistent with
Rule 17Ad-22(e)(6)(i) under the Act because it is designed to assist
NSCC in maintaining a risk-based margin system that considers, and
produces margin levels commensurate with, the risks of portfolios that
experience significant volatility on an intraday basis.\76\
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\76\ 17 CFR 240.17Ad-22(e)(6)(i).
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D. Consistency With Rule 17Ad-22(e)(23)(ii) Under the Act
Rule 17Ad-22(e)(23)(ii) under the Act requires that each covered
clearing agency, like NSCC, establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide
sufficient information to enable participants to identify and evaluate
the risks, fees, and other material costs they incur by participating
in NSCC.\77\ The Commission believes that the proposal is consistent
with Rule 17Ad-22(e)(23)(ii) under the Act for the reason stated below.
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\77\ 17 CFR 240.17Ad-22(e)(23)(ii).
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As described above in Section II.B, NSCC is proposing to amend its
Rules to include a description of the intraday volatility charge,
including the thresholds that would trigger the collection of the
charge, the exceptions to the collection of the charge when the
thresholds are met, the method by which NSCC would calculate that
charge, and NSCC's discretion to reduce the percent threshold that
triggers the collection of the charge, including the circumstances when
NSCC may exercise this discretion. Additionally, NSCC represents that
members would be able to continue to use existing tools, including the
ability to view the calculated volatility charge in 15-minute
increments throughout the business day
[[Page 16687]]
and the VaR margin calculator available on NSCC's Risk Client Portal,
to monitor their positions and anticipate any potential intraday
charges. For these reasons, the Commission believes the Proposed Rule
Change would provide members with sufficient information regarding when
and how NSCC may collect additional amounts to address the risks of
portfolios that experience significant volatility on an intraday basis.
The Commission also believes that the specificity regarding how and
when NSCC would calculate the intraday volatility charge provides
additional transparency over the ``special charge'' in NSCC's Rules
that allows NSCC to collect a special charge in times of market
volatility or price fluctuations. As NSCC states, ``[w]hen the intraday
volatility charge is triggered, a special charge would not also be
required from a Member to address the same volatility risks.'' \78\
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\78\ See Notice of Filing, supra note 3, at 43359-60.
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Finally, one commenter asserted that the proposal failed to provide
any information regarding what would happen if a member fails to meet
an intraday volatility charge.\79\ However, NSCC's Rules address a
member's requirement to meet its obligations with respect to required
margin, as determined by NSCC, and set forth NSCC's authority if a
member does not meet its obligations.\80\ Therefore, the Commission
disagrees that this proposal should have provided more information on
what happens if a member does not meet this type of margin call.
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\79\ Robinhood Letter at 2-3, supra note 69.
\80\ See Rule 4, Section 1 and Procedure XV, Section II(B) of
the Rules, supra note 10. See also Letter from Timothy Hulse,
Managing Director, DTCC, at 1-2 (Sept. 27, 2022), available at
https://www.sec.gov/comments/sr-nscc-2022-009/srnscc2022009-20144273-309218.pdf.
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Accordingly, the Commission finds that the Proposed Rule Change
would enable NSCC to establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide
sufficient information to enable members to identify and evaluate the
risks, fees, and other material costs they incur as NSCC members,
consistent with Rule 17Ad-22(e)(23)(ii).
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \81\ and
the rules and regulations promulgated thereunder.
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\81\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\82\ that proposed rule change SR-NSCC-2022-009, be, and hereby is,
approved.\83\
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\82\ 15 U.S.C. 78s(b)(2).
\83\ In approving the Proposed Rule Change, the Commission
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\84\
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\84\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-05447 Filed 3-17-23; 8:45 am]
BILLING CODE 8011-01-P
