Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of No Objection to Advance Notice Related to Certain Enhancements to the Gap Risk Measure and the VaR Charge, 54365-54370 [2023-17127]
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Federal Register / Vol. 88, No. 153 / Thursday, August 10, 2023 / Notices
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 22 of the Act 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:
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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–
ISE–2023–14 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–ISE–2023–14. This file
number should be included on the
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submission, all subsequent
amendments, all written statements
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Commission, and all written
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will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
22 15
U.S.C. 78s(b)(2)(B).
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that you wish to make available
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submissions should refer to file number
SR–ISE–2023–14 and should be
submitted on or before August 31, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.23
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–17104 Filed 8–9–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98064; File No. SR–NSCC–
2022–802)]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of No Objection to
Advance Notice Related to Certain
Enhancements to the Gap Risk
Measure and the VaR Charge
August 4, 2023.
I. Introduction
On December 2, 2022, the National
Securities Clearing Corporation
(‘‘NSCC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
advance notice SR–NSCC–2022–802
(‘‘Advance Notice’’) pursuant to section
806(e)(1) of Title VIII of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act, entitled Payment,
Clearing and Settlement Supervision
Act of 2010 (‘‘Clearing Supervision
Act’’) 1 and Rule 19b–4(n)(1)(i) 2 under
the Securities Exchange Act of 1934
(‘‘Exchange Act’’) 3 regarding certain
enhancements to its gap risk charge and
the volatility component of a member’s
required margin.4 The Advance Notice
was published for comment in the
Federal Register on December 21,
2022.5 On January 10, 2023, the
Commission issued an extension of the
review period for the Advance Notice.6
On March 27, 2023, the Commission
requested additional information from
NSCC pursuant to section 806(e)(1)(D)
of the Clearing Supervision Act, which
23 17
CFR 200.30–3(a)(12).
U.S.C. 5465(e)(1).
2 17 CFR 240.19b–4(n)(1)(i).
3 15 U.S.C. 78a et seq.
4 See Notice of Filing, infra note 5, at 87 FR
78175.
5 Exchange Act Release No. 96513 (Dec. 15, 2022),
87 FR 78175 (Dec. 21, 2022) (File No. SR–NSCC–
2022–802) (‘‘Notice of Filing’’).
6 Exchange Act Release No. 96624 (Jan. 10, 2023),
88 FR 2707 (Jan. 17, 2023).
1 12
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54365
tolled the Commission’s period of
review of the Advance Notice until 120
days 7 from the date the requested
information was received by the
Commission.8 The Commission received
NSCC’s response to the Commission’s
request for additional information on
April 28, 2023. The Commission has
received comments regarding the
changes proposed in the Advance
Notice.9 The Commission is hereby
providing notice of no objection to the
Advance Notice.
II. Background 10
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
amount of margin (i.e., collateral) from
each member.11
A. Overview Regarding NSCC’s Margin
Methodology
A member’s margin is designed to
mitigate potential losses to NSCC
associated with the liquidation of the
member’s portfolio in the event that
7 The Commission may extend the review period
for an additional 60 days (to 120 days total) for
proposed changes that raise novel or complex
issues. See 12 U.S.C. 5465(e)(1)(H).
8 See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii);
Memorandum from Office of Clearance and
Settlement, Division of Trading and Markets, titled
‘‘Commission’s Request for Additional Information’’
(dated Mar. 27, 2023), available at https://
www.sec.gov/comments/sr-nscc-2022-802/
srnscc2022802-20161718-330589.pdf.
9 The Commission received one comment that
was not relevant to the proposal in the Advance
Notice. See https://www.sec.gov/comments/sr-nscc2022-802/srnscc2022802-320764.htm (commenting
on certain aspects of NSCC’s operations that are not
addressed or changed in this proposal). In addition,
the Commission received one comment on the
related proposed rule change filed as NSCC–2022–
015. See Exchange Act Release No. 96511 (Dec. 15,
2022), 87 FR 78157 (Dec. 21, 2022) (‘‘Proposed Rule
Change’’), with comments at https://www.sec.gov/
comments/sr-nscc-2022-015/srnscc2022015.htm.
Because the proposals contained in the Advance
Notice and the Proposed Rule Change are the same,
all public comments received on the proposals were
considered regardless of whether the comments
were submitted with respect to the Advance Notice
or the Proposed Rule Change.
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 Pursuant to its Rules, NSCC uses the term
‘‘Required Fund Deposit’’ to denote margin or
collateral collected from its members. See Rule 4
(Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules, supra note
10.
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member defaults.12 The aggregate of all
members’ margin deposits (together
with certain other deposits required
under the Rules) constitutes NSCC’s
clearing fund. NSCC would access its
clearing fund should a defaulting
member’s own margin and resources at
NSCC be insufficient to satisfy losses to
NSCC caused by the liquidation of that
member’s portfolio.13
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 the actual
historical returns for each security held
in the portfolio. 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.14 NSCC also evaluates
whether multiple members may
experience backtesting deficiencies for
the same underlying reason.15
Each member’s margin consists of a
number of applicable components, each
of which is calculated to address
specific risks faced by NSCC.16 Each
member’s start of day required fund
deposit is calculated overnight, based
on the member’s prior end-of-day net
unsettled positions.17 NSCC notifies
members early the following morning,
and members are required to make
deposits by approximately 10:00 a.m.
EST.18
Generally, the largest portion of a
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
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 payment on
time. See Rule 46 (Restrictions on Access to
Services) of the Rules, supra note 10.
13 See Rule 4, supra note 10.
14 See National Securities Clearing Corporation,
Disclosure Framework for Covered Clearing
Agencies and Financial Market Infrastructures, at
61 (Dec. 2022), available at https://www.dtcc.com/
legal/policy-and-compliance.
15 See id.
16 See Procedure XV of the Rules, supra note 10.
17 See Procedure XV, Sections II(B) of the Rules,
supra note 10.
18 See id. The Rules provide that required
deposits to the clearing fund are due within one
hour of demand, unless otherwise determined by
NSCC. Id.
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given period within a 99th percentile
level of confidence. This component
represents the amount assumed
necessary to absorb losses while
liquidating the member’s portfolio.
NSCC’s methodology for calculating
the volatility component of a member’s
required fund deposit 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 (e.g., equity securities),
NSCC calculates the volatility
component using, among other things, a
parametric Value at Risk (‘‘VaR’’) model,
which results in a ‘‘VaR Charge.’’ 19 The
VaR Charge usually comprises the
largest portion of a member’s required
fund deposit.
B. Current Treatment of Gap Risk in
NSCC’s Margin Methodology
Under NSCC’s current Rules, one of
the potential methods of calculating the
VaR Charge relies on a measure of gap
risk. It does not accrue for all portfolios,
but instead only serves as the VaR
Charge if it is the largest of three
potential calculations.20
Gap risk events have been generally
understood as idiosyncratic issuer
events (for example, earning reports,
management changes, merger
announcements, insolvency, or other
unexpected, issuer-specific events) that
cause a rapid shift in price volatility
levels. The gap risk charge was designed
to address the risk presented by a
portfolio that is more susceptible to the
effects of gap risk events, i.e., those
portfolios holding positions that
represent more than a certain percent of
the entire portfolio’s value, such that the
event could impact the entire portfolio’s
value.21
The current gap risk charge applies
only if a member’s overall net unsettled
non-index position with the largest
absolute market value in the portfolio
represents more than a certain percent
19 See Sections I(A)(1)(a)(i) and I(A)(2)(a)(i) of
Procedure XV of the Rules, supra note 10.
20 Specifically, the VaR Charge is the greatest of
(1) the larger of two separate calculations based on
different underlying estimates that utilize a
parametric VaR model, which addresses the market
risk of a member’s portfolio (referred to as the core
parametric estimation), (2) the gap risk calculation,
and (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.
21 See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 10. See also
Exchange Act Release Nos. 82780 (Feb. 26, 2018),
83 FR 9035 (Mar. 2, 2018) (SR–NSCC–2017–808);
82781 (Feb. 26, 2018), 83 FR 9042 (Mar. 2, 2018)
(SR–NSCC–2017–020) (‘‘Initial Filing’’).
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of the entire portfolio’s value, that is, if
the net unsettled position exceeds a
specified ‘‘concentration threshold.’’
The concentration threshold can be set
no higher than 30 percent and is
evaluated periodically based on
members’ backtesting results over a
twelve month look-back period, and it is
currently set at 5%.22 NSCC’s Rules
currently calculate a gap risk charge
only for ‘‘non-index’’ positions,
meaning positions in the portfolio other
than positions in ETFs that track
diversified indices. This is because
index-based ETFs that track closely to
diversified indices are generally
considered less prone to the effects of
gap risk events.
The risk of large, unexpected price
movements, particularly those caused
by a gap risk event, are more likely to
have a greater impact on portfolios with
large net unsettled positions in
securities that are susceptible to those
events. Generally, index-based ETFs
that track closely to diversified indices
are less prone to the effects of gap risk
events. Therefore, if the concentration
threshold is met, NSCC currently
calculates the gap risk charge for
positions in the portfolio other than
positions in ETFs that track diversified
indices, referred to as ‘‘non-index
positions.’’
To calculate the gap risk charge,
NSCC multiplies the gross market value
of the largest non-index net unsettled
position in the portfolio by a gap risk
haircut, which can be no less than 10
percent (‘‘gap risk haircut’’).23
Currently, NSCC determines the gap risk
haircut empirically as no less than the
larger of the 1st and 99th percentiles of
three-day returns of a set of CUSIPs that
are subject to the VaR Charge pursuant
to the Rules, giving equal rank to each
to determine which has the highest
movement over that three-day period.
NSCC uses a look-back period of not
less than ten years plus a one-year stress
period, and if the one-year stress period
overlaps with the look-back period, only
the non-overlapping period would be
combined with the look-back period.
The resulting haircut is then rounded
up to the nearest whole percentage and
applied to the largest non-index net
unsettled position to determine the gap
risk charge.
22 See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 10; see
Important Notice a9055 (Sept. 27, 2021), at https://
www.dtcc.com/-/media/Files/pdf/2021/9/27/
a9055.pdf (notifying members that the
concentration threshold had been changed from
10% to 5%).
23 See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 10.
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Federal Register / Vol. 88, No. 153 / Thursday, August 10, 2023 / Notices
III. The Advance Notice
NSCC is proposing to make the
following changes to the gap risk charge:
(1) make the gap risk charge an additive
component of the member’s total VaR
Charge when it is applicable, rather than
being applied as the applicable VaR
Charge only when it is the largest of
three separate calculations, (2) adjusting
the gap risk charge to be based on the
two largest positions in a portfolio,
rather than based on the single largest
position, (3) changing the floor of the
gap risk haircut from 10 percent to 5
percent for the largest position, adding
a floor of the gap risk haircut of 2.5
percent for the second largest position,
and providing that gap risk haircuts
would be determined based on
backtesting and impact analysis, and (4)
amending which ETF positions are
excluded from the gap risk charge to
more precisely include ETFs that are
more prone to gap risk, i.e., are nondiversified.
First, NSCC is proposing to make the
result of the gap risk charge calculation
an additive component of a member’s
total VaR Charge, rather than applicable
as the VaR Charge only when it is the
highest result of three calculations.
Under the proposal, the VaR Charge
would be equal to the sum of (1) the
greater of either the core parametric
estimation or the portfolio margin floor
calculation, neither of which is
changing in this proposal,24 and (2) the
gap risk charge calculation. Rather than
being applied only when the gap risk
charge exceeds the other two
calculations, the gap risk charge
calculation would apply every time the
top two positions exceed the
concentration threshold and would
always be a portion of the overall VaR
Charge in such circumstances. NSCC
states that making this charge additive
could improve its ability to mitigate
idiosyncratic risks that it could face
through the collection of the VaR
Charge.25 Based on impact studies,
NSCC believes this broader application
together with the other proposed
changes outlined below would better
protect against more idiosyncratic risk
scenarios than the current
methodology.26
Second, NSCC is proposing to make
the gap risk charge rely upon the
absolute values of the two largest nondiversified net unsettled positions, as
opposed to using the absolute value of
only the single largest non-diversified
net unsettled position. Therefore, the
24 See
25 See
note 20 supra.
Notice of Filing, supra note 5, 87 FR at
78178.
26 Id.
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gap risk charge would be calculated by
first multiplying each of the two largest
non-diversified net unsettled positions
with a gap risk haircut, and then adding
the sum of the resulting products. The
gap risk charge would be applicable if
that sum of the resulting products
exceeded the concentration threshold.27
NSCC states that applying the gap risk
charge to the two largest non-diversified
positions in the portfolio would cover
concurrent gap moves involving more
than one concentrated position, adding
more flexibility and coverage.28
Third, NSCC proposes to revise the
calculation of the gap risk haircut in
response to making the proposal an
additive component of a member’s VaR
Charge. Currently, the gap risk haircut is
determined by selecting the largest of
the 1st and 99th percentiles of three-day
returns of a composite set of equities,
using a look-back period of not less than
10 years plus a one year stress period.29
NSCC believes that this methodology
results in implicit overlapping of the
risk covered by the core parametric VaR
and the gap risk charge.30 Because the
proposal would make the gap risk
charge an additive component to the
VaR Charge rather than a substitutive
component, NSCC does not believe that
the current methodology for the gap risk
haircut would result in an appropriate
level of margin.31 Under the proposal,
NSCC would determine and calibrate
the concentration threshold and the gap
risk haircut periodically based on
backtesting and impact analysis. NSCC
states that the concentration threshold
and the gap risk haircuts would be
selected from various combinations of
concentration thresholds and gap risk
haircuts based on backtesting and
impact analysis across all member
portfolios, initially using a five year
look-back period.32 NSCC believes that
this would provide more flexibility to
set the parameters from time to time to
27 As noted in Section II.B above, the
concentration threshold is currently set at 5%, and
the Rules define the concentration threshold as no
more than 30 percent of the value of the entire
portfolio. See Section I(A)(1)(a)(i)II and
I(A)(2)(a)(i)II of Procedure XV of the Rules, supra
note 20. The proposed changes would clarify that
the concentration threshold is not fixed at 30
percent by defining concentration threshold as a
percentage designated by NSCC of the value of the
entire portfolio and determined by NSCC from time
to time, and that shall be no more than 30 percent.
NSCC believes this proposed change will help
clarify that the concentration threshold could
change from time to time but could not be set to
be more than 30 percent. See Notice of Filing, supra
note 5, 87 FR at 78179.
28 See Notice of Filing, supra note 5, 87 FR at
78178.
29 Id.
30 See id.
31 Id.
32 Id.
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54367
provide improved backtesting
performance, broader coverage for
idiosyncratic risk scenarios and
flexibility for model tuning to balance
performance and cost considerations.33
In addition, NSCC proposes to revise
the determination of the gap risk haircut
in response to the proposal’s inclusion
of the two largest non-diversified net
unsettled positions, as opposed to only
the one, and to its additive nature.
Currently, the percent that is applied to
the largest non-index net unsettled
position in the portfolio is no less than
10 percent.34 Because of the proposal’s
shift to including the two largest
positions, NSCC believes it is
appropriate to set a lower floor for the
gap risk haircut that applies to the
largest of those two positions.35
Moreover, because the gap risk charge
would now be additive and would
apply more frequently, NSCC believes
that the flexibility to set a lower floor for
the largest position would be
appropriate.36
Specifically, NSCC is proposing to
lower the gap risk haircut that would be
applied to the largest non-diversified
net unsettled position to be a percent
that is no less than 5 percent. The gap
risk haircut that would be applied to the
second largest non-diversified net
unsettled position in the portfolio
would be no larger than the gap risk
haircut that would be applied to the
largest non-diversified net unsettled
position and would be subject to a floor
of 2.5 percent. NSCC states that, upon
implementation of the proposed rule
change, NSCC would set the
concentration threshold at 10%, apply a
gap risk haircut on the largest nondiversified net unsettled position of
10% and a gap risk haircut on the
second largest non-diversified net
unsettled position of 5%.37 NSCC
would set the concentration threshold
and the gap risk haircuts based on
backtesting and impact analysis in
accordance with NSCC’s model risk
management practices and governance
set forth in the Model Risk Management
Framework.38 NSCC would provide
33 Id.
34 Id.
35 Id.
36 Id.
at 78178–79.
at 78179.
37 Id.
38 See Exchange Act Release Nos. 81485 (Aug. 25,
2017), 82 FR 41433 (Aug. 31, 2017) (File No. SR–
NSCC–2017–008); 84458 (Oct. 19, 2018), 83 FR
53925 (Oct. 25, 2018) (File No. SR–NSCC–2018–
009); 88911 (May 20, 2020), 85 FR 31828 (May 27,
2020) (File No. SR–NSCC–2020–008); 92381 (July
13, 2021), 86 FR 38163 (July 19, 2021) (File No. SR–
NSCC–2021–008); and 94272 (Feb. 17, 2022), 87 FR
10419 (Feb. 24, 2022) (File No. SR–NSCC–2022–
001). NSCC’s model risk management governance
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notice to members by important notice
of the concentration threshold and gap
risk haircuts that it would be applying.
Fourth, NSCC is proposing to amend
what positions are excluded from the
gap risk charge calculation. Currently,
only ‘‘non-index’’ positions and indexbased exchange-traded products that
track a narrow market index are
included in the gap risk charge.39 Under
the proposal, this would be revised to
refer to ‘‘non-diversified’’ positions
instead of non-index positions. The rule
text would specify that NSCC would
exclude ETF positions from the
calculation (that is, it would consider
them diversified) if the positions have
characteristics that indicate that they are
less prone to the effects of gap risk
events, including whether the ETF
positions track to an index that is linked
to a broad based market index, contain
a diversified underlying basket, are
unleveraged or track to an asset class
that is less prone to gap risk. NSCC
states that the proposed change would
result in certain non-index based ETFs
being excluded from the gap risk charge
whereas they are currently included,
such as unleveraged U.S. dollar based
ETFs.40 NSCC also states that this
proposed change would provide greater
transparency to members regarding
which positions are excluded from this
calculation.41
NSCC states that certain ETFs, both
index based and non-index based, are
less prone to the effects of gap risk
events as a result of having certain
characteristics and, therefore, are less
likely to pose idiosyncratic risks that the
gap risk charge is designed to mitigate.42
By contrast, based on the proposed
methodology, NSCC would include
certain commodity ETFs in the gap risk
charge that track to an index that is not
a broad-based diversified commodity
index; such ETFs are not currently
subject to the gap risk charge, but would
be subject going forward.
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III. Commission Findings and Notice of
No Objection
Although the Clearing Supervision
Act does not specify a standard of
procedures include daily backtesting of model
performance, periodic sensitivity analyses of
models and annual validation of models. They
would also provide for review of the concentration
threshold and the gap risk haircuts at least
annually.
39 See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 10. See also
Initial Filing, supra note 21.
40 See Notice of Filing, supra note 5, 87 FR at
78178.
41 Id. NSCC states that it uses a third-party
provider to identify ETFs that meet its criteria of
being diversified. See id.
42 Id.
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review for an advance notice, the stated
purpose of the Clearing Supervision Act
is instructive: to mitigate systemic risk
in the financial system and promote
financial stability by, among other
things, promoting uniform risk
management standards for systemically
important financial market utilities
(‘‘SIFMUs’’) and strengthening the
liquidity of SIFMUs.43
Section 805(a)(2) of the Clearing
Supervision Act authorizes the
Commission to prescribe regulations
containing risk management standards
for the payment, clearing, and
settlement activities of designated
clearing entities engaged in designated
activities for which the Commission is
the supervisory agency.44 section 805(b)
of the Clearing Supervision Act
provides the following objectives and
principles for the Commission’s risk
management standards prescribed under
section 805(a) :45
• to promote robust risk management;
• to promote safety and soundness;
• to reduce systemic risks; and
• to support the stability of the
broader financial system.
Section 805(c) provides, in addition,
that the Commission’s risk management
standards may address such areas as
risk management and default policies
and procedures, among other areas.46
The Commission has adopted risk
management standards under section
805(a)(2) of the Clearing Supervision
Act and section 17A of the Exchange
Act (the ‘‘Clearing Agency Rules’’).47
The Clearing Agency Rules require,
among other things, each covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures that are reasonably
designed to meet certain minimum
requirements for its operations and risk
management practices on an ongoing
basis.48 As such, it is appropriate for the
Commission to review advance notices
against the Clearing Agency Rules and
the objectives and principles of these
risk management standards as described
in section 805(b) of the Clearing
Supervision Act. As discussed below,
the Commission believes the changes
proposed in the Advance Notice are
consistent with the objectives and
43 See
12 U.S.C. 5461(b).
U.S.C. 5464(a)(2).
45 12 U.S.C. 5464(b).
46 12 U.S.C. 5464(c).
47 17 CFR 240.17Ad–22. See Exchange Act
Release No. 68080 (Oct. 22, 2012), 77 FR 66220
(Nov. 2, 2012) (S7–08–11). See also Covered
Clearing Agency Standards Adopting Release,
Exchange Act Release No. 78961 (Sept. 28, 2016),
81 FR 70786 (Oct. 13, 2016). NSCC is a ‘‘covered
clearing agency’’ as defined in Rule 17Ad–22(a)(5).
48 17 CFR 240.17Ad–22.
44 12
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Sfmt 4703
principles described in section 805(b) of
the Clearing Supervision Act,49 and in
the Clearing Agency Rules, in particular
Rule 17Ad–22(e)(4)(i) and (e)(6)(i).50
A. Consistency With Section 805(b) of
the Clearing Supervision Act
The Commission believes that the
proposal contained in NSCC’s Advance
Notice is consistent with the stated
objectives and principles of section
805(b) of the Clearing Supervision Act.
Specifically, as discussed below, the
Commission believes that the changes
proposed in the Advance Notice are
consistent with promoting robust risk
management, promoting safety and
soundness, reducing systemic risks, and
supporting the stability of the broader
financial system.51
The Commission believes that the
Advance Notice is consistent with
promoting robust risk management as
well as safety and soundness because,
based on the confidential information
provided by NSCC and reviewed by the
Commission, including the impact
study demonstrating the collective
impact of the proposed changes on the
margin collected both at the overall
clearing agency level and on a memberby-member basis and on NSCC’s
backtesting performance, the proposed
changes with respect to the calculation
of the gap risk charge provide better
margin coverage than the current
methodology. The Commission believes
that the changes described in the
Advance Notice should enable NSCC to
better manage its exposure to portfolios
with identified concentration risk,
which should, in turn, limit its exposure
to members in the event of a member
default, which is consistent with
promoting robust risk management.
The Commission believes that making
the gap risk charge an additive
component, as opposed to a potential
substitutive option applicable only if it
exceeds other methodologies for
determining the VaR Charge, should
help NSCC better protect against more
idiosyncratic risk scenarios in
concentrated portfolios than the current
methodology. In addition, adjusting the
gap risk calculation to take into account
the two largest positions, as well as to
apply two separate haircuts based on
backtesting and impact analysis with
floors set forth in the Rules, should
allow NSCC to cover concurrent gap
moves involving more than one
concentrated position. Moreover,
modifying the criteria for ETF positions
subject to the gap risk charge based on
49 12
U.S.C. 5464(b).
CFR 240.17Ad–22(e)(4)(i) and (e)(6)(i).
51 12 U.S.C. 5464(b).
50 17
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whether they are non-diversified rather
than whether they are non-index would
allow NSCC to more accurately
determine which ETFs should be
included and excluded from the gap risk
charge based on characteristics that
indicate that such ETFs are more or less
prone to the effects of gap risk events,
thereby providing more accurate
coverage of the potential exposure
arising from such positions.
Further, the Commission believes
that, to the extent the proposed changes
are consistent with promoting NSCC’s
safety and soundness, they are also
consistent with reducing systemic risk
and supporting the stability of the
broader financial system. NSCC has
been designated as a SIFMU, in part,
because its failure or disruption could
increase the risk of significant liquidity
or credit problems spreading among
financial institutions or markets.52 The
Commission believes that the proposed
changes would support NSCC’s ability
to continue providing services to the
markets it serves by addressing losses
and shortfalls arising out of a member
default. NSCC’s continued operations
would, in turn, help reduce systemic
risk and support the stability of the
financial system by reducing the risk of
significant liquidity or credit problems
spreading among market participants
that rely on NSCC’s central role in the
market.
Accordingly, and for the reasons
stated above, the Commission believes
the changes proposed in the Advance
Notice are consistent with section
805(b) of the Clearing Supervision
Act.53
B. Consistency With Rule 17Ad–
22(e)(4)(i) Under the Exchange Act
Rule 17Ad–22(e)(4)(i) under the
Exchange Act requires that a covered
clearing agency 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.54
Based on its review of the record, the
Commission believes NSCC’s proposal
to broaden the scope of the gap risk
charge and the related adjustments to its
calculation could help improve NSCC’s
52 Financial Stability Oversight Council, 2012
Annual Report, Appendix A, https://
home.treasury.gov/system/files/261/2012-AnnualReport.pdf.
53 12 U.S.C. 5464(b).
54 17 CFR 240.17Ad–22(e)(4)(i).
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backtesting performance, provide
broader coverage for idiosyncratic risk
scenarios, and could help address the
potential increased risks NSCC may face
related to its ability to liquidate a
portfolio that is susceptible to such risks
in the event of a member default.
Specifically, the Commission has
reviewed and analyzed NSCC’s analysis
of the improvements in its backtesting
coverage,55 and agrees that the analysis
demonstrates that the proposal would
result in better backtesting coverage
and, therefore, less credit exposure to its
members.
Accordingly, the Commission believes
that the proposal would enable NSCC to
better manage its credit risks by
allowing it to respond regularly and
more effectively to any material
deterioration of backtesting
performances, market events, market
structure changes, or model validation
55 NSCC submitted more detailed results of the
impact study as confidential Exhibit 3 to the
Advance Notice. NSCC requested confidential
treatment of Exhibit 3 pursuant to 5 U.S.C. 552(b)(4)
and 552(b)(8) and 17 CFR. 200.80(b)(4) and
200.80(b)(8). A commenter raised a concern
regarding redacted portions of the filing, which
consisted of certain supporting exhibits filed
confidentially as Exhibit 3 to the filing. See https://
www.sec.gov/comments/sr-nscc-2022-015/
srnscc2022015-320658.htm. NSCC asserted that this
exhibit to the filing was entitled to confidential
treatment because it contains: (i) trade secrets and
commercial information that is privileged or
confidential and which, if disclosed, would be
accessible to the DTCC Companies’ competitors and
could result in substantial competitive injury to the
DTCC Companies; and (ii) non-public, confidential
information prepared for use by Commission staff.
Under section 23(a)(3) of the Exchange Act, the
Commission is not required to make public
statements filed with the Commission in connection
with a proposed rule change of a self-regulatory
organization if the Commission could withhold the
statements from the public in accordance with the
Freedom of Information Act (‘‘FOIA’’), 5 U.S.C. 552.
15 U.S.C. 78w(a)(3). The Commission has reviewed
the documents for which NSCC requests
confidential treatment and concludes that they
could be withheld from the public under the FOIA.
FOIA Exemption 4 protects confidential
commercial or financial information. 5 U.S.C.
552(b)(4). Under Exemption 4, information is
confidential if it ‘‘is both customarily and actually
treated as private by its owner and provided to
government under an assurance of privacy.’’ Food
Marketing Institute v. Argus Leader Media, 139 S.
Ct. 2356, 2366 (2019). Based on its review of the
materials submitted, the Commission believes that
the information is the type that would not
customarily be disclosed to the public. Specifically,
this information consists of an impact study
analyzing the effect that the changes to NSCC’s
margin methodology would have on each member’s
individual margin requirement to NSCC;
information regarding NSCC’s analysis and
development of the particular changes to the margin
methodology, including its consideration of
potential alternative haircuts and thresholds; and
excerpts from NSCC’s non-public detailed margin
methodology. In addition, by requesting
confidential treatment, NSCC had an assurance of
privacy because the Commission generally protects
information that can be withheld under Exemption
4. Thus, the Commission has determined to accord
confidential treatment to the confidential exhibits.
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Fmt 4703
Sfmt 4703
54369
findings, thereby helping to ensure that
NSCC can take steps to collect sufficient
margin to maintain sufficient financial
resources to cover its exposure to its
members. Therefore, the Commission
believes the changes proposed in the
Advance Notice are consistent with
Rule 17Ad–22(e)(4)(i) under the
Exchange Act.
C. Consistency With Rule 17Ad–
22(e)(6)(i) Under the Exchange Act
Rule 17Ad–22(e)(6)(i) under the
Exchange Act requires that each covered
clearing agency that provides central
counterparty services 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.56
The Commission understands that, as
described above, the proposal as a
whole is designed to enable NSCC to
more effectively address the risks
presented by members’ concentrated
positions in securities more prone to
gap risk events and to produce margin
levels that are more commensurate with
the particular risk attributes of these
concentrated holdings, including the
market price risk of liquidating large
positions in securities that are more
prone to gap risk events. The
Commission believes that the proposal
would improve NSCC’s ability to
consider, and produce margin levels
commensurate with, the risks and
particular attributes presented by a
portfolio that meets the concentration
threshold and, therefore, is more
susceptible to the impacts of
idiosyncratic risks.
First, the Commission believes that
broadening the gap risk charge to an
additive feature of the VaR Charge and
using the two largest non-diversified
positions would help NSCC to more
effectively manage the idiosyncratic
risks of portfolios with concentrated
holdings. Specifically, the proposed
changes should result in an overall
increase of margin for members that
have positions subject to the gap risk
charge.57
56 17
CFR 240.17Ad–22(e)(6)(i).
impact study indicated that the proposed
changes would have resulted in a 10.88% increase
for the daily total VaR Charge on average and would
have resulted in a 4.89% increase in the daily total
clearing fund on average during that period. See
Notice of Filing, supra note 5, 87 FR at 78176. In
addition, the Commission reviewed confidential
57 The
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Second, given the proposed additive
nature of the gap risk charge, the
Commission believes the adjustments to
the gap risk charge calculation (i.e.,
establishing floors for the gap risk
haircuts applicable to the two largest
positions) are reasonably designed to
cover NSCC’s exposure to members
arising from gap risks. The Commission
believes the adjustments to the gap risk
charge calculation are reasonable
because the record shows the proposal
should improve NSCC’s ability to
mitigate against idiosyncratic risks that
NSCC may face when liquidating a
portfolio that contains a concentration
of positions, while balancing NSCC’s
consideration of the potential costs to
members that may be subject to the gap
risk charge.58 The Commission believes
that the established floors for the two
haircuts should also help ensure that
the gap risk charge collects margin
sufficient to cover the potential
exposure in a gap risk event.
Third, by providing additional
specific objective criteria to determine
which positions would be subject to the
gap risk charge, the Commission
believes that NSCC should be able to
better identify those securities that may
be more prone to idiosyncratic risks.
Specifically, the proposal should ensure
that ETFs identified as non-diversified
(whether index-based or not) and
therefore more prone to idiosyncratic
risks will be subject to the gap risk
charge.
Taken together, the Commission
believes that the proposal should permit
NSCC to calculate a gap risk charge that
is more appropriately designed to
address the gap risks presented by
concentrated positions in portfolios.
Accordingly, the Commission believes
the proposal is consistent with Rule
17Ad–22(e)(6)(i) under the Exchange
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 and particular attributes
of portfolios with identified
concentration risks.59
ddrumheller on DSK120RN23PROD with NOTICES1
IV. Conclusion
It is therefore noticed, pursuant to
section 806(e)(1)(I) of the Clearing
materials submitted to the Commission, which
included more granular information, at a member
level, of the impacts of this proposal as compared
to the current methodology. See note 55 supra.
58 As part of the confidential materials submitted
to the Commission, NSCC provided analysis of
alternative potential haircuts and thresholds that it
considered when developing the proposal. See note
55 supra. The Commission’s review of those
materials further supports its belief as to the
reasonableness of this aspect of the proposal.
59 17 CFR 240.17Ad–22(e)(6)(i).
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Supervision Act, that the Commission
DOES NOT OBJECT to Advance Notice
(SR–NSCC–2022–802) and that NSCC is
AUTHORIZED to implement the
proposal as of the date of this notice, or
the date of an order by the Commission
approving proposed rule change SR–
NSCC–2022–015, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–17127 Filed 8–9–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98055; File No. SR–ICC–
2023–007]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change Relating to the
ICC Recovery Plan and the ICC WindDown Plan
August 4, 2023.
I. Introduction
On June 5, 2023, ICE Clear Credit LLC
(‘‘ICC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(2) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend its
Recovery Plan and Wind-Down Plan.
The proposed rule change was
published for comment in the Federal
Register on June 22, 2023.3 The
Commission did not receive comments
regarding the proposed rule change. For
the reasons discussed below, the
Commission is approving the proposed
rule change.
II. Description of the Proposed Rule
Change
A. Background
ICC is registered with the Commission
as a clearing agency for the purpose of
clearing CDS contracts.4 The proposed
rule change would amend both the
Recovery Plan and the Wind-Down
Plan, which serve as plans for the
recovery and orderly wind-down of ICC,
respectively, if such recovery or winddown is necessitated by credit losses,
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Self-Regulatory Organizations; ICE Clear Credit
LLC; Notice of Proposed Rule Change Relating to
the ICC Recovery Plan and the ICC Wind-Down
Plan; Exchange Act Release No. 97734 (June 15,
2023), 88 FR 40874 (June 22, 2023) (File No. SR–
ICC–2023–007) (‘‘Notice’’).
4 Capitalized terms not otherwise defined herein
have the meanings assigned to them in ICC’s
Clearing Rules.
2 17
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Fmt 4703
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liquidity shortfalls, losses from general
business risk, or any other losses
incurred by ICC. The Recovery Plan is
designed to establish ICC’s actions to
maintain its viability as a going concern
by addressing any uncovered credit loss,
liquidity shortfall, capital inadequacy,
or business, operational or other
structural weakness that threatens ICC’s
viability as a going concern. The WindDown Plan is designed to establish how
ICC could be wound down in an orderly
manner in the event that it cannot
continue as a going concern.
B. Recovery Plan
ICC proposes general updates and
edits to its Recovery Plan to promote
clarity and to ensure that the
information in it is current. The
proposed amendments to the Recovery
Plan reflect and relate to changes that
impacted ICC in the past year. To that
end, the current Recovery Plan includes
in the introduction a disclaimer that,
unless otherwise specified, all
information provided in the plan is
current as of December 31, 2021. The
proposed rule change would update that
date to December 31, 2022. The
proposed amendments to the Recovery
Plan also would include changes to the
coverage amount under the ICC clearing
participant (‘‘CP’’) default insurance
policy (‘‘CP Default Insurance Policy’’),
and the addition of ICC-specific
procedures for financial resource
calculations.
Section IV covers key recovery
elements. Within this section, the
proposed rule change would amend
clearing participation (IV.B),
management and governance (IV.C), and
key performance metrics (IV.D). In
Section IV.B, ICC would create a
reference to a membership category,
Associate Clearing Participant. In
Section IV.C, ICC would make a
correction to the Management/
Governance chart to indicate that the
business continuity plan (‘‘BCP’’) and
disaster recovery (‘‘DR’’) Oversight
Committee is not a sub-committee of the
ICC Audit Committee. In Section IV.C,
ICC would update the description of ICE
Holding Board Chairman Vincent Tese,
who is currently listed as an
independent director of both ICE
Holding and ICE Inc. The proposed rule
change would amend the description to
remove his listing as an independent
director of Ice Inc. In Section IV.D, ICC
would update its revenues, volumes,
and expenses for years 2021 and 2022.
The proposed rule change also would
amend Section VI of the Recovery Plan,
which covers interconnections and
interdependencies. Specifically, ICC
proposes to amend Sections VI.A
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]]>Agencies
[Federal Register Volume 88, Number 153 (Thursday, August 10, 2023)]
[Notices]
[Pages 54365-54370]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17127]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98064; File No. SR-NSCC-2022-802)]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of No Objection to Advance Notice Related to
Certain Enhancements to the Gap Risk Measure and the VaR Charge
August 4, 2023.
I. Introduction
On December 2, 2022, the National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') advance notice SR-NSCC-2022-802 (``Advance Notice'')
pursuant to section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, entitled Payment, Clearing
and Settlement Supervision Act of 2010 (``Clearing Supervision Act'')
\1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of
1934 (``Exchange Act'') \3\ regarding certain enhancements to its gap
risk charge and the volatility component of a member's required
margin.\4\ The Advance Notice was published for comment in the Federal
Register on December 21, 2022.\5\ On January 10, 2023, the Commission
issued an extension of the review period for the Advance Notice.\6\ On
March 27, 2023, the Commission requested additional information from
NSCC pursuant to section 806(e)(1)(D) of the Clearing Supervision Act,
which tolled the Commission's period of review of the Advance Notice
until 120 days \7\ from the date the requested information was received
by the Commission.\8\ The Commission received NSCC's response to the
Commission's request for additional information on April 28, 2023. The
Commission has received comments regarding the changes proposed in the
Advance Notice.\9\ The Commission is hereby providing notice of no
objection to the Advance Notice.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ See Notice of Filing, infra note 5, at 87 FR 78175.
\5\ Exchange Act Release No. 96513 (Dec. 15, 2022), 87 FR 78175
(Dec. 21, 2022) (File No. SR-NSCC-2022-802) (``Notice of Filing'').
\6\ Exchange Act Release No. 96624 (Jan. 10, 2023), 88 FR 2707
(Jan. 17, 2023).
\7\ The Commission may extend the review period for an
additional 60 days (to 120 days total) for proposed changes that
raise novel or complex issues. See 12 U.S.C. 5465(e)(1)(H).
\8\ See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); Memorandum from
Office of Clearance and Settlement, Division of Trading and Markets,
titled ``Commission's Request for Additional Information'' (dated
Mar. 27, 2023), available at https://www.sec.gov/comments/sr-nscc-2022-802/srnscc2022802-20161718-330589.pdf.
\9\ The Commission received one comment that was not relevant to
the proposal in the Advance Notice. See https://www.sec.gov/comments/sr-nscc-2022-802/srnscc2022802-320764.htm (commenting on
certain aspects of NSCC's operations that are not addressed or
changed in this proposal). In addition, the Commission received one
comment on the related proposed rule change filed as NSCC-2022-015.
See Exchange Act Release No. 96511 (Dec. 15, 2022), 87 FR 78157
(Dec. 21, 2022) (``Proposed Rule Change''), with comments at https://www.sec.gov/comments/sr-nscc-2022-015/srnscc2022015.htm. Because
the proposals contained in the Advance Notice and the Proposed Rule
Change are the same, all public comments received on the proposals
were considered regardless of whether the comments were submitted
with respect to the Advance Notice or the Proposed Rule Change.
---------------------------------------------------------------------------
II. Background \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.
---------------------------------------------------------------------------
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 amount of margin
(i.e., collateral) from each member.\11\
---------------------------------------------------------------------------
\11\ Pursuant to its Rules, NSCC uses the term ``Required Fund
Deposit'' to denote margin or collateral collected from its members.
See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund Formula
and Other Matters) of the Rules, supra note 10.
---------------------------------------------------------------------------
A. Overview Regarding NSCC's Margin Methodology
A member's margin is designed to mitigate potential losses to NSCC
associated with the liquidation of the member's portfolio in the event
that
[[Page 54366]]
member defaults.\12\ The aggregate of all members' margin deposits
(together with certain other deposits required under the Rules)
constitutes NSCC's clearing fund. NSCC would access its clearing fund
should a defaulting member's own margin and resources at NSCC be
insufficient to satisfy losses to NSCC caused by the liquidation of
that member's portfolio.\13\
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\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 payment
on time. See Rule 46 (Restrictions on Access to Services) of the
Rules, supra note 10.
\13\ See Rule 4, supra note 10.
---------------------------------------------------------------------------
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 the
actual historical returns for each security held in the portfolio. 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.\14\ NSCC
also evaluates whether multiple members may experience backtesting
deficiencies for the same underlying reason.\15\
---------------------------------------------------------------------------
\14\ See National Securities Clearing Corporation, Disclosure
Framework for Covered Clearing Agencies and Financial Market
Infrastructures, at 61 (Dec. 2022), available at https://www.dtcc.com/legal/policy-and-compliance.
\15\ See id.
---------------------------------------------------------------------------
Each member's margin consists of a number of applicable components,
each of which is calculated to address specific risks faced by
NSCC.\16\ Each member's start of day required fund deposit is
calculated overnight, based on the member's prior end-of-day net
unsettled positions.\17\ NSCC notifies members early the following
morning, and members are required to make deposits by approximately
10:00 a.m. EST.\18\
---------------------------------------------------------------------------
\16\ See Procedure XV of the Rules, supra note 10.
\17\ See Procedure XV, Sections II(B) of the Rules, supra note
10.
\18\ See id. The Rules provide that required deposits to the
clearing fund are due within one hour of demand, unless otherwise
determined by NSCC. Id.
---------------------------------------------------------------------------
Generally, the largest portion of a 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 to absorb losses while
liquidating the member's portfolio.
NSCC's methodology for calculating the volatility component of a
member's required fund deposit 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 (e.g., equity securities),
NSCC calculates the volatility component using, among other things, a
parametric Value at Risk (``VaR'') model, which results in a ``VaR
Charge.'' \19\ The VaR Charge usually comprises the largest portion of
a member's required fund deposit.
---------------------------------------------------------------------------
\19\ See Sections I(A)(1)(a)(i) and I(A)(2)(a)(i) of Procedure
XV of the Rules, supra note 10.
---------------------------------------------------------------------------
B. Current Treatment of Gap Risk in NSCC's Margin Methodology
Under NSCC's current Rules, one of the potential methods of
calculating the VaR Charge relies on a measure of gap risk. It does not
accrue for all portfolios, but instead only serves as the VaR Charge if
it is the largest of three potential calculations.\20\
---------------------------------------------------------------------------
\20\ Specifically, the VaR Charge is the greatest of (1) the
larger of two separate calculations based on different underlying
estimates that utilize a parametric VaR model, which addresses the
market risk of a member's portfolio (referred to as the core
parametric estimation), (2) the gap risk calculation, and (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.
---------------------------------------------------------------------------
Gap risk events have been generally understood as idiosyncratic
issuer events (for example, earning reports, management changes, merger
announcements, insolvency, or other unexpected, issuer-specific events)
that cause a rapid shift in price volatility levels. The gap risk
charge was designed to address the risk presented by a portfolio that
is more susceptible to the effects of gap risk events, i.e., those
portfolios holding positions that represent more than a certain percent
of the entire portfolio's value, such that the event could impact the
entire portfolio's value.\21\
---------------------------------------------------------------------------
\21\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 10. See also Exchange Act
Release Nos. 82780 (Feb. 26, 2018), 83 FR 9035 (Mar. 2, 2018) (SR-
NSCC-2017-808); 82781 (Feb. 26, 2018), 83 FR 9042 (Mar. 2, 2018)
(SR-NSCC-2017-020) (``Initial Filing'').
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The current gap risk charge applies only if a member's overall net
unsettled non-index position with the largest absolute market value in
the portfolio represents more than a certain percent of the entire
portfolio's value, that is, if the net unsettled position exceeds a
specified ``concentration threshold.'' The concentration threshold can
be set no higher than 30 percent and is evaluated periodically based on
members' backtesting results over a twelve month look-back period, and
it is currently set at 5%.\22\ NSCC's Rules currently calculate a gap
risk charge only for ``non-index'' positions, meaning positions in the
portfolio other than positions in ETFs that track diversified indices.
This is because index-based ETFs that track closely to diversified
indices are generally considered less prone to the effects of gap risk
events.
---------------------------------------------------------------------------
\22\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 10; see Important Notice a9055
(Sept. 27, 2021), at https://www.dtcc.com/-/media/Files/pdf/2021/9/27/a9055.pdf (notifying members that the concentration threshold had
been changed from 10% to 5%).
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The risk of large, unexpected price movements, particularly those
caused by a gap risk event, are more likely to have a greater impact on
portfolios with large net unsettled positions in securities that are
susceptible to those events. Generally, index-based ETFs that track
closely to diversified indices are less prone to the effects of gap
risk events. Therefore, if the concentration threshold is met, NSCC
currently calculates the gap risk charge for positions in the portfolio
other than positions in ETFs that track diversified indices, referred
to as ``non-index positions.''
To calculate the gap risk charge, NSCC multiplies the gross market
value of the largest non-index net unsettled position in the portfolio
by a gap risk haircut, which can be no less than 10 percent (``gap risk
haircut'').\23\ Currently, NSCC determines the gap risk haircut
empirically as no less than the larger of the 1st and 99th percentiles
of three-day returns of a set of CUSIPs that are subject to the VaR
Charge pursuant to the Rules, giving equal rank to each to determine
which has the highest movement over that three-day period. NSCC uses a
look-back period of not less than ten years plus a one-year stress
period, and if the one-year stress period overlaps with the look-back
period, only the non-overlapping period would be combined with the
look-back period. The resulting haircut is then rounded up to the
nearest whole percentage and applied to the largest non-index net
unsettled position to determine the gap risk charge.
---------------------------------------------------------------------------
\23\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 10.
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[[Page 54367]]
III. The Advance Notice
NSCC is proposing to make the following changes to the gap risk
charge: (1) make the gap risk charge an additive component of the
member's total VaR Charge when it is applicable, rather than being
applied as the applicable VaR Charge only when it is the largest of
three separate calculations, (2) adjusting the gap risk charge to be
based on the two largest positions in a portfolio, rather than based on
the single largest position, (3) changing the floor of the gap risk
haircut from 10 percent to 5 percent for the largest position, adding a
floor of the gap risk haircut of 2.5 percent for the second largest
position, and providing that gap risk haircuts would be determined
based on backtesting and impact analysis, and (4) amending which ETF
positions are excluded from the gap risk charge to more precisely
include ETFs that are more prone to gap risk, i.e., are non-
diversified.
First, NSCC is proposing to make the result of the gap risk charge
calculation an additive component of a member's total VaR Charge,
rather than applicable as the VaR Charge only when it is the highest
result of three calculations. Under the proposal, the VaR Charge would
be equal to the sum of (1) the greater of either the core parametric
estimation or the portfolio margin floor calculation, neither of which
is changing in this proposal,\24\ and (2) the gap risk charge
calculation. Rather than being applied only when the gap risk charge
exceeds the other two calculations, the gap risk charge calculation
would apply every time the top two positions exceed the concentration
threshold and would always be a portion of the overall VaR Charge in
such circumstances. NSCC states that making this charge additive could
improve its ability to mitigate idiosyncratic risks that it could face
through the collection of the VaR Charge.\25\ Based on impact studies,
NSCC believes this broader application together with the other proposed
changes outlined below would better protect against more idiosyncratic
risk scenarios than the current methodology.\26\
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\24\ See note 20 supra.
\25\ See Notice of Filing, supra note 5, 87 FR at 78178.
\26\ Id.
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Second, NSCC is proposing to make the gap risk charge rely upon the
absolute values of the two largest non-diversified net unsettled
positions, as opposed to using the absolute value of only the single
largest non-diversified net unsettled position. Therefore, the gap risk
charge would be calculated by first multiplying each of the two largest
non-diversified net unsettled positions with a gap risk haircut, and
then adding the sum of the resulting products. The gap risk charge
would be applicable if that sum of the resulting products exceeded the
concentration threshold.\27\ NSCC states that applying the gap risk
charge to the two largest non-diversified positions in the portfolio
would cover concurrent gap moves involving more than one concentrated
position, adding more flexibility and coverage.\28\
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\27\ As noted in Section II.B above, the concentration threshold
is currently set at 5%, and the Rules define the concentration
threshold as no more than 30 percent of the value of the entire
portfolio. See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 20. The proposed changes would
clarify that the concentration threshold is not fixed at 30 percent
by defining concentration threshold as a percentage designated by
NSCC of the value of the entire portfolio and determined by NSCC
from time to time, and that shall be no more than 30 percent. NSCC
believes this proposed change will help clarify that the
concentration threshold could change from time to time but could not
be set to be more than 30 percent. See Notice of Filing, supra note
5, 87 FR at 78179.
\28\ See Notice of Filing, supra note 5, 87 FR at 78178.
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Third, NSCC proposes to revise the calculation of the gap risk
haircut in response to making the proposal an additive component of a
member's VaR Charge. Currently, the gap risk haircut is determined by
selecting the largest of the 1st and 99th percentiles of three-day
returns of a composite set of equities, using a look-back period of not
less than 10 years plus a one year stress period.\29\ NSCC believes
that this methodology results in implicit overlapping of the risk
covered by the core parametric VaR and the gap risk charge.\30\ Because
the proposal would make the gap risk charge an additive component to
the VaR Charge rather than a substitutive component, NSCC does not
believe that the current methodology for the gap risk haircut would
result in an appropriate level of margin.\31\ Under the proposal, NSCC
would determine and calibrate the concentration threshold and the gap
risk haircut periodically based on backtesting and impact analysis.
NSCC states that the concentration threshold and the gap risk haircuts
would be selected from various combinations of concentration thresholds
and gap risk haircuts based on backtesting and impact analysis across
all member portfolios, initially using a five year look-back
period.\32\ NSCC believes that this would provide more flexibility to
set the parameters from time to time to provide improved backtesting
performance, broader coverage for idiosyncratic risk scenarios and
flexibility for model tuning to balance performance and cost
considerations.\33\
---------------------------------------------------------------------------
\29\ Id.
\30\ See id.
\31\ Id.
\32\ Id.
\33\ Id.
---------------------------------------------------------------------------
In addition, NSCC proposes to revise the determination of the gap
risk haircut in response to the proposal's inclusion of the two largest
non-diversified net unsettled positions, as opposed to only the one,
and to its additive nature. Currently, the percent that is applied to
the largest non-index net unsettled position in the portfolio is no
less than 10 percent.\34\ Because of the proposal's shift to including
the two largest positions, NSCC believes it is appropriate to set a
lower floor for the gap risk haircut that applies to the largest of
those two positions.\35\ Moreover, because the gap risk charge would
now be additive and would apply more frequently, NSCC believes that the
flexibility to set a lower floor for the largest position would be
appropriate.\36\
---------------------------------------------------------------------------
\34\ Id.
\35\ Id. at 78178-79.
\36\ Id. at 78179.
---------------------------------------------------------------------------
Specifically, NSCC is proposing to lower the gap risk haircut that
would be applied to the largest non-diversified net unsettled position
to be a percent that is no less than 5 percent. The gap risk haircut
that would be applied to the second largest non-diversified net
unsettled position in the portfolio would be no larger than the gap
risk haircut that would be applied to the largest non-diversified net
unsettled position and would be subject to a floor of 2.5 percent. NSCC
states that, upon implementation of the proposed rule change, NSCC
would set the concentration threshold at 10%, apply a gap risk haircut
on the largest non-diversified net unsettled position of 10% and a gap
risk haircut on the second largest non-diversified net unsettled
position of 5%.\37\ NSCC would set the concentration threshold and the
gap risk haircuts based on backtesting and impact analysis in
accordance with NSCC's model risk management practices and governance
set forth in the Model Risk Management Framework.\38\ NSCC would
provide
[[Page 54368]]
notice to members by important notice of the concentration threshold
and gap risk haircuts that it would be applying.
---------------------------------------------------------------------------
\37\ Id.
\38\ See Exchange Act Release Nos. 81485 (Aug. 25, 2017), 82 FR
41433 (Aug. 31, 2017) (File No. SR-NSCC-2017-008); 84458 (Oct. 19,
2018), 83 FR 53925 (Oct. 25, 2018) (File No. SR-NSCC-2018-009);
88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (File No. SR-NSCC-
2020-008); 92381 (July 13, 2021), 86 FR 38163 (July 19, 2021) (File
No. SR-NSCC-2021-008); and 94272 (Feb. 17, 2022), 87 FR 10419 (Feb.
24, 2022) (File No. SR-NSCC-2022-001). NSCC's model risk management
governance procedures include daily backtesting of model
performance, periodic sensitivity analyses of models and annual
validation of models. They would also provide for review of the
concentration threshold and the gap risk haircuts at least annually.
---------------------------------------------------------------------------
Fourth, NSCC is proposing to amend what positions are excluded from
the gap risk charge calculation. Currently, only ``non-index''
positions and index-based exchange-traded products that track a narrow
market index are included in the gap risk charge.\39\ Under the
proposal, this would be revised to refer to ``non-diversified''
positions instead of non-index positions. The rule text would specify
that NSCC would exclude ETF positions from the calculation (that is, it
would consider them diversified) if the positions have characteristics
that indicate that they are less prone to the effects of gap risk
events, including whether the ETF positions track to an index that is
linked to a broad based market index, contain a diversified underlying
basket, are unleveraged or track to an asset class that is less prone
to gap risk. NSCC states that the proposed change would result in
certain non-index based ETFs being excluded from the gap risk charge
whereas they are currently included, such as unleveraged U.S. dollar
based ETFs.\40\ NSCC also states that this proposed change would
provide greater transparency to members regarding which positions are
excluded from this calculation.\41\
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\39\ See Section I(A)(1)(a)(i)II and I(A)(2)(a)(i)II of
Procedure XV of the Rules, supra note 10. See also Initial Filing,
supra note 21.
\40\ See Notice of Filing, supra note 5, 87 FR at 78178.
\41\ Id. NSCC states that it uses a third-party provider to
identify ETFs that meet its criteria of being diversified. See id.
---------------------------------------------------------------------------
NSCC states that certain ETFs, both index based and non-index
based, are less prone to the effects of gap risk events as a result of
having certain characteristics and, therefore, are less likely to pose
idiosyncratic risks that the gap risk charge is designed to
mitigate.\42\ By contrast, based on the proposed methodology, NSCC
would include certain commodity ETFs in the gap risk charge that track
to an index that is not a broad-based diversified commodity index; such
ETFs are not currently subject to the gap risk charge, but would be
subject going forward.
---------------------------------------------------------------------------
\42\ Id.
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III. Commission Findings and Notice of No Objection
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: to mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for systemically
important financial market utilities (``SIFMUs'') and strengthening the
liquidity of SIFMUs.\43\
---------------------------------------------------------------------------
\43\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------
Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe regulations containing risk management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency.\44\ section 805(b) of the
Clearing Supervision Act provides the following objectives and
principles for the Commission's risk management standards prescribed
under section 805(a) :\45\
---------------------------------------------------------------------------
\44\ 12 U.S.C. 5464(a)(2).
\45\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
to promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk
management standards may address such areas as risk management and
default policies and procedures, among other areas.\46\
---------------------------------------------------------------------------
\46\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------
The Commission has adopted risk management standards under section
805(a)(2) of the Clearing Supervision Act and section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\47\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk management practices on an
ongoing basis.\48\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission believes the changes proposed in the
Advance Notice are consistent with the objectives and principles
described in section 805(b) of the Clearing Supervision Act,\49\ and in
the Clearing Agency Rules, in particular Rule 17Ad-22(e)(4)(i) and
(e)(6)(i).\50\
---------------------------------------------------------------------------
\47\ 17 CFR 240.17Ad-22. See Exchange Act Release No. 68080
(Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (S7-08-11). See also
Covered Clearing Agency Standards Adopting Release, Exchange Act
Release No. 78961 (Sept. 28, 2016), 81 FR 70786 (Oct. 13, 2016).
NSCC is a ``covered clearing agency'' as defined in Rule 17Ad-
22(a)(5).
\48\ 17 CFR 240.17Ad-22.
\49\ 12 U.S.C. 5464(b).
\50\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(i).
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A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission believes that the proposal contained in NSCC's
Advance Notice is consistent with the stated objectives and principles
of section 805(b) of the Clearing Supervision Act. Specifically, as
discussed below, the Commission believes that the changes proposed in
the Advance Notice are consistent with promoting robust risk
management, promoting safety and soundness, reducing systemic risks,
and supporting the stability of the broader financial system.\51\
---------------------------------------------------------------------------
\51\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
The Commission believes that the Advance Notice is consistent with
promoting robust risk management as well as safety and soundness
because, based on the confidential information provided by NSCC and
reviewed by the Commission, including the impact study demonstrating
the collective impact of the proposed changes on the margin collected
both at the overall clearing agency level and on a member-by-member
basis and on NSCC's backtesting performance, the proposed changes with
respect to the calculation of the gap risk charge provide better margin
coverage than the current methodology. The Commission believes that the
changes described in the Advance Notice should enable NSCC to better
manage its exposure to portfolios with identified concentration risk,
which should, in turn, limit its exposure to members in the event of a
member default, which is consistent with promoting robust risk
management.
The Commission believes that making the gap risk charge an additive
component, as opposed to a potential substitutive option applicable
only if it exceeds other methodologies for determining the VaR Charge,
should help NSCC better protect against more idiosyncratic risk
scenarios in concentrated portfolios than the current methodology. In
addition, adjusting the gap risk calculation to take into account the
two largest positions, as well as to apply two separate haircuts based
on backtesting and impact analysis with floors set forth in the Rules,
should allow NSCC to cover concurrent gap moves involving more than one
concentrated position. Moreover, modifying the criteria for ETF
positions subject to the gap risk charge based on
[[Page 54369]]
whether they are non-diversified rather than whether they are non-index
would allow NSCC to more accurately determine which ETFs should be
included and excluded from the gap risk charge based on characteristics
that indicate that such ETFs are more or less prone to the effects of
gap risk events, thereby providing more accurate coverage of the
potential exposure arising from such positions.
Further, the Commission believes that, to the extent the proposed
changes are consistent with promoting NSCC's safety and soundness, they
are also consistent with reducing systemic risk and supporting the
stability of the broader financial system. NSCC has been designated as
a SIFMU, in part, because its failure or disruption could increase the
risk of significant liquidity or credit problems spreading among
financial institutions or markets.\52\ The Commission believes that the
proposed changes would support NSCC's ability to continue providing
services to the markets it serves by addressing losses and shortfalls
arising out of a member default. NSCC's continued operations would, in
turn, help reduce systemic risk and support the stability of the
financial system by reducing the risk of significant liquidity or
credit problems spreading among market participants that rely on NSCC's
central role in the market.
---------------------------------------------------------------------------
\52\ Financial Stability Oversight Council, 2012 Annual Report,
Appendix A, https://home.treasury.gov/system/files/261/2012-Annual-Report.pdf.
---------------------------------------------------------------------------
Accordingly, and for the reasons stated above, the Commission
believes the changes proposed in the Advance Notice are consistent with
section 805(b) of the Clearing Supervision Act.\53\
---------------------------------------------------------------------------
\53\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(4)(i) Under the Exchange Act
Rule 17Ad-22(e)(4)(i) under the Exchange Act requires that a
covered clearing agency 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.\54\
---------------------------------------------------------------------------
\54\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
Based on its review of the record, the Commission believes NSCC's
proposal to broaden the scope of the gap risk charge and the related
adjustments to its calculation could help improve NSCC's backtesting
performance, provide broader coverage for idiosyncratic risk scenarios,
and could help address the potential increased risks NSCC may face
related to its ability to liquidate a portfolio that is susceptible to
such risks in the event of a member default. Specifically, the
Commission has reviewed and analyzed NSCC's analysis of the
improvements in its backtesting coverage,\55\ and agrees that the
analysis demonstrates that the proposal would result in better
backtesting coverage and, therefore, less credit exposure to its
members.
---------------------------------------------------------------------------
\55\ NSCC submitted more detailed results of the impact study as
confidential Exhibit 3 to the Advance Notice. NSCC requested
confidential treatment of Exhibit 3 pursuant to 5 U.S.C. 552(b)(4)
and 552(b)(8) and 17 CFR. 200.80(b)(4) and 200.80(b)(8). A commenter
raised a concern regarding redacted portions of the filing, which
consisted of certain supporting exhibits filed confidentially as
Exhibit 3 to the filing. See https://www.sec.gov/comments/sr-nscc-2022-015/srnscc2022015-320658.htm. NSCC asserted that this exhibit
to the filing was entitled to confidential treatment because it
contains: (i) trade secrets and commercial information that is
privileged or confidential and which, if disclosed, would be
accessible to the DTCC Companies' competitors and could result in
substantial competitive injury to the DTCC Companies; and (ii) non-
public, confidential information prepared for use by Commission
staff. Under section 23(a)(3) of the Exchange Act, the Commission is
not required to make public statements filed with the Commission in
connection with a proposed rule change of a self-regulatory
organization if the Commission could withhold the statements from
the public in accordance with the Freedom of Information Act
(``FOIA''), 5 U.S.C. 552. 15 U.S.C. 78w(a)(3). The Commission has
reviewed the documents for which NSCC requests confidential
treatment and concludes that they could be withheld from the public
under the FOIA. FOIA Exemption 4 protects confidential commercial or
financial information. 5 U.S.C. 552(b)(4). Under Exemption 4,
information is confidential if it ``is both customarily and actually
treated as private by its owner and provided to government under an
assurance of privacy.'' Food Marketing Institute v. Argus Leader
Media, 139 S. Ct. 2356, 2366 (2019). Based on its review of the
materials submitted, the Commission believes that the information is
the type that would not customarily be disclosed to the public.
Specifically, this information consists of an impact study analyzing
the effect that the changes to NSCC's margin methodology would have
on each member's individual margin requirement to NSCC; information
regarding NSCC's analysis and development of the particular changes
to the margin methodology, including its consideration of potential
alternative haircuts and thresholds; and excerpts from NSCC's non-
public detailed margin methodology. In addition, by requesting
confidential treatment, NSCC had an assurance of privacy because the
Commission generally protects information that can be withheld under
Exemption 4. Thus, the Commission has determined to accord
confidential treatment to the confidential exhibits.
---------------------------------------------------------------------------
Accordingly, the Commission believes that the proposal would enable
NSCC to better manage its credit risks by allowing it to respond
regularly and more effectively to any material deterioration of
backtesting performances, market events, market structure changes, or
model validation findings, thereby helping to ensure that NSCC can take
steps to collect sufficient margin to maintain sufficient financial
resources to cover its exposure to its members. Therefore, the
Commission believes the changes proposed in the Advance Notice are
consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act.
C. Consistency With Rule 17Ad-22(e)(6)(i) Under the Exchange Act
Rule 17Ad-22(e)(6)(i) under the Exchange Act requires that each
covered clearing agency that provides central counterparty services
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.\56\
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\56\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
The Commission understands that, as described above, the proposal
as a whole is designed to enable NSCC to more effectively address the
risks presented by members' concentrated positions in securities more
prone to gap risk events and to produce margin levels that are more
commensurate with the particular risk attributes of these concentrated
holdings, including the market price risk of liquidating large
positions in securities that are more prone to gap risk events. The
Commission believes that the proposal would improve NSCC's ability to
consider, and produce margin levels commensurate with, the risks and
particular attributes presented by a portfolio that meets the
concentration threshold and, therefore, is more susceptible to the
impacts of idiosyncratic risks.
First, the Commission believes that broadening the gap risk charge
to an additive feature of the VaR Charge and using the two largest non-
diversified positions would help NSCC to more effectively manage the
idiosyncratic risks of portfolios with concentrated holdings.
Specifically, the proposed changes should result in an overall increase
of margin for members that have positions subject to the gap risk
charge.\57\
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\57\ The impact study indicated that the proposed changes would
have resulted in a 10.88% increase for the daily total VaR Charge on
average and would have resulted in a 4.89% increase in the daily
total clearing fund on average during that period. See Notice of
Filing, supra note 5, 87 FR at 78176. In addition, the Commission
reviewed confidential materials submitted to the Commission, which
included more granular information, at a member level, of the
impacts of this proposal as compared to the current methodology. See
note 55 supra.
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[[Page 54370]]
Second, given the proposed additive nature of the gap risk charge,
the Commission believes the adjustments to the gap risk charge
calculation (i.e., establishing floors for the gap risk haircuts
applicable to the two largest positions) are reasonably designed to
cover NSCC's exposure to members arising from gap risks. The Commission
believes the adjustments to the gap risk charge calculation are
reasonable because the record shows the proposal should improve NSCC's
ability to mitigate against idiosyncratic risks that NSCC may face when
liquidating a portfolio that contains a concentration of positions,
while balancing NSCC's consideration of the potential costs to members
that may be subject to the gap risk charge.\58\ The Commission believes
that the established floors for the two haircuts should also help
ensure that the gap risk charge collects margin sufficient to cover the
potential exposure in a gap risk event.
---------------------------------------------------------------------------
\58\ As part of the confidential materials submitted to the
Commission, NSCC provided analysis of alternative potential haircuts
and thresholds that it considered when developing the proposal. See
note 55 supra. The Commission's review of those materials further
supports its belief as to the reasonableness of this aspect of the
proposal.
---------------------------------------------------------------------------
Third, by providing additional specific objective criteria to
determine which positions would be subject to the gap risk charge, the
Commission believes that NSCC should be able to better identify those
securities that may be more prone to idiosyncratic risks. Specifically,
the proposal should ensure that ETFs identified as non-diversified
(whether index-based or not) and therefore more prone to idiosyncratic
risks will be subject to the gap risk charge.
Taken together, the Commission believes that the proposal should
permit NSCC to calculate a gap risk charge that is more appropriately
designed to address the gap risks presented by concentrated positions
in portfolios. Accordingly, the Commission believes the proposal is
consistent with Rule 17Ad-22(e)(6)(i) under the Exchange 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
and particular attributes of portfolios with identified concentration
risks.\59\
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\59\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore noticed, pursuant to section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission DOES NOT OBJECT to
Advance Notice (SR-NSCC-2022-802) and that NSCC is AUTHORIZED to
implement the proposal as of the date of this notice, or the date of an
order by the Commission approving proposed rule change SR-NSCC-2022-
015, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-17127 Filed 8-9-23; 8:45 am]
BILLING CODE 8011-01-P
