Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change To Modify the Amended and Restated Stock Options and Futures Settlement Agreement and Make Certain Revisions to the NSCC Rules, 59968-59976 [2023-18670]
Download as PDF
59968
Federal Register / Vol. 88, No. 167 / Wednesday, August 30, 2023 / Notices
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quoting and trading purposes.’’ 194
FINRA also states that its recent
technological updates to the ADF have
significantly reduced the ADF’s
processing latency times as compared to
when the ADF was last operational in
2015.195 FINRA also represents that it
continues to conduct capacity
requirement testing with
IntelligentCross and ‘‘aim[s] to address
any potential areas identified for further
improvement prior to IntelligentCross
becoming an ADF [p]articipant and
sending quotes to the ADF (subject to
SEC approval).’’ 196 Additionally, based
on the results of FINRA’s ADF testing
with IntelligentCross, FINRA states that
ADF latency is generally in line with
exchange latency to dissemination by
the SIPs.197 FINRA also states that it
expects the ADF latency in production
to be lower than in the ADF test
environment.198 Accordingly, FINRA
believes that any processing latency for
the ADF would generally be in line with
exchange processing latencies once
IntelligentCross begins quoting on the
ADF.199
The Commission believes that FINRA
has demonstrated that, with the recent
technological updates to address latency
in the ADF’s system capabilities,200
along with recent tests to the ADF
application with IntelligentCross, the
ADF technology infrastructure will be
consistent with current speed and
capacity standards for processing and
disseminating IntelligentCross’
quotations. Moreover, FINRA and
IntelligentCross have represented that
they will continue to conduct testing
and explore technological
enhancements to further reduce ADF
latency, thus ensuring that the ADF
technology infrastructure continues to
be consistent with current processing
latencies.201
194 See FINRA Letter at 3. FINRA states that in
2021 it began a multi-year effort to update the
technological infrastructure for several of its
facilities, relevant data vendor feeds, and related
reference data. See id. The ADF’s trade reporting
and quoting functionality were migrated onto a new
platform in November 2021 and March 2022,
respectively. See id.
195 See id. FINRA states that the ADF supports
increments of nanoseconds for both its quoting and
reporting functions. See id.
196 Id.
197 See FINRA Letter II at 6. FINRA states that the
ADF latency tests conducted by FINRA with
IntelligentCross were conducted as stress tests that
included processing volumes and sustained
messages rates well in excess of those likely to be
experienced in production. See id. See FINRA
Letter II at 5–6 for additional detailed description
of FINRA’s ADF latency tests.
198 See id.
199 See id.
200 See supra notes 195 and 196.
201 See Notice, supra note 3, at 79404; FINRA
Letter II at 6.
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IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,202
that the proposed rule change (SR–
FINRA–2022–032) is approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.203
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–18677 Filed 8–29–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98213; File No. SR–NSCC–
2023–007]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Proposed Rule Change To Modify the
Amended and Restated Stock Options
and Futures Settlement Agreement and
Make Certain Revisions to the NSCC
Rules
August 24, 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 August
10, 2023, National Securities Clearing
Corporation (‘‘NSCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the clearing agency. The Commission
is publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change consists of
amendments to (1) modify the Amended
and Restated Stock Options and Futures
Settlement Agreement dated August 5,
2017 between NSCC and The Options
Clearing Corporation (‘‘OCC,’’ and
together with NSCC, the ‘‘Clearing
Agencies’’) (‘‘Existing Accord’’) 3 and (2)
make certain revisions to Rule 18,
Procedure III and Addendum K of the
NSCC Rules & Procedures (‘‘NSCC
202 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 The Existing Accord was previously approved
by the Commission. See Securities Exchange Act
Release Nos. 81266, 81260 (Jul. 31, 2017) (File Nos.
SR–NSCC–2017–007; SR–OCC–2017–013), 82 FR
36484 (Aug. 4, 2017).
203 17
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Rules’’) 4 in connection with the
proposed modifications to the Existing
Accord, as described in greater detail
below.5
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
Executive Summary
NSCC is a clearing agency that
provides clearing, settlement, risk
management, and central counterparty
services for trades involving equity
securities. OCC is the sole clearing
agency for standardized equity options
listed on national securities exchanges
registered with the Commission,
including options that contemplate the
physical delivery of equities cleared by
NSCC in exchange for cash (‘‘physically
settled’’ options).6 OCC also clears
certain futures contracts that, at
maturity, require the delivery of equity
securities cleared by NSCC in exchange
for cash. As a result, the exercise/
assignment of certain options or
maturation of certain futures cleared by
OCC effectively results in stock
settlement obligations. NSCC and OCC
maintain a legal agreement, generally
referred to by the parties as the
‘‘Accord’’ agreement, that governs the
processing of such physically settled
options and futures cleared by OCC that
4 Capitalized terms not defined herein are defined
in the NSCC Rules available at www.dtcc.com/-/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
5 OCC also has filed a proposed rule change and
an advance notice with the Commission in
connection with this proposal. See File Nos. SR–
OCC–2023–007 and SR–OCC–2023–801 (the ‘‘OCC
Filing’’).
6 The term ‘‘physically-settled’’ as used
throughout the OCC Rulebook refers to cleared
contracts that settle into their underlying interest
(i.e., options or futures contracts that are not cashsettled). When a contract settles into its underlying
interest, shares of stock are sent, i.e., delivered, to
contract holders who have the right to receive the
shares from contract holders who are obligated to
deliver the shares at the time of exercise/assignment
in the case of an option, and maturity in the case
of a future.
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Federal Register / Vol. 88, No. 167 / Wednesday, August 30, 2023 / Notices
result in transactions in underlying
equity securities to be cleared by NSCC
(‘‘Existing Accord’’).
The Existing Accord establishes terms
under which NSCC accepts for clearing
certain securities transactions that result
from the exercise and assignment of
relevant options contracts and the
maturity of futures contracts that are
cleared and settled by OCC.7 It also
establishes the time when OCC’s
settlement guaranty in respect of those
transactions ends and NSCC’s
settlement guaranty begins.
The Existing Accord allows for a
scenario in which NSCC could choose
not to guarantee the settlement of such
securities arising out of transactions.
Specifically, NSCC is not obligated to
guarantee settlement until its member
has met its collateral requirements at
NSCC. If NSCC chooses not to guarantee
settlement, OCC would engage in an
alternate method of settlement outside
of NSCC. This scenario presents two
primary problems. First, the cash
required for OCC and its Clearing
Members in certain market conditions to
facilitate settlement outside of NSCC
could be significantly more than the
amount required if NSCC were to
guarantee the relevant transactions. This
is because settlement of the transactions
in the underlying equity securities
outside of NSCC would mean that they
would no longer receive the benefit of
netting through the facilities of NSCC.
In such a scenario, the additional
collateral required from Clearing
Members to support OCC’s continuing
settlement guarantee would also have to
be sufficiently liquid to properly
manage the risks associated with those
transactions being due on the second
business day following the option
exercise, or the relevant futures contract
maturity date.
Based on an analysis of scenarios
using historical data where it was
assumed that OCC could not settle
transactions through the facilities of
NSCC, the worst-case outcome resulted
in extreme liquidity demands—of over
$300 billion—for OCC to effect
settlement via an alternative method,
e.g., by way of gross broker-to-broker
settlement, as discussed in more detail
below. OCC Clearing Members, by way
of their contributions to the OCC
Clearing Fund, would bear the brunt of
this demand. Furthermore, there is no
guarantee that OCC Clearing Members
could fund the entire amount of any
similar real-life scenarios. By contrast,
7 Under the Existing Accord, such options and
futures are defined as ‘‘E&A/Delivery
Transactions,’’ which refers to ‘‘Exercise &
Assignment Delivery Transactions.’’
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projected GSPs identified during the
study ranged from approximately $419
million to over $6 billion, also as
discussed in more detail below.
The second primary problem relates
to the significant operational
complexities if settlement occurs
outside of NSCC. More specifically,
netting through NSCC reduces the
volume and value of settlement
obligations. For example, in 2022 it is
estimated that netting through NSCC’s
continuous net settlement (‘‘CNS’’)
accounting system 8 reduced the value
of CNS settlement obligations by
approximately 98% or $510 trillion
from $519 trillion to $9 trillion. If
settlement occurred outside of NSCC, on
a broker-to-broker basis between OCC
Clearing Members, for example, shares
would not be netted, and Clearing
Members would have to coordinate
directly with each other to settle the
relevant transactions. The operational
complexities and uncertainty associated
with alternate means of settlement
would impact every market participant
involved in a settlement of OCC-related
transactions.
To address these problems, the
Clearing Agencies are proposing to
amend and restate the Existing Accord
and make related changes to their
respective rules that would allow OCC
to elect to make a cash payment to
NSCC following the default of a
Common Member 9 that would cause
NSCC to guarantee settlement of that
Common Member’s transactions and,
therefore, cause those transactions to be
settled through processing by NSCC. As
part of this proposal, OCC also would
enhance its daily liquidity stress testing
processes and procedures to account for
the possibility of OCC making such a
payment to NSCC in the event of a
Common Member default. By making
these enhancements to its stress testing,
OCC could include the liquid resources
necessary to make the payment in its
resource planning. The Clearing
Agencies believe that by NSCC
accepting such a payment from OCC the
operational efficiencies and reduced
costs related to the settlement of
transactions through NSCC would limit
8 See Rule 11 (CNS System) and Procedure VII
(CNS Accounting Operation) of the NSCC Rules,
supra note 4.
9 A firm that is both an OCC Clearing Member and
an NSCC Member or is an OCC Clearing Member
that has designated an NSCC Member to act on its
behalf is referred to herein as a ‘‘Common
Member’’. The term ‘‘Clearing Member’’ as used
herein has the meaning provided in OCC’s By-Laws.
See OCC’s By-laws & Rules, available at
www.theocc.com/Company-Information/
Documents-and-Archives/By-Laws-and-Rules. The
term ‘‘Member’’ as used herein has the meaning
provided in NSCC’s Rules. See supra note 4.
PO 00000
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59969
market disruption following a Common
Member default because settlement
through NSCC following such a default
would be less operationally complex
and would be expected to require less
liquidity and other collateral from
market participants than the processes
available to OCC for closing out
positions. Additionally, proposed
enhancements by OCC to its liquidity
stress testing would add assurances that
OCC could make such a payment in the
event of a Common Member default.
The Clearing Agencies believe that their
respective clearing members and all
other participants in the markets for
which OCC provides clearance and
settlement would benefit from OCC’s
ability to choose to make a cash
payment to effect settlement through the
facilities of NSCC. This change would
provide more certainty around certain
default scenarios and would blunt the
financial and operational burdens
market participants could experience in
the case of most clearing member
defaults.10
Background
OCC acts as a central counterparty
clearing agency for U.S.-listed options
and futures on a number of underlying
financial assets including common
stocks, currencies and stock indices. In
connection with these services, OCC
provides the OCC Guaranty pursuant to
its By-Laws and Rules. NSCC acts as a
central counterparty clearing agency for
certain equity securities, corporate and
municipal debt, exchange traded funds
and unit investment trusts that are
eligible for its services. Eligible trading
activity may be processed through
NSCC’s CNS system or Balance Order
Account system,11 where all eligible
compared and recorded transactions for
a particular settlement date are netted
by issue into one net long (buy), net
short (sell) or flat position. As a result,
for each day with activity, each Member
has a single deliver or receive obligation
for each issue in which it has activity.
In connection with these services, NSCC
also provides the NSCC Guaranty
pursuant to Addendum K of the NSCC
Rules.
OCC’s Rules provide that delivery of,
and payment for, securities underlying
certain exercised stock options and
matured single stock futures that are
physically settled are generally effected
through the facilities of NSCC and are
10 OCC filed its analysis of the financial impact
of alternate means of settlement as an exhibit to the
OCC Filing.
11 See Rule 8 (Balance Order and Foreign Security
Systems) and Procedure V (Balance Order
Accounting Operation) of the NSCC Rules, supra
note 4.
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Federal Register / Vol. 88, No. 167 / Wednesday, August 30, 2023 / Notices
not settled through OCC’s facilities.12
OCC and NSCC executed the Existing
Accord to facilitate, via NSCC’s systems,
the physical settlement of securities
arising out of options and futures
cleared by OCC. OCC Clearing Members
that clear and settle physically settled
options and futures transactions through
OCC also are required under OCC’s
Rules 13 to be Members of NSCC or to
have appointed or nominated a Member
of NSCC to act on its behalf. As noted
above, these firms are referred to as
‘‘Common Members’’ in the Existing
Accord.
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Summary of the Existing Accord
The Existing Accord governs the
transfer between OCC and NSCC of
responsibility for settlement obligations
that involve a delivery and receipt of
stock in the settlement of physically
settled options and futures that are
cleared and settled by OCC and for
which the underlying securities are
eligible for clearing through the
facilities of NSCC (‘‘E&A/Delivery
Transactions’’). It also establishes the
time when OCC’s settlement guarantee
(the ‘‘OCC Guaranty’’) ends and NSCC’s
settlement guarantee (the ‘‘NSCC
Guaranty’’) 14 begins with respect to
E&A/Delivery Transactions. However, in
the case of a Common Member default 15
NSCC can reject these settlement
obligations, in which case the
settlement guaranty would not transfer
from OCC to NSCC, and OCC would not
have a right to settle the transactions
through the facilities of NSCC. Instead,
OCC would have to engage in
alternative methods of settlement that
have the potential to create significant
liquidity and collateral requirements for
both OCC and its non-defaulting
Clearing Members.16 More specifically,
this could involve broker-to-broker
settlement between OCC Clearing
12 See Chapter IX of OCC’s Rules (Delivery of
Underlying Securities and Payment), supra note 9.
13 See OCC Rule 901, supra note 9.
14 See Addendum K and Procedure III of the
NSCC Rules, supra note 4.
15 A Common Member that has been suspended
by OCC or for which NSCC has ceased to act is
referred to as a ‘‘Mutually Suspended Member.’’
16 For example, OCC evaluated certain Clearing
Member default scenarios in which OCC assumed
that NSCC would not accept the settlement
obligations under the Existing Accord, including
the default of a large Clearing Member coinciding
with a monthly options expiration. OCC has
estimated that in such a Clearing Member default
scenario, the aggregate liquidity burden on OCC in
connection with obligations having to be settled on
a gross, broker-to-broker basis could reach a
significantly high level. For example, in January
2022, the largest gross broker-to-broker settlement
amount in the case of a larger Clearing Member
default would have resulted in liquidity needs of
approximately $384,635,833,942. OCC provided the
data and analysis as an exhibit to the OCC Filing.
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17:31 Aug 29, 2023
Jkt 259001
Members.17 This settlement method is
operationally complex because it
requires bilateral coordination directly
between numerous Clearing Members
rather than relying on NSCC to facilitate
multilateral netting to settle the relevant
settlement obligations. As described
above, it also potentially could result in
significant liquidity and collateral
requirements for both OCC and its nondefaulting Clearing Members because
the transactions would not be netted
through the facilities of NSCC.
Alternatively, where NSCC accepts the
E&A/Delivery Transactions from OCC,
the OCC Guaranty ends and the NSCC
Guaranty takes effect. The transactions
are then netted through NSCC’s systems,
which allows settlement obligations for
the same settlement date to be netted
into a single deliver or receive
obligation. This netting reduces the
costs associated with securities transfers
by reducing the number of securities
movements required for settlement and
further reduces operational and market
risk. The benefits of such netting by
NSCC may be significant with respect to
the large volumes of E&A/Delivery
Transactions processed during monthly
options expiry periods.
Pursuant to the Existing Accord, on
each trading day NSCC delivers to OCC
a file that identifies the securities,
including stocks, exchange-traded funds
and exchange-traded notes, that are
eligible (1) to settle through NSCC and
(2) to be delivered in settlement of (i)
exercises and assignments of stock
options cleared and settled by OCC or
(ii) delivery obligations from maturing
stock futures cleared and settled by
OCC. OCC, in turn, delivers to NSCC a
file identifying securities to be
delivered, or received, for physical
settlement in connection with OCC
transactions.18
After NSCC receives the list of eligible
transactions from OCC and NSCC has
received all required deposits to the
NSCC Clearing Fund from all Common
Members taking into consideration
17 In broker-to-broker settlement, Clearing
Member parties are responsible for coordinating
settlement—delivery and payment—among
themselves on a transaction-by-transaction basis.
Once transactions settle, the parties also have an
obligation to affirmatively notify OCC so that OCC
can close out the transactions. If either one of or
both of the parties do not notify OCC, the
transaction would remain open on OCC’s books
indefinitely until the time both parties have
provided notice of settlement to OCC.
18 Each day that both OCC and NSCC are open for
accepting trades for clearing is referred to as an
‘‘Activity Date’’ in the Existing Accord. Securities
eligible for settlement at NSCC are referred to
collectively as ‘‘Eligible Securities’’ in the Existing
Accord. Eligible securities are settled at NSCC
through NSCC’s CNS Accounting Operation or
NSCC’s Balance Order Accounting Operation.
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amounts required to physically settle
the OCC transactions, the OCC Guaranty
would end and the NSCC Guaranty
would begin with respect to physical
settlement of the eligible OCC-related
transactions.19 At this point, NSCC is
solely responsible for settling the
transactions.20
Each day, NSCC is required to
promptly notify OCC at the time the
NSCC Guaranty takes effect. If NSCC
rejects OCC’s transactions due to an
improper submission 21 or if NSCC
‘‘ceases to act’’ for a Common
Member,22 NSCC’s Guaranty would not
take effect for the affected transactions
pursuant to the NSCC Rules.
NSCC is required to promptly notify
OCC if it ceases to act for a Common
Member. Upon receiving such a notice,
OCC would not continue to submit to
NSCC any further unsettled transactions
that involve such Common Member,
unless authorized representatives of
both OCC and NSCC otherwise consent.
OCC would, however, deliver to NSCC
a list of all transactions that have
already been submitted to NSCC and
that involve such Common Member.
The NSCC Guaranty ordinarily would
not take effect with respect to
transactions for a Common Member for
which NSCC has ceased to act, unless
both Clearing Agencies agree otherwise.
As such, NSCC does not have any
existing contractual obligation to
guarantee such Common Member’s
transactions. To the extent the NSCC
Guaranty does not take effect, OCC’s
Guaranty would continue to apply, and,
as described above, OCC would remain
responsible for effecting the settlement
19 The term ‘‘NSCC Clearing Fund’’ as used herein
has the same meaning as the term ‘‘Clearing Fund’’
as provided in the NSCC Rules. Procedure XV of
the NSCC Rules provides that all NSCC Clearing
Fund requirements and other deposits must be
made within one hour of demand, unless NSCC
determines otherwise, supra note 4.
20 This is referred to in the Existing Accord as the
‘‘Guaranty Substitution Time,’’ and the process of
the substitution of the NSCC Guaranty for the OCC
Guaranty with respect to E&A/Delivery
Transactions is referred to as ‘‘Guaranty
Substitution.’’
21 Guaranty Substitution by NSCC (discussed
further below) does not occur with respect to an
E&A/Delivery Transaction that is not submitted to
NSCC in the proper format or that involves a
security that is not identified as an Eligible Security
on the then-current NSCC Eligibility Master File.
22 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 an
NSCC Member’s failure to make a Required Fund
Deposit in a timely fashion. See NSCC Rule 46
(Restrictions on Access to Services), supra note 4.
An NSCC Member for which it has ceased to act is
referred to in the Existing Accord as a ‘‘Defaulting
NSCC Member.’’ Transactions associated with a
Defaulting NSCC Member are referred to as
‘‘Defaulted NSCC Member Transactions’’ in the
Existing Accord.
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of such Common Member’s transactions
pursuant to OCC’s By-Laws and Rules.
As noted above, the Existing Accord
does provide that the Clearing Agencies
may agree to permit additional
transactions for a Common Member
default (‘‘Defaulted NSCC Member
Transactions’’) to be processed by NSCC
while subject to the NSCC Guaranty.
This optional feature, however, creates
uncertainty for the Clearing Agencies
and market participants about how
Defaulted NSCC Member Transactions
may be processed following a Common
Member default and also does not
provide NSCC with the ability to collect
collateral from OCC that it may need to
close out these additional transactions.
While the optional feature would
remain in the agreement as part of this
proposal, the proposed changes to the
Existing Accord, as described below,
could significantly reduce the
likelihood that it would be utilized.
Proposed Changes to the Existing
Accord
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The proposed changes to the Existing
Accord would permit OCC to make a
cash payment, referred to as the
‘‘Guaranty Substitution Payment’’ or
‘‘GSP,’’ to NSCC. This cash payment
could occur on either or both of the day
that the Common Clearing Member
becomes a Mutually Suspended Member
and on the next business day. Upon
NSCC’s receipt of the Guaranty
Substitution Payment from OCC, the
NSCC Guaranty would take effect for the
Common Member’s transactions, and
they would be accepted by NSCC for
clearance and settlement.23 OCC could
use all Clearing Member contributions
to the OCC Clearing Fund 24 and certain
Margin Assets 25 of a defaulted Clearing
Member to pay the GSP, as described in
more detail below.
NSCC would calculate the Guaranty
Substitution Payment as the sum of the
Mutually Suspended Member’s unpaid
required deposit to the NSCC Clearing
Fund (‘‘Required Fund Deposit’’) 26 and
the unpaid Supplemental Liquidity
Deposit 27 obligation that is attributable
23 Acceptance of such transactions by NSCC
would be subject to NSCC’s standard validation
criteria for incoming trades. See NSCC Rule 7,
supra note 4.
24 The term ‘‘OCC Clearing Fund’’ as used herein
has the same meaning as the term ‘‘Clearing Fund’’
in OCC’s By-Laws, supra note 9.
25 The term ‘‘Margin Assets’’ as used herein has
the same meaning as provided in OCC’s By-Laws,
supra note 9.
26 The Required Fund Deposit is calculated
pursuant to Rule 4 (Clearing Fund) and Procedure
XV (Clearing Fund Formula and Other Matters) of
the NSCC Rules. See supra note 4.
27 Under the NSCC Rules, NSCC collects
additional cash deposits from those Members who
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to E&A/Delivery Transactions. The
proposed changes to the Existing
Accord define how NSCC would
calculate the Guaranty Substitution
Payment.
More specifically, NSCC would first
determine how much of the member’s
unpaid Clearing Fund requirement
would be included in the GSP. NSCC
would look at the day-over-day change
in gross market value of the Mutually
Suspended Member’s positions as well
as day-over-day change in the member’s
NSCC Clearing Fund requirements.
Based on such changes, NSCC would
identify how much of the change in the
Clearing Fund requirement was
attributable to E&A/Delivery
Transactions coming from OCC. If 100
percent of the day-over-day change in
the NSCC Clearing Fund requirement is
attributable to activity coming from
OCC, then the GSP would include 100
percent of the member’s NSCC Clearing
Fund requirement. If less than 100
percent of the change is attributable to
activity coming from OCC, then the GSP
would include that percent of the
member’s unpaid NSCC Clearing Fund
requirement attributable to activity
coming from OCC. NSCC would then
determine the portion of the member’s
unpaid SLD obligation that is
attributable to E&A/Delivery
Transactions. As noted above, the GSP
would be the sum of these two amounts.
A member’s NSCC Clearing Fund
requirement and SLD obligation at
NSCC are designed to address the credit
and liquidity risks that a member poses
to NSCC. The GSP calculation is
intended to assess how much of a
member’s obligations arise out of
activity coming from OCC so that the
amount paid by OCC is commensurate
with the risk to NSCC of guarantying
such activity.
To permit OCC to anticipate the
potential resources it would need to pay
the GSP for a Mutually Suspended
Member, each business day NSCC
would provide OCC with (1) Required
Fund Deposit and Supplemental
Liquidity Deposit obligations, as
calculated pursuant to the NSCC Rules,
and (2) the gross market value of the
E&A/Delivery Transactions and the
gross market value of total Net Unsettled
Positions (as such term is defined in the
NSCC Rules). On options expiry days
that fall on a Friday, NSCC would also
provide OCC with information regarding
liquidity needs and resources, and any
intraday SLD requirements of Common
would generate the largest settlement debits in
stressed market conditions, referred to as
‘‘Supplemental Liquidity Deposits’’ or ‘‘SLD.’’ See
Rule 4A of the NSCC Rules, supra note 4.
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Members. Such information would be
delivered pursuant to the ongoing
information sharing obligations under
the Existing Accord (as proposed to be
amended) and the Service Level
Agreement (‘‘SLA’’) to which both
NSCC and OCC are a party pursuant to
Section 2 of the Existing Accord.28 The
SLA addresses specifics regarding the
time, form and manner of various
required notifications and actions
described in the Accord and also
includes information applicable under
the Accord.
NSCC and OCC believe the proposed
calculation of the Required Fund
Deposit portion of the GSP is
appropriate because it is designed to
provide a reasonable proxy for the
impact of the Mutually Suspended
Member’s E&A/Delivery Transactions
on its Required Fund Deposit. While
impact study data did show that the
proposed calculation could result in a
GSP that overestimates or
underestimates the Required Fund
Deposit attributable to the Mutually
Suspended Member’s E&A/Delivery
Transactions,29 current technology
constraints prohibit NSCC from
performing a precise calculation of the
GSP on a daily basis for every Common
Member.30
Implementing the ability for OCC to
make the GSP and cause the E&A/
Delivery Transactions to be cleared and
settled through NSCC would promote
the ability of OCC and NSCC to be
efficient and effective in meeting the
requirements of the markets they serve.
This is because data demonstrates that
the expected size of the GSP would be
smaller than the amount of cash that
would otherwise be needed by OCC and
its Clearing Members to facilitate
settlement outside of NSCC. More
specifically, based on a historical study
28 The revised SLA has been filed as an exhibit
to this filing.
29 The impact study was conducted at the
Commission’s request to cover a three-day period
and reviewed the ten Common Members with the
largest Required Fund Deposits attributable to the
Mutually Suspended Member’s E&A/Delivery
Transactions. Over the 30 instances in the study,
approximately 15 instances resulted in an
underestimate of the Required Fund Deposit by an
average of approximately $112,900,926; four
instances where the proxy calculation was the same
as the Required Fund Deposit; and eleven instances
of an overestimate of the Required Fund Deposit by
an average of approximately $59,654,583. NSCC
filed additional detail related to the referenced
study as an exhibit to this filing.
30 OCC and NSCC have agreed that performing the
necessary technology build at this time would delay
the implementation of this proposal. Therefore,
NSCC would consider incorporating those
technology updates into future revisions to the
Accord, for example in connection with a move to
a shorter settlement cycle in the U.S. equities
markets.
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of alternate means of settlement
available to OCC from September 2021
through September 2022, in the event
that NSCC did not accept E&A/Delivery
Transactions, the worst-case scenario
peak liquidity need OCC identified was
$384,635,833,942 for settlement to occur
on a gross broker-to-broker basis. OCC
estimates that the corresponding GSP in
this scenario would have been
$863,619,056. OCC also analyzed
several other large liquidity demand
amounts that were identified during the
study if OCC effected settlement on a
gross broker-to-broker basis.31 These
liquidity demand amounts and the
largest liquidity demand amount OCC
observed of $384,635,833,942
substantially exceed the amount of
liquid resources currently available to
OCC.32 By contrast, projected GSPs
identified during the study ranged from
$419,297,734 to $6,281,228,428. For
each of these projected GSP amounts,
OCC observed that the Margin Assets
and OCC Clearing Fund contributions
that would have been required of
Clearing Members in these scenarios
would have been sufficient to satisfy the
amount of the projected GSPs.
To help address the current
technology constraint that prohibits
NSCC from performing a precise
calculation of the GSP on a daily basis
for every Common Member, proposed
Section 6(b)(i) of the Existing Accord
and related Section 7(d) of the SLA
would provide that, with respect to a
Mutually Suspended Member, either
NSCC or OCC may require that the
Required Fund Deposit portion of the
GSP be re-calculated by calculating the
Required Fund Deposit for the Mutually
Suspended Member both before and
after the delivery of the E&A/Delivery
Transactions and utilize the precise
amount that is attributable to that
activity in the final GSP. If such a
recalculation is required, the result
would replace the Required Fund
Deposit component of the GSP that was
initially calculated. The SLD component
of the GSP would be unchanged by such
recalculation.
As the above demonstrates, the GSP is
intended to address the significant
collateral and liquidity requirements
that could be required of OCC Clearing
Members in the event of a Common
Member default.
Allowing OCC to make a GSP
payment also is intended to allow for
settlement processing to take place
through the facilities of NSCC to retain
operational efficiencies associated with
the settlement process. Alternative
settlement means such as broker-to
broker settlement add operational
burdens because transactions would
need to be settled individually on oneoff bases. In contrast, NSCC’s netting
reduces the volume and value of
settlement obligations that would need
to be closed out in the market.33
Because the clearance and settlement of
obligations through NSCC’s facilities
following a Common Member default,
including netting of E&A/Delivery
Transactions with a Common Member’s
positions at NSCC would avoid these
potentially significant operational
burdens for OCC and its Clearing
Members, OCC and NSCC believe that
the proposed changes would limit
market disruption relating to a Common
Member default. NSCC netting
significantly reduces the total number of
obligations that require the exchange of
money for settlement. Allowing more
activity to be processed through NSCC’s
netting systems would minimize risk
associated with the close out of those
transactions following the default of a
Common Member.
Amending the Existing Accord to
define the terms and conditions under
which Guaranty Substitution may occur,
at OCC’s election, with respect to
Defaulted NSCC Member Transactions
after a Common Member becomes a
Mutually Suspended Member would
also provide more certainty to both the
Clearing Agencies and market
participants generally about how a
Mutually Suspended Member’s
Defaulted NSCC Member Transactions
may be processed.
NSCC and OCC have agreed it is
appropriate to limit the availability of
the proposed provision to the day of the
Common Member default and the next
business day because, based on
historical cease to act events and
simulations of cease to act events
involving Common Members, most
activity of a Mutually Suspended
Member is closed out on those days.34
Furthermore, the benefits of netting
through NSCC’s systems would be
reduced for any activity submitted to
NSCC after that time.
To implement these proposed changes
to the Existing Accord, OCC and NSCC
propose to make the following changes.
31 OCC filed additional detail related to the
referenced study as an exhibit to the OCC Filing.
32 As of Mar. 31, 2023, OCC held approximately
$10.37 billion in qualifying liquid resources. See
OCC Quantitative Disclosure, Jan.–Mar. 2023,
available at www.theocc.com/risk-management/
pfmi-disclosures.
33 CNS reduces the value of obligations that
require financial settlement by approximately 98
percent, where, for example, approximately $519
trillion in trades could be netted down to
approximately $9 trillion in net settlements.
34 OCC filed data regarding simulated events as an
exhibit to the OCC Filing.
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Section 1—Definitions
First, new definitions would be
added, and existing definitions would
be amended in Section 1, which is the
Definitions section.
The new defined terms would be as
follows.
• The term ‘‘Close Out Transaction’’
would be defined to mean ‘‘the
liquidation, termination or acceleration
of one or more exercised or matured
Stock Options 35 or Stock Futures 36
contracts, securities contracts,
commodity contracts, forward contracts,
repurchase agreements, swap
agreements, master netting agreements
or similar agreements of a Mutually
Suspended Member pursuant to OCC
Rules 1101 through 1111 and/or NSCC
Rule 18.’’ This proposed definition
would make it clear that the payment of
the Guaranty Substitution Payment and
NSCC’s subsequent acceptance of
Defaulted NSCC Member Transactions
for clearance and settlement are
intended to fall within the ‘‘safe
harbors’’ provided in the Bankruptcy
Code,37 the Securities Investor
Protection Act,38 and other similar laws.
• The term ‘‘Guaranty Substitution
Payment’’ would be defined to mean
‘‘an amount calculated by NSCC in
accordance with the calculations set
forth in Appendix A [to the Existing
Accord (as proposed to be amended)], to
include two components: (i) a portion of
the Mutually Suspended Member’s
Required Fund Deposit deficit to NSCC
at the time of the cease to act and (ii)
a portion of the Mutually Suspended
Member’s unpaid Supplemental
Liquidity Deposit obligation at the time
of the cease to act.’’
• The term ‘‘Mutually Suspended
Member’’ would mean ‘‘any OCC
Participating Member 39 that has been
35 The term ‘‘Stock Options’’ is defined in the
Existing Accord within the definition of ‘‘Eligible
Securities’’ and refers to options issued by OCC.
36 The term ‘‘Stock Futures’’ is defined in the
Existing Accord within the definition of ‘‘Eligible
Securities,’’ described below, and refers to stock
futures contracts cleared by OCC.
37 11 U.S.C. 101 et seq., including §§ 362(b)(6),
(7), (17), (25) and (27) (exceptions to the automatic
stay), §§ 546(e)–(g) and (j) (limitations on avoiding
powers), and §§ 555–556 and 559–562 (contractual
right to liquidate, terminate or accelerate certain
contracts).
38 15 U.S.C. 78aaa–lll, including § 78eee(b)(2)(C)
(exceptions to the stay).
39 The term ‘‘OCC Participating Member’’ is
defined in the Existing Accord to mean ‘‘(i) a
Common Member; (ii) an OCC Clearing Member
that is an ‘Appointing Clearing Member’ (as defined
in Article I of OCC’s By-Laws) and has appointed
an Appointed Clearing Member that is an NSCC
Member to effect settlement of E&A/Delivery
Transactions through NSCC on the Appointing
Clearing Member’s behalf; (iii) an OCC Clearing
Member that is an Appointed Clearing Member; or
(iv) a Canadian Clearing Member.’’ No changes are
proposed to this definition.
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suspended by OCC that is also an NSCC
Participating Member 40 for which
NSCC has ceased to act.’’
• The term ‘‘Required Fund Deposit’’
would have the meaning ‘‘provided in
Rule 4 of NSCC’s Rules and Procedures
(or any replacement or substitute rule),
the version of which, with respect to
any transaction or obligation incurred
that is the subject of this Agreement, is
in effect at the time of such transaction
or incurrence of obligation.’’
• The term ‘‘Supplemental Liquidity
Deposit’’ would have the meaning
‘‘provided in Rule 4A of NSCC’s Rules
and Procedures (or any replacement or
substitute rule), the version of which,
with respect to any transaction or
obligation incurred that is the subject of
this Agreement, is in effect at the time
of such transaction or incurrence of
obligation.’’
The defined terms that would be
amended in Section 1 of the Existing
Accord are as follows.
• The definition for the term ‘‘E&A/
Delivery Transaction’’ generally
contemplates a transaction that involves
a delivery and receipt of stock in the
settlement of physically settled options
and futures that are cleared and settled
by OCC and for which the underlying
securities are eligible for clearing
through the facilities of NSCC. The
definition would be amended to make
clear that it would apply in respect of
a ‘‘Close Out Transaction’’ of a
‘‘Mutually Suspended Member’’ as
those terms are proposed to be defined
(described above).
• The definition for the term ‘‘Eligible
Securities’’ generally contemplates the
securities that are eligible to be used for
physical settlement under the Existing
Accord. The term would be modified to
clarify that this may include, for
example, equities, exchange-traded
funds and exchange-traded notes that
are underlying securities for options
issued by OCC.
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Section 6—Default by an NSCC
Participating Member or OCC
Participating Member
Section 6 of the Existing Accord
provides that NSCC is required to
provide certain notice to OCC in
circumstances in which NSCC has
ceased to act for a Common Member.
Currently, Section 6(A)(ii) of the
40 The term ‘‘NSCC Participating Member’’ is
defined in the Existing Accord to mean ‘‘(i) a
Common Member; (ii) an NSCC Member that is an
‘Appointed Clearing Member’ (as defined in Article
I of OCC’s By-Laws); or (iii) [The Canadian
Depository for Securities Limited, or ‘‘CDS’’]. For
the avoidance of doubt, the Clearing Agencies agree
that CDS is an NSCC Member for purposes of this
Agreement.’’ No changes are proposed to this
definition.
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Existing Accord also requires NSCC to
notify OCC if a Common Member has
failed to satisfy its Clearing Fund
obligations to NSCC, but for which
NSCC has not yet ceased to act. In
practice, this provision would trigger a
number of obligations (described below)
when a Common Member fails to satisfy
its NSCC Clearing Fund obligations for
any reason, including those due to an
operational delay. Therefore, OCC and
NSCC are proposing to remove the
notification requirement under Section
6(A)(ii) from the Existing Accord. Under
Section 7(d) of the Existing Accord,
NSCC and OCC are required to provide
each other with general surveillance
information regarding Common
Members, which includes information
regarding any Common Member that is
considered by the other party to be in
distress. Therefore, if a Common
Member has failed to satisfy its NSCC
Clearing Fund obligations and NSCC
believes this failure is due to, for
example, financial distress and not, for
example, due to a known operational
delay, and NSCC has not yet ceased to
act for that Common Member, such
notification to OCC would still occur
but would be done pursuant to Section
7(d) of the Existing Accord (as proposed
to be amended), and not Section
6(A)(ii). Notifications under Section 6 of
the Existing Accord (as proposed to be
amended) would be limited to instances
when NSCC has actually ceased to act
for a Common Member pursuant to the
NSCC Rules.41
Following notice by NSCC that it has
ceased to act for a Common Member,
OCC is obligated in turn to deliver to
NSCC a list of all E&A/Delivery
Transactions (excluding certain
transactions for which Guaranty
Substitution does not occur) involving
the Common Member.42 This provision
would be amended to clarify that it
applies in respect of such E&A/Delivery
Transactions for the Common Member
for which the NSCC Guaranty has not
yet attached—meaning that Guaranty
Substitution has not yet occurred.
As described above in the summary of
the Existing Accord, where NSCC has
ceased to act for a Common Member, the
Existing Accord refers to the Common
Member as the Defaulting NSCC
Member and also refers to the relevant
E&A/Delivery Transactions in
connection with that Defaulting NSCC
Member for which a Guaranty
41 See Rule 46 (Restrictions on Access to Services)
of the NSCC Rules, supra note 4.
42 The section of the Existing Accord that
addresses circumstances in which NSCC ceases to
act and/or an NSCC Member defaults is currently
part of Section 6(a). It would be re-designated as
Section 6(b) for organizational purposes.
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Substitution has not yet occurred as
Defaulted NSCC Member Transactions.
If the Defaulting NSCC Member is also
suspended by OCC, it would be covered
by the proposed definition that is
described above for a Mutually
Suspended Member. For such a
Mutually Suspended Member, the
proposed changes in Section 6(b) would
provide that NSCC, by a time agreed
upon by the parties, would provide OCC
with the amount of the Guaranty
Substitution Payment as calculated by
NSCC and related documentation
regarding the calculation. The Guaranty
Substitution Payment would be
calculated pursuant to NSCC’s Rules as
that portion of the unmet Required
Fund Deposit 43 and Supplemental
Liquidity Deposit 44 obligations of the
Mutually Suspended Member
attributable to the Defaulted NSCC
Member Transactions. By a time agreed
upon by the parties,45 OCC would then
be required to either notify NSCC of its
intent to make the full amount of the
Guaranty Substitution Payment to NSCC
or notify NSCC that it would not make
the Guaranty Substitution Payment. If
OCC makes the full amount of the
Guaranty Substitution Payment, NSCC’s
guaranty would take effect at the time of
NSCC’s receipt of that payment and the
OCC Guaranty would end.
The proposed changes would further
provide that if OCC does not suspend
the Common Member (such that the
Common Member would therefore not
meet the proposed definition of a
Mutually Suspended Member) or if OCC
elects to not make the full amount of the
Guaranty Substitution Payment to
NSCC, then all of the Defaulted NSCC
Member Transactions would be exited
from NSCC’s CNS Accounting
Operation and/or NSCC’s Balance Order
Accounting Operation, as applicable,
and Guaranty Substitution would not
occur in respect thereof. Therefore,
NSCC would continue to have no
obligation to guarantee or settle the
Defaulted NSCC Member Transactions,
and the OCC Guaranty would continue
43 The Required Fund Deposit is calculated
pursuant to Rule 4 (Clearing Fund) and Procedure
XV (Clearing Fund Formula and Other Matters) of
the NSCC Rules, see supra note 4.
44 The Supplemental Liquidity Deposit is
calculated pursuant to Rule 4A (Supplemental
Liquidity Deposits) of the NSCC Rules, see supra
note 4.
45 The time by which OCC would be required to
notify NSCC of its intent would be defined in the
Service Level Agreement. As of the time of this
filing, the parties intend to set that time as one hour
after OCC’s receipt of the calculated Guaranty
Substitution Payment from NSCC.
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to apply to them pursuant to OCC’s ByLaws and Rules.46
Proposed changes to the Existing
Accord would also address the
application of any Guaranty
Substitution Payment by NSCC.
Specifically, new Section 6(d) would
provide that any Guaranty Substitution
Payment made by OCC may be used by
NSCC to satisfy any liability or
obligation of the Mutually Suspended
Clearing Member to NSCC on account of
transactions involving the Mutually
Suspended Clearing Member for which
the NSCC Guaranty applies and to the
extent that any amount of assets
otherwise held by NSCC for the account
of the Mutually Suspended Member
(including any Required Fund Deposit
or Supplemental Liquidity Deposit) are
insufficient to satisfy its obligations
related to transactions for which the
NSCC Guaranty applies. Proposed
changes to Section 6(d) would further
provide for the return to OCC of any
unused portion of the GSP. With regard
to the portion of the Guaranty
Substitution Payment that corresponds
to a member’s Supplemental Liquidity
Deposit obligation, NSCC must return
any unused amount to OCC within
fourteen (14) days following the
conclusion of NSCC’s settlement, closeout and/or liquidation. With regard to
the portion of the Guaranty Substitution
Payment that corresponds to a Required
Fund Deposit, NSCC must return any
unused amount to OCC under terms
agreed to by the parties.47
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Other Proposed Changes
Certain other technical changes are
also proposed to the Existing Accord to
conform it to the proposed changes
described above. For example, the
preamble and the ‘‘whereas’’ clauses in
the Preliminary Statement would be
amended to clarify that the agreement is
an amended and restated agreement and
to summarize that the agreement would
be modified to contemplate the
Guaranty Substitution Payment
structure. Section 1(c), which addresses
the terms in the Existing Accord that are
defined by reference to NSCC’s Rules
and Procedures and OCC’s By-Laws and
Rules would be modified to state that
such terms would have the meaning
then in effect at the time of any
transaction or obligation that is covered
46 Under the current and proposed terms of the
Existing Accord, NSCC would be permitted to
voluntarily guaranty and settle the Defaulted NSCC
Member Transactions.
47 Such amounts would be returned to OCC as
appropriate and in accordance with a Netting
Contract and Limited Cross-Guaranty, by and
among The Depository Trust Company, Fixed
Income Clearing Corporation, NSCC and OCC,
dated as of Jan. 1, 2003, as amended.
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by the agreement rather than stating that
such terms have the meaning given to
them as of the effective date of the
agreement. This change is proposed to
help ensure that the meaning of such
terms in the agreement would not
become inconsistent with the meaning
in the NSCC Rules and/or OCC By-Laws
and Rules, as they may be modified
through proposed rule changes with the
Commission.
Technical changes would be made to
Sections 3(d) and (e) of the Existing
Accord to provide that those provisions
would not apply in the event new
Section 6(b) described above, is
triggered. Section 3(d) generally
provides that OCC would no longer
submit E&A/Delivery Transactions to
NSCC involving a suspended OCC
Participating Member. Similarly,
Section 3(e) generally provides that OCC
would no longer submit E&A/Delivery
Transactions to NSCC involving an
NSCC Participating Member for which
NSCC has ceased to act. A proposed
change would also be made to Section
5 of the Existing Accord to modify a
reference to Section 5 of Article VI of
OCC’s By-Laws to instead provide that
the updated cross-reference should be to
Chapter IV of OCC’s Rules.
Section 5 would also be amended to
clarify that Guaranty Substitution
occurs when NSCC has received both
the Required Fund Deposit and
Supplemental Liquidity Deposit, as
calculated by NSCC in its sole
discretion, from Common Members. The
addition of the collection of the
Supplemental Liquidity Deposit to the
definition of the Guaranty Substitution
Time in this Section 5 would reflect
OCC and NSCC’s agreement that both
amounts are components of the
Guaranty Substitution Payment (as
described above) and would make this
definition consistent with that
agreement.
In Section 7 of the Existing Accord,
proposed changes would be made to
provide that NSCC would provide to
OCC information regarding a Common
Member’s Required Fund Deposit and
Supplemental Liquidity Deposit
obligations, to include the
Supplemental Liquidity Deposit
obligation in this notice requirement,
and additionally that NSCC would
provide OCC with information regarding
the potential Guaranty Substitution
Payment for the Common Member. On
an options expiration date that is a
Friday, NSCC would, by close of
business on that day, also provide to
OCC information regarding the intra-day
liquidity requirement, intra-day
liquidity resources and intra-day calls
for a Common Member that is subject to
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a Supplemental Liquidity Deposit at
NSCC.
Finally, Section 14 of the Existing
Accord would be modernized to provide
that notices between the parties would
be provided by email rather than by
hand, overnight delivery service or firstclass mail.
Proposed Changes to NSCC Rules
In connection with the proposed
changes to the Existing Accord, NSCC is
also proposing changes to its Rules,
described below.
First, NSCC would amend Rule 18
(Procedures for When the Corporation
Ceases to Act), which describes the
actions NSCC would take with respect
to the transactions of a Member after
NSCC has ceased to act for that
Member.48 The proposed changes
would include a new Section 9(a) to
specify that following a Member default,
NSCC may continue to act and provide
the NSCC Guaranty pursuant to a
‘‘Close-Out Agreement’’ such as the
Existing Accord (as it is proposed to be
amended); 49 a new Section 9(b) to
specify that any transactions undertaken
pursuant to a Close-Out Agreement
would be treated as having been
received, provided or undertaken for the
account of the Member for which NSCC
has ceased to act, but that any deposit,
payment, financial assurance or other
accommodation provided to NSCC
pursuant to a Close-Out Agreement shall
be returned or released as provided for
in the agreement; and a new Section
9(c), to provide that NSCC shall have a
lien upon, and may apply, any property
of the defaulting Member in satisfaction
of any obligation, liability or loss that
relates to a transaction undertaken or
service provided pursuant to a CloseOut Agreement.
NSCC would also propose
clarifications to Sections 4, 6(b)(iii)(B)
and 8 to use more precise references to
the legal entity described in those
sections of this Rule.
Second, NSCC would amend Section
B of Procedure III and Addendum K of
the NSCC Rules 50 to provide that the
NSCC Guaranty would not attach to
Defaulted NSCC Member Transactions
except as provided for in the Existing
Accord (as it is proposed to be
amended), and that the NSCC Guaranty
attaches, with respect to obligations
arising from the exercise or assignment
of OCC options settled at NSCC or stock
futures contracts cleared by OCC, as
48 See
supra note 4.
Existing Accord is currently the only
agreement that would be considered a ‘‘Close-Out
Agreement’’ under this new Section 9(b).
50 See id.
49 The
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provided for in the Existing Accord (as
it is proposed to be amended) or other
arrangement with OCC. Finally, the
proposed changes to Procedure III
would clarify that Guaranty Substitution
occurs when NSCC has received both
the Required Fund Deposit and
Supplemental Liquidity Deposit,
consistent with the proposed revisions
to Section 5 of the Current Accord,
described above. As noted above, the
proposal to include the collection of the
Supplemental Liquidity Deposit in
connection with the Guaranty
Substitution reflect OCC and NSCC’s
agreement that both amounts are
components of the Guaranty
Substitution Payment.
Collectively, these proposed changes
would establish and clarify the rights of
both NSCC and a Member for which
NSCC has ceased to act with respect to
property held by NSCC and the
operation and applicability of any
Close-Out Agreement, and would make
it clear that any payments received
pursuant to a Close-Out Agreement and
NSCC’s acceptance of a Mutually
Suspended Member’s transactions for
clearance and settlement pursuant to a
Close-Out Agreement are intended to
fall within the Bankruptcy Code and
Securities Investor Protection Act ‘‘safe
harbors.’’
2. Statutory Basis
NSCC believes the proposed changes
to the Existing Accord and its Rules are
consistent with the requirements of the
Exchange Act and the rules and
regulations thereunder applicable to a
registered clearing agency. In particular,
NSCC believes the proposed change is
consistent with Section 17A(b)(3)(F) of
the Act 51 and Rules 17Ad–22(e)(7) and
(20), each promulgated under the Act,52
for the reasons described below.
Section 17A(b)(3)(F) of the Exchange
Act requires, among other things, that
the rules of a clearing agency be
designed, in general, to protect investors
and the public interest.53 As described
above, NSCC believes that providing
OCC with the ability to make a Guaranty
Substitution Payment to it with respect
to any unmet obligations of a Mutually
Suspended Member would promote
prompt and accurate clearance and
settlement because it would allow
relevant securities settlement
obligations to be accepted by NSCC for
clearance and settlement, which would
reduce the size of the related settlement
obligations for both the Mutually
Suspended Member and its assigned
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(7), (20).
53 15 U.S.C. 78q–1(b)(3)(F).
delivery counterparties through netting
through NSCC’s CNS Accounting
Operation and/or NSCC’s Balance Order
Accounting Operation. Further, this
proposal would reduce the
circumstances in which OCC’s Guaranty
would continue to apply to these
settlement obligations, to be settled on
a broker-to-broker basis between OCC
Clearing Members, which could result
in substantial collateral and liquidity
requirements for OCC Clearing Members
and that, in turn, could also increase a
risk of default by the affected OCC
Clearing Members at a time when a
Common Member has already been
suspended. For these reasons, NSCC
believes that the proposed changes
would be beneficial to and protective of
OCC, NSCC, their participants, and the
markets that they serve and that the
proposed changes are therefore
designed, in general, to protect investors
and the public interest.
Rule 17Ad–22(e)(7) requires NSCC, in
relevant part, to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
effectively measure, monitor and
manage the liquidity risk that arises in
or is borne by NSCC and to, among
other things, address foreseeable
liquidity shortfalls that would not be
covered by NSCC’s liquid resources.54
NSCC believes the proposal is
consistent the requirements of Rule
17Ad–22(e)(7) because, any increase to
NSCC’s liquidity needs that may be
created by applying the NSCC Guaranty
to Defaulted Member Transactions
would occur with a simultaneous
increase to its liquidity resources in the
form of the Guaranty Substitution
Payment. Therefore, NSCC believes it
will continue to adhere to the
requirements of Rule 17Ad–22(e)(7)
under the proposal.
Finally, Rule 17Ad–22(e)(20) requires
NSCC to establish, implement, maintain
and enforce written policies and
procedures reasonably designed to
identify, monitor and manage risks
related to any link that NSCC
establishes with one or more other
clearing agencies, financial market
utilities, or trading markets.55 The
Existing Accord between OCC and
NSCC is one such link. As described
above, NSCC believes that
implementation of the proposal would
help manage the risks presented by the
settlement link because, when the
proposed provision is triggered by OCC,
NSCC would receive the Guaranty
Substitution Payment with respect to
51 15
52 17
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17:31 Aug 29, 2023
54 17
55 17
Jkt 259001
PO 00000
CFR 240.17Ad–22(e)(7).
CFR 240.17Ad–22(e)(20).
Frm 00112
Fmt 4703
Sfmt 4703
59975
the relevant securities settlement
obligations.
(B) Clearing Agency’s Statement on
Burden on Competition
Section 17A(b)(3)(I) of the Act 56
requires that the rules of a clearing
agency not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act. NSCC does not
believe that the proposal would impose
any burden on competition. This is
because it would implement changes
that would permit OCC in certain
circumstances to make a Guaranty
Substitution Payment to NSCC so that
the NSCC Guaranty would take effect for
the Defaulted NSCC Member
Transactions, and the OCC Guaranty
would end. The proposed changes
would not inhibit access to NSCC’s
services in any way, applies to all
Members and does not disadvantage or
favor any particular user in relationship
to another user. Accordingly, NSCC
does not believe that the proposed rule
change would have any impact or
impose a burden on competition.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
NSCC has not received or solicited
any written comments relating to this
proposal. If any written comments are
received, they will be publicly filed as
an Exhibit 2 to this filing, as required by
Form 19b–4 and the General
Instructions thereto.
Persons submitting comments are
cautioned that, according to Section IV
(Solicitation of Comments) of the
Exhibit 1A in the General Instructions to
Form 19b–4, the Commission does not
edit personal identifying information
from comment submissions.
Commenters should submit only
information that they wish to make
available publicly, including their
name, email address, and any other
identifying information.
All prospective commenters should
follow the Commission’s instructions on
how to submit comments, available at
www.sec.gov/regulatory-actions/how-tosubmit-comments. General questions
regarding the rule filing process or
logistical questions regarding this filing
should be directed to the Main Office of
the Commission’s Division of Trading
and Markets at tradingandmarkets@
sec.gov or 202–551–5777.
NSCC reserves the right not to
respond to any comments received.
56 15
E:\FR\FM\30AUN1.SGM
U.S.C. 78q–1(b)(3)(I).
30AUN1
59976
Federal Register / Vol. 88, No. 167 / Wednesday, August 30, 2023 / Notices
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) by order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NSCC–2023–007 on the subject line.
lotter on DSK11XQN23PROD with NOTICES1
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to File
Number SR–NSCC–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
VerDate Sep<11>2014
17:31 Aug 29, 2023
Jkt 259001
inspection and copying at the principal
office of NSCC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx).
Do not include personal identifiable
information in submissions; you should
submit only information that you wish
to make available publicly. We may
redact in part or withhold entirely from
publication submitted material that is
obscene or subject to copyright
protection. All submissions should refer
to File Number SR–NSCC–2023–007
and should be submitted on or before
September 20, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.57
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–18670 Filed 8–29–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98215; File No. SR–OCC–
2023–007]
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change
Concerning Modifications to the
Amended and Restated Stock Options
and Futures Settlement Agreement
Between The Options Clearing
Corporation and the National
Securities Clearing Corporation
August 24, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’ or ‘‘Act’’),1 and Rule
19b–4 thereunder,2 notice is hereby
given that on August 10, 2023, the
Options Clearing Corporation (‘‘OCC’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by OCC. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
This proposed rule change would (1)
modify the Amended and Restated
Stock Options and Futures Settlement
Agreement dated August 5, 2017
between OCC and National Securities
Clearing Corporation (‘‘NSCC,’’ and
together with OCC, the ‘‘Clearing
57 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
PO 00000
Frm 00113
Fmt 4703
Sfmt 4703
Agencies’’) (‘‘Existing Accord’’) 3 and (2)
make certain revisions to OCC By-Laws,
OCC Rules,4 OCC’s Comprehensive
Stress Testing & Clearing Fund
Methodology, and Liquidity Risk
Management Description and OCC’s
Liquidity Risk Management Framework
in connection with the proposed
modifications to the Existing Accord, as
described in greater detail below.5
The proposed changes would permit
OCC to elect to make a cash payment to
NSCC following the default of a
common clearing participant that would
cause NSCC’s central counterparty trade
guaranty to attach to certain obligations
of that participant, as described in
greater detail below.
The proposed changes are included in
Exhibits 5A and 5B and confidential
Exhibits 5C, 5D, and 5E to File No. SR–
OCC–2023–007. Material proposed to be
added is underlined and material
proposed to be deleted is marked in
strikethrough text.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
OCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. OCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
(1) Purpose
Executive Summary
NSCC is a clearing agency that
provides clearing, settlement, risk
management, and central counterparty
services for trades involving equity
securities. OCC is the sole clearing
agency for standardized equity options
listed on national securities exchanges
registered with the Commission,
including options that contemplate the
3 The Existing Accord was previously approved
by the Commission. See Securities Exchange Act
Release Nos. 81266, 81260 (July 31, 2017) (File Nos.
SR–NSCC–2017–007; SR–OCC–2017–013), 82 FR
36484 (Aug. 4, 2017).
4 OCC By-Laws are available at https://
www.theocc.com/getmedia/3309eceb-56cf-48fcb3b3-498669a24572/occ_bylaws.pdf and OCC Rules
are available at https://www.theocc.com/getmedia/
9d3854cd-b782-450f-bcf7-33169b0576ce/occ_
rules.pdf.
5 NSCC also has filed a proposed rule change with
the Commission in connection with this proposal.
See SR–NSCC–2023–007.
E:\FR\FM\30AUN1.SGM
30AUN1
Agencies
[Federal Register Volume 88, Number 167 (Wednesday, August 30, 2023)]
[Notices]
[Pages 59968-59976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-18670]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98213; File No. SR-NSCC-2023-007]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change To Modify the
Amended and Restated Stock Options and Futures Settlement Agreement and
Make Certain Revisions to the NSCC Rules
August 24, 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 August 10, 2023, National Securities Clearing Corporation (``NSCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to (1) modify the
Amended and Restated Stock Options and Futures Settlement Agreement
dated August 5, 2017 between NSCC and The Options Clearing Corporation
(``OCC,'' and together with NSCC, the ``Clearing Agencies'')
(``Existing Accord'') \3\ and (2) make certain revisions to Rule 18,
Procedure III and Addendum K of the NSCC Rules & Procedures (``NSCC
Rules'') \4\ in connection with the proposed modifications to the
Existing Accord, as described in greater detail below.\5\
---------------------------------------------------------------------------
\3\ The Existing Accord was previously approved by the
Commission. See Securities Exchange Act Release Nos. 81266, 81260
(Jul. 31, 2017) (File Nos. SR-NSCC-2017-007; SR-OCC-2017-013), 82 FR
36484 (Aug. 4, 2017).
\4\ Capitalized terms not defined herein are defined in the NSCC
Rules available at www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf.
\5\ OCC also has filed a proposed rule change and an advance
notice with the Commission in connection with this proposal. See
File Nos. SR-OCC-2023-007 and SR-OCC-2023-801 (the ``OCC Filing'').
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
Executive Summary
NSCC is a clearing agency that provides clearing, settlement, risk
management, and central counterparty services for trades involving
equity securities. OCC is the sole clearing agency for standardized
equity options listed on national securities exchanges registered with
the Commission, including options that contemplate the physical
delivery of equities cleared by NSCC in exchange for cash (``physically
settled'' options).\6\ OCC also clears certain futures contracts that,
at maturity, require the delivery of equity securities cleared by NSCC
in exchange for cash. As a result, the exercise/assignment of certain
options or maturation of certain futures cleared by OCC effectively
results in stock settlement obligations. NSCC and OCC maintain a legal
agreement, generally referred to by the parties as the ``Accord''
agreement, that governs the processing of such physically settled
options and futures cleared by OCC that
[[Page 59969]]
result in transactions in underlying equity securities to be cleared by
NSCC (``Existing Accord'').
---------------------------------------------------------------------------
\6\ The term ``physically-settled'' as used throughout the OCC
Rulebook refers to cleared contracts that settle into their
underlying interest (i.e., options or futures contracts that are not
cash-settled). When a contract settles into its underlying interest,
shares of stock are sent, i.e., delivered, to contract holders who
have the right to receive the shares from contract holders who are
obligated to deliver the shares at the time of exercise/assignment
in the case of an option, and maturity in the case of a future.
---------------------------------------------------------------------------
The Existing Accord establishes terms under which NSCC accepts for
clearing certain securities transactions that result from the exercise
and assignment of relevant options contracts and the maturity of
futures contracts that are cleared and settled by OCC.\7\ It also
establishes the time when OCC's settlement guaranty in respect of those
transactions ends and NSCC's settlement guaranty begins.
---------------------------------------------------------------------------
\7\ Under the Existing Accord, such options and futures are
defined as ``E&A/Delivery Transactions,'' which refers to ``Exercise
& Assignment Delivery Transactions.''
---------------------------------------------------------------------------
The Existing Accord allows for a scenario in which NSCC could
choose not to guarantee the settlement of such securities arising out
of transactions. Specifically, NSCC is not obligated to guarantee
settlement until its member has met its collateral requirements at
NSCC. If NSCC chooses not to guarantee settlement, OCC would engage in
an alternate method of settlement outside of NSCC. This scenario
presents two primary problems. First, the cash required for OCC and its
Clearing Members in certain market conditions to facilitate settlement
outside of NSCC could be significantly more than the amount required if
NSCC were to guarantee the relevant transactions. This is because
settlement of the transactions in the underlying equity securities
outside of NSCC would mean that they would no longer receive the
benefit of netting through the facilities of NSCC. In such a scenario,
the additional collateral required from Clearing Members to support
OCC's continuing settlement guarantee would also have to be
sufficiently liquid to properly manage the risks associated with those
transactions being due on the second business day following the option
exercise, or the relevant futures contract maturity date.
Based on an analysis of scenarios using historical data where it
was assumed that OCC could not settle transactions through the
facilities of NSCC, the worst-case outcome resulted in extreme
liquidity demands--of over $300 billion--for OCC to effect settlement
via an alternative method, e.g., by way of gross broker-to-broker
settlement, as discussed in more detail below. OCC Clearing Members, by
way of their contributions to the OCC Clearing Fund, would bear the
brunt of this demand. Furthermore, there is no guarantee that OCC
Clearing Members could fund the entire amount of any similar real-life
scenarios. By contrast, projected GSPs identified during the study
ranged from approximately $419 million to over $6 billion, also as
discussed in more detail below.
The second primary problem relates to the significant operational
complexities if settlement occurs outside of NSCC. More specifically,
netting through NSCC reduces the volume and value of settlement
obligations. For example, in 2022 it is estimated that netting through
NSCC's continuous net settlement (``CNS'') accounting system \8\
reduced the value of CNS settlement obligations by approximately 98% or
$510 trillion from $519 trillion to $9 trillion. If settlement occurred
outside of NSCC, on a broker-to-broker basis between OCC Clearing
Members, for example, shares would not be netted, and Clearing Members
would have to coordinate directly with each other to settle the
relevant transactions. The operational complexities and uncertainty
associated with alternate means of settlement would impact every market
participant involved in a settlement of OCC-related transactions.
---------------------------------------------------------------------------
\8\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting
Operation) of the NSCC Rules, supra note 4.
---------------------------------------------------------------------------
To address these problems, the Clearing Agencies are proposing to
amend and restate the Existing Accord and make related changes to their
respective rules that would allow OCC to elect to make a cash payment
to NSCC following the default of a Common Member \9\ that would cause
NSCC to guarantee settlement of that Common Member's transactions and,
therefore, cause those transactions to be settled through processing by
NSCC. As part of this proposal, OCC also would enhance its daily
liquidity stress testing processes and procedures to account for the
possibility of OCC making such a payment to NSCC in the event of a
Common Member default. By making these enhancements to its stress
testing, OCC could include the liquid resources necessary to make the
payment in its resource planning. The Clearing Agencies believe that by
NSCC accepting such a payment from OCC the operational efficiencies and
reduced costs related to the settlement of transactions through NSCC
would limit market disruption following a Common Member default because
settlement through NSCC following such a default would be less
operationally complex and would be expected to require less liquidity
and other collateral from market participants than the processes
available to OCC for closing out positions. Additionally, proposed
enhancements by OCC to its liquidity stress testing would add
assurances that OCC could make such a payment in the event of a Common
Member default. The Clearing Agencies believe that their respective
clearing members and all other participants in the markets for which
OCC provides clearance and settlement would benefit from OCC's ability
to choose to make a cash payment to effect settlement through the
facilities of NSCC. This change would provide more certainty around
certain default scenarios and would blunt the financial and operational
burdens market participants could experience in the case of most
clearing member defaults.\10\
---------------------------------------------------------------------------
\9\ A firm that is both an OCC Clearing Member and an NSCC
Member or is an OCC Clearing Member that has designated an NSCC
Member to act on its behalf is referred to herein as a ``Common
Member''. The term ``Clearing Member'' as used herein has the
meaning provided in OCC's By-Laws. See OCC's By-laws & Rules,
available at www.theocc.com/Company-Information/Documents-and-Archives/By-Laws-and-Rules. The term ``Member'' as used herein has
the meaning provided in NSCC's Rules. See supra note 4.
\10\ OCC filed its analysis of the financial impact of alternate
means of settlement as an exhibit to the OCC Filing.
---------------------------------------------------------------------------
Background
OCC acts as a central counterparty clearing agency for U.S.-listed
options and futures on a number of underlying financial assets
including common stocks, currencies and stock indices. In connection
with these services, OCC provides the OCC Guaranty pursuant to its By-
Laws and Rules. NSCC acts as a central counterparty clearing agency for
certain equity securities, corporate and municipal debt, exchange
traded funds and unit investment trusts that are eligible for its
services. Eligible trading activity may be processed through NSCC's CNS
system or Balance Order Account system,\11\ where all eligible compared
and recorded transactions for a particular settlement date are netted
by issue into one net long (buy), net short (sell) or flat position. As
a result, for each day with activity, each Member has a single deliver
or receive obligation for each issue in which it has activity. In
connection with these services, NSCC also provides the NSCC Guaranty
pursuant to Addendum K of the NSCC Rules.
---------------------------------------------------------------------------
\11\ See Rule 8 (Balance Order and Foreign Security Systems) and
Procedure V (Balance Order Accounting Operation) of the NSCC Rules,
supra note 4.
---------------------------------------------------------------------------
OCC's Rules provide that delivery of, and payment for, securities
underlying certain exercised stock options and matured single stock
futures that are physically settled are generally effected through the
facilities of NSCC and are
[[Page 59970]]
not settled through OCC's facilities.\12\ OCC and NSCC executed the
Existing Accord to facilitate, via NSCC's systems, the physical
settlement of securities arising out of options and futures cleared by
OCC. OCC Clearing Members that clear and settle physically settled
options and futures transactions through OCC also are required under
OCC's Rules \13\ to be Members of NSCC or to have appointed or
nominated a Member of NSCC to act on its behalf. As noted above, these
firms are referred to as ``Common Members'' in the Existing Accord.
---------------------------------------------------------------------------
\12\ See Chapter IX of OCC's Rules (Delivery of Underlying
Securities and Payment), supra note 9.
\13\ See OCC Rule 901, supra note 9.
---------------------------------------------------------------------------
Summary of the Existing Accord
The Existing Accord governs the transfer between OCC and NSCC of
responsibility for settlement obligations that involve a delivery and
receipt of stock in the settlement of physically settled options and
futures that are cleared and settled by OCC and for which the
underlying securities are eligible for clearing through the facilities
of NSCC (``E&A/Delivery Transactions''). It also establishes the time
when OCC's settlement guarantee (the ``OCC Guaranty'') ends and NSCC's
settlement guarantee (the ``NSCC Guaranty'') \14\ begins with respect
to E&A/Delivery Transactions. However, in the case of a Common Member
default \15\ NSCC can reject these settlement obligations, in which
case the settlement guaranty would not transfer from OCC to NSCC, and
OCC would not have a right to settle the transactions through the
facilities of NSCC. Instead, OCC would have to engage in alternative
methods of settlement that have the potential to create significant
liquidity and collateral requirements for both OCC and its non-
defaulting Clearing Members.\16\ More specifically, this could involve
broker-to-broker settlement between OCC Clearing Members.\17\ This
settlement method is operationally complex because it requires
bilateral coordination directly between numerous Clearing Members
rather than relying on NSCC to facilitate multilateral netting to
settle the relevant settlement obligations. As described above, it also
potentially could result in significant liquidity and collateral
requirements for both OCC and its non-defaulting Clearing Members
because the transactions would not be netted through the facilities of
NSCC. Alternatively, where NSCC accepts the E&A/Delivery Transactions
from OCC, the OCC Guaranty ends and the NSCC Guaranty takes effect. The
transactions are then netted through NSCC's systems, which allows
settlement obligations for the same settlement date to be netted into a
single deliver or receive obligation. This netting reduces the costs
associated with securities transfers by reducing the number of
securities movements required for settlement and further reduces
operational and market risk. The benefits of such netting by NSCC may
be significant with respect to the large volumes of E&A/Delivery
Transactions processed during monthly options expiry periods.
---------------------------------------------------------------------------
\14\ See Addendum K and Procedure III of the NSCC Rules, supra
note 4.
\15\ A Common Member that has been suspended by OCC or for which
NSCC has ceased to act is referred to as a ``Mutually Suspended
Member.''
\16\ For example, OCC evaluated certain Clearing Member default
scenarios in which OCC assumed that NSCC would not accept the
settlement obligations under the Existing Accord, including the
default of a large Clearing Member coinciding with a monthly options
expiration. OCC has estimated that in such a Clearing Member default
scenario, the aggregate liquidity burden on OCC in connection with
obligations having to be settled on a gross, broker-to-broker basis
could reach a significantly high level. For example, in January
2022, the largest gross broker-to-broker settlement amount in the
case of a larger Clearing Member default would have resulted in
liquidity needs of approximately $384,635,833,942. OCC provided the
data and analysis as an exhibit to the OCC Filing.
\17\ In broker-to-broker settlement, Clearing Member parties are
responsible for coordinating settlement--delivery and payment--among
themselves on a transaction-by-transaction basis. Once transactions
settle, the parties also have an obligation to affirmatively notify
OCC so that OCC can close out the transactions. If either one of or
both of the parties do not notify OCC, the transaction would remain
open on OCC's books indefinitely until the time both parties have
provided notice of settlement to OCC.
---------------------------------------------------------------------------
Pursuant to the Existing Accord, on each trading day NSCC delivers
to OCC a file that identifies the securities, including stocks,
exchange-traded funds and exchange-traded notes, that are eligible (1)
to settle through NSCC and (2) to be delivered in settlement of (i)
exercises and assignments of stock options cleared and settled by OCC
or (ii) delivery obligations from maturing stock futures cleared and
settled by OCC. OCC, in turn, delivers to NSCC a file identifying
securities to be delivered, or received, for physical settlement in
connection with OCC transactions.\18\
---------------------------------------------------------------------------
\18\ Each day that both OCC and NSCC are open for accepting
trades for clearing is referred to as an ``Activity Date'' in the
Existing Accord. Securities eligible for settlement at NSCC are
referred to collectively as ``Eligible Securities'' in the Existing
Accord. Eligible securities are settled at NSCC through NSCC's CNS
Accounting Operation or NSCC's Balance Order Accounting Operation.
---------------------------------------------------------------------------
After NSCC receives the list of eligible transactions from OCC and
NSCC has received all required deposits to the NSCC Clearing Fund from
all Common Members taking into consideration amounts required to
physically settle the OCC transactions, the OCC Guaranty would end and
the NSCC Guaranty would begin with respect to physical settlement of
the eligible OCC-related transactions.\19\ At this point, NSCC is
solely responsible for settling the transactions.\20\
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\19\ The term ``NSCC Clearing Fund'' as used herein has the same
meaning as the term ``Clearing Fund'' as provided in the NSCC Rules.
Procedure XV of the NSCC Rules provides that all NSCC Clearing Fund
requirements and other deposits must be made within one hour of
demand, unless NSCC determines otherwise, supra note 4.
\20\ This is referred to in the Existing Accord as the
``Guaranty Substitution Time,'' and the process of the substitution
of the NSCC Guaranty for the OCC Guaranty with respect to E&A/
Delivery Transactions is referred to as ``Guaranty Substitution.''
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Each day, NSCC is required to promptly notify OCC at the time the
NSCC Guaranty takes effect. If NSCC rejects OCC's transactions due to
an improper submission \21\ or if NSCC ``ceases to act'' for a Common
Member,\22\ NSCC's Guaranty would not take effect for the affected
transactions pursuant to the NSCC Rules.
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\21\ Guaranty Substitution by NSCC (discussed further below)
does not occur with respect to an E&A/Delivery Transaction that is
not submitted to NSCC in the proper format or that involves a
security that is not identified as an Eligible Security on the then-
current NSCC Eligibility Master File.
\22\ 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 an NSCC Member's failure to make a Required
Fund Deposit in a timely fashion. See NSCC Rule 46 (Restrictions on
Access to Services), supra note 4. An NSCC Member for which it has
ceased to act is referred to in the Existing Accord as a
``Defaulting NSCC Member.'' Transactions associated with a
Defaulting NSCC Member are referred to as ``Defaulted NSCC Member
Transactions'' in the Existing Accord.
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NSCC is required to promptly notify OCC if it ceases to act for a
Common Member. Upon receiving such a notice, OCC would not continue to
submit to NSCC any further unsettled transactions that involve such
Common Member, unless authorized representatives of both OCC and NSCC
otherwise consent. OCC would, however, deliver to NSCC a list of all
transactions that have already been submitted to NSCC and that involve
such Common Member. The NSCC Guaranty ordinarily would not take effect
with respect to transactions for a Common Member for which NSCC has
ceased to act, unless both Clearing Agencies agree otherwise. As such,
NSCC does not have any existing contractual obligation to guarantee
such Common Member's transactions. To the extent the NSCC Guaranty does
not take effect, OCC's Guaranty would continue to apply, and, as
described above, OCC would remain responsible for effecting the
settlement
[[Page 59971]]
of such Common Member's transactions pursuant to OCC's By-Laws and
Rules.
As noted above, the Existing Accord does provide that the Clearing
Agencies may agree to permit additional transactions for a Common
Member default (``Defaulted NSCC Member Transactions'') to be processed
by NSCC while subject to the NSCC Guaranty. This optional feature,
however, creates uncertainty for the Clearing Agencies and market
participants about how Defaulted NSCC Member Transactions may be
processed following a Common Member default and also does not provide
NSCC with the ability to collect collateral from OCC that it may need
to close out these additional transactions. While the optional feature
would remain in the agreement as part of this proposal, the proposed
changes to the Existing Accord, as described below, could significantly
reduce the likelihood that it would be utilized.
Proposed Changes to the Existing Accord
The proposed changes to the Existing Accord would permit OCC to
make a cash payment, referred to as the ``Guaranty Substitution
Payment'' or ``GSP,'' to NSCC. This cash payment could occur on either
or both of the day that the Common Clearing Member becomes a Mutually
Suspended Member and on the next business day. Upon NSCC's receipt of
the Guaranty Substitution Payment from OCC, the NSCC Guaranty would
take effect for the Common Member's transactions, and they would be
accepted by NSCC for clearance and settlement.\23\ OCC could use all
Clearing Member contributions to the OCC Clearing Fund \24\ and certain
Margin Assets \25\ of a defaulted Clearing Member to pay the GSP, as
described in more detail below.
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\23\ Acceptance of such transactions by NSCC would be subject to
NSCC's standard validation criteria for incoming trades. See NSCC
Rule 7, supra note 4.
\24\ The term ``OCC Clearing Fund'' as used herein has the same
meaning as the term ``Clearing Fund'' in OCC's By-Laws, supra note
9.
\25\ The term ``Margin Assets'' as used herein has the same
meaning as provided in OCC's By-Laws, supra note 9.
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NSCC would calculate the Guaranty Substitution Payment as the sum
of the Mutually Suspended Member's unpaid required deposit to the NSCC
Clearing Fund (``Required Fund Deposit'') \26\ and the unpaid
Supplemental Liquidity Deposit \27\ obligation that is attributable to
E&A/Delivery Transactions. The proposed changes to the Existing Accord
define how NSCC would calculate the Guaranty Substitution Payment.
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\26\ The Required Fund Deposit is calculated pursuant to Rule 4
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other
Matters) of the NSCC Rules. See supra note 4.
\27\ Under the NSCC Rules, NSCC collects additional cash
deposits from those Members who would generate the largest
settlement debits in stressed market conditions, referred to as
``Supplemental Liquidity Deposits'' or ``SLD.'' See Rule 4A of the
NSCC Rules, supra note 4.
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More specifically, NSCC would first determine how much of the
member's unpaid Clearing Fund requirement would be included in the GSP.
NSCC would look at the day-over-day change in gross market value of the
Mutually Suspended Member's positions as well as day-over-day change in
the member's NSCC Clearing Fund requirements. Based on such changes,
NSCC would identify how much of the change in the Clearing Fund
requirement was attributable to E&A/Delivery Transactions coming from
OCC. If 100 percent of the day-over-day change in the NSCC Clearing
Fund requirement is attributable to activity coming from OCC, then the
GSP would include 100 percent of the member's NSCC Clearing Fund
requirement. If less than 100 percent of the change is attributable to
activity coming from OCC, then the GSP would include that percent of
the member's unpaid NSCC Clearing Fund requirement attributable to
activity coming from OCC. NSCC would then determine the portion of the
member's unpaid SLD obligation that is attributable to E&A/Delivery
Transactions. As noted above, the GSP would be the sum of these two
amounts. A member's NSCC Clearing Fund requirement and SLD obligation
at NSCC are designed to address the credit and liquidity risks that a
member poses to NSCC. The GSP calculation is intended to assess how
much of a member's obligations arise out of activity coming from OCC so
that the amount paid by OCC is commensurate with the risk to NSCC of
guarantying such activity.
To permit OCC to anticipate the potential resources it would need
to pay the GSP for a Mutually Suspended Member, each business day NSCC
would provide OCC with (1) Required Fund Deposit and Supplemental
Liquidity Deposit obligations, as calculated pursuant to the NSCC
Rules, and (2) the gross market value of the E&A/Delivery Transactions
and the gross market value of total Net Unsettled Positions (as such
term is defined in the NSCC Rules). On options expiry days that fall on
a Friday, NSCC would also provide OCC with information regarding
liquidity needs and resources, and any intraday SLD requirements of
Common Members. Such information would be delivered pursuant to the
ongoing information sharing obligations under the Existing Accord (as
proposed to be amended) and the Service Level Agreement (``SLA'') to
which both NSCC and OCC are a party pursuant to Section 2 of the
Existing Accord.\28\ The SLA addresses specifics regarding the time,
form and manner of various required notifications and actions described
in the Accord and also includes information applicable under the
Accord.
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\28\ The revised SLA has been filed as an exhibit to this
filing.
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NSCC and OCC believe the proposed calculation of the Required Fund
Deposit portion of the GSP is appropriate because it is designed to
provide a reasonable proxy for the impact of the Mutually Suspended
Member's E&A/Delivery Transactions on its Required Fund Deposit. While
impact study data did show that the proposed calculation could result
in a GSP that overestimates or underestimates the Required Fund Deposit
attributable to the Mutually Suspended Member's E&A/Delivery
Transactions,\29\ current technology constraints prohibit NSCC from
performing a precise calculation of the GSP on a daily basis for every
Common Member.\30\
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\29\ The impact study was conducted at the Commission's request
to cover a three-day period and reviewed the ten Common Members with
the largest Required Fund Deposits attributable to the Mutually
Suspended Member's E&A/Delivery Transactions. Over the 30 instances
in the study, approximately 15 instances resulted in an
underestimate of the Required Fund Deposit by an average of
approximately $112,900,926; four instances where the proxy
calculation was the same as the Required Fund Deposit; and eleven
instances of an overestimate of the Required Fund Deposit by an
average of approximately $59,654,583. NSCC filed additional detail
related to the referenced study as an exhibit to this filing.
\30\ OCC and NSCC have agreed that performing the necessary
technology build at this time would delay the implementation of this
proposal. Therefore, NSCC would consider incorporating those
technology updates into future revisions to the Accord, for example
in connection with a move to a shorter settlement cycle in the U.S.
equities markets.
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Implementing the ability for OCC to make the GSP and cause the E&A/
Delivery Transactions to be cleared and settled through NSCC would
promote the ability of OCC and NSCC to be efficient and effective in
meeting the requirements of the markets they serve. This is because
data demonstrates that the expected size of the GSP would be smaller
than the amount of cash that would otherwise be needed by OCC and its
Clearing Members to facilitate settlement outside of NSCC. More
specifically, based on a historical study
[[Page 59972]]
of alternate means of settlement available to OCC from September 2021
through September 2022, in the event that NSCC did not accept E&A/
Delivery Transactions, the worst-case scenario peak liquidity need OCC
identified was $384,635,833,942 for settlement to occur on a gross
broker-to-broker basis. OCC estimates that the corresponding GSP in
this scenario would have been $863,619,056. OCC also analyzed several
other large liquidity demand amounts that were identified during the
study if OCC effected settlement on a gross broker-to-broker basis.\31\
These liquidity demand amounts and the largest liquidity demand amount
OCC observed of $384,635,833,942 substantially exceed the amount of
liquid resources currently available to OCC.\32\ By contrast, projected
GSPs identified during the study ranged from $419,297,734 to
$6,281,228,428. For each of these projected GSP amounts, OCC observed
that the Margin Assets and OCC Clearing Fund contributions that would
have been required of Clearing Members in these scenarios would have
been sufficient to satisfy the amount of the projected GSPs.
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\31\ OCC filed additional detail related to the referenced study
as an exhibit to the OCC Filing.
\32\ As of Mar. 31, 2023, OCC held approximately $10.37 billion
in qualifying liquid resources. See OCC Quantitative Disclosure,
Jan.-Mar. 2023, available at www.theocc.com/risk-management/pfmi-disclosures.
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To help address the current technology constraint that prohibits
NSCC from performing a precise calculation of the GSP on a daily basis
for every Common Member, proposed Section 6(b)(i) of the Existing
Accord and related Section 7(d) of the SLA would provide that, with
respect to a Mutually Suspended Member, either NSCC or OCC may require
that the Required Fund Deposit portion of the GSP be re-calculated by
calculating the Required Fund Deposit for the Mutually Suspended Member
both before and after the delivery of the E&A/Delivery Transactions and
utilize the precise amount that is attributable to that activity in the
final GSP. If such a recalculation is required, the result would
replace the Required Fund Deposit component of the GSP that was
initially calculated. The SLD component of the GSP would be unchanged
by such recalculation.
As the above demonstrates, the GSP is intended to address the
significant collateral and liquidity requirements that could be
required of OCC Clearing Members in the event of a Common Member
default.
Allowing OCC to make a GSP payment also is intended to allow for
settlement processing to take place through the facilities of NSCC to
retain operational efficiencies associated with the settlement process.
Alternative settlement means such as broker-to broker settlement add
operational burdens because transactions would need to be settled
individually on one-off bases. In contrast, NSCC's netting reduces the
volume and value of settlement obligations that would need to be closed
out in the market.\33\ Because the clearance and settlement of
obligations through NSCC's facilities following a Common Member
default, including netting of E&A/Delivery Transactions with a Common
Member's positions at NSCC would avoid these potentially significant
operational burdens for OCC and its Clearing Members, OCC and NSCC
believe that the proposed changes would limit market disruption
relating to a Common Member default. NSCC netting significantly reduces
the total number of obligations that require the exchange of money for
settlement. Allowing more activity to be processed through NSCC's
netting systems would minimize risk associated with the close out of
those transactions following the default of a Common Member.
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\33\ CNS reduces the value of obligations that require financial
settlement by approximately 98 percent, where, for example,
approximately $519 trillion in trades could be netted down to
approximately $9 trillion in net settlements.
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Amending the Existing Accord to define the terms and conditions
under which Guaranty Substitution may occur, at OCC's election, with
respect to Defaulted NSCC Member Transactions after a Common Member
becomes a Mutually Suspended Member would also provide more certainty
to both the Clearing Agencies and market participants generally about
how a Mutually Suspended Member's Defaulted NSCC Member Transactions
may be processed.
NSCC and OCC have agreed it is appropriate to limit the
availability of the proposed provision to the day of the Common Member
default and the next business day because, based on historical cease to
act events and simulations of cease to act events involving Common
Members, most activity of a Mutually Suspended Member is closed out on
those days.\34\ Furthermore, the benefits of netting through NSCC's
systems would be reduced for any activity submitted to NSCC after that
time.
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\34\ OCC filed data regarding simulated events as an exhibit to
the OCC Filing.
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To implement these proposed changes to the Existing Accord, OCC and
NSCC propose to make the following changes.
Section 1--Definitions
First, new definitions would be added, and existing definitions
would be amended in Section 1, which is the Definitions section.
The new defined terms would be as follows.
The term ``Close Out Transaction'' would be defined to
mean ``the liquidation, termination or acceleration of one or more
exercised or matured Stock Options \35\ or Stock Futures \36\
contracts, securities contracts, commodity contracts, forward
contracts, repurchase agreements, swap agreements, master netting
agreements or similar agreements of a Mutually Suspended Member
pursuant to OCC Rules 1101 through 1111 and/or NSCC Rule 18.'' This
proposed definition would make it clear that the payment of the
Guaranty Substitution Payment and NSCC's subsequent acceptance of
Defaulted NSCC Member Transactions for clearance and settlement are
intended to fall within the ``safe harbors'' provided in the Bankruptcy
Code,\37\ the Securities Investor Protection Act,\38\ and other similar
laws.
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\35\ The term ``Stock Options'' is defined in the Existing
Accord within the definition of ``Eligible Securities'' and refers
to options issued by OCC.
\36\ The term ``Stock Futures'' is defined in the Existing
Accord within the definition of ``Eligible Securities,'' described
below, and refers to stock futures contracts cleared by OCC.
\37\ 11 U.S.C. 101 et seq., including Sec. Sec. 362(b)(6), (7),
(17), (25) and (27) (exceptions to the automatic stay), Sec. Sec.
546(e)-(g) and (j) (limitations on avoiding powers), and Sec. Sec.
555-556 and 559-562 (contractual right to liquidate, terminate or
accelerate certain contracts).
\38\ 15 U.S.C. 78aaa-lll, including Sec. 78eee(b)(2)(C)
(exceptions to the stay).
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The term ``Guaranty Substitution Payment'' would be
defined to mean ``an amount calculated by NSCC in accordance with the
calculations set forth in Appendix A [to the Existing Accord (as
proposed to be amended)], to include two components: (i) a portion of
the Mutually Suspended Member's Required Fund Deposit deficit to NSCC
at the time of the cease to act and (ii) a portion of the Mutually
Suspended Member's unpaid Supplemental Liquidity Deposit obligation at
the time of the cease to act.''
The term ``Mutually Suspended Member'' would mean ``any
OCC Participating Member \39\ that has been
[[Page 59973]]
suspended by OCC that is also an NSCC Participating Member \40\ for
which NSCC has ceased to act.''
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\39\ The term ``OCC Participating Member'' is defined in the
Existing Accord to mean ``(i) a Common Member; (ii) an OCC Clearing
Member that is an `Appointing Clearing Member' (as defined in
Article I of OCC's By-Laws) and has appointed an Appointed Clearing
Member that is an NSCC Member to effect settlement of E&A/Delivery
Transactions through NSCC on the Appointing Clearing Member's
behalf; (iii) an OCC Clearing Member that is an Appointed Clearing
Member; or (iv) a Canadian Clearing Member.'' No changes are
proposed to this definition.
\40\ The term ``NSCC Participating Member'' is defined in the
Existing Accord to mean ``(i) a Common Member; (ii) an NSCC Member
that is an `Appointed Clearing Member' (as defined in Article I of
OCC's By-Laws); or (iii) [The Canadian Depository for Securities
Limited, or ``CDS'']. For the avoidance of doubt, the Clearing
Agencies agree that CDS is an NSCC Member for purposes of this
Agreement.'' No changes are proposed to this definition.
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The term ``Required Fund Deposit'' would have the meaning
``provided in Rule 4 of NSCC's Rules and Procedures (or any replacement
or substitute rule), the version of which, with respect to any
transaction or obligation incurred that is the subject of this
Agreement, is in effect at the time of such transaction or incurrence
of obligation.''
The term ``Supplemental Liquidity Deposit'' would have the
meaning ``provided in Rule 4A of NSCC's Rules and Procedures (or any
replacement or substitute rule), the version of which, with respect to
any transaction or obligation incurred that is the subject of this
Agreement, is in effect at the time of such transaction or incurrence
of obligation.''
The defined terms that would be amended in Section 1 of the
Existing Accord are as follows.
The definition for the term ``E&A/Delivery Transaction''
generally contemplates a transaction that involves a delivery and
receipt of stock in the settlement of physically settled options and
futures that are cleared and settled by OCC and for which the
underlying securities are eligible for clearing through the facilities
of NSCC. The definition would be amended to make clear that it would
apply in respect of a ``Close Out Transaction'' of a ``Mutually
Suspended Member'' as those terms are proposed to be defined (described
above).
The definition for the term ``Eligible Securities''
generally contemplates the securities that are eligible to be used for
physical settlement under the Existing Accord. The term would be
modified to clarify that this may include, for example, equities,
exchange-traded funds and exchange-traded notes that are underlying
securities for options issued by OCC.
Section 6--Default by an NSCC Participating Member or OCC Participating
Member
Section 6 of the Existing Accord provides that NSCC is required to
provide certain notice to OCC in circumstances in which NSCC has ceased
to act for a Common Member. Currently, Section 6(A)(ii) of the Existing
Accord also requires NSCC to notify OCC if a Common Member has failed
to satisfy its Clearing Fund obligations to NSCC, but for which NSCC
has not yet ceased to act. In practice, this provision would trigger a
number of obligations (described below) when a Common Member fails to
satisfy its NSCC Clearing Fund obligations for any reason, including
those due to an operational delay. Therefore, OCC and NSCC are
proposing to remove the notification requirement under Section 6(A)(ii)
from the Existing Accord. Under Section 7(d) of the Existing Accord,
NSCC and OCC are required to provide each other with general
surveillance information regarding Common Members, which includes
information regarding any Common Member that is considered by the other
party to be in distress. Therefore, if a Common Member has failed to
satisfy its NSCC Clearing Fund obligations and NSCC believes this
failure is due to, for example, financial distress and not, for
example, due to a known operational delay, and NSCC has not yet ceased
to act for that Common Member, such notification to OCC would still
occur but would be done pursuant to Section 7(d) of the Existing Accord
(as proposed to be amended), and not Section 6(A)(ii). Notifications
under Section 6 of the Existing Accord (as proposed to be amended)
would be limited to instances when NSCC has actually ceased to act for
a Common Member pursuant to the NSCC Rules.\41\
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\41\ See Rule 46 (Restrictions on Access to Services) of the
NSCC Rules, supra note 4.
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Following notice by NSCC that it has ceased to act for a Common
Member, OCC is obligated in turn to deliver to NSCC a list of all E&A/
Delivery Transactions (excluding certain transactions for which
Guaranty Substitution does not occur) involving the Common Member.\42\
This provision would be amended to clarify that it applies in respect
of such E&A/Delivery Transactions for the Common Member for which the
NSCC Guaranty has not yet attached--meaning that Guaranty Substitution
has not yet occurred.
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\42\ The section of the Existing Accord that addresses
circumstances in which NSCC ceases to act and/or an NSCC Member
defaults is currently part of Section 6(a). It would be re-
designated as Section 6(b) for organizational purposes.
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As described above in the summary of the Existing Accord, where
NSCC has ceased to act for a Common Member, the Existing Accord refers
to the Common Member as the Defaulting NSCC Member and also refers to
the relevant E&A/Delivery Transactions in connection with that
Defaulting NSCC Member for which a Guaranty Substitution has not yet
occurred as Defaulted NSCC Member Transactions.
If the Defaulting NSCC Member is also suspended by OCC, it would be
covered by the proposed definition that is described above for a
Mutually Suspended Member. For such a Mutually Suspended Member, the
proposed changes in Section 6(b) would provide that NSCC, by a time
agreed upon by the parties, would provide OCC with the amount of the
Guaranty Substitution Payment as calculated by NSCC and related
documentation regarding the calculation. The Guaranty Substitution
Payment would be calculated pursuant to NSCC's Rules as that portion of
the unmet Required Fund Deposit \43\ and Supplemental Liquidity Deposit
\44\ obligations of the Mutually Suspended Member attributable to the
Defaulted NSCC Member Transactions. By a time agreed upon by the
parties,\45\ OCC would then be required to either notify NSCC of its
intent to make the full amount of the Guaranty Substitution Payment to
NSCC or notify NSCC that it would not make the Guaranty Substitution
Payment. If OCC makes the full amount of the Guaranty Substitution
Payment, NSCC's guaranty would take effect at the time of NSCC's
receipt of that payment and the OCC Guaranty would end.
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\43\ The Required Fund Deposit is calculated pursuant to Rule 4
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other
Matters) of the NSCC Rules, see supra note 4.
\44\ The Supplemental Liquidity Deposit is calculated pursuant
to Rule 4A (Supplemental Liquidity Deposits) of the NSCC Rules, see
supra note 4.
\45\ The time by which OCC would be required to notify NSCC of
its intent would be defined in the Service Level Agreement. As of
the time of this filing, the parties intend to set that time as one
hour after OCC's receipt of the calculated Guaranty Substitution
Payment from NSCC.
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The proposed changes would further provide that if OCC does not
suspend the Common Member (such that the Common Member would therefore
not meet the proposed definition of a Mutually Suspended Member) or if
OCC elects to not make the full amount of the Guaranty Substitution
Payment to NSCC, then all of the Defaulted NSCC Member Transactions
would be exited from NSCC's CNS Accounting Operation and/or NSCC's
Balance Order Accounting Operation, as applicable, and Guaranty
Substitution would not occur in respect thereof. Therefore, NSCC would
continue to have no obligation to guarantee or settle the Defaulted
NSCC Member Transactions, and the OCC Guaranty would continue
[[Page 59974]]
to apply to them pursuant to OCC's By-Laws and Rules.\46\
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\46\ Under the current and proposed terms of the Existing
Accord, NSCC would be permitted to voluntarily guaranty and settle
the Defaulted NSCC Member Transactions.
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Proposed changes to the Existing Accord would also address the
application of any Guaranty Substitution Payment by NSCC. Specifically,
new Section 6(d) would provide that any Guaranty Substitution Payment
made by OCC may be used by NSCC to satisfy any liability or obligation
of the Mutually Suspended Clearing Member to NSCC on account of
transactions involving the Mutually Suspended Clearing Member for which
the NSCC Guaranty applies and to the extent that any amount of assets
otherwise held by NSCC for the account of the Mutually Suspended Member
(including any Required Fund Deposit or Supplemental Liquidity Deposit)
are insufficient to satisfy its obligations related to transactions for
which the NSCC Guaranty applies. Proposed changes to Section 6(d) would
further provide for the return to OCC of any unused portion of the GSP.
With regard to the portion of the Guaranty Substitution Payment that
corresponds to a member's Supplemental Liquidity Deposit obligation,
NSCC must return any unused amount to OCC within fourteen (14) days
following the conclusion of NSCC's settlement, close-out and/or
liquidation. With regard to the portion of the Guaranty Substitution
Payment that corresponds to a Required Fund Deposit, NSCC must return
any unused amount to OCC under terms agreed to by the parties.\47\
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\47\ Such amounts would be returned to OCC as appropriate and in
accordance with a Netting Contract and Limited Cross-Guaranty, by
and among The Depository Trust Company, Fixed Income Clearing
Corporation, NSCC and OCC, dated as of Jan. 1, 2003, as amended.
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Other Proposed Changes
Certain other technical changes are also proposed to the Existing
Accord to conform it to the proposed changes described above. For
example, the preamble and the ``whereas'' clauses in the Preliminary
Statement would be amended to clarify that the agreement is an amended
and restated agreement and to summarize that the agreement would be
modified to contemplate the Guaranty Substitution Payment structure.
Section 1(c), which addresses the terms in the Existing Accord that are
defined by reference to NSCC's Rules and Procedures and OCC's By-Laws
and Rules would be modified to state that such terms would have the
meaning then in effect at the time of any transaction or obligation
that is covered by the agreement rather than stating that such terms
have the meaning given to them as of the effective date of the
agreement. This change is proposed to help ensure that the meaning of
such terms in the agreement would not become inconsistent with the
meaning in the NSCC Rules and/or OCC By-Laws and Rules, as they may be
modified through proposed rule changes with the Commission.
Technical changes would be made to Sections 3(d) and (e) of the
Existing Accord to provide that those provisions would not apply in the
event new Section 6(b) described above, is triggered. Section 3(d)
generally provides that OCC would no longer submit E&A/Delivery
Transactions to NSCC involving a suspended OCC Participating Member.
Similarly, Section 3(e) generally provides that OCC would no longer
submit E&A/Delivery Transactions to NSCC involving an NSCC
Participating Member for which NSCC has ceased to act. A proposed
change would also be made to Section 5 of the Existing Accord to modify
a reference to Section 5 of Article VI of OCC's By-Laws to instead
provide that the updated cross-reference should be to Chapter IV of
OCC's Rules.
Section 5 would also be amended to clarify that Guaranty
Substitution occurs when NSCC has received both the Required Fund
Deposit and Supplemental Liquidity Deposit, as calculated by NSCC in
its sole discretion, from Common Members. The addition of the
collection of the Supplemental Liquidity Deposit to the definition of
the Guaranty Substitution Time in this Section 5 would reflect OCC and
NSCC's agreement that both amounts are components of the Guaranty
Substitution Payment (as described above) and would make this
definition consistent with that agreement.
In Section 7 of the Existing Accord, proposed changes would be made
to provide that NSCC would provide to OCC information regarding a
Common Member's Required Fund Deposit and Supplemental Liquidity
Deposit obligations, to include the Supplemental Liquidity Deposit
obligation in this notice requirement, and additionally that NSCC would
provide OCC with information regarding the potential Guaranty
Substitution Payment for the Common Member. On an options expiration
date that is a Friday, NSCC would, by close of business on that day,
also provide to OCC information regarding the intra-day liquidity
requirement, intra-day liquidity resources and intra-day calls for a
Common Member that is subject to a Supplemental Liquidity Deposit at
NSCC.
Finally, Section 14 of the Existing Accord would be modernized to
provide that notices between the parties would be provided by email
rather than by hand, overnight delivery service or first-class mail.
Proposed Changes to NSCC Rules
In connection with the proposed changes to the Existing Accord,
NSCC is also proposing changes to its Rules, described below.
First, NSCC would amend Rule 18 (Procedures for When the
Corporation Ceases to Act), which describes the actions NSCC would take
with respect to the transactions of a Member after NSCC has ceased to
act for that Member.\48\ The proposed changes would include a new
Section 9(a) to specify that following a Member default, NSCC may
continue to act and provide the NSCC Guaranty pursuant to a ``Close-Out
Agreement'' such as the Existing Accord (as it is proposed to be
amended); \49\ a new Section 9(b) to specify that any transactions
undertaken pursuant to a Close-Out Agreement would be treated as having
been received, provided or undertaken for the account of the Member for
which NSCC has ceased to act, but that any deposit, payment, financial
assurance or other accommodation provided to NSCC pursuant to a Close-
Out Agreement shall be returned or released as provided for in the
agreement; and a new Section 9(c), to provide that NSCC shall have a
lien upon, and may apply, any property of the defaulting Member in
satisfaction of any obligation, liability or loss that relates to a
transaction undertaken or service provided pursuant to a Close-Out
Agreement.
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\48\ See supra note 4.
\49\ The Existing Accord is currently the only agreement that
would be considered a ``Close-Out Agreement'' under this new Section
9(b).
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NSCC would also propose clarifications to Sections 4, 6(b)(iii)(B)
and 8 to use more precise references to the legal entity described in
those sections of this Rule.
Second, NSCC would amend Section B of Procedure III and Addendum K
of the NSCC Rules \50\ to provide that the NSCC Guaranty would not
attach to Defaulted NSCC Member Transactions except as provided for in
the Existing Accord (as it is proposed to be amended), and that the
NSCC Guaranty attaches, with respect to obligations arising from the
exercise or assignment of OCC options settled at NSCC or stock futures
contracts cleared by OCC, as
[[Page 59975]]
provided for in the Existing Accord (as it is proposed to be amended)
or other arrangement with OCC. Finally, the proposed changes to
Procedure III would clarify that Guaranty Substitution occurs when NSCC
has received both the Required Fund Deposit and Supplemental Liquidity
Deposit, consistent with the proposed revisions to Section 5 of the
Current Accord, described above. As noted above, the proposal to
include the collection of the Supplemental Liquidity Deposit in
connection with the Guaranty Substitution reflect OCC and NSCC's
agreement that both amounts are components of the Guaranty Substitution
Payment.
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\50\ See id.
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Collectively, these proposed changes would establish and clarify
the rights of both NSCC and a Member for which NSCC has ceased to act
with respect to property held by NSCC and the operation and
applicability of any Close-Out Agreement, and would make it clear that
any payments received pursuant to a Close-Out Agreement and NSCC's
acceptance of a Mutually Suspended Member's transactions for clearance
and settlement pursuant to a Close-Out Agreement are intended to fall
within the Bankruptcy Code and Securities Investor Protection Act
``safe harbors.''
2. Statutory Basis
NSCC believes the proposed changes to the Existing Accord and its
Rules are consistent with the requirements of the Exchange Act and the
rules and regulations thereunder applicable to a registered clearing
agency. In particular, NSCC believes the proposed change is consistent
with Section 17A(b)(3)(F) of the Act \51\ and Rules 17Ad-22(e)(7) and
(20), each promulgated under the Act,\52\ for the reasons described
below.
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\51\ 15 U.S.C. 78q-1(b)(3)(F).
\52\ 17 CFR 240.17Ad-22(e)(7), (20).
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Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that the rules of a clearing agency be designed, in general, to
protect investors and the public interest.\53\ As described above, NSCC
believes that providing OCC with the ability to make a Guaranty
Substitution Payment to it with respect to any unmet obligations of a
Mutually Suspended Member would promote prompt and accurate clearance
and settlement because it would allow relevant securities settlement
obligations to be accepted by NSCC for clearance and settlement, which
would reduce the size of the related settlement obligations for both
the Mutually Suspended Member and its assigned delivery counterparties
through netting through NSCC's CNS Accounting Operation and/or NSCC's
Balance Order Accounting Operation. Further, this proposal would reduce
the circumstances in which OCC's Guaranty would continue to apply to
these settlement obligations, to be settled on a broker-to-broker basis
between OCC Clearing Members, which could result in substantial
collateral and liquidity requirements for OCC Clearing Members and
that, in turn, could also increase a risk of default by the affected
OCC Clearing Members at a time when a Common Member has already been
suspended. For these reasons, NSCC believes that the proposed changes
would be beneficial to and protective of OCC, NSCC, their participants,
and the markets that they serve and that the proposed changes are
therefore designed, in general, to protect investors and the public
interest.
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\53\ 15 U.S.C. 78q-1(b)(3)(F).
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Rule 17Ad-22(e)(7) requires NSCC, in relevant part, to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to effectively measure, monitor and manage the
liquidity risk that arises in or is borne by NSCC and to, among other
things, address foreseeable liquidity shortfalls that would not be
covered by NSCC's liquid resources.\54\ NSCC believes the proposal is
consistent the requirements of Rule 17Ad-22(e)(7) because, any increase
to NSCC's liquidity needs that may be created by applying the NSCC
Guaranty to Defaulted Member Transactions would occur with a
simultaneous increase to its liquidity resources in the form of the
Guaranty Substitution Payment. Therefore, NSCC believes it will
continue to adhere to the requirements of Rule 17Ad-22(e)(7) under the
proposal.
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\54\ 17 CFR 240.17Ad-22(e)(7).
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Finally, Rule 17Ad-22(e)(20) requires NSCC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to identify, monitor and manage risks related to any link that
NSCC establishes with one or more other clearing agencies, financial
market utilities, or trading markets.\55\ The Existing Accord between
OCC and NSCC is one such link. As described above, NSCC believes that
implementation of the proposal would help manage the risks presented by
the settlement link because, when the proposed provision is triggered
by OCC, NSCC would receive the Guaranty Substitution Payment with
respect to the relevant securities settlement obligations.
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\55\ 17 CFR 240.17Ad-22(e)(20).
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \56\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. NSCC does not
believe that the proposal would impose any burden on competition. This
is because it would implement changes that would permit OCC in certain
circumstances to make a Guaranty Substitution Payment to NSCC so that
the NSCC Guaranty would take effect for the Defaulted NSCC Member
Transactions, and the OCC Guaranty would end. The proposed changes
would not inhibit access to NSCC's services in any way, applies to all
Members and does not disadvantage or favor any particular user in
relationship to another user. Accordingly, NSCC does not believe that
the proposed rule change would have any impact or impose a burden on
competition.
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\56\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
NSCC has not received or solicited any written comments relating to
this proposal. If any written comments are received, they will be
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at www.sec.gov/regulatory-actions/how-to-submit-comments. General questions regarding
the rule filing process or logistical questions regarding this filing
should be directed to the Main Office of the Commission's Division of
Trading and Markets at [email protected] or 202-551-5777.
NSCC reserves the right not to respond to any comments received.
[[Page 59976]]
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NSCC-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.
All submissions should refer to File Number SR-NSCC-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 NSCC and on DTCC's website
(https://dtcc.com/legal/sec-rule-filings.aspx).
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-NSCC-2023-007 and should
be submitted on or before September 20, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\57\
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\57\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-18670 Filed 8-29-23; 8:45 am]
BILLING CODE 8011-01-P