Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change Relating to the Schedule of Haircuts for Eligible Clearing Fund Securities, 68777-68784 [2023-21936]
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Federal Register / Vol. 88, No. 191 / Wednesday, October 4, 2023 / Notices
suspended. In addition, the Commission
is instituting proceedings to determine
whether the proposed rule change
should be approved or disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.53
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–22031 Filed 10–3–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98589; File No. SR–NSCC–
2023–009]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Proposed Rule Change Relating to the
Schedule of Haircuts for Eligible
Clearing Fund Securities
September 28, 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
September 22, 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 primarily 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
modifications to NSCC’s Rules &
Procedures (‘‘Rules’’) 3 in order to
modify the schedule of haircuts for
Eligible Clearing Fund Securities and
remove it from Procedure XV of the
Rules (‘‘Procedure XV’’), and make other
clarifying changes, as described in
greater detail below.
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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
53 17
CFR 200.30–3(a)(57).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Capitalized terms not defined herein are defined
in the Rules, available at www.dtcc.com/∼/media/
Files/Downloads/legal/rules/nscc_rules.pdf.
1 15
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any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
NSCC is proposing to modify the
schedule of haircuts for Eligible
Clearing Fund Securities, and to remove
it and the related concentration limits
from Procedure XV, and make other
clarifying changes, as described in
greater detail below.
Background
As part of its market risk management
strategy, NSCC manages its credit
exposure to members by determining
the appropriate Required Fund Deposits
to the Clearing Fund and monitoring its
sufficiency, as provided for in the
Rules.4 The Required Fund Deposit
serves as each member’s margin.
The objective of a member’s Required
Fund Deposit is to mitigate potential
losses to NSCC associated with
liquidating a member’s portfolio in the
event NSCC ceases to act for that
member (hereinafter referred to as a
‘‘default’’).5 The aggregate of all
members’ Required Fund Deposits
constitutes the Clearing Fund of NSCC.
NSCC would access its Clearing Fund
should a defaulting member’s own
Required Fund Deposit be insufficient
to satisfy losses to NSCC caused by the
liquidation of that member’s portfolio.
The Clearing Fund reduces the risk that
NSCC would need to mutualize any
losses among non-defaulting members
during the liquidation process.
Under Rule 4 (Clearing Fund),
members are required to make deposits
to the Clearing Fund, with the amount
of each member’s Required Fund
Deposit being determined by NSCC in
accordance with Rule 4. A member may
satisfy its Required Fund Deposit with
cash or an open account indebtedness
4 See Rule 4 (Clearing Fund) and Procedure XV
(Clearing Fund Formula and Other Matters), supra
note 3. NSCC’s market risk management strategy is
designed to comply with Rule 17Ad–22(e)(4) under
the Act, where these risks are referred to as ‘‘credit
risks.’’ 17 CFR 240.17Ad–22(e)(4).
5 The Rules identify when NSCC may cease to act
for a member and the types of actions NSCC may
take. For example, NSCC may suspend a firm’s
membership with NSCC or prohibit or limit a
member’s access to NSCC’s services in the event
that member defaults on a financial or other
obligation to NSCC. See Rule 46 (Restrictions on
Access to Services), supra note 3.
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secured by Eligible Clearing Fund
Securities.6 Eligible Clearing Fund
Securities, comprised of certain agency,
mortgage-backed, and Treasury
securities, are valued based on the prior
Business Day’s closing market price,
less a haircut, and may be subject to a
concentration limit.7 Haircuts are used
to protect NSCC and its members from
price fluctuations, i.e., if NSCC is
required to liquidate collateral of an
insolvent member and such collateral is
worth less at the time of liquidation
than when it is pledged to NSCC.
Concentration limits are intended to
reduce NSCC’s risk by limiting the
percentage of certain types of Eligible
Clearing Fund Securities pledged by
members to secure the Clearing Fund
deposits. This is because when a
member’s portfolio contains large net
unsettled positions in a particular group
of securities with a similar risk profile
or in a particular asset type, such
securities could present additional risk
to NSCC.
Currently, collateral haircuts
applicable to relevant security types and
remaining maturity terms are specified
as fixed percentages in Section III.(A) of
Procedure XV (‘‘Section III.(A)’’).8 The
sufficiency of collateral haircuts is
evaluated through use of back-tests,
stress-tests and market observations. To
ensure the sufficiency of the collateral
haircuts, a backtesting analysis of
members’ collateral deposits is
conducted daily, and summary reviews
are completed quarterly, each by the
NSCC market risk group pursuant to
NSCC’s internal market risk
management policies and procedures.
NSCC performs daily backtesting of
collateral by comparing the collateral
haircut for each member in simulated
liquidations with the member’s actual
collateral held on deposit at NSCC. Any
exceptions noted are escalated to
management daily to assess the root
cause and determine whether further
analysis and/or review would be
appropriate. Specifically, if NSCC
determines that a particular security
may present inherent volatility and/or
liquidity risks that could likely result in
an erosion in the value of the security
exceeding the applicable collateral
6 See
Rule 4, Section 1, supra note 3.
Rule 1 (Definitions) for applicable
definitions, including Eligible Clearing Fund
Securities and its components, which are Eligible
Clearing Fund Agency Securities, Eligible Clearing
Fund Mortgage-Backed Securities, and Eligible
Clearing Fund Treasury Securities. Supra note 3.
8 See Section III.(A) of Procedure XV, supra note
3. Section III.(A) was last modified in 2011 in order
to conform the haircuts to requirements of NSCC’s
lenders under its credit facilities. See Securities
Exchange Act Release No. 64487 (May 13, 2011), 76
FR 29019 (May 19, 2011) (SR–NSCC–2011–02).
7 See
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haircut, ad hoc reviews may be
conducted by risk management
pursuant to NSCC’s internal market risk
management procedures. On a quarterly
basis, NSCC reviews and identifies
instances where the simulated losses
from available historical stress testing
scenario dates have exceeded the
collateral haircut values. In addition,
each quarter, NSCC reviews the
composition of the Eligible Clearing
Fund Securities that members have
pledged to secure their Required Fund
Deposits in order to assess the
sufficiency of the collateral haircuts
applied and whether any haircut
changes would be needed.
In addition to collateral haircuts,
NSCC applies concentration limits to
certain Eligible Clearing Fund
Securities. Currently, the concentration
limits applicable to certain Eligible
Clearing Fund Securities are specified
in subsections (a) and (b) of Section
II.(A)1. of Procedure XV (‘‘Section
II.(A)1.’’).9 Specifically, subsection (a)
provides any deposits of Eligible
Clearing Fund Agency Securities or
Eligible Clearing Fund Mortgage-Backed
Securities in excess of 25 percent of a
member’s Required Fund Deposit will
be subject to a haircut that is twice the
amount of the percentage noted in
Section III.(A). In addition, footnote 7 of
subsection (a) of Section II.(A)1.
provides that a member that is an
Agency may not pledge Eligible Clearing
Fund Agency Securities of which it is
the issuer. Footnote 8 of subsection (a)
provides that with regard to a member
that pledges Eligible Clearing Fund
Mortgage-Backed Securities of which it
is the issuer, such collateral will be
subject to a premium haircut as
specified in Section III.(A). Subsection
(b) of Section II.(A)1. provides that no
more than 20 percent of a member’s
Required Fund Deposit may be in the
form of Eligible Clearing Fund Agency
Securities that are of a single issuer.
Changes to the collateral haircuts and
concentration limits are currently
subject to NSCC’s internal governance
process and would remain so with
respect to the haircut schedule changes
made in accordance with this proposal.
If NSCC determines that, based on the
analyses that it performs, there is
insufficient/excessive collateral haircut/
concentration due to an identifiable
cause that affected multiple members
and such cause would likely persist
based on NSCC’s assessment of market
conditions, such outcome or result
could cause NSCC to amend the
haircuts/concentration limits in the
9 See
Section II.(A)1. of Procedure XV, supra note
3.
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haircut schedule. If NSCC determines
that a change to the haircut schedule is
warranted, its market risk group would
document the recommendation and
rationale for the change at the time of
such determination and obtain approval
from an executive director or above with
a notice to the risk management
committee, in accordance with NSCC’s
internal market risk management
policies and procedures. Before making
adjustments to the haircut schedule,
NSCC measures the potential impact of
such adjustments to ensure any impact
is both necessary and appropriate.
Through its review, NSCC has
observed that under volatile market
conditions with elevated frequency and
magnitude of securities price
movements, the collateral value of
Eligible Clearing Fund Securities may
shift in a relatively short period of time
and the current haircuts may not
sufficiently account for the change in
value. When the erosion in the value of
the Eligible Clearing Fund Securities
exceeds the relevant haircuts, NSCC is
exposed to increased risk of potential
losses associated with liquidating a
member’s portfolio in the event of a
member default when the defaulting
member’s own margin is insufficient to
satisfy losses to NSCC caused by the
liquidation of that member’s portfolio.
Similarly, when a member’s portfolio
contains large net unsettled positions in
a particular group of securities with a
similar risk profile or in a particular
asset type, such securities could present
additional risk to NSCC. The additional
risk exposures associated with
liquidating a member’s portfolio in the
event of a member default could lead to
an increase in the likelihood that NSCC
would need to mutualize losses among
non-defaulting members during the
liquidation process. However, any
changes to the haircuts and/or
concentration limits currently requires a
proposed rule change to be filed with
the Commission. In order to provide
NSCC with more flexibility in adjusting
the haircuts and concentration limits so
NSCC can respond to changing market
conditions more promptly in order to
mitigate the additional risk exposure,
NSCC is proposing to remove Section
III.(A) and concentration limits from the
Rules, and to publish the haircuts and
concentration limits in a haircut
schedule on NSCC’s website.
Specifically, NSCC is proposing to
delete subsections (a) and (b) of Section
II.(A)1., and delete Section III of
Procedure XV. Currently, subsections (a)
and (b) of Section II.(A)1. set out certain
concentration limits for Eligible
Clearing Fund Agency Securities and
Eligible Clearing Fund Mortgage-Backed
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Securities. Subsection (a) provides that
any deposits of Eligible Clearing Fund
Agency Securities or Eligible Clearing
Fund Mortgage-Backed Securities,
respectively, in excess of 25 percent of
a member’s Required Fund Deposit will
be subject to an additional haircut equal
to twice the percentage as specified in
Section III.(A). In addition, footnote 8 of
subsection (a) provides that with regard
to a member that pledges Eligible
Clearing Fund Mortgage-Backed
Securities of which it is the issuer, such
collateral will be subject to a premium
haircut as specified in Section III.(A).
The same language from subsection (a)
and footnote 8 of Section II.(A)1. is in
Section III.(A). Having this language in
both the Rules and the proposed haircut
schedule is unnecessary and could
potentially create confusion for
members. As such, NSCC is proposing
to eliminate this duplication by deleting
subsection (a) and footnote 8 of Section
II.(A)1., and including this language in
the proposed haircut schedule.
Subsection (b) of Section II.(A)1.
currently sets out an additional
concentration limit with respect to
Eligible Clearing Fund Agency
Securities. Specifically, subsection (b)
provides that no more than 20 percent
of the Required Fund Deposit may be in
the form of Eligible Clearing Fund
Agency Securities that are of a single
issuer. In addition, footnote 7 of
subsection (a) provides that a member
that is an Agency may not pledge
Eligible Agency Securities of which it is
the issuer. NSCC is proposing to delete
subsection (b) and footnote 7 of Section
II.(A)1., and move this language to the
proposed haircut schedule. For clarity,
NSCC is also proposing to revise the
language currently in footnote 7 of
Section II.(A)1. to provide that no
member may pledge Eligible Clearing
Fund Agency Securities of which it is
the issuer to secure its Required Fund
Deposit. NSCC would also add
‘‘Clearing Fund’’ in the reference to
‘‘Eligible Agency Securities’’ currently
in the language in subsection (b) of
Section II.(A)1. to reflect the correct
defined term for Eligible Clearing Fund
Agency Securities, and move ‘‘may be’’
earlier in the first sentence for clarity.
Furthermore, NSCC is proposing to
add language in Section II.(A)1. that
makes it clear that all Eligible Clearing
Fund Securities pledged to secure
Clearing Fund deposits shall, for
collateral valuation purposes, be subject
to a haircut and may be subject to a
concentration limit. The proposed
language would provide that NSCC shall
determine the applicable haircuts and
any concentration limits from time to
time in accordance with its internal
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policy and governance process, based
on factors determined to be relevant by
NSCC, which may include, for example,
backtesting results and NSCC’s
assessment of market conditions, in
order to set appropriately conservative
haircuts and/or concentration limits for
the Eligible Clearing Fund Securities
and minimize backtesting deficiency
occurrences. The proposed language
would also provide that the haircuts and
any concentration limits prescribed by
NSCC shall be set forth in a haircut
schedule that is published on NSCC’s
website and that it shall be the
member’s responsibility to retrieve the
haircut schedule. Section II.(A)1. would
also indicate that NSCC will provide
members with at a minimum one
Business Day’s advance notice of any
change in the haircut schedule.
NSCC is proposing to delete Section
III of Procedure XV, which contains the
haircut schedule. In addition, NSCC is
proposing to (i) remove references to
Section III of Procedure XV in two
places in Rule 4, and replace them with
a reference to Section II.(A) of Procedure
XV in each case, (ii) remove references
to subsections 1(a) and (b) of Section
II.(A) of Procedure XV and references to
Section III of Procedure XV in Rule 56
and (iii) remove a reference to Section
III of Procedure XV in Section II.(A) of
Procedure XV, and replace it with a
reference to the proposed haircut
schedule, to reflect the proposed
changes described above. NSCC is also
proposing to make some punctuation
and grammar changes and add a
reference to Procedure XV in Section
12(c) of Rule 56 to clarify the language.
Finally, NSCC is proposing to clarify
some language in Sections I.(B)(1),
II.(A), II.(B), II.(C) and II.(D) of
Procedure XV to reflect that Mutual
Fund/Insurance Services Members and
other Limited Members are no longer
required to make deposits into the
Clearing Fund. In 2022, NSCC removed
the requirement that any Limited
Members, including Mutual Fund/
Insurance Services Members, make any
deposits to the Clearing Fund.10
Sections I.(B)(1), II.(A), II.(B), II.(C) and
II.(D) of Procedure XV still contain
references to Mutual Fund/Insurance
Service Members and/or Limited
Members making deposits into the
Clearing Fund, and NSCC is proposing
to remove those references for clarity.
NSCC believes that the proposed
change to move the haircuts and
concentration limits from the Rules to
the website would enable NSCC to
adjust the haircuts and concentration
limits without undergoing a rule filing
process.11 By being able to make
appropriate and timely adjustments to
the haircuts and concentration limits,
NSCC would have the flexibility to
respond to changing market conditions
more promptly. Having the flexibility to
respond to changing market conditions
more promptly would in turn help
better ensure that NSCC collects
sufficient margin from members as well
as risk manages its credit exposures to
its members. The proposed change
would also align NSCC with the manner
in which its affiliate, The Depository
Trust Company (‘‘DTC’’), provides
haircut schedules to participants.12
Concurrent with moving the haircuts
and concentration limits from the Rules
to the website, NSCC is also proposing
to reconfigure the categories relating to
Treasury securities haircuts by moving
the Treasury Inflation-Protected
Securities (‘‘TIPS’’) to a separate
category and increasing the haircut
levels for TIPS. The proposed change to
TIPS is reflected in Exhibit 3c to this
filing. TIPS are a type of Treasury
security issued by the U.S. government
that are indexed to inflation such that
the principal value of the security rises
as inflation rises.
In connection with NSCC’s
assessments of its collateral haircuts,
NSCC employs daily backtesting to
determine the adequacy of each
member’s collateral haircuts. NSCC
compares the collateral haircuts for each
member with the simulated liquidation
gains/losses using the actual positions
in the member’s portfolio, and the
actual historical security returns. A
backtesting deficiency occurs when a
member’s collateral haircuts would not
have been adequate to cover the
simulated liquidation losses.
In connection with such assessments,
NSCC has determined that in periods
where the inflation rate fluctuates, the
current haircut levels for TIPS may be
inadequate to address the fluctuations
from time to time. This is because TIPS
are indexed to the inflation rate, and
prices on TIPS move inversely to their
yields, e.g., when the inflation rate
increases, prices on TIPS decrease.
When the decline in market value of
TIPS exceeds the haircut for TIPS,
NSCC would be exposed to potential
liquidation losses. Accordingly, NSCC is
proposing to reconfigure and modify the
haircut information that would be
posted on NSCC’s website to ensure that
the haircut levels would be
commensurate with the particular risk
attributes of TIPS.
Specifically, NSCC would list TIPS of
various maturity groupings in a separate
category from Treasury bills, notes and
bonds. In addition, NSCC would change
the haircut level applicable for TIPS as
follows:
Current
%
Maturity
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TIPS ..................
Zero to 1 year ...............................................................................................................
1 year to 2 years ..........................................................................................................
2 years to 5 years ........................................................................................................
5 years to 10 years ......................................................................................................
10 years to 15 years ....................................................................................................
15 years or greater .......................................................................................................
Proposed
%
2.0
2.0
3.0
4.0
6.0
6.0
2.0
3.0
5.0
7.0
7.0
10.0
In determining the appropriate
haircut levels for TIPS, NSCC conducted
a review of TIPS haircuts at other
registered clearing agencies and foreign
central counterparty clearing houses
(‘‘CCPs’’) to compare NSCC’s current
TIPS haircuts with that required by
registered clearing agencies and foreign
CCPs when TIPS are deposited to their
clearing funds, or the equivalent thereof.
The results of the review and
comparison indicated that NSCC’s
current haircut levels for TIPS are
generally lower than the TIPS haircuts
required by other clearing agencies and
10 See Securities Exchange Act Release No. 93722
(Dec. 6, 2021), 86 FR 70548 (Dec. 10, 2021) (SR–
NSCC–2021–015).
11 Pursuant to Section 806(e)(1) of Title VIII of the
Dodd-Frank Wall Street Reform and Consumer
Protection Act and Rule 19b–4(n)(1)(i) under the
Act, if a change materially affects the nature or level
of risks presented by NSCC, then NSCC is required
to file an advance notice. 12 U.S.C. 5465(e)(1) and
17 CFR 240.19b–4(n)(1)(i).
12 DTC also allows its participants to pledge
eligible collateral as a portion of the participant
fund; however, instead of being in the DTC
rulebook, the collateral haircut schedules are
published periodically by Important Notice to DTC
participants.
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foreign CCPs, particularly with respect
to maturity ranges of 10 years or longer.
While the TIPS haircut requirement at
such other entities is not dispositive as
to the risk borne by NSCC or the proper
TIPS haircut levels to offset such risk,
it is indicative of the TIPS haircuts
being applied to users of other similarly
situated entities in order to use the
services of the clearing agencies and
foreign CCPs and the impact to such
users. The chart below shows the
TIPS Remaining
Maturity (Years)
NSCC Current
Collateral Haircut
ICE 13
<1
2.00%
2.00%
1
2.00%
2
3
3.50%
3.00%
5
7
5.00%
4.00%
10
6.75%
15
11.25%
6.00%
20
Impact Study
NSCC conducted an impact study for
the period from September 1, 2021
through August 31, 2022 (‘‘Impact
Study’’). If the proposed haircut
adjustments had been in place during
the Impact Study period, the changes
would have resulted in an average daily
increase of $197,000 in the Clearing
Fund assuming TIPS were deposited.
Two members would have been
impacted with a daily average dollar
increase of approximately $123,000 (or
0.10% of their average Clearing Fund
deposit) and $74,000 (or 0.31% of their
average Clearing Fund deposit),
respectively, had the proposed changes
been in place.
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0.63%
2.38%
3.00%
4.75%
10.75%
CMEts
1.00%
occ16
0.50%
2.00%
2.00%
3.00%
4.50%
3.50%
8.00%
5.00%
13 See ICE Clear U.S. Acceptable Collateral and
Haircuts, available at www.theice.com/publicdocs/
clear_us/ICUS_Collateral_Information.pdf.
14 See LCH LTD-Margin Collateral Haircut
Schedule, available at www.lch.com/system/files/
media_root/Collateral/Acceptable%
20Collateral%20Haircuts%20LCH%20Ltd_0.pdf.
15 See CME Group Acceptable Performance Bond
Collateral for Base Guaranty Fund Products,
available at www.cmegroup.com/clearing/files/
acceptable-collateral-futures-options-selectforwards.pdf.
16 See OCC Collateral Haircut Schedule, available
at www.theocc.com/clearance-and-settlement/
acceptable-collateral-haircuts.
Jkt 262001
Implementation Timeframe
Subject to approval by the
Commission, NSCC expects to
implement this proposal by no later
than 60 Business Days after such
approval and would announce the
effective date of the proposed changes
by an Important Notice posted to
NSCC’s website.
2. Statutory Basis
NSCC believes this proposal is
consistent with the requirements of the
Act, and the rules and regulations
thereunder applicable to a registered
clearing agency. Specifically, NSCC
believes that the proposed changes
described above are consistent with
Section 17A(b)(3)(F) of the Act,17 and
Rules 17Ad–22(e)(4)(i), (e)(5), (e)(6)(i),
and (e)(6)(v), each promulgated under
the Act,18 for the reasons described
below.
Section 17A(b)(3)(F) of the Act
requires, in part, that the rules of a
clearing agency be designed to promote
the prompt and accurate clearance and
settlement of securities transactions,
and to assure the safeguarding of
securities and funds which are in the
custody or control of the clearing agency
or for which it is responsible.19 As
17 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(4)(i), (e)(5), (e)(6)(i),
and (e)(6)(v).
19 15 U.S.C. 78q–1(b)(3)(F).
18 17
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described above, NSCC believes the
proposed changes to move the collateral
haircuts and concentration limits from
the Rules to the website would provide
NSCC with more flexibility to respond
to changing market conditions because
adjustments to the haircuts and
concentration limits would no longer
require a rule change. By being able to
make appropriate and timely
adjustments to the haircuts and
concentration limits, NSCC would have
the flexibility to respond to changing
market conditions more promptly.
NSCC believes that having this
additional flexibility to respond to
changing market conditions more
promptly would help better ensure that
NSCC (i) collects sufficient margin from
members to cover the risk exposures
that NSCC may face in liquidating
members’ portfolios and (ii) minimizes
exposures from members with large
collateral positions in a particular group
of securities with a similar risk profile
or in a particular asset type, such that,
in the event of a member default,
NSCC’s operations would not be
disrupted, and non-defaulting members
would not be exposed to losses they
cannot anticipate or control. In this way,
the proposed rule change to move the
collateral haircuts and concentration
limits from the Rules to the website
would assure the safeguarding of
securities and funds which are in the
custody and control of NSCC or for
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NSCC is not proposing any changes to
the concentration limits at this time.
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16.00%
30
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haircuts that participants of other
clearing agencies and foreign CCPs are
currently subject to when using TIPS to
meet their margin requirements, as
compared with the existing TIPS
haircuts required at NSCC.
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which it is responsible, consistent with
Section 17A(b)(3)(F) of the Act.20
NSCC also believes the proposed
changes to move TIPS haircuts into a
separate category and raise the haircut
levels for TIPS would help ensure that
the haircut levels for TIPS would be
commensurate with the particular risk
attributes of TIPS. NSCC has determined
that in periods where the inflation rate
fluctuates, the current haircut levels for
TIPS have been inadequate to address
the fluctuations from time to time, and
more conservative haircuts for TIPS are
warranted. Having haircut levels for
TIPS that are commensurate with the
particular risk attributes of TIPS would
enable NSCC to collect sufficient margin
from members to cover the risk
exposures that NSCC may face in
liquidating members’ portfolios such
that, in the event of a member default,
NSCC’s operations would not be
disrupted, and non-defaulting members
would not be exposed to losses they
cannot anticipate or control. In this way,
the proposed rule change to move TIPS
haircuts into a separate category and
raise the haircut levels for TIPS would
assure the safeguarding of securities and
funds which are in the custody and
control of NSCC or for which it is
responsible, consistent with Section
17A(b)(3)(F) of the Act.21
NSCC believes that the proposed
clarifying changes would help to ensure
that the Rules are clear to members.
When members better understand their
rights and obligations regarding the
Rules, members are more likely to act in
accordance with the Rules, which NSCC
believes would promote the prompt and
accurate clearance and settlement of
securities transactions. As such, NSCC
believes that the proposed clarifying
changes would be consistent with
Section 17A(b)(3)(F) of the Act.22
Rule 17Ad–22(e)(4)(i) under the Act 23
requires a covered clearing agency to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to effectively
identify, measure, monitor, and manage
its credit exposures to participants and
those exposures arising from its
payment, clearing, and settlement
processes by maintaining sufficient
financial resources to cover its credit
exposure to each participant fully with
a high degree of confidence. As
described above, NSCC believes the
proposed changes to move the collateral
haircuts and concentration limits from
the Rules to the website would provide
20 Id.
NSCC with more flexibility to respond
to changing market conditions because
adjustments to the haircuts and
concentration limits would no longer
require a rule change. By being able to
make appropriate and timely
adjustments to the haircuts and
concentration limits, NSCC would have
the flexibility to respond to changing
market conditions more promptly.
NSCC believes that having this
additional flexibility to respond to
changing market conditions more
promptly would help ensure that NSCC
(i) collects sufficient margin from
members to cover the risk exposures
that NSCC may face in liquidating
members’ portfolios and (ii) minimizes
exposures from members with large
collateral positions in a particular group
of securities with a similar risk profile
or in a particular asset type, such that,
in the event of a member default,
NSCC’s operations would not be
disrupted, and non-defaulting members
would not be exposed to losses they
cannot anticipate or control. In this way,
the proposed rule change to move the
collateral haircuts and concentration
limits from the Rules to the website
would help ensure that NSCC maintains
sufficient financial resources to cover its
credit exposure to each participant fully
with a high degree of confidence,
consistent with the requirements of Rule
17Ad–22(e)(4)(i) under the Act.24
NSCC also believes the proposed
changes to move TIPS haircuts into a
separate category and raise the haircut
levels for TIPS would help ensure that
the haircut levels for TIPS would be
commensurate with the particular risk
attributes of TIPS. NSCC has determined
that in periods where the inflation rate
fluctuates, the current haircut levels for
TIPS may be inadequate to address the
fluctuations from time to time, and more
conservative haircuts for TIPS are
warranted. Ensuring that the haircut
levels for TIPS are commensurate with
the particular risk attributes of TIPS
would in turn help ensure that NSCC
requires members to maintain sufficient
margin to cover the credit exposures
that NSCC may face related to its ability
to liquidate members’ portfolios in the
event of a member default. In this way,
the proposed rule change to move TIPS
haircuts into a separate category and
raise the haircut levels for TIPS would
help ensure that NSCC maintains
sufficient financial resources to cover its
credit exposure to each participant fully
with a high degree of confidence,
consistent with the requirements of Rule
17Ad–22(e)(4)(i) under the Act.25
Rule 17Ad–22(e)(5) under the Act 26
requires, in part, a covered clearing
agency to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
set and enforce appropriately
conservative haircuts and concentration
limits if the covered clearing agency
requires collateral to manage its or its
participants’ credit exposure. As
described above, NSCC believes the
proposed changes to move the collateral
haircuts and concentration limits from
the Rules to the website would provide
NSCC with more flexibility to respond
to changing market conditions because
adjustments to the haircuts and
concentration limits would no longer
require a rule change. By being able to
make appropriate and timely
adjustments to the haircuts and
concentration limits, NSCC would have
the flexibility to respond to changing
market conditions more promptly.
NSCC believes that having this
additional flexibility to respond to
changing market conditions more
promptly would help better ensure that
NSCC (i) collects sufficient margin from
members to cover the risk exposures
that NSCC may face in liquidating
members’ portfolios and (ii) minimizes
exposures from members with large
collateral positions in a particular group
of securities with a similar risk profile
or in a particular asset type, such that,
in the event of a member default,
NSCC’s operations would not be
disrupted, and non-defaulting members
would not be exposed to losses they
cannot anticipate or control.
Specifically, NSCC would have the
ability to promptly set and enforce
conservative collateral haircuts and
concentration limits that are reflective
of the current market conditions. In this
way, the proposed changes to move the
collateral haircuts and concentration
limits from the Rules to the website
would help NSCC set and enforce
appropriately conservative collateral
haircuts and concentration limits,
consistent with the requirements of Rule
17Ad–22(e)(5) under the Act.27
NSCC also believes the proposed
changes to move TIPS haircuts into a
separate category and raise the haircut
levels for TIPS would help ensure that
the haircut levels for TIPS would be
commensurate with the particular risk
attributes of TIPS. NSCC has determined
that in periods where the inflation rate
fluctuates, the current haircut levels for
TIPS have been inadequate to address
the fluctuations from time to time, and
more conservative haircuts for TIPS are
21 Id.
22 Id.
23 17
CFR 240.17Ad–22(e)(4)(i).
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24 Id.
26 17
25 Id.
27 Id.
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warranted. Specifically, NSCC would
have the ability to set and enforce
conservative collateral haircuts that are
commensurate with the particular risk
attributes of TIPS. In this way, the
proposed changes to move TIPS haircuts
into a separate category and raise the
haircut levels for TIPS would help
NSCC set and enforce appropriately
conservative collateral haircuts,
consistent with the requirements of Rule
17Ad–22(e)(5) under the Act.28
Rule 17Ad–22(e)(6)(i) under the Act 29
requires a covered clearing agency to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to cover, if the
covered clearing agency provides
central counterparty services, its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, considers, and
produces margin levels commensurate
with, the risks and particular attributes
of each relevant product, portfolio, and
market. NSCC believes that the
proposed changes to move the collateral
haircuts and concentration limits from
the Rules to the website would provide
NSCC with more flexibility to respond
to changing market conditions because
NSCC would be able to make
appropriate adjustments to the haircuts
and concentration limits without a rule
change. By being able to make
appropriate and timely adjustments to
the haircuts and concentration limits,
NSCC would have the flexibility to
respond to changing market conditions
more promptly. NSCC believes that
having this additional flexibility to
respond to changing market conditions
more promptly would enable NSCC to
better risk manage its credit exposure to
its members by (i) collecting sufficient
margin from members to cover the risk
exposures that NSCC may face in
liquidating members’ portfolios and (ii)
minimizing exposures from members
with large collateral positions in a
particular group of securities with a
similar risk profile or in a particular
asset type, thus allowing NSCC to
produce margin levels commensurate
with the risks and particular attributes
of each relevant product, portfolio, and
market. Therefore, NSCC believes this
proposed change is consistent with Rule
17Ad–22(e)(6)(i) under the Act.30
NSCC also believes the proposed
changes to move TIPS haircuts into a
separate category and raise the haircut
levels for TIPS would help ensure that
the haircut levels for TIPS would be
commensurate with the particular risk
28 Id.
29 17
attributes of TIPS. NSCC has determined
that in periods where the inflation rate
fluctuates, the current haircut levels for
TIPS may be inadequate to address the
fluctuations from time to time, and more
conservative haircuts for TIPS are
warranted. Ensuring that the haircut
levels for TIPS are commensurate with
the particular risk attributes of TIPS
would allow NSCC to produce margin
levels commensurate with the risks and
particular attributes of each relevant
product, portfolio, and market.
Therefore, NSCC believes this proposed
change is consistent with Rule 17Ad–
22(e)(6)(i) under the Act.31
Rule 17Ad–22(e)(6)(v) under the
Act 32 requires a covered clearing
agency to establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
cover, if the covered clearing agency
provides central counterparty services,
its credit exposures to its participants by
establishing a risk-based margin system
that, at a minimum, uses an appropriate
method for measuring credit exposure
that accounts for relevant product risk
factors and portfolio effects across
products. NSCC believes that the
proposed changes to move the collateral
haircuts and concentration limits from
the Rules to the website would provide
NSCC with more flexibility to respond
to changing market conditions more
promptly because NSCC would be able
to make appropriate adjustments to the
haircuts and concentration limits
without a rule change. Having this
additional flexibility would enable
NSCC to better risk manage its credit
exposure to its members because NSCC
would then be able to make appropriate
and timely adjustments to the haircuts
and concentration limits, as described
above. Being able to adjust the haircuts
and concentration limits appropriately
and timely would allow NSCC to better
risk manage its credit exposure to its
members by (i) collecting sufficient
margin from members to cover the risk
exposures that NSCC may face in
liquidating members’ portfolios and (ii)
minimizing exposures from members
with large collateral positions in a
particular group of securities with a
similar risk profile or in a particular
asset type, thus producing margin levels
commensurate with relevant product
risk factors and portfolio effects across
products. Therefore, NSCC believes this
proposed change is consistent with Rule
17Ad–22(e)(6)(v) under the Act.33
NSCC also believes the proposed
changes to move TIPS haircuts into a
separate category and raise the haircut
levels for TIPS would help ensure that
the haircut levels for TIPS would be
commensurate with the particular risk
attributes of TIPS. Specifically, as
proposed, NSCC would have collateral
haircuts that are commensurate with the
particular risk attributes of TIPS.
Ensuring that the haircut levels for TIPS
are commensurate with the particular
risk attributes of TIPS would allow
NSCC to produce margin levels
commensurate with relevant product
risk factors and portfolio effects across
products. Therefore, NSCC believes this
proposed change is consistent with Rule
17Ad–22(e)(6)(v) under the Act.34
(B) Clearing Agency’s Statement on
Burden on Competition
Section 17A(b)(3)(I) of the Act
requires that the rules of NSCC do not
impose any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.35 NSCC does
not believe the proposed rule changes to
move the haircuts and concentration
limits from the Rules to the website
would impose a burden on competition.
These proposed changes are designed to
enable NSCC to timely respond to
increases in market volatility with
haircut requirements and concentration
limits that are more reflective of the
current credit exposures to NSCC. As
discussed above, these proposed
changes would allow NSCC to better
risk manage its credit exposure to its
members by (i) collecting sufficient
margin from members to cover the risk
exposures that NSCC may face in
liquidating members’ portfolios and (ii)
minimizing exposures from members
with large collateral positions in a
particular group of securities with a
similar risk profile or in a particular
asset type, such that, in the event of a
member default, NSCC’s operations
would not be disrupted, and nondefaulting members would not be
exposed to losses they cannot anticipate
or control. These proposed changes
would not unfairly inhibit access to
NSCC’s services, or disadvantage or
favor any particular member in
relationship to another member. The
proposed changes would allow NSCC to
adjust the haircuts and concentration
limits more promptly and would not
otherwise affect members’ access to
NSCC’s services. In addition, any
changes to the haircuts or concentration
limits would be directly related to the
perceived risk related to members’
collateral based on back-tests, stresstests and market observations, and
31 Id.
CFR 240.17Ad–22(e)(6)(i).
32 17
30 Id.
VerDate Sep<11>2014
CFR 240.17Ad–22(e)(6)(v).
33 Id.
20:21 Oct 03, 2023
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Frm 00224
34 Id.
35 15
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U.S.C. 78q–1(b)(3)(I).
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would be applied uniformly to all
members. Accordingly, NSCC believes
that these proposed changes would not
impose any burden or have any impact
on competition.
Similarly, NSCC does not believe the
proposed rule changes to move TIPS
haircuts into a separate category would
impose a burden on competition. These
proposed changes are designed to
improve the clarity and presentation of
the haircut information. These proposed
changes would not unfairly inhibit
access to NSCC’s services, or
disadvantage or favor any particular
member in relationship to another
member, and the changes would be
applied uniformly to all members.
Accordingly, NSCC believes that these
proposed changes would not impose
any burden or have any impact on
competition.
NSCC believes the proposed changes
to raise certain TIPS haircut levels may
have an impact on competition because
these changes could result in members’
Eligible Clearing Fund Securities being
subject to higher haircuts than they
would have been under the current
haircut schedule. NSCC believes that
the proposed change could burden
competition by potentially increasing
these members’ operating costs by
requiring members who are using TIPS
as collateral to pledge additional
collateral. Nonetheless, NSCC believes
any burden on competition imposed by
the proposed changes would not be
significant and, regardless of whether
such burden on competition could be
deemed significant, would be necessary
and appropriate, as permitted by
Section 17A(b)(3)(I) of the Act for the
reasons described in this filing and
further below.36
NSCC believes any burden on
competition presented by the proposed
changes to the TIPS haircut levels
would not be significant. As discussed
above, if the proposed changes to the
TIPS haircut levels had been in place
during the Impact Study period, two
members would have been impacted
with an daily average dollar increase of
approximately $123,000 (or 0.10% of
their average Clearing Fund deposit)
and $74,000 (or 0.31% of their average
Clearing Fund deposit), respectively. In
addition, NSCC believes that the
proposed changes to the TIPS haircut
levels are comparable with what is
being required of users of other similar
registered clearing agencies and foreign
CCPs when posting TIPS as collateral.
NSCC believes any burden on
competition that may be imposed by the
proposed changes to the TIPS haircut
36 Id.
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20:21 Oct 03, 2023
Jkt 262001
levels would be necessary because, as
described above, the proposed changes
would help ensure that the collateral
values attributed to TIPS would be
commensurate with the particular risk
attributes of TIPS. Making sure proper
collateral values are attributed to TIPS
that are used as margin would thus help
better ensure that NSCC collects
sufficient margin from members and
thereby assure the safeguarding of
securities and funds which are in the
custody and control of NSCC or for
which it is responsible, consistent with
Section 17A(b)(3)(F) of the Act.37
In addition, NSCC believes the
proposed changes to the TIPS haircut
levels are necessary to support NSCC’s
compliance with Rules 17Ad–22(e)(4)(i),
(e)(5), (e)(6)(i), and (e)(6)(v) under the
Act. Specifically, as described above,
NSCC believes these proposed changes
would ensure that the haircut levels for
TIPS are commensurate with the
particular risk attributes of TIPS. Having
haircut levels for TIPS that are
commensurate with the particular risk
attributes of TIPS would ensure proper
collateral valuation for TIPS used as
margin. Ensuring proper collateral
valuation for TIPS used as margin
would help NSCC better measure,
monitor, and manage its credit
exposures to participants and those
exposures arising from its payment,
clearing, and settlement processes,
consistent with the requirements of Rule
17Ad–22(e)(4)(i) under the Act.38
Ensuring proper collateral valuation for
TIPS used as margin would also allow
NSCC to set and enforce appropriately
conservative collateral haircuts,
consistent with the requirements of Rule
17Ad–22(e)(5) under the Act.39 It would
also help NSCC cover its credit
exposures to its participants, consistent
with the requirements of Rules 17Ad–
22(e)(6)(i) and (e)(6)(v) under the Act.40
NSCC also believes that any burden
on competition that may be imposed by
the proposed changes to the TIPS
haircut levels would be appropriate in
furtherance of the Act because these
proposed changes have been specifically
designed to assure the safeguarding of
securities and funds which are in the
custody and control of NSCC or for
which it is responsible, as required by
Section 17A(b)(3)(F) of the Act.41 As
described above, NSCC believes these
proposed changes would help better
ensure that NSCC collects sufficient
margin from members, thus enabling
37 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(4)(i).
39 17 CFR 240.17Ad–22(e)(5).
40 17 CFR 240.17Ad–22(e)(6)(i) and (e)(6)(v).
41 15 U.S.C. 78q–1(b)(3)(F).
38 17
PO 00000
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68783
NSCC to produce margin levels more
commensurate with the risks it faces as
a central counterparty. Accordingly,
NSCC believes these proposed changes
are appropriately designed to meet its
risk management goals and regulatory
obligations.
NSCC does not believe the proposed
clarifying changes to the Rules would
impact competition. These changes
would help to ensure that the Rules
remain clear. In addition, the changes
would facilitate members’
understanding of the Rules and their
obligations thereunder. These changes
would not affect NSCC’s operations or
the rights and obligations of the
membership. As such, NSCC believes
the proposed clarifying changes would
not have any impact 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 additional written
comments are received, they will be
publicly filed as an Exhibit 2 to this
filing, as required by Form 19b–4 and
the General Instructions thereto.
Persons submitting comments are
cautioned that, according to Section IV
(Solicitation of Comments) of the
Exhibit 1A in the General Instructions to
Form 19b–4, the Commission does not
edit personal identifying information
from comment submissions.
Commenters should submit only
information that they wish to make
available publicly, including their
name, email address, and any other
identifying information.
All prospective commenters should
follow the Commission’s instructions on
how to submit comments, available at
https://www.sec.gov/regulatory-actions/
how-to-submit-comments. General
questions regarding the rule filing
process or logistical questions regarding
this filing should be directed to the
Main Office of the SEC’s Division of
Trading and Markets at
tradingandmarkets@sec.gov or 202–
551–5777.
NSCC reserves the right to not
respond to any comments received.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
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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:
lotter on DSK11XQN23PROD with NOTICES1
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NSCC–2023–009 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–2023–009. 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
(dtcc.com/legal/sec-rule-filings). 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
VerDate Sep<11>2014
20:21 Oct 03, 2023
Jkt 262001
to File Number SR–NSCC–2023–009
and should be submitted on or before
October 25, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.42
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–21936 Filed 10–3–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–558, OMB Control No.
3235–0617]
Proposed Collection; Comment
Request; Extension: Rule 433 Under
the Securities Act of 1933—Conditions
to Permissible Post-Filing Free Writing
Prospectuses
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736.
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the collections of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
Rule 433 (17 CFR 230.433) governs
the use and filing of free writing
prospectuses under the Securities Act of
1933 (15 U.S.C. 77a et seq.). The
purpose of Rule 433 is to reduce the
restrictions on communications that a
company can make to investors during
a registered offering of its securities,
while maintaining a high level of
investor protection. A free writing
prospectus meeting the conditions of
Rule 433(d)(1) must be filed with the
Commission and is publicly available.
We estimate that it takes approximately
9.79057 burden hours per response to
prepare a free writing prospectus and
that the information is filed by 20,179
responses. We estimate that 25% of the
9.79052 burden hours per response
(2.44764 hours) is prepared by the
company for total annual reporting
burden of 49,391 hours (2.4476 hours ×
20,179 responses).
Written comments are invited on: (a)
whether this proposed collection of
information is necessary for the proper
performance of the functions of the
42 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00226
Fmt 4703
Sfmt 4703
agency, including whether the
information will have practical utility;
(b) the accuracy of the agency’s estimate
of the burden imposed by the collection
of information; (c) ways to enhance the
quality, utility, and clarity of the
information collected; and (d) ways to
minimize the burden of the collection of
information on respondents, including
through the use of automated collection
techniques or other forms of information
technology. Consideration will be given
to comments and suggestions submitted
in writing within 60 days of this
publication by December 4, 2023.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
control number.
Please direct your written comment to
David Bottom, Director/Chief
Information Officer, Securities and
Exchange Commission, c/o John
Pezzullo, 100 F Street NE, Washington,
DC 20549 or send an email to: PRA_
Mailbox@sec.gov.
Dated: September 28, 2023.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–21925 Filed 10–3–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–114, OMB Control No.
3235–0102]
Proposed Collection; Comment
Request; Extension: Tender Offer—
Regulation 14D and Regulation 14E,
Schedule 14D–9
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736.
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
Regulation 14D (17 CFR 240.14d–1—
240.14d–11) and Regulation 14E (17
CFR 240.14e–1—240.14e–8) and related
Schedule 14D–9 (17 CFR 240.14d–101)
require information important to
security holders in deciding how to
respond to tender offers. Schedule 14D–
9 takes approximately 260.56 hours per
E:\FR\FM\04OCN1.SGM
04OCN1
]]>Agencies
[Federal Register Volume 88, Number 191 (Wednesday, October 4, 2023)]
[Notices]
[Pages 68777-68784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21936]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98589; File No. SR-NSCC-2023-009]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change Relating to the
Schedule of Haircuts for Eligible Clearing Fund Securities
September 28, 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 September 22, 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 primarily 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.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of modifications to NSCC's Rules
& Procedures (``Rules'') \3\ in order to modify the schedule of
haircuts for Eligible Clearing Fund Securities and remove it from
Procedure XV of the Rules (``Procedure XV''), and make other clarifying
changes, as described in greater detail below.
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\3\ Capitalized terms not defined herein are defined in the
Rules, available at www.dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
NSCC is proposing to modify the schedule of haircuts for Eligible
Clearing Fund Securities, and to remove it and the related
concentration limits from Procedure XV, and make other clarifying
changes, as described in greater detail below.
Background
As part of its market risk management strategy, NSCC manages its
credit exposure to members by determining the appropriate Required Fund
Deposits to the Clearing Fund and monitoring its sufficiency, as
provided for in the Rules.\4\ The Required Fund Deposit serves as each
member's margin.
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\4\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters), supra note 3. NSCC's market risk
management strategy is designed to comply with Rule 17Ad-22(e)(4)
under the Act, where these risks are referred to as ``credit
risks.'' 17 CFR 240.17Ad-22(e)(4).
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The objective of a member's Required Fund Deposit is to mitigate
potential losses to NSCC associated with liquidating a member's
portfolio in the event NSCC ceases to act for that member (hereinafter
referred to as a ``default'').\5\ The aggregate of all members'
Required Fund Deposits constitutes the Clearing Fund of NSCC. NSCC
would access its Clearing Fund should a defaulting member's own
Required Fund Deposit be insufficient to satisfy losses to NSCC caused
by the liquidation of that member's portfolio. The Clearing Fund
reduces the risk that NSCC would need to mutualize any losses among
non-defaulting members during the liquidation process.
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\5\ The Rules identify when NSCC may cease to act for a member
and the types of actions NSCC may take. For example, NSCC may
suspend a firm's membership with NSCC or prohibit or limit a
member's access to NSCC's services in the event that member defaults
on a financial or other obligation to NSCC. See Rule 46
(Restrictions on Access to Services), supra note 3.
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Under Rule 4 (Clearing Fund), members are required to make deposits
to the Clearing Fund, with the amount of each member's Required Fund
Deposit being determined by NSCC in accordance with Rule 4. A member
may satisfy its Required Fund Deposit with cash or an open account
indebtedness secured by Eligible Clearing Fund Securities.\6\ Eligible
Clearing Fund Securities, comprised of certain agency, mortgage-backed,
and Treasury securities, are valued based on the prior Business Day's
closing market price, less a haircut, and may be subject to a
concentration limit.\7\ Haircuts are used to protect NSCC and its
members from price fluctuations, i.e., if NSCC is required to liquidate
collateral of an insolvent member and such collateral is worth less at
the time of liquidation than when it is pledged to NSCC. Concentration
limits are intended to reduce NSCC's risk by limiting the percentage of
certain types of Eligible Clearing Fund Securities pledged by members
to secure the Clearing Fund deposits. This is because when a member's
portfolio contains large net unsettled positions in a particular group
of securities with a similar risk profile or in a particular asset
type, such securities could present additional risk to NSCC.
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\6\ See Rule 4, Section 1, supra note 3.
\7\ See Rule 1 (Definitions) for applicable definitions,
including Eligible Clearing Fund Securities and its components,
which are Eligible Clearing Fund Agency Securities, Eligible
Clearing Fund Mortgage-Backed Securities, and Eligible Clearing Fund
Treasury Securities. Supra note 3.
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Currently, collateral haircuts applicable to relevant security
types and remaining maturity terms are specified as fixed percentages
in Section III.(A) of Procedure XV (``Section III.(A)'').\8\ The
sufficiency of collateral haircuts is evaluated through use of back-
tests, stress-tests and market observations. To ensure the sufficiency
of the collateral haircuts, a backtesting analysis of members'
collateral deposits is conducted daily, and summary reviews are
completed quarterly, each by the NSCC market risk group pursuant to
NSCC's internal market risk management policies and procedures. NSCC
performs daily backtesting of collateral by comparing the collateral
haircut for each member in simulated liquidations with the member's
actual collateral held on deposit at NSCC. Any exceptions noted are
escalated to management daily to assess the root cause and determine
whether further analysis and/or review would be appropriate.
Specifically, if NSCC determines that a particular security may present
inherent volatility and/or liquidity risks that could likely result in
an erosion in the value of the security exceeding the applicable
collateral
[[Page 68778]]
haircut, ad hoc reviews may be conducted by risk management pursuant to
NSCC's internal market risk management procedures. On a quarterly
basis, NSCC reviews and identifies instances where the simulated losses
from available historical stress testing scenario dates have exceeded
the collateral haircut values. In addition, each quarter, NSCC reviews
the composition of the Eligible Clearing Fund Securities that members
have pledged to secure their Required Fund Deposits in order to assess
the sufficiency of the collateral haircuts applied and whether any
haircut changes would be needed.
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\8\ See Section III.(A) of Procedure XV, supra note 3. Section
III.(A) was last modified in 2011 in order to conform the haircuts
to requirements of NSCC's lenders under its credit facilities. See
Securities Exchange Act Release No. 64487 (May 13, 2011), 76 FR
29019 (May 19, 2011) (SR-NSCC-2011-02).
---------------------------------------------------------------------------
In addition to collateral haircuts, NSCC applies concentration
limits to certain Eligible Clearing Fund Securities. Currently, the
concentration limits applicable to certain Eligible Clearing Fund
Securities are specified in subsections (a) and (b) of Section II.(A)1.
of Procedure XV (``Section II.(A)1.'').\9\ Specifically, subsection (a)
provides any deposits of Eligible Clearing Fund Agency Securities or
Eligible Clearing Fund Mortgage-Backed Securities in excess of 25
percent of a member's Required Fund Deposit will be subject to a
haircut that is twice the amount of the percentage noted in Section
III.(A). In addition, footnote 7 of subsection (a) of Section II.(A)1.
provides that a member that is an Agency may not pledge Eligible
Clearing Fund Agency Securities of which it is the issuer. Footnote 8
of subsection (a) provides that with regard to a member that pledges
Eligible Clearing Fund Mortgage-Backed Securities of which it is the
issuer, such collateral will be subject to a premium haircut as
specified in Section III.(A). Subsection (b) of Section II.(A)1.
provides that no more than 20 percent of a member's Required Fund
Deposit may be in the form of Eligible Clearing Fund Agency Securities
that are of a single issuer.
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\9\ See Section II.(A)1. of Procedure XV, supra note 3.
---------------------------------------------------------------------------
Changes to the collateral haircuts and concentration limits are
currently subject to NSCC's internal governance process and would
remain so with respect to the haircut schedule changes made in
accordance with this proposal. If NSCC determines that, based on the
analyses that it performs, there is insufficient/excessive collateral
haircut/concentration due to an identifiable cause that affected
multiple members and such cause would likely persist based on NSCC's
assessment of market conditions, such outcome or result could cause
NSCC to amend the haircuts/concentration limits in the haircut
schedule. If NSCC determines that a change to the haircut schedule is
warranted, its market risk group would document the recommendation and
rationale for the change at the time of such determination and obtain
approval from an executive director or above with a notice to the risk
management committee, in accordance with NSCC's internal market risk
management policies and procedures. Before making adjustments to the
haircut schedule, NSCC measures the potential impact of such
adjustments to ensure any impact is both necessary and appropriate.
Through its review, NSCC has observed that under volatile market
conditions with elevated frequency and magnitude of securities price
movements, the collateral value of Eligible Clearing Fund Securities
may shift in a relatively short period of time and the current haircuts
may not sufficiently account for the change in value. When the erosion
in the value of the Eligible Clearing Fund Securities exceeds the
relevant haircuts, NSCC is exposed to increased risk of potential
losses associated with liquidating a member's portfolio in the event of
a member default when the defaulting member's own margin is
insufficient to satisfy losses to NSCC caused by the liquidation of
that member's portfolio. Similarly, when a member's portfolio contains
large net unsettled positions in a particular group of securities with
a similar risk profile or in a particular asset type, such securities
could present additional risk to NSCC. The additional risk exposures
associated with liquidating a member's portfolio in the event of a
member default could lead to an increase in the likelihood that NSCC
would need to mutualize losses among non-defaulting members during the
liquidation process. However, any changes to the haircuts and/or
concentration limits currently requires a proposed rule change to be
filed with the Commission. In order to provide NSCC with more
flexibility in adjusting the haircuts and concentration limits so NSCC
can respond to changing market conditions more promptly in order to
mitigate the additional risk exposure, NSCC is proposing to remove
Section III.(A) and concentration limits from the Rules, and to publish
the haircuts and concentration limits in a haircut schedule on NSCC's
website.
Specifically, NSCC is proposing to delete subsections (a) and (b)
of Section II.(A)1., and delete Section III of Procedure XV. Currently,
subsections (a) and (b) of Section II.(A)1. set out certain
concentration limits for Eligible Clearing Fund Agency Securities and
Eligible Clearing Fund Mortgage-Backed Securities. Subsection (a)
provides that any deposits of Eligible Clearing Fund Agency Securities
or Eligible Clearing Fund Mortgage-Backed Securities, respectively, in
excess of 25 percent of a member's Required Fund Deposit will be
subject to an additional haircut equal to twice the percentage as
specified in Section III.(A). In addition, footnote 8 of subsection (a)
provides that with regard to a member that pledges Eligible Clearing
Fund Mortgage-Backed Securities of which it is the issuer, such
collateral will be subject to a premium haircut as specified in Section
III.(A). The same language from subsection (a) and footnote 8 of
Section II.(A)1. is in Section III.(A). Having this language in both
the Rules and the proposed haircut schedule is unnecessary and could
potentially create confusion for members. As such, NSCC is proposing to
eliminate this duplication by deleting subsection (a) and footnote 8 of
Section II.(A)1., and including this language in the proposed haircut
schedule.
Subsection (b) of Section II.(A)1. currently sets out an additional
concentration limit with respect to Eligible Clearing Fund Agency
Securities. Specifically, subsection (b) provides that no more than 20
percent of the Required Fund Deposit may be in the form of Eligible
Clearing Fund Agency Securities that are of a single issuer. In
addition, footnote 7 of subsection (a) provides that a member that is
an Agency may not pledge Eligible Agency Securities of which it is the
issuer. NSCC is proposing to delete subsection (b) and footnote 7 of
Section II.(A)1., and move this language to the proposed haircut
schedule. For clarity, NSCC is also proposing to revise the language
currently in footnote 7 of Section II.(A)1. to provide that no member
may pledge Eligible Clearing Fund Agency Securities of which it is the
issuer to secure its Required Fund Deposit. NSCC would also add
``Clearing Fund'' in the reference to ``Eligible Agency Securities''
currently in the language in subsection (b) of Section II.(A)1. to
reflect the correct defined term for Eligible Clearing Fund Agency
Securities, and move ``may be'' earlier in the first sentence for
clarity.
Furthermore, NSCC is proposing to add language in Section II.(A)1.
that makes it clear that all Eligible Clearing Fund Securities pledged
to secure Clearing Fund deposits shall, for collateral valuation
purposes, be subject to a haircut and may be subject to a concentration
limit. The proposed language would provide that NSCC shall determine
the applicable haircuts and any concentration limits from time to time
in accordance with its internal
[[Page 68779]]
policy and governance process, based on factors determined to be
relevant by NSCC, which may include, for example, backtesting results
and NSCC's assessment of market conditions, in order to set
appropriately conservative haircuts and/or concentration limits for the
Eligible Clearing Fund Securities and minimize backtesting deficiency
occurrences. The proposed language would also provide that the haircuts
and any concentration limits prescribed by NSCC shall be set forth in a
haircut schedule that is published on NSCC's website and that it shall
be the member's responsibility to retrieve the haircut schedule.
Section II.(A)1. would also indicate that NSCC will provide members
with at a minimum one Business Day's advance notice of any change in
the haircut schedule.
NSCC is proposing to delete Section III of Procedure XV, which
contains the haircut schedule. In addition, NSCC is proposing to (i)
remove references to Section III of Procedure XV in two places in Rule
4, and replace them with a reference to Section II.(A) of Procedure XV
in each case, (ii) remove references to subsections 1(a) and (b) of
Section II.(A) of Procedure XV and references to Section III of
Procedure XV in Rule 56 and (iii) remove a reference to Section III of
Procedure XV in Section II.(A) of Procedure XV, and replace it with a
reference to the proposed haircut schedule, to reflect the proposed
changes described above. NSCC is also proposing to make some
punctuation and grammar changes and add a reference to Procedure XV in
Section 12(c) of Rule 56 to clarify the language.
Finally, NSCC is proposing to clarify some language in Sections
I.(B)(1), II.(A), II.(B), II.(C) and II.(D) of Procedure XV to reflect
that Mutual Fund/Insurance Services Members and other Limited Members
are no longer required to make deposits into the Clearing Fund. In
2022, NSCC removed the requirement that any Limited Members, including
Mutual Fund/Insurance Services Members, make any deposits to the
Clearing Fund.\10\ Sections I.(B)(1), II.(A), II.(B), II.(C) and II.(D)
of Procedure XV still contain references to Mutual Fund/Insurance
Service Members and/or Limited Members making deposits into the
Clearing Fund, and NSCC is proposing to remove those references for
clarity.
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\10\ See Securities Exchange Act Release No. 93722 (Dec. 6,
2021), 86 FR 70548 (Dec. 10, 2021) (SR-NSCC-2021-015).
---------------------------------------------------------------------------
NSCC believes that the proposed change to move the haircuts and
concentration limits from the Rules to the website would enable NSCC to
adjust the haircuts and concentration limits without undergoing a rule
filing process.\11\ By being able to make appropriate and timely
adjustments to the haircuts and concentration limits, NSCC would have
the flexibility to respond to changing market conditions more promptly.
Having the flexibility to respond to changing market conditions more
promptly would in turn help better ensure that NSCC collects sufficient
margin from members as well as risk manages its credit exposures to its
members. The proposed change would also align NSCC with the manner in
which its affiliate, The Depository Trust Company (``DTC''), provides
haircut schedules to participants.\12\
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\11\ Pursuant to Section 806(e)(1) of Title VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act and Rule 19b-
4(n)(1)(i) under the Act, if a change materially affects the nature
or level of risks presented by NSCC, then NSCC is required to file
an advance notice. 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-
4(n)(1)(i).
\12\ DTC also allows its participants to pledge eligible
collateral as a portion of the participant fund; however, instead of
being in the DTC rulebook, the collateral haircut schedules are
published periodically by Important Notice to DTC participants.
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Concurrent with moving the haircuts and concentration limits from
the Rules to the website, NSCC is also proposing to reconfigure the
categories relating to Treasury securities haircuts by moving the
Treasury Inflation-Protected Securities (``TIPS'') to a separate
category and increasing the haircut levels for TIPS. The proposed
change to TIPS is reflected in Exhibit 3c to this filing. TIPS are a
type of Treasury security issued by the U.S. government that are
indexed to inflation such that the principal value of the security
rises as inflation rises.
In connection with NSCC's assessments of its collateral haircuts,
NSCC employs daily backtesting to determine the adequacy of each
member's collateral haircuts. NSCC compares the collateral haircuts for
each member with the simulated liquidation gains/losses using the
actual positions in the member's portfolio, and the actual historical
security returns. A backtesting deficiency occurs when a member's
collateral haircuts would not have been adequate to cover the simulated
liquidation losses.
In connection with such assessments, NSCC has determined that in
periods where the inflation rate fluctuates, the current haircut levels
for TIPS may be inadequate to address the fluctuations from time to
time. This is because TIPS are indexed to the inflation rate, and
prices on TIPS move inversely to their yields, e.g., when the inflation
rate increases, prices on TIPS decrease. When the decline in market
value of TIPS exceeds the haircut for TIPS, NSCC would be exposed to
potential liquidation losses. Accordingly, NSCC is proposing to
reconfigure and modify the haircut information that would be posted on
NSCC's website to ensure that the haircut levels would be commensurate
with the particular risk attributes of TIPS.
Specifically, NSCC would list TIPS of various maturity groupings in
a separate category from Treasury bills, notes and bonds. In addition,
NSCC would change the haircut level applicable for TIPS as follows:
----------------------------------------------------------------------------------------------------------------
Maturity Current % Proposed %
----------------------------------------------------------------------------------------------------------------
TIPS................................... Zero to 1 year................... 2.0 2.0
1 year to 2 years................ 2.0 3.0
2 years to 5 years............... 3.0 5.0
5 years to 10 years.............. 4.0 7.0
10 years to 15 years............. 6.0 7.0
15 years or greater.............. 6.0 10.0
----------------------------------------------------------------------------------------------------------------
In determining the appropriate haircut levels for TIPS, NSCC
conducted a review of TIPS haircuts at other registered clearing
agencies and foreign central counterparty clearing houses (``CCPs'') to
compare NSCC's current TIPS haircuts with that required by registered
clearing agencies and foreign CCPs when TIPS are deposited to their
clearing funds, or the equivalent thereof. The results of the review
and comparison indicated that NSCC's current haircut levels for TIPS
are generally lower than the TIPS haircuts required by other clearing
agencies and
[[Page 68780]]
foreign CCPs, particularly with respect to maturity ranges of 10 years
or longer. While the TIPS haircut requirement at such other entities is
not dispositive as to the risk borne by NSCC or the proper TIPS haircut
levels to offset such risk, it is indicative of the TIPS haircuts being
applied to users of other similarly situated entities in order to use
the services of the clearing agencies and foreign CCPs and the impact
to such users. The chart below shows the haircuts that participants of
other clearing agencies and foreign CCPs are currently subject to when
using TIPS to meet their margin requirements, as compared with the
existing TIPS haircuts required at NSCC.
[GRAPHIC] [TIFF OMITTED] TN04OC23.013
NSCC is not proposing any changes to the concentration limits at
this time.
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\13\ See ICE Clear U.S. Acceptable Collateral and Haircuts,
available at www.theice.com/publicdocs/clear_us/ICUS_Collateral_Information.pdf.
\14\ See LCH LTD-Margin Collateral Haircut Schedule, available
at www.lch.com/system/files/media_root/Collateral/Acceptable%20Collateral%20Haircuts%20LCH%20Ltd_0.pdf.
\15\ See CME Group Acceptable Performance Bond Collateral for
Base Guaranty Fund Products, available at www.cmegroup.com/clearing/files/acceptable-collateral-futures-options-select-forwards.pdf.
\16\ See OCC Collateral Haircut Schedule, available at
www.theocc.com/clearance-and-settlement/acceptable-collateral-haircuts.
---------------------------------------------------------------------------
Impact Study
NSCC conducted an impact study for the period from September 1,
2021 through August 31, 2022 (``Impact Study''). If the proposed
haircut adjustments had been in place during the Impact Study period,
the changes would have resulted in an average daily increase of
$197,000 in the Clearing Fund assuming TIPS were deposited. Two members
would have been impacted with a daily average dollar increase of
approximately $123,000 (or 0.10% of their average Clearing Fund
deposit) and $74,000 (or 0.31% of their average Clearing Fund deposit),
respectively, had the proposed changes been in place.
Implementation Timeframe
Subject to approval by the Commission, NSCC expects to implement
this proposal by no later than 60 Business Days after such approval and
would announce the effective date of the proposed changes by an
Important Notice posted to NSCC's website.
2. Statutory Basis
NSCC believes this proposal is consistent with the requirements of
the Act, and the rules and regulations thereunder applicable to a
registered clearing agency. Specifically, NSCC believes that the
proposed changes described above are consistent with Section
17A(b)(3)(F) of the Act,\17\ and Rules 17Ad-22(e)(4)(i), (e)(5),
(e)(6)(i), and (e)(6)(v), each promulgated under the Act,\18\ for the
reasons described below.
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(5), (e)(6)(i), and
(e)(6)(v).
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Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions, and to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible.\19\ As
described above, NSCC believes the proposed changes to move the
collateral haircuts and concentration limits from the Rules to the
website would provide NSCC with more flexibility to respond to changing
market conditions because adjustments to the haircuts and concentration
limits would no longer require a rule change. By being able to make
appropriate and timely adjustments to the haircuts and concentration
limits, NSCC would have the flexibility to respond to changing market
conditions more promptly. NSCC believes that having this additional
flexibility to respond to changing market conditions more promptly
would help better ensure that NSCC (i) collects sufficient margin from
members to cover the risk exposures that NSCC may face in liquidating
members' portfolios and (ii) minimizes exposures from members with
large collateral positions in a particular group of securities with a
similar risk profile or in a particular asset type, such that, in the
event of a member default, NSCC's operations would not be disrupted,
and non-defaulting members would not be exposed to losses they cannot
anticipate or control. In this way, the proposed rule change to move
the collateral haircuts and concentration limits from the Rules to the
website would assure the safeguarding of securities and funds which are
in the custody and control of NSCC or for
[[Page 68781]]
which it is responsible, consistent with Section 17A(b)(3)(F) of the
Act.\20\
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78q-1(b)(3)(F).
\20\ Id.
---------------------------------------------------------------------------
NSCC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. NSCC has determined that in periods
where the inflation rate fluctuates, the current haircut levels for
TIPS have been inadequate to address the fluctuations from time to
time, and more conservative haircuts for TIPS are warranted. Having
haircut levels for TIPS that are commensurate with the particular risk
attributes of TIPS would enable NSCC to collect sufficient margin from
members to cover the risk exposures that NSCC may face in liquidating
members' portfolios such that, in the event of a member default, NSCC's
operations would not be disrupted, and non-defaulting members would not
be exposed to losses they cannot anticipate or control. In this way,
the proposed rule change to move TIPS haircuts into a separate category
and raise the haircut levels for TIPS would assure the safeguarding of
securities and funds which are in the custody and control of NSCC or
for which it is responsible, consistent with Section 17A(b)(3)(F) of
the Act.\21\
---------------------------------------------------------------------------
\21\ Id.
---------------------------------------------------------------------------
NSCC believes that the proposed clarifying changes would help to
ensure that the Rules are clear to members. When members better
understand their rights and obligations regarding the Rules, members
are more likely to act in accordance with the Rules, which NSCC
believes would promote the prompt and accurate clearance and settlement
of securities transactions. As such, NSCC believes that the proposed
clarifying changes would be consistent with Section 17A(b)(3)(F) of the
Act.\22\
---------------------------------------------------------------------------
\22\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(i) under the Act \23\ requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to effectively identify,
measure, monitor, and manage its credit exposures to participants and
those exposures arising from its payment, clearing, and settlement
processes by maintaining sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence. As described above, NSCC believes the proposed changes to
move the collateral haircuts and concentration limits from the Rules to
the website would provide NSCC with more flexibility to respond to
changing market conditions because adjustments to the haircuts and
concentration limits would no longer require a rule change. By being
able to make appropriate and timely adjustments to the haircuts and
concentration limits, NSCC would have the flexibility to respond to
changing market conditions more promptly. NSCC believes that having
this additional flexibility to respond to changing market conditions
more promptly would help ensure that NSCC (i) collects sufficient
margin from members to cover the risk exposures that NSCC may face in
liquidating members' portfolios and (ii) minimizes exposures from
members with large collateral positions in a particular group of
securities with a similar risk profile or in a particular asset type,
such that, in the event of a member default, NSCC's operations would
not be disrupted, and non-defaulting members would not be exposed to
losses they cannot anticipate or control. In this way, the proposed
rule change to move the collateral haircuts and concentration limits
from the Rules to the website would help ensure that NSCC maintains
sufficient financial resources to cover its credit exposure to each
participant fully with a high degree of confidence, consistent with the
requirements of Rule 17Ad-22(e)(4)(i) under the Act.\24\
---------------------------------------------------------------------------
\23\ 17 CFR 240.17Ad-22(e)(4)(i).
\24\ Id.
---------------------------------------------------------------------------
NSCC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. NSCC has determined that in periods
where the inflation rate fluctuates, the current haircut levels for
TIPS may be inadequate to address the fluctuations from time to time,
and more conservative haircuts for TIPS are warranted. Ensuring that
the haircut levels for TIPS are commensurate with the particular risk
attributes of TIPS would in turn help ensure that NSCC requires members
to maintain sufficient margin to cover the credit exposures that NSCC
may face related to its ability to liquidate members' portfolios in the
event of a member default. In this way, the proposed rule change to
move TIPS haircuts into a separate category and raise the haircut
levels for TIPS would help ensure that NSCC maintains sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence, consistent with the
requirements of Rule 17Ad-22(e)(4)(i) under the Act.\25\
---------------------------------------------------------------------------
\25\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(5) under the Act \26\ requires, in part, a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to set and enforce
appropriately conservative haircuts and concentration limits if the
covered clearing agency requires collateral to manage its or its
participants' credit exposure. As described above, NSCC believes the
proposed changes to move the collateral haircuts and concentration
limits from the Rules to the website would provide NSCC with more
flexibility to respond to changing market conditions because
adjustments to the haircuts and concentration limits would no longer
require a rule change. By being able to make appropriate and timely
adjustments to the haircuts and concentration limits, NSCC would have
the flexibility to respond to changing market conditions more promptly.
NSCC believes that having this additional flexibility to respond to
changing market conditions more promptly would help better ensure that
NSCC (i) collects sufficient margin from members to cover the risk
exposures that NSCC may face in liquidating members' portfolios and
(ii) minimizes exposures from members with large collateral positions
in a particular group of securities with a similar risk profile or in a
particular asset type, such that, in the event of a member default,
NSCC's operations would not be disrupted, and non-defaulting members
would not be exposed to losses they cannot anticipate or control.
Specifically, NSCC would have the ability to promptly set and enforce
conservative collateral haircuts and concentration limits that are
reflective of the current market conditions. In this way, the proposed
changes to move the collateral haircuts and concentration limits from
the Rules to the website would help NSCC set and enforce appropriately
conservative collateral haircuts and concentration limits, consistent
with the requirements of Rule 17Ad-22(e)(5) under the Act.\27\
---------------------------------------------------------------------------
\26\ 17 CFR 240.17Ad-22(e)(5).
\27\ Id.
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NSCC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. NSCC has determined that in periods
where the inflation rate fluctuates, the current haircut levels for
TIPS have been inadequate to address the fluctuations from time to
time, and more conservative haircuts for TIPS are
[[Page 68782]]
warranted. Specifically, NSCC would have the ability to set and enforce
conservative collateral haircuts that are commensurate with the
particular risk attributes of TIPS. In this way, the proposed changes
to move TIPS haircuts into a separate category and raise the haircut
levels for TIPS would help NSCC set and enforce appropriately
conservative collateral haircuts, consistent with the requirements of
Rule 17Ad-22(e)(5) under the Act.\28\
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(i) under the Act \29\ requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to cover, if the covered
clearing agency provides central counterparty services, its credit
exposures to its participants by establishing a risk-based margin
system that, at a minimum, considers, and produces margin levels
commensurate with, the risks and particular attributes of each relevant
product, portfolio, and market. NSCC believes that the proposed changes
to move the collateral haircuts and concentration limits from the Rules
to the website would provide NSCC with more flexibility to respond to
changing market conditions because NSCC would be able to make
appropriate adjustments to the haircuts and concentration limits
without a rule change. By being able to make appropriate and timely
adjustments to the haircuts and concentration limits, NSCC would have
the flexibility to respond to changing market conditions more promptly.
NSCC believes that having this additional flexibility to respond to
changing market conditions more promptly would enable NSCC to better
risk manage its credit exposure to its members by (i) collecting
sufficient margin from members to cover the risk exposures that NSCC
may face in liquidating members' portfolios and (ii) minimizing
exposures from members with large collateral positions in a particular
group of securities with a similar risk profile or in a particular
asset type, thus allowing NSCC to produce margin levels commensurate
with the risks and particular attributes of each relevant product,
portfolio, and market. Therefore, NSCC believes this proposed change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\30\
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\29\ 17 CFR 240.17Ad-22(e)(6)(i).
\30\ Id.
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NSCC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. NSCC has determined that in periods
where the inflation rate fluctuates, the current haircut levels for
TIPS may be inadequate to address the fluctuations from time to time,
and more conservative haircuts for TIPS are warranted. Ensuring that
the haircut levels for TIPS are commensurate with the particular risk
attributes of TIPS would allow NSCC to produce margin levels
commensurate with the risks and particular attributes of each relevant
product, portfolio, and market. Therefore, NSCC believes this proposed
change is consistent with Rule 17Ad-22(e)(6)(i) under the Act.\31\
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\31\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(v) under the Act \32\ requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to cover, if the covered
clearing agency provides central counterparty services, its credit
exposures to its participants by establishing a risk-based margin
system that, at a minimum, uses an appropriate method for measuring
credit exposure that accounts for relevant product risk factors and
portfolio effects across products. NSCC believes that the proposed
changes to move the collateral haircuts and concentration limits from
the Rules to the website would provide NSCC with more flexibility to
respond to changing market conditions more promptly because NSCC would
be able to make appropriate adjustments to the haircuts and
concentration limits without a rule change. Having this additional
flexibility would enable NSCC to better risk manage its credit exposure
to its members because NSCC would then be able to make appropriate and
timely adjustments to the haircuts and concentration limits, as
described above. Being able to adjust the haircuts and concentration
limits appropriately and timely would allow NSCC to better risk manage
its credit exposure to its members by (i) collecting sufficient margin
from members to cover the risk exposures that NSCC may face in
liquidating members' portfolios and (ii) minimizing exposures from
members with large collateral positions in a particular group of
securities with a similar risk profile or in a particular asset type,
thus producing margin levels commensurate with relevant product risk
factors and portfolio effects across products. Therefore, NSCC believes
this proposed change is consistent with Rule 17Ad-22(e)(6)(v) under the
Act.\33\
---------------------------------------------------------------------------
\32\ 17 CFR 240.17Ad-22(e)(6)(v).
\33\ Id.
---------------------------------------------------------------------------
NSCC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. Specifically, as proposed, NSCC
would have collateral haircuts that are commensurate with the
particular risk attributes of TIPS. Ensuring that the haircut levels
for TIPS are commensurate with the particular risk attributes of TIPS
would allow NSCC to produce margin levels commensurate with relevant
product risk factors and portfolio effects across products. Therefore,
NSCC believes this proposed change is consistent with Rule 17Ad-
22(e)(6)(v) under the Act.\34\
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\34\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act requires that the rules of NSCC do
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\35\ NSCC does not believe the
proposed rule changes to move the haircuts and concentration limits
from the Rules to the website would impose a burden on competition.
These proposed changes are designed to enable NSCC to timely respond to
increases in market volatility with haircut requirements and
concentration limits that are more reflective of the current credit
exposures to NSCC. As discussed above, these proposed changes would
allow NSCC to better risk manage its credit exposure to its members by
(i) collecting sufficient margin from members to cover the risk
exposures that NSCC may face in liquidating members' portfolios and
(ii) minimizing exposures from members with large collateral positions
in a particular group of securities with a similar risk profile or in a
particular asset type, such that, in the event of a member default,
NSCC's operations would not be disrupted, and non-defaulting members
would not be exposed to losses they cannot anticipate or control. These
proposed changes would not unfairly inhibit access to NSCC's services,
or disadvantage or favor any particular member in relationship to
another member. The proposed changes would allow NSCC to adjust the
haircuts and concentration limits more promptly and would not otherwise
affect members' access to NSCC's services. In addition, any changes to
the haircuts or concentration limits would be directly related to the
perceived risk related to members' collateral based on back-tests,
stress-tests and market observations, and
[[Page 68783]]
would be applied uniformly to all members. Accordingly, NSCC believes
that these proposed changes would not impose any burden or have any
impact on competition.
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\35\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
Similarly, NSCC does not believe the proposed rule changes to move
TIPS haircuts into a separate category would impose a burden on
competition. These proposed changes are designed to improve the clarity
and presentation of the haircut information. These proposed changes
would not unfairly inhibit access to NSCC's services, or disadvantage
or favor any particular member in relationship to another member, and
the changes would be applied uniformly to all members. Accordingly,
NSCC believes that these proposed changes would not impose any burden
or have any impact on competition.
NSCC believes the proposed changes to raise certain TIPS haircut
levels may have an impact on competition because these changes could
result in members' Eligible Clearing Fund Securities being subject to
higher haircuts than they would have been under the current haircut
schedule. NSCC believes that the proposed change could burden
competition by potentially increasing these members' operating costs by
requiring members who are using TIPS as collateral to pledge additional
collateral. Nonetheless, NSCC believes any burden on competition
imposed by the proposed changes would not be significant and,
regardless of whether such burden on competition could be deemed
significant, would be necessary and appropriate, as permitted by
Section 17A(b)(3)(I) of the Act for the reasons described in this
filing and further below.\36\
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
NSCC believes any burden on competition presented by the proposed
changes to the TIPS haircut levels would not be significant. As
discussed above, if the proposed changes to the TIPS haircut levels had
been in place during the Impact Study period, two members would have
been impacted with an daily average dollar increase of approximately
$123,000 (or 0.10% of their average Clearing Fund deposit) and $74,000
(or 0.31% of their average Clearing Fund deposit), respectively. In
addition, NSCC believes that the proposed changes to the TIPS haircut
levels are comparable with what is being required of users of other
similar registered clearing agencies and foreign CCPs when posting TIPS
as collateral.
NSCC believes any burden on competition that may be imposed by the
proposed changes to the TIPS haircut levels would be necessary because,
as described above, the proposed changes would help ensure that the
collateral values attributed to TIPS would be commensurate with the
particular risk attributes of TIPS. Making sure proper collateral
values are attributed to TIPS that are used as margin would thus help
better ensure that NSCC collects sufficient margin from members and
thereby assure the safeguarding of securities and funds which are in
the custody and control of NSCC or for which it is responsible,
consistent with Section 17A(b)(3)(F) of the Act.\37\
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\37\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
In addition, NSCC believes the proposed changes to the TIPS haircut
levels are necessary to support NSCC's compliance with Rules 17Ad-
22(e)(4)(i), (e)(5), (e)(6)(i), and (e)(6)(v) under the Act.
Specifically, as described above, NSCC believes these proposed changes
would ensure that the haircut levels for TIPS are commensurate with the
particular risk attributes of TIPS. Having haircut levels for TIPS that
are commensurate with the particular risk attributes of TIPS would
ensure proper collateral valuation for TIPS used as margin. Ensuring
proper collateral valuation for TIPS used as margin would help NSCC
better measure, monitor, and manage its credit exposures to
participants and those exposures arising from its payment, clearing,
and settlement processes, consistent with the requirements of Rule
17Ad-22(e)(4)(i) under the Act.\38\ Ensuring proper collateral
valuation for TIPS used as margin would also allow NSCC to set and
enforce appropriately conservative collateral haircuts, consistent with
the requirements of Rule 17Ad-22(e)(5) under the Act.\39\ It would also
help NSCC cover its credit exposures to its participants, consistent
with the requirements of Rules 17Ad-22(e)(6)(i) and (e)(6)(v) under the
Act.\40\
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\38\ 17 CFR 240.17Ad-22(e)(4)(i).
\39\ 17 CFR 240.17Ad-22(e)(5).
\40\ 17 CFR 240.17Ad-22(e)(6)(i) and (e)(6)(v).
---------------------------------------------------------------------------
NSCC also believes that any burden on competition that may be
imposed by the proposed changes to the TIPS haircut levels would be
appropriate in furtherance of the Act because these proposed changes
have been specifically designed to assure the safeguarding of
securities and funds which are in the custody and control of NSCC or
for which it is responsible, as required by Section 17A(b)(3)(F) of the
Act.\41\ As described above, NSCC believes these proposed changes would
help better ensure that NSCC collects sufficient margin from members,
thus enabling NSCC to produce margin levels more commensurate with the
risks it faces as a central counterparty. Accordingly, NSCC believes
these proposed changes are appropriately designed to meet its risk
management goals and regulatory obligations.
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
NSCC does not believe the proposed clarifying changes to the Rules
would impact competition. These changes would help to ensure that the
Rules remain clear. In addition, the changes would facilitate members'
understanding of the Rules and their obligations thereunder. These
changes would not affect NSCC's operations or the rights and
obligations of the membership. As such, NSCC believes the proposed
clarifying changes would not have any impact 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 additional written comments are received, they
will be publicly filed as an Exhibit 2 to this filing, as required by
Form 19b-4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
SEC's Division of Trading and Markets at [email protected] or
202-551-5777.
NSCC reserves the right to not respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which
[[Page 68784]]
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-2023-009 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-2023-009. 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
(dtcc.com/legal/sec-rule-filings). 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-2023-009 and should be submitted on or before October 25, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21936 Filed 10-3-23; 8:45 am]
BILLING CODE 8011-01-P
