Notice2021-17074
Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of a Proposed Rule Change To Remove ID Net Transactions From the Required Fund Deposit Calculations and Make Other Changes to the Rules
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 11, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 152 (Wednesday, August 11, 2021)</title>
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[Federal Register Volume 86, Number 152 (Wednesday, August 11, 2021)]
[Notices]
[Pages 44100-44105]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-17074]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92566; File No. SR-NSCC-2021-011]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of a Proposed Rule Change To Remove ID
Net Transactions From the Required Fund Deposit Calculations and Make
Other Changes to the Rules
August 5, 2021.
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 July 27, 2021, National Securities Clearing Corporation (``NSCC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\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'') to (1) remove transactions processed through
the ID Net Service from the calculation of Members' Required Fund
Deposits to the Clearing Fund; (2) provide greater transparency
regarding the status of the ID Net Service as a non-guaranteed service
and how transactions processed through the ID Net Service are handled
following a Member default; and (3) make other changes to the Rules to
implement these proposed changes, as described in greater detail
below.\3\
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\3\ Capitalized terms not defined herein are defined in the
Rules, available at http://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
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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 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 revise its margining methodology to remove
institutional delivery (``ID'') transactions that are processed through
the ID Net Service from the calculation of Members' Required Deposits
to the Clearing Fund, as described in greater detail below.\4\ While ID
transactions processed through the ID Net Service (``ID Net
Transactions'') are netted with transactions that have been processed
through NSCC's continuous net
[[Page 44101]]
settlement (``CNS'') system, these transactions are not subject to
NSCC's trade guarantee.\5\ Therefore, the proposed change would improve
NSCC's ability to collect Required Fund Deposits from its Members that
more accurately reflect the positions that it may be required to
complete in the event of a Member default.
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\4\ See Rule 65 (ID Net Service) and Procedure XVI (ID Net
Service) of the Rules, supra note 3.
\5\ Transactions processed through the ID Net Service have never
been subject to NSCC's trade guarantee. This service was implemented
only to provide Members with the operational benefit of netting
these transactions with their CNS obligations, as described in
greater detail below.
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NSCC is also proposing to amend the Rules to provide greater
transparency regarding the status of the ID Net Service as a non-
guaranteed service and how ID Net Transactions are handled following a
Member default. Finally, NSCC is proposing to make other changes to the
Rules to implement these proposed changes.
Overview of ID Transactions and the ID Net Service
The parties involved in an ID transaction include the institutional
investor (such as mutual funds, insurance companies, hedge funds, bank
trust departments and pension funds), the investment manager (who
enters trade orders on behalf of institutional investors), the buying
broker and the selling broker, and custodian banks. After execution,
the trade allocation details of ID transactions are matched between the
executing broker and the investment manager or institutional investor's
custodian bank. After an executing broker has provided a final notice
of execution, most investment managers will provide client trade
allocation details to the executing broker using a service provided by
NSCC's affiliate, Institutional Trade Processing (``ITP'').
When the executing broker accepts and processes the trade
allocations, an electronic confirmation is provided through ITP's
TradeSuite ID<SUP>TM</SUP> service to the investment manager or the
institutional investor's custodian bank for affirmation.\6\ ITP links
with the various parties to institutional trades to provide real-time
central matching electronically comparing trade details and notifying
parties of any exceptions.\7\ After the trade allocation details are
affirmed, the institutional delivery details are sent to The Depository
Trust Company (``DTC'') where the trade is settled. NSCC risk
management receives a daily feed from ITP that includes both ID
transactions that have only been confirmed as well as those that have
also been affirmed. Some eligible ID transactions may be processed
through NSCC's CNS Accounting Operation or Balance Order Accounting
Operation, as applicable, for clearance and settlement with the buying
broker and selling broker as counterparties.\8\
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\6\ For more information regarding this service, see <a href="https://www.dtcc.com/institutional-trade-processing/itp/tradesuite-id">https://www.dtcc.com/institutional-trade-processing/itp/tradesuite-id</a>.
\7\ Exceptions occur when the mandatory matching fields (for
example, security identifier or settlement date) do not match.
\8\ See Section B (Institutional Clearing Service) of Procedure
IV (Special Representative Service) of the Rules, supra note 3.
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Alternatively, Members may subscribe for the ID Net Service and
direct ID transactions to be submitted to NSCC and DTC pursuant to this
service. The ID Net Service is a joint service of NSCC and DTC that
allows the executing brokers that are subscribers to the service to net
affirmed eligible ID transactions that are held at DTC with
transactions have been processed through CNS. ID Net Transactions net
with CNS obligations to create efficiencies in settlement but these
transactions are not processed through CNS. The ID Net Service accepts
affirmed transactions in Eligible ID Net Securities (as defined in Rule
65 (ID Net Service) of the Rules) and nets the broker-dealer side of
such transactions with the broker-dealer's CNS obligations.\9\ Most
equity securities that are eligible for processing through CNS are
Eligible ID Net Securities.
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\9\ See supra note 4.
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Participation in the ID Net Service is voluntary. Eligibility for
the ID Net Service requires that the broker-dealer in the ID
transaction be an NSCC Member and a participant of DTC. The custodian
bank in the ID transaction must be a DTC participant. In addition,
eligibility for ID Net Service processing is based on the underlying
security being processed, the type of transaction submitted for
processing, and the timing of affirmation. As described in Procedure
XVI of the Rules, ID Net Transactions that are not completed by the
cut-off time established by NSCC (currently 11:30 a.m. EST) on
settlement day are exited from NSCC's systems and must be settled on a
trade-for-trade basis away from NSCC.\10\
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\10\ Supra note 3.
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This service provides Members with the operational benefit of
netting these transactions with their CNS obligations, allowing them to
combine their affirmed ID transactions with other trades in CNS. As
noted above, ID Net transactions are not subject to NSCC's trade
guarantee.
Required Fund Deposit and Risk Management of ID Net Transactions
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.\11\ 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'').\12\ 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.
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\11\ 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).
\12\ 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) of the Rules, supra note 3.
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Pursuant to the Rules, each Member's Required Fund Deposit amount
consists of a number of applicable components, each of which is
calculated to address specific risks faced by NSCC, and are described
in Procedure XV of the Rules.\13\ Because ID Net Transactions are
netted with CNS transactions, these transactions are currently included
in the netted positions that are used to calculate certain components
of Members' Required Fund Deposits. These components include the
volatility component, the mark-to-market component, which includes both
a Regular Mark-to-Market charge and an ID Net Mark-to-Market charge,
the Margin Requirement Differential component (``MRD charge''), and a
margin liquidity adjustment charge (``MLA charge'').
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\13\ Supra note 3.
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The volatility component of each Member's Required Fund Deposit is
designed to measure market price volatility and is calculated for
Members' net of unsettled pending positions, defined as ``Net Unsettled
Positions.'' \14\ Currently, Members' Net Unsettled Positions, for
purposes of calculating
[[Page 44102]]
the volatility component, include ID Net Transactions. The volatility
component captures the market price risk associated with each Member's
portfolio at a 99th percentile level of confidence. NSCC has two
methodologies for calculating the volatility component. The volatility
component applicable to most Net Unsettled Positions is calculated
using a parametric Value at Risk (``VaR'') model and usually comprises
the largest portion of a Member's Required Fund Deposit (``VaR
Charge'').\15\
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\14\ See Sections I(A)(1)(a) and (2)(a) of Procedure XV of the
Rules, supra note 3.
\15\ As described in Procedure XV, Section I(A)(1)(a)(ii), (iii)
and (iv), and Section I(A)(2)(a)(ii), (iii) and (iv) of the Rules,
Net Unsettled Positions in certain securities are excluded from the
VaR Charge and instead charged a volatility component that is
calculated by multiplying the absolute value of those Net Unsettled
Positions by a percentage. Supra note 3.
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The mark-to-market component measures the unrealized profit or loss
using the contract price versus the Current Market Price (which is the
price for a security determined daily for purposes of the CNS system;
generally, the prior day's closing price).\16\ NSCC calculates both a
Regular Mark-to-Market charge and, for Members that subscribe to the ID
Net Service, NSCC also calculates a separate ID Net mark-to-market
component with respect to only ID Net Transactions, using the same
calculation, referred to in the Rules as the ID Net Mark-to-Market
charge.\17\ For both calculations, and only with respect to Members
that use the ID Net Service, if the mark-to-market calculation results
in a positive number, there is no mark-to-market charge applied.\18\
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\16\ See Section I(A)(1)(b) of Procedure XV of the Rules, supra
note 3. See also the definition of ``Current Market Price'' in Rule
1 (Definitions and Descriptions), id.
\17\ See Section I(A)(1)(c) of Procedure XV of the Rules, supra
note 3.
\18\ See id.
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The MRD charge is designed to help mitigate the risks posed to NSCC
by day-over-day fluctuations in a Member's portfolio by forecasting
future changes in a Member's portfolio based on a 100-day historical
look-back at each Member's portfolio over a given time period.\19\
Currently, the charge is calculated as the sum of the changes in a
Member's Regular Mark-to-Market charge, ID Net Mark-to-Market charge,
and volatility component over the look-back period. Finally, the MLA
charge is designed to address the risk presented to NSCC 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.\20\ Similar to the volatility component, the MLA
charge is calculated on a Member's Net Unsettled Positions, which
currently includes ID Net Transactions.
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\19\ See Section I(A)(1)(f) and (d) of Procedure XV of the
Rules, supra note 3.
\20\ See supra note 3.
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Proposed Enhancement to NSCC's Margining Methodology
NSCC is proposing to enhance its margining methodology to remove ID
Net Transactions from the calculation of Members' Required Fund
Deposits. NSCC does not guaranty the completion of these ID Net
Transactions, so, in the event of a Member default, these transactions
are excluded from NSCC's operations to be settled away from NSCC. By
removing ID Net Transactions from the calculation of Members' Required
Fund Deposits, NSCC would be able to calculate and collect an amount
that more accurately reflects the risks presented by positions it would
be obligated to complete in the event of a Member default.
Including ID Net Transactions in the margin calculations presents
the risk that NSCC is either under-margining or over-margining the
positions of Members that use the ID Net Service.\21\ However, NSCC
does not expect the proposed change to have a material impact on the
size of its Clearing Fund. At the time of this filing, only twelve
Members are subscribed to the ID Net Service, and their Required Fund
Deposits are driven primarily by their CNS and Balance Order activity.
For most of these Members, the inclusion of ID Net Transactions in
margin calculations has an immaterial impact on these Members' Required
Fund Deposits on a typical business day. In connection with its regular
review of its margining methodology, NSCC has determined that it could
more accurately and, therefore, more effectively measure the risks it
faces following a Member default by removing these non-guaranteed
positions from its margining methodology.
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\21\ For example, if the inclusion of ID Net Transactions in a
Member's Net Unsettled Positions results in a lower margin charge
(as compared to the margin charge that would have been calculated
for that Member if those ID Net Transactions were excluded from its
Net Unsettled Positions), NSCC could be under-margining on that Net
Unsettled Position.
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In order to implement this proposed change, NSCC would remove ID
Net Transactions from Members' Net Unsettled Positions for purposes of
calculating the volatility charge and the MLA charge. NSCC would also
(1) eliminate the ID Net Mark-to-Market charge from the Required Fund
Deposit calculations by removing Section I(A)(1)(c) from Procedure XV
of the Rules and (2) amend Section I(A)(1)(b) of Procedure XV of the
Rules to make clear that ID Net Transactions are not included in the
calculation of the Regular Mark-to-Market charge. Finally, NSCC would
amend Section I(A)(1)(f) (which will be renamed Section I(A)(1)(e)
following implementation of the proposed changes) and Section
I(A)(2)(d) of Procedure XV of the Rules, which describe the calculation
of the MRD charge, to remove the ID Net Mark-to-Market charge from this
description.
NSCC is not proposing any other changes to the calculation of these
margin charges and is not proposing any changes to the operation of the
ID Net Service.
Proposed Changes to Clarify the Non-Guaranteed Status of ID Net Service
NSCC is also proposing to amend Rule 65 (ID Net Service) and Rule
18 (Procedures for when the Corporation Declines or Ceases to Act) to
provide greater transparency and clarity into how ID Net Transactions
are processed in the event of a Member default. As stated above, the ID
Net Service provides Members with the operational benefit of netting
these transactions through NSCC's CNS system, allowing them to combine
their affirmed ID transactions with other trades in CNS. However, ID
Net Transactions are not subject to NSCC's trade guarantee and would be
exited from NSCC's systems in the event of a Member default.
Currently, Rule 65 current describes the circumstances in which
NSCC may remove a Member's status as an ID Net Subscriber, which
include the circumstances that provide NSCC with the right to suspend,
prohibit or limit a Member's access to NSCC's services under Rule 46
(Restrictions on Access to Services) of the Rules.\22\ Additionally,
Procedure XVI (ID Net Service) of the Rules describes NSCC's ability to
exit ID Net Transactions from its operations.\23\ Because the ID Net
Service is not a guaranteed service, NSCC would rely on these rules to
exit ID Net Transactions from its operations in the event of a Member
default. Specifically, if NSCC ceases to act for a Member that is an ID
Net Subscriber, that firm would no longer be eligible to use the
service pursuant to Rule 65, and NSCC would exit its ID Net
Transactions from its operations, and those transactions would be
settled on a trade-for-trade basis outside the ID Net Service.\24\ NSCC
[[Page 44103]]
is proposing to amend Rules 65 and 18 of the Rules to improve the
transparency of the Rules in describing this service as non-guaranteed
and to provide clarity on how these transactions will be processed in
the event of a Member default.
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\22\ See Section 5(b) of Rule 65 (ID Net Service) and Section 1
of Rule 46 (Restrictions on Access to Services) of the Rules, supra
note 3.
\23\ See supra note 3.
\24\ See Securities Exchange Act Release No. 57901 (June 2,
2008), 73 FR 32373, at 32375 (June 6, 2008) (File Nos. SR-DTC-2007-
14; SR-NSCC-2007-14) (``If the transaction becomes ineligible for
any reason, the transaction will be exited from the ID Net Service
processing and will be settled on a trade-for-trade basis between
the ID Net Firm and the ID Net Bank outside of the ID Net Service at
DTC.'')
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First, NSCC would include a statement in a new Section 5(c) of Rule
65 of the Rules that states the ID Net Service is not a guaranteed
service, and refers to Rule 18 of the Rules to describe how ID Net
Transactions would be treated if NSCC ceases to act for a Member that
is an ID Net Subscriber. Second, NSCC would amend Section 2(a) of Rule
18 of the Rules to make it clear that uncompleted transactions
processed through the ID Net Service in accordance with Rule 65 would
be excluded from NSCC's operations if NSCC ceased to act for a Member
that is an ID Net Subscriber pursuant to Rule 46 of the Rules.
The proposed changes to Rules 65 and 18 of the Rules would use
language that is similar to language used to describe two other non-
guaranteed NSCC services--the Automated Customer Account Transfer
Service (``ACATS'') and the Obligation Warehouse (``OW'') service.\25\
By using parallel language in describing the nature of each of these
services as non-guaranteed and how transactions processed through these
services would be excluded from NSCC's operations following a Member
default, the proposed changes would create consistency and clarity
within the Rules, improving the Rules' transparency to Members.
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\25\ See Rule 50 (Automated Customer Account Transfer Service)
and Rule 51 (Obligation Warehouse), supra note 3.
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Other Proposed Changes to the NSCC Rules To Implement the Proposal
NSCC is proposing additional changes to the Rules in order
implement the proposed changes described above. First, NSCC would move
the definitions of ``Net Unsettled Positions'' and ``Net Balance Order
Unsettled Positions'' from Procedure XV (Clearing Fund Formula and
Other Matters) to Rule 1 (Definitions and Descriptions) of the Rules.
In moving the definition of this term, which is used for the
calculation of both the volatility component and the MLA charge, to
Rule 1 of the Rules, NSCC would simplify the description of the
calculation of these charges. NSCC would also amend the definition of
Net Unsettled Positions to implement the proposed change to remove ID
Net Transactions from these positions. Other than with respect to the
removal of ID Net Transactions from these positions, the meaning of the
term ``Net Unsettled Positions'' would not change from its current
meaning.
NSCC is also proposing to change the defined term ``Regular Mark-
to-Market'' charge to the ``Mark-to-Market'' charge in Procedure XV of
the Rules.\26\ Following the proposed change to eliminate the ID Net
Mark-to-Market charge, as described above, the Regular Mark-to-Market
charge would be the only mark-to-market charge that is calculated by
NSCC. Therefore, it will no longer be necessary to refer to this charge
as the ``Regular'' mark-to-market charge.
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\26\ See Section I(A)(1)(c) of Procedure XV of the Rules, supra
note 3.
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Finally, NSCC is proposing to re-number the margin components in
Section I(A)(1) of Procedure XV of the Rules to reflect the deletion of
the ID Mark-to-Market charge, and to update the references to these
components in the description of the Excess Capital Premium charge.\27\
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\27\ See Section I(B)(2) of Procedure XV of the Rules, supra
note 3.
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(i) Implementation Timeframe
NSCC would implement the proposed changes no later than 10 Business
Days after the approval of the proposed rule change by the Commission.
NSCC would announce the effective date of the proposed changes by
Important Notice posted to its website.
2. Statutory Basis
NSCC believes that the proposed changes are consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. In particular, NSCC
believes the proposed changes are consistent with Section 17A(b)(3)(F)
of the Act,\28\ and Rules 17Ad-22(e)(4)(i) and (e)(6)(i), each
promulgated under the Act,\29\ for the reasons described below.
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\28\ 15 U.S.C. 78q-1(b)(3)(F).
\29\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
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Section 17A(b)(3)(F) of the Act requires that the rules of NSCC be
designed to, among other things, assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible.\30\ The proposed change to remove ID Net
Transactions from the calculation of the Members' Required Fund
Deposits would allow NSCC to calculate these amounts using only the
positions that it may be required to complete in the event of a Member
default. The proposed change would assist NSCC in calculating and
collecting margin requirements that better reflect the risks it may
face in liquidating a defaulted Member's positions. The Clearing Fund
is a key tool that NSCC uses to mitigate potential losses to NSCC
associated with liquidating a Member's portfolio in the event of Member
default. The proposal to enhance the calculation of margin requirements
by removing non-guaranteed positions would enable NSCC to better
measure the risks it faces in the event of a Member default, such that
NSCC's operations would not be disrupted and non-defaulting Members
would not be exposed to losses they cannot anticipate or control in
such an event.
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\30\ 15 U.S.C. 78q-1(b)(3)(F).
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Additionally, the proposed changes to include transparency around
the nature of the ID Net Service as a non-guaranteed service and
clarity on how ID Net Transactions are processed following a Member
default, and to update the Rules to implement the other proposed
changes, would make the Rules more effective in communicating Members'
rights and obligations in connection with the use of the ID Net
Service. When Members better understand their rights and obligations
regarding the Rules, they 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.
Therefore, the proposed changes are designed to assure the
safeguarding of securities and funds which are in the custody or
control of NSCC or for which it is responsible, consistent with Section
17A(b)(3)(F) of the Act.\31\
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\31\ Id.
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Rule 17Ad-22(e)(4)(i) under the Act requires, in part, that NSCC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes, including
by maintaining sufficient financial resources to cover its credit
exposure to each participant fully with a high degree of
confidence.\32\ As described above, the proposed change to remove ID
Net Transactions from the calculation of Required Fund Deposits of
Members that are ID Net Subscribers would enable NSCC to more
accurately measure the risks presented by those Members' guaranteed
positions.
[[Page 44104]]
Therefore, NSCC believes the proposal would enhance NSCC's ability to
effectively identify, measure, monitor and, through the collection of
Required Fund Deposits, manage its credit exposures to Members by
maintaining sufficient financial resources to cover its credit exposure
fully with a high degree of confidence. As such, NSCC believes the
proposed changes are consistent with Rule 17Ad-22(e)(4)(i) under the
Act.\33\
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\32\ 17 CFR 240.17Ad-22(e)(4)(i).
\33\ Id.
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Rule 17Ad-22(e)(6)(i) under the Act requires, in part, that NSCC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.\34\ The Required Fund Deposits are made up of risk-based
components (as margin) that are calculated and assessed daily to limit
NSCC's credit exposures to Members. NSCC's proposal to remove ID Net
Transactions from the calculation of Required Fund Deposits is designed
to enable NSCC to more effectively measure the risks presented by its
Members' guaranteed positions and, therefore, assess a more appropriate
level of margin. The proposed change is designed to assist NSCC in
maintaining a risk-based margin system that considers, and produces
margin levels commensurate with, the risks and particular attributes of
Members' portfolios. Therefore, NSCC believes the proposed change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\35\
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\34\ 17 CFR 240.17Ad-22(e)(6)(i).
\35\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
NSCC believes that the proposed change to remove ID Net
Transactions from the calculation of Required Fund Deposits of Members
that are ID Net Subscribers could have an impact on competition.
Specifically, NSCC believes the proposed change could burden
competition because it may result in either larger or smaller Required
Fund Deposit amounts for those Members. When the proposal results in a
larger Required Fund Deposit, the proposed change could burden
competition for Members that have lower operating margins or higher
costs of capital compared to other Members. However, any increase or
decrease in a Required Fund Deposit is not expected to be material and
would be the result of a margin calculation that more accurately
reflects the risks presented by each Member's guaranteed positions. As
such, NSCC believes that any burden on competition imposed by the
proposed change would not be significant and, further, would be both
necessary and appropriate in furtherance of NSCC's efforts to mitigate
risks and meet the requirements of the Act, as described in this filing
and further below.
NSCC believes the above described burden on competition that may be
created by the proposed change would be necessary in furtherance of the
Act, specifically Section 17A(b)(3)(F) of the Act.\36\ As stated above,
the proposal is designed to assist NSCC in better estimating and
collecting margin requirements that reflect the risks it may face in
liquidating a defaulted Member's guaranteed positions. Therefore, NSCC
believes this proposed change is consistent with the requirements of
Section 17A(b)(3)(F) of the Act, which requires that the Rules be
designed to assure the safeguarding of securities and funds that are in
NSCC's custody or control or which it is responsible.\37\
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\36\ 15 U.S.C. 78q-1(b)(3)(F).
\37\ Id.
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NSCC believes the proposal would also support NSCC's compliance
with Rules 17Ad-22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under the Act,
which require NSCC to establish, implement, maintain and enforce
written policies and procedures reasonably designed to (x) effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes, including by maintaining sufficient financial
resources to cover its credit exposure to each participant fully with a
high degree of confidence; and (y) cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.\38\
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\38\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
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As described above, NSCC believes the proposal to remove ID Net
Transactions from the calculation of Required Fund Deposits would
enable it to more effectively measure the risks presented by its
Members' guaranteed positions, and improve its ability to maintain a
risk-based margin system that considers, and produces margin levels
commensurate with, the risks of each Member's portfolio. Therefore, the
proposed change would better limit NSCC's credit exposures to Members,
consistent with the requirements of Rules 17Ad-22(e)(4)(i) and Rule
17Ad-22(e)(6)(i) under the Act.\39\ NSCC believes that the above
described burden on competition that could be created by the proposed
change would be appropriate in furtherance of the Act because such
change has been appropriately designed to assure the safeguarding of
securities and funds which are in the custody or control of NSCC or for
which it is responsible, as described in detail above. The proposal
would also enable NSCC to produce margin levels more commensurate with
the risks and particular attributes of each Member's portfolio by
removing non-guaranteed positions from the calculation of Required Fund
Deposits. NSCC believes that it has designed the proposed change in an
appropriate way in order to meet compliance with its obligations under
the Act. Specifically, the proposal would improve the risk-based
margining methodology that NSCC employs to set margin requirements and
better limit NSCC's credit exposures to its Members. Therefore, as
described above, NSCC believes the proposed change is necessary and
appropriate in furtherance of NSCC's obligations under the Act,
specifically Section 17A(b)(3)(F) of the Act \40\ and Rules 17Ad-
22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under the Act.\41\
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\39\ Id.
\40\ 15 U.S.C. 78q-1(b)(3)(F).
\41\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
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The proposed rule changes to increase transparency regarding the ID
Net Service and to update the Rules to implement the other proposed
changes would help ensure that the Rules remain clear and accurate. In
addition, these 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 these proposed rule 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 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
[[Page 44105]]
(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 <a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</a>. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
Commission's Division of Trading and Markets at
<a href="/cdn-cgi/l/email-protection#88fcfae9ece1e6efe9e6ece5e9fae3edfcfbc8fbedeba6efe7fe"><span class="__cf_email__" data-cfemail="53272132373a3d34323d373e322138362720132036307d343c25">[email protected]</span></a> or 202-551-5777.
NSCC reserves the right not to 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 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
<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#fc8e899099d19f9391919992888fbc8f999fd29b938a"><span class="__cf_email__" data-cfemail="dcaea9b0b9f1bfb3b1b1b9b2a8af9cafb9bff2bbb3aa">[email protected]</span></a>. Please include
File Number SR-NSCC-2021-011 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-2021-011. 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-2021-011 and should be submitted on
or before September 1, 2021.
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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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-17074 Filed 8-10-21; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 11, 2021.
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.