Notice2021-13413
Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Partial Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Partial Amendment No. 1, To Amend the Supplemental Liquidity Deposit Requirements
Primary source
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Published
June 24, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 119 (Thursday, June 24, 2021)</title>
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[Federal Register Volume 86, Number 119 (Thursday, June 24, 2021)]
[Notices]
[Pages 33414-33420]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-13413]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92213; File No. SR-NSCC-2021-002]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Partial Amendment No. 1 and Order
Granting Accelerated Approval of a Proposed Rule Change, as Modified by
Partial Amendment No. 1, To Amend the Supplemental Liquidity Deposit
Requirements
June 21, 2021.
I. Introduction
On March 5, 2021, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2021-002 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder \2\ to amend its supplemental liquidity
[[Page 33415]]
deposit requirements.\3\ The proposed rule change was published for
comment in the Federal Register on March 24, 2021,\4\ and the
Commission has received comments in support of the changes proposed
therein.\5\ On May 7, 2021, pursuant to Section 19(b)(2) of the Act,\6\
the Commission designated a longer period within which to approve,
disapprove, or institute proceedings to determine whether to approve or
disapprove the proposed rule change.\7\ On June 17, 2021, NSCC filed
Partial Amendment No. 1 to the proposed rule change, which provided
additional description of the proposed rule change and did not change
the substance of the proposed rule change, as discussed in more detail
in Section II.D below. The Commission is publishing this notice to
solicit comments on Partial Amendment No. 1 from interested persons
and, for the reasons discussed below, is approving the proposed rule
change, as modified by Partial Amendment No. 1 (hereinafter, ``Proposed
Rule Change''), on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing, infra note 4, at 86 FR 15738. On March
5, 2021, NSCC also filed the proposals contained in the proposed
rule change as advance notice SR-NSCC-2021-801 (the ``Advance
Notice'') with the Commission pursuant to Section 806(e)(1) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act entitled
the Payment, Clearing, and Settlement Supervision Act of 2010
(``Clearing Supervision Act''), 12 U.S.C. 5465(e)(1), and Rule 19b-
4(n)(1)(i) of the Act, 17 CFR 240.19b-4(n)(1)(i). Notice of filing
of the Advance Notice was published in the Federal Register on March
24, 2021. Securities Exchange Act Release No. 91347 (March 18,
2021), 86 FR 15750 (March 24, 2021) (File No. SR-NSCC-2021-801).
\4\ Securities Exchange Act Release No. 91350 (March 18, 2021),
86 FR 15738 (March 24, 2021) (File No. SR-NSCC-2021-002) (``Notice
of Filing'').
\5\ Comments are available at <a href="https://www.sec.gov/comments/sr-nscc-2021-002/srnscc2021002.htm">https://www.sec.gov/comments/sr-nscc-2021-002/srnscc2021002.htm</a>. To date, the comments received
generally support the proposal.
\6\ 15 U.S.C. 78s(b)(2).
\7\ Securities Exchange Act Release No. 91788 (May 7, 2021), 86
FR 26112 (May 12, 2021) (File No. SR-NSCC-2021-002).
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II. Description of the Proposed Rule Change
A. Background
As a central counterparty (``CCP''),\8\ NSCC occupies an important
role in the securities settlement system by interposing itself between
counterparties to financial transactions, becoming the buyer to each
seller and seller to each buyer to ensure the performance of the
contract, thereby reducing the risk faced by its Members \9\ and
contributing to global financial stability. NSCC's liquidity risk
management plays an integral part in NSCC's ability to perform its role
as a CCP. If a Member defaults, NSCC, as a CCP, would need to complete
settlement of guaranteed transactions on the failing Member's behalf
from the date of default through the remainder of the settlement cycle
(currently two days for securities that settle on a regular way basis
in the U.S. markets). To do so, and to meet its related regulatory
requirements, NSCC seeks to maintain sufficient liquid resources in
order to meet the potential funding required to settle outstanding
transactions of a defaulting Member in a timely manner, as well as to
hold qualifying liquid resources sufficient to meet its minimum
liquidity resource requirement in each relevant currency for which it
has payment obligations owed to its Members.\10\
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\8\ 17 CFR 240.17Ad-22(a)(1).
\9\ Capitalized terms not defined herein are defined in NSCC's
Rules and Procedures (``Rules''), available at http://dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
\10\ See Securities Exchange Act Release No. 82377 (December 21,
2017), 82 FR 61617 (December 28, 2017) (File Nos. SR-DTC-2017-004;
SR-FICC-2017-008; SR-NSCC-2017-005) (approving NSCC's Liquidity Risk
Management Framework).
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NSCC has a number of default liquidity resources that it considers
to be qualifying liquid resources for the purposes of Rule 17Ad-
22(a)(14).\11\ These resources include: (1) Cash deposits to the NSCC
Clearing Fund; \12\ (2) the proceeds of the issuance and private
placement of (a) short-term, unsecured notes in the form of commercial
paper and extendable notes (``Commercial Paper Program''),\13\ and (b)
term debt (``Term Debt Issuance''); \14\ (3) cash that would be
obtained by drawing on NSCC's committed 364-day credit facility with a
consortium of banks (``Line of Credit''); \15\ and (4) supplemental
liquidity deposits, collected pursuant to NSCC Rule 4(A), as discussed
further below.\16\
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\11\ See Notice of Filing, supra note 4, at 15738-39. Qualifying
liquid resources include, among other things: Cash held either at
the central bank of issue or at creditworthy commercial banks, and
assets that are readily available and convertible into cash through
prearranged funding arrangements, such as committed arrangements
without material adverse change provisions, including lines of
credit, foreign exchange swaps, and repurchase agreements. 17 CFR
240.17Ad-22(a)(14).
\12\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules, supra note 9.
\13\ See Securities Exchange Act Release Nos. 75730 (August 19,
2015), 80 FR 51638 (August 25, 2015) (File No. SR-NSCC-2015-802);
82676 (February 9, 2018), 83 FR 6912 (February 15, 2018) (File No.
SR-NSCC-2017-807).
\14\ See Securities Exchange Act Release No. 88146 (February 7,
2020), 85 FR 8046 (February 12, 2020) (File No. SR-NSCC-2019-802).
\15\ See Securities Exchange Act Release No. 80605 (May 5,
2017), 82 FR 21850 (May 10, 2017) (File Nos. SR-DTC-2017-802; SR-
NSCC-2017-802).
\16\ See Rule 4(A) (Supplemental Liquidity Deposits) of the
Rules, supra note 9. See also Securities Exchange Act Release Nos.
70999 (December 5, 2013), 78 FR 75413 (December 11, 2013) (File No.
SR-NSCC-2013-02); 71000 (December 5, 2013), 78 FR 75400 (December
11, 2013) (File No. SR-NSCC-2013-802).
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B. Current Rules Relating to Supplemental Liquidity Deposits
Currently, NSCC only collects supplemental liquidity deposits
during monthly options expiry periods in order to cover the heightened
liquidity exposure resulting from increased trading activity around
options expiration.\17\ NSCC only collects supplemental liquidity
deposits from its 30 largest Members or group of affiliated Members
(hereinafter, ``Providers'').\18\ NSCC calculates each Provider's
supplemental liquidity obligation for an upcoming options expiry period
using an estimate based on NSCC's highest liquidity need and the
Provider's settlement activity during the prior 24-months.\19\
Providers, in turn, must fund their supplemental liquidity obligations
two business days prior to the start of the options expiry period,
which NSCC will return seven business days after the end of that
period.\20\
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\17\ See Rule 4(A), supra note 9. NSCC defines the duration of
the options expiry periods in its Rules, which typically runs from
the third Friday of the month to the following Tuesday. See id.
\18\ See Section 2 of Rule 4(A), supra note 9. NSCC may use a
Provider's supplemental liquidity deposit to satisfy a loss or
liability arising only from that Provider's default on its
obligations to NSCC. Supplemental liquidity deposits are not
otherwise subject to NSCC's Loss Allocation Waterfall. See Section
13(c) of Rule 4(A), supra note 9.
\19\ See Section 2 of Rule 4(A), supra note 9. Typically, NSCC
performs this calculation, at the latest, one week prior to the
start of the options expiry period.
\20\ See Sections 4 and 9 of Rule 4(A), supra note 9.
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In order to ensure NSCC maintains adequate liquidity resources
throughout the options expiry period, Providers may voluntarily prefund
additional supplemental liquidity deposits at the start of the period,
if it anticipates increases in its trading activity, compared to its
historical activity, will create a liquidity shortfall at NSCC.\21\ In
the event a Provider fails to provide adequate voluntary prefunded
deposits, NSCC may require the Provider to fund additional supplemental
liquidity deposits if NSCC experiences a resulting liquidity
shortfall,\22\ which NSCC may hold for up to 90 days.\23\ The 90-day
lock-up incentivizes Providers to voluntarily prefund their
supplemental liquidity deposits in order to ensure NSCC maintains
adequate liquidity resources throughout the options expiry period.
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\21\ See Section 2 of Rule 4(A), supra note 9. See also, Notice
of Filing, supra note 4, at 15739.
\22\ See Section 7 of Rule 4(A), supra note 9.
\23\ See Section 10 of Rule 4(A), supra note 9.
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[[Page 33416]]
C. Proposed Changes to the Rules Relating to Supplemental Liquidity
Deposits
As discussed above, NSCC may only collect supplemental liquidity
deposits during monthly options expiry periods under its current
Rules.\24\ However, NSCC can face sudden liquidity shortfalls on any
business day, not just those business days that fall within monthly
options expiry periods, particularly during volatile market conditions
unrelated to options expiration.\25\ To address this issue, NSCC
proposes to change the frequency at which it may collect supplemental
liquidity deposits to each business day, based on a daily calculation.
This proposed approach to collecting supplemental liquidity deposits
should allow NSCC to respond quickly to any sudden liquidity shortfalls
arising from a Provider's activity, regardless of when those shortfalls
occur.
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\24\ The description that follows is excerpted from the Notice
of Filing, supra note 4.
\25\ See Notice of Filing, supra note 4, at 15740.
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NSCC also proposes the ability to collect supplemental liquidity
deposits on an intraday basis in certain instances where sudden
intraday increases in liquidity risk justify shortening the amount of
time NSCC is exposed to that risk, including a mandatory intraday
collection in connection with monthly options expiry periods. Moreover,
NSCC proposes to eliminate the up to 90 day lock-up period of certain
supplemental liquidity deposits. Additionally, NSCC proposes an
alternative pro rata daily calculation in the rare event its regular
daily calculation would inadvertently result in collecting supplement
liquidity deposits from multiple Providers that, taken together, would
significantly exceed NSCC's liquidity needs on that day.
1. Proposed Daily Calculation of Supplemental Liquidity Deposits
A Provider \26\ will be obligated to provide a supplemental
liquidity deposit on each business day in which its settlement activity
causes a liquidity shortfall at NSCC.\27\ NSCC will provide a notice to
each Provider of the amount of its supplemental liquidity deposit,
which the Provider will be required to fund within one hour of such
notice.\28\ NSCC proposes to return supplemental liquidity deposits on
the next business day,\29\ except in certain circumstances as described
in greater detail in Section II.C.4. below.
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\26\ Under the proposal, Providers will continue to be the 30
largest Members or group of affiliated Members, but NSCC proposes to
simplify how it determines the 30 Providers in order to provide
greater transparency and predictability in its determination. The 30
Providers will be determined daily and will be based on the
Provider's settlement activity during the prior 24-months. NSCC's
determination will no longer require a calculation of liquidity
exposures the Providers presented to NSCC based on NSCC's qualifying
liquid resources throughout a 24 month lookback period. NSCC will
continue to make available to each Member daily information on
NSCC's liquidity need based on that Member's settlement activity on
the previous business day.
\27\ A liquidity shortfall will arise if NSCC's daily liquidity
need exceeds its qualifying liquid resources, assuming stressed
market conditions. NSCC will continue to apply stress scenarios in
determining its total qualifying liquid resources in order to
anticipate market conditions that could cause those resources to be
unavailable on that day. Because the daily calculation will be done
at the start of each business day, it will be based on the
qualifying liquid resources available to NSCC as of the end of the
prior business day.
\28\ NSCC's proposed timing would mirror the current requirement
that is applied to its Members' Required Fund Deposits (i.e.,
margin), which is also calculated and collected daily, and must be
funded within one hour of demand. NSCC expects to deliver
notification of Provider obligations by around 8:30 a.m. ET each
business day, with deposits required by no later than 9:30 a.m. ET.
See Notice of Filing, supra note 4, at 15741.
\29\ Because NSCC would recalculate supplemental liquidity
deposits daily, NSCC will no longer need to hold deposits for the
extended periods under its current Rules. See Notice of Filing,
supra note 4, at 15742.
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NSCC states that, under its proposed calculation, it will no longer
need to estimate its liquidity need for a Provider's expected
settlement activity based on the Provider's historical settlement
activity.\30\ Instead, each Provider's deposit will be calculated based
on NSCC's actual liquidity need based on the Provider's daily
settlement activity in the event the Provider defaulted on that day,
which NSCC believes will provide both NSCC and Providers with a more
reliable measure of the liquidity risks posed to NSCC.\31\
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\30\ See Notice of Filing, supra note 4, at 15740.
\31\ See id. at 15740-41.
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NSCC provided the Commission with the results of an impact study
comparing the proposal against the observed regulatory liquidity needs
and NSCC's qualifying liquid resources available during the period from
2016 through 2020. The study assessed both pro-forma and hypothetical
impacts of the proposal under various liquidity scenarios. The study
also analyzed historical trends including the average composition and
rankings of the top 30 Providers at NSCC during the 2016 to 2020
period. Based on the pro-forma/hypothetical impact as well analysis of
the top Providers, the study's results generally indicate that the
proposal would continue to allow NSCC to meet its regulatory liquidity
obligations, and the largest Members would continue to be the ones
affected by supplemental liquidity obligations.\32\
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\32\ See id. at 15744. NSCC further states that if its other
qualifying liquid resources materially decrease, it would expect to
see an increase in both number and amount of supplemental liquidity
obligations that Providers would have been required to fund under
the proposed rule. See id. at 15744.
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2. Proposed Intraday Supplemental Liquidity Calls
NSCC also proposes to establish intraday supplemental liquidity
calls, which are intended to allow NSCC to calculate and collect
additional supplemental liquidity deposits on an intraday basis if a
Provider's increased daily activity levels or projected settlement
activity causes a NSCC liquidity shortfall during a given day.\33\ NSCC
believes the proposed intraday supplemental liquidity calls will help
to mitigate increased liquidity exposures presented to NSCC on an
intraday basis in specified circumstances, as discussed further
below.\34\
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\33\ The alternative pro rata calculation described in Section
II.C.3 below would not apply to an intraday supplemental liquidity
call.
\34\ See Notice of Filing, supra note 4, at 15741.
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i. Proposed Mandatory Intraday Supplemental Liquidity Call During
Options Expiry Periods
First, NSCC proposes to establish a mandatory monthly intraday
supplemental liquidity call that is calculated and collected, when
applicable, on the first business day (typically a Friday) of an
options expiry period.\35\ A Provider's mandatory intraday supplemental
liquidity call will be the difference between, on the one hand, NSCC's
qualifying liquid resources and, on the other hand, NSCC's daily
liquidity need based on the Provider's settlement activity at the start
of the business day, recalculated to account for both the Provider's
actual settlement activity submitted to NSCC over the course of the
day, and the Provider's projected settlement activity in stock options
expected to be submitted to NSCC.\36\ Because NSCC's recalculated daily
liquidity need will not factor in late day trades or other off-
[[Page 33417]]
setting settlement activity,\37\ NSCC proposes to adjust its
recalculated daily liquidity need using an estimated netting percentage
based on each Provider's average percentage of netting from its off-
setting settlement activity observed over the prior 24 months. NSCC
states that the actual settlement activity flowing into NSCC for cash
settlement of stocks underlying expiring options is typically lower
than the projected settlement activity NSCC receives from OCC on the
Thursday before the start of the options expiry period due to late day
offsetting trades in stock options on that Friday; therefore, applying
this netting percentage should more accurately reflect the actual
liquidity exposures that will be presented to NSCC from the
Providers.\38\
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\35\ NSCC will retain how it defines the duration of the options
expiry periods in its Rules. See supra note 17.
\36\ Each business day, NSCC receives information regarding
projected settlement activity from The Options Clearing Corporation
(``OCC'') pursuant to a Stock and Futures Settlement Agreement. That
agreement provides for the clearance and settlement of exercises and
assignments of options on eligible securities or the maturity of
eligible stock futures contracts through NSCC. See Securities
Exchange Act Release No. 81260 (July 31, 2017), 82 FR 36484 (August
4, 2017) (File Nos. SR-NSCC-2017-803; SR-OCC-2017-804). In this
case, the recalculation will be based on the data NSCC receives from
OCC late Thursday.
\37\ See Notice of Filing, supra note 4, at 15741. For example,
an affiliated Member may be entitled, under NSCC Rules, to liquidity
credits based the trading activity of its affiliates, who are also
Members, in order to determine NSCC's net liquidity exposure from
the affiliated family of Members.
\38\ See Notice of Filing, supra note 4, at 15741.
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Moreover, NSCC proposes to eliminate the up to 90 day lock-up
period of certain supplemental liquidity deposits. NSCC will no longer
need to hold these deposits for longer periods because NSCC proposes to
use the daily calculation and collection of supplemental liquidity
deposits to help ensure NSCC maintains adequate liquidity resources
each day, including throughout options expiry periods.\39\
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\39\ See id. at 15740.
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ii. Proposed Discretionary Intraday Supplemental Liquidity Call Other
Than During Options Expiry Periods
Second, NSCC proposes to establish a discretionary intraday
supplemental liquidity call on any business day other than the first
business day during options expiry periods. Under this provision, NSCC
will have the discretion to call for additional supplemental liquidity
deposits on an intraday basis on any such business day if a Provider's
increased activity levels during that day would cause a liquidity
shortfall at NSCC. The amount of a Provider's intraday supplemental
liquidity call, pursuant to NSCC's discretion, would be the difference
between NSCC's daily liquidity need, recalculated to take into account
the increase in the Provider's settlement activity during the day, and
NSCC's qualifying liquid resources.
NSCC states that it would collect a discretionary intraday call in
circumstances where NSCC believes it should accelerate the collection
of a Provider's supplemental liquidity obligation because that
Provider's intraday settlement activity would cause NSCC's liquidity
needs to exceed its liquidity resources.\40\ For example, NSCC may
impose an intraday supplemental liquidity call on a Provider if NSCC
determines that Provider is unlikely to meet its projected settlement
obligations through the settlement cycle due to rapidly escalating
financial stress.\41\ NSCC will make this determination based on a
variety of factors, including NSCC's assessment of the Provider's
ability to meet its obligations to NSCC (i.e., an assessment of the
Provider's creditworthiness on a particular business day) or estimates
of settlement activity that could offset settlement exposures and are
not reflected in NSCC's liquidity estimates.\42\
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\40\ See id. at 15741-42.
\41\ See id. at 15742.
\42\ See id.
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3. Proposed Pro Rata Calculation of Supplemental Liquidity Deposits
As a potential alternative to the calculation described above, NSCC
proposes a discretionary pro rata calculation that could apply in the
event two or more Providers each would be obligated to provide a
supplemental liquidity deposit of more than $2 billion on a business
day pursuant to the calculation described above.\43\ Under the proposed
alternative, NSCC will have the option to allocate, on a pro rata
basis, its largest liquidity need on a business day to all Providers
that are required to make a supplemental liquidity deposit on that day,
thereby reducing all such Providers' obligations to NSCC on that day.
NSCC's determination will be based on the market conditions at that
time. For example, NSCC may determine that, in certain market
conditions, this alternative approach would be appropriate to alleviate
liquidity pressures on all Providers required to make a supplemental
liquidity deposit on that day.\44\ NSCC states this alternative would
allow NSCC to use this pro rata calculation to sufficiently cover its
liquidity exposure on that day, without requiring that all Providers
fund the total amount of its calculated supplemental liquidity deposit
on that day.
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\43\ NSCC represents that it has never had two or more Providers
owe more than $2 billion on a calculation date since its adoption of
the supplemental liquidity deposit Rules in 2013. Therefore, NSCC
believes this alternative calculation would only be available in
very limited circumstances. See Notice of Filing, supra note 4, at
15741.
\44\ See Notice of Filing, supra note 4, at 15741.
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4. Proposed Clarifying Changes to the Treatment of Supplemental
Liquidity Deposits
As described in Section II.C.1 above, NSCC proposes to return
supplemental liquidity deposits, including any amount funded pursuant
to an intraday supplemental liquidity call, on the next business day.
However, NSCC proposes to clarify that, consistent with its current
Rules regarding excess Clearing Fund deposits, it will have the right
to withhold all or any part of any Member's excess Clearing Fund
deposits, including supplemental liquidity deposits, if that Member has
been placed on the Watch List pursuant to the Rules or if NSCC
determines that the Member's anticipated activities in the near future
may reasonably be expected to be materially different than its
activities of the recent past.\45\ NSCC states that, while the proposed
provision would not change NSCC's rights with respect to these funds,
it would provide Members with greater transparency into how
supplemental liquidity deposits will be treated under Rule 4.\46\
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\45\ See Section 9 of Rule 4, supra note 9. Proposed Section
12(a) of Rule 4(A) cross-references to Section 9 of Rule 4.
\46\ See Notice of Filing, supra note 4, at 15742.
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NSCC further proposes that it will hold a retired Provider's
supplemental liquidity deposits for 30 calendar days after any of the
Provider's open transactions have settled and obligations have been
satisfied,\47\ rather than return such deposits on the next business
day. NSCC states that the proposed provision will help protect NSCC
from liquidity risks presented by open transactions in the days
following a firm's retirement and would align the treatment of these
funds with the treatment of a retired Member's Required Fund
Deposits.\48\
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\47\ See Section 7 of Rule 4, supra note 9. Proposed Section 10
of Rule 4(A) cross-references to Section 7 of Rule 4.
\48\ See Notice of Filing, supra note 4, at 15742.
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Additionally, NSCC proposes to simplify and clarify NSCC's right to
debit Providers' accounts at NSCC if a Provider fails to meet its
supplemental liquidity obligations, and NSCC's obligation to make
available to Providers the amount of the Daily Liquidity Need that NSCC
would have had in the event the Provider defaulted on the previous
business day. NSCC states that, while the proposed miscellaneous
changes will not significantly alter the structure of these provisions,
they will provide transparency to Providers regarding
[[Page 33418]]
their rights and obligations under the Rules.\49\
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\49\ See id.
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D. Partial Amendment No. 1
On June 17, 2021, NSCC filed Partial Amendment No. 1 to revise its
disclosure, pursuant to Item 3(a) of Form 19b-4, relating to the
purpose of the Proposed Rule Change by including the following language
at the beginning of its Item 3(a) disclosure:
As described in greater detail below, NSCC adopted the SLD
requirements in 2013 to establish supplemental liquidity deposits to
the Clearing Fund designed to ensure that NSCC has adequate
liquidity resources to meet its liquidity needs during monthly
options expiry settlement periods when NSCC observes significant
increases in its liquidity exposures. Since that time, NSCC has
continued to strengthen its liquidity risk management by
diversifying its sources of qualifying liquid resources. These
efforts are aimed at, for example, managing the risk that any one of
those sources is reduced.
In connection with these ongoing efforts, NSCC is proposing
changes to the SLD requirements. As described in greater detail in
this filing, the proposed changes include:
(1) Calculating and collecting, when applicable, SLD on each
Business Day, rather than only during the monthly options settlement
periods.
(2) calculating SLD based on observed Member activity, rather
than based on historical and forecasted settlement activity.
(3) adopting an intraday SLD calculation and collection, when
applicable, on the first Business Day of the monthly options
settlement periods based on additional exposures that are presented
by options activity submitted after the start of day.
(4) eliminating the 90-day holding period for certain SLD.
(5) adopting a discretionary, alternative pro rata calculation
of Members' SLD requirements that would apply in certain
circumstances and allow NSCC to allocate its largest liquidity need
on a Business Day among Members that are required to pay SLD, rather
than collect separate SLD from each of those Members.
In Partial Amendment No. 1, NSCC clarifies its disclosure
describing the purpose of the proposal, pursuant to Item 3(a) of Form
19b-4. NSCC does not, however, make changes to the proposal itself,
including the proposed text of the Rules that was provided as Exhibit 5
to the Proposed Rule Change. Therefore, Partial Amendment No. 1, NSCC
does not alter the manner in which the Proposed Rule Change would nor
does it alter the manner in which the Proposed Rule Change will affect
its Members or other interested persons.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \50\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such organization. After careful consideration, the
Commission finds that the Proposed Rule Change is consistent with the
requirements of the Act and the rules and regulations applicable to
NSCC. In particular, the Commission finds that the Proposed Rule Change
is consistent with Section 17A(b)(3)(F) \51\ of the Act and Rule 17Ad-
22(e)(7) \52\ thereunder.
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\50\ 15 U.S.C. 78s(b)(2)(C).
\51\ 15 U.S.C. 78q-1(b)(3)(F).
\52\ 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) \53\ of the Act requires, in part, that the
rules of a clearing agency, such as NSCC, be designed to, among other
things, promote the prompt and accurate clearance and settlement of
securities transactions and assure the safeguarding of securities and
funds which are in the custody or control of the clearing agency or for
which it is responsible. The Commission finds that the Proposed Rule
Change is consistent with Section 17A(b)(3)(F) of the Act for the
reasons stated below.
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\53\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above in Section II.B, NSCC can face sudden liquidity
shortfalls on any business day, particularly during volatile market
conditions, which can be unrelated to options expiration. As a CCP, it
is imperative that NSCC maintains adequate resources to satisfy
liquidity needs arising from its settlement obligations, including in
the event of a Member default. However, NSCC currently may only collect
supplemental liquidity deposits during monthly options expiry periods.
As described above in Section II.C.1, the Proposed Rule Change is
designed to allow NSCC to respond quickly to sudden liquidity
shortfalls that may arise, regardless of timing, by collecting
supplemental liquidity deposits based on a daily calculation, instead
of being limited to only the monthly options expiration period. The
ability to calculate and collect supplemental liquidity deposits, as
applicable, on a daily basis should help NSCC more accurately manage
its daily liquidity exposures based on Members' actual activity.
Moreover, the proposal would allow NSCC to determine the amount of
supplemental liquidity deposits based on Members' actual activity,
providing more precise and, potentially, lower charges for Members than
provided under the current methodology, which uses estimates based on a
look-back period and can, on occasion, result in NSCC collecting more
resources than needed to cover its exposure.
Further, as described above in Section II.C.3, the proposal will
provide NSCC with additional flexibility over the timing and amount of
collections. First, establishing the mandatory intraday supplemental
liquidity calls on the first business day of the monthly options expiry
periods should help NSCC continue to manage the potential increased
liquidity exposures that may arise from options settlement-related
activity by allowing it to accelerate the collection of supplemental
liquidity deposits on that day, as opposed to waiting for the proposed
daily collection that would occur on the morning of the following
business day. Second, the proposed discretionary intraday supplemental
liquidity calls should collect additional supplemental liquidity
deposits from Members whose activity outside of the monthly options
expiry periods may cause a sudden increase in NSCC's liquidity needs on
an overnight basis. Moreover, as described above in Section II.C.3, the
proposed alternative pro rata calculation that NSCC may apply in
certain circumstances will provide NSCC the flexibility to determine
the total amount collected on a business day, while continuing to
collect sufficient liquidity to complete end-of-day settlement in the
event the Provider with the largest payment obligation defaults.
Additionally, as described above in Section II.C.4, the proposed
clarifying changes would make the rights and obligations of both NSCC
and its Members under the Rules more transparent and easier to
understand. A clearer rule supports the ability of Members to meet
their supplemental liquidity deposit requirements and understand how
NSCC will treat such deposits, and the liquidity provided to NSCC
through supplemental liquidity deposits would allow it to complete end-
of-day settlement in the event the Provider with the largest payment
obligation defaults.
For the reasons stated above, the Commission finds the Proposed
Rule Change is designed to allow NSCC to address potential sudden
liquidity exposures that may arise on a daily basis. The daily
calculation and collection of supplemental liquidity
[[Page 33419]]
deposits should allow NSCC to effectively cover those liquidity
exposures and, should help NSCC ensure it can complete settlement for
all its Members in the event one Member defaults, which the Commission
believes should promote the prompt and accurate clearance and
settlement of securities transactions. Moreover, the Commission
believes that enhancing NSCC's ability to complete settlement in the
event of a Member default should help avoid the potential for loss
mutualization among the non-defaulting members and potential impacts on
the broader financial system, which is consistent with assuring the
safeguarding of securities and funds which are in its custody or
control. Accordingly, the Commission finds the changes proposed in the
Proposed Rule Change are consistent with Section 17A(b)(3)(F) of the
Act.\54\
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\54\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(7)(i) and (ii)
The Commission finds the changes proposed in the Proposed Rule
Change are consistent with Rules 17Ad-22(e)(7)(i) and (ii), each
promulgated under the Act,\55\ for the reasons described below.
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\55\ 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
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Rule 17Ad-22(e)(7)(i) under the Act requires that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to maintain sufficient
liquid resources at the minimum in all relevant currencies to effect
same-day and, where appropriate, intraday and multiday settlement of
payment obligations with a high degree of confidence under a wide range
of foreseeable stress scenarios that includes, but is not limited to,
the default of the participant family that would generate the largest
aggregate payment obligation for the covered clearing agency in extreme
but plausible market conditions.\56\ Rule 17Ad-22(e)(7)(ii) under the
Act requires that a cover clearing agency establish, implement,
maintain and enforce written policies and procedures reasonably
designed to hold qualifying liquid resources sufficient to meet the
minimum liquidity resource requirement under Rule 17Ad-22(e)(7)(i) in
each relevant currency for which the covered clearing agency has
payment obligations owed to its clearing members.\57\
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\56\ 17 CFR 240.17Ad-22(e)(7)(i).
\57\ 17 CFR 240.17Ad-22(e)(7)(ii). For purposes of Rule 17Ad-
22(e)(7)(ii), ``qualifying liquid resources'' are defined in Rule
17Ad-22(a)(14) as including, in part, cash held either at the
central bank of issue or at creditworthy commercial banks. 17 CFR
240.17Ad-22(a)(14).
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As described above in Sections II.C.1 and 2, the Proposed Rule
Change would help strengthen NSCC's ability to maintain sufficient
liquid resources to complete end-of-day settlement in the event of the
Member default by allowing NSCC to calculate and collect, when
applicable, supplemental liquidity deposits every business day, or on
an intraday basis, from those Members that pose the largest liquidity
exposures to NSCC on that day. These resources would be available to
NSCC to complete end-of-day settlement in the event of the default of a
Member. Moreover, the Commission has reviewed and considered the impact
study results provided by NSCC comparing the proposal against the
observed regulatory liquidity needs and NSCC's qualifying liquid
resources available during the period from 2016 through 2020, to assess
both pro-forma and hypothetical impacts of the proposal under various
liquidity scenarios,\58\ and finds that these results generally
indicated that the proposal would continue allow NSCC to meet its
regulatory liquidity obligations.
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\58\ See supra note 32 and accompanying text.
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In addition, deposits made to satisfy supplemental liquidity
deposit obligations are currently and will continue to be required to
be made as cash deposits, which will continue to be held by NSCC at
either its cash deposit account at the Federal Reserve Bank of New
York, at a creditworthy commercial bank, or in other investments
pursuant to NSCC's Clearing Agency Investment Policy.\59\ Therefore,
supplemental liquidity deposits would continue to be considered a
qualifying liquid resource, as defined by Rule 17Ad-22(a)(14),\60\ and
would support NSCC's ability to hold qualifying liquid resources
sufficient to meet the minimum liquidity resource requirement under
Rule 17Ad-22(e)(7)(i),\61\ as required by Rule 17Ad-22(e)(7)(ii).\62\
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\59\ See Securities Exchange Act Release Nos. 79528 (December
12, 2016), 81 FR 91232 (December 16, 2016) (File Nos. SR-DTC-2016-
007, SR-FICC-2016-005, SR-NSCC-2016-003); 84949 (December 21, 2018),
83 FR 67779 (December 31, 2018) (File Nos. SR-DTC-2018-012, SR-FICC-
2018-014, SR-NSCC-2018-013).
\60\ 17 CFR 240.17Ad-22(a)(14).
\61\ 17 CFR 240.17Ad-22(e)(7)(i).
\62\ 17 CFR 240.17Ad-22(e)(7)(ii).
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Accordingly, the Commission finds that implementation of the
proposed amendments to NSCC's supplemental liquidity deposit
requirements would be consistent with Rule 17Ad-22(e)(7)(i) and (ii)
under the Act.\63\
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\63\ 17 CFR 240.17Ad-22(e)(7).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Partial Amendment No. 1, is consistent with the
Act. Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#7705021b125a14181a1a121903043704121459101801"><span class="__cf_email__" data-cfemail="aad8dfc6cf87c9c5c7c7cfc4ded9ead9cfc984cdc5dc">[email protected]</span></a>. Please include
File Number SR-NSCC-2021-002 on the subject line.
Paper Comments
<bullet> 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-2021-002. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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
(<a href="http://dtcc.com/legal/sec-rule-filings.aspx">http://dtcc.com/legal/sec-rule-filings.aspx</a>). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NSCC-2021-002 and should be submitted on
or before July 15, 2021.
[[Page 33420]]
V. Accelerated Approval of the Proposed Rule Change, as Modified by
Partial Amendment No. 1
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\64\ to approve the proposed rule change prior to the 30th day
after the date of publication of Partial Amendment No. 1 in the Federal
Register. As discussed in Section II.D above, in Partial Amendment No.
1, NSCC amends its Form 19b-4, Item 3(a) disclosure to provide
additional description of the purpose of the Proposed Rule Change, and
Partial Amendment No. 1 does change the substance of the proposal, the
proposed text of the Rules that was provided as Exhibit 5 to the
Proposed Rule Change, the manner in which the Proposed Rule Change will
operate, or the manner in which the Proposed Rule Change will affect
its Members or other interested persons.
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\64\ 15 U.S.C. 78s(b)(2).
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Furthermore, as discussed in Section III.A above, the Commission
believes that the Proposed Rule Change, as modified by Partial
Amendment No. 1, should help NSCC ensure it can complete settlement for
all its Members in the event one Member defaults, which the Commission
believes should promote the prompt and accurate clearance and
settlement of securities transactions, consistent with Section
17A(b)(3)(F).\65\ Therefore, the Commission believes the nature of the
changes in Partial Amendment No. 1 and NSCC's intended enhancements to
its daily liquidity risk management warrants accelerated approval of
the Proposed Rule Change. Accordingly, the Commission finds good cause
for approving the Proposed Rule Change, as modified by Partial
Amendment No. 1, on an accelerated basis, pursuant to Section 19(b)(2)
of the Act.\66\
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\65\ 15 U.S.C. 78q-1(b)(3)(F)
\66\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \67\ and
the rules and regulations promulgated thereunder.
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\67\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\68\ that Proposed Rule Change, as modified by Partial Amendment No. 1,
SR-NSCC-2021-002, be, and hereby is, Approved on an accelerated
basis.<SUP>69 70</SUP>
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\68\ 15 U.S.C. 78s(b)(2).
\69\ In approving the Proposed Rule Change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\70\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\70\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13413 Filed 6-23-21; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.