Notice2021-20659
Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Partial Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Partial Amendment No. 1 To Remove ID Net Transactions From the Required Fund Deposit Calculations and Make Other Changes to the Rules
Primary source
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Published
September 24, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 183 (Friday, September 24, 2021)</title>
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[Federal Register Volume 86, Number 183 (Friday, September 24, 2021)]
[Notices]
[Pages 53125-53128]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-20659]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93070; File No. SR-NSCC-2021-011]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Partial Amendment No. 1 and Order
Granting Accelerated Approval of Proposed Rule Change, as Modified by
Partial Amendment No. 1 To Remove ID Net Transactions From the Required
Fund Deposit Calculations and Make Other Changes to the Rules
September 20, 2021.
I. Introduction
On July 27, 2021, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\
proposed rule change SR-NSCC-2021-011. On August 6, 2021, NSCC filed
Amendment No.1 to the proposed rule change, to make clarifications and
corrections to the proposed rule change.\3\ The proposed rule change
was published for public comment in the Federal Register on August 11,
2021,\4\ and the Commission has received comments on the changes
proposed therein.\5\ For the reasons discussed below, the Commission is
approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Partial Amendment No. 1 made clarification corrections to
the description of the proposed rule change, namely the insertion of
a legend noting the changes to the Rules have been approved but not
yet implemented.
\4\ Securities Exchange Act Release No. 92566 (August 5, 2021),
86 FR 44100 (August 11, 2021) (``Notice'').
\5\ See Letter from NSCC, dated August 6, 2021, to Vanessa
Countryman, Secretary, Commission, available at <a href="https://www.sec.gov/comments/sr-nscc-2021-011/srnscc2021011-9122299-247146.pdf">https://www.sec.gov/comments/sr-nscc-2021-011/srnscc2021011-9122299-247146.pdf</a>
(providing notice of Amendment No. 1). Two other comments letters
were received that do not raise issues related to this proposed rule
change.
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II. Description of the Proposed Rule Change
NSCC is proposing to revise the margin methodology set forth in its
Rules & Procedures (``Rules'') \6\ to remove institutional delivery
(``ID'') transactions that are processed through the ID Net Service
from the calculation of its members' required margin. The ID Net
Service is a joint service of NSCC and Depository Trust Company
(``DTC'') that allows subscribers to the service,
[[Page 53126]]
which are generally executing brokers, to net, on the one side,
affirmed eligible ID transactions that are processed through ITP
Matching (US) LLC (``ITP'') and then held at DTC with, on the other
side, broker-dealer transactions have been processed through NSCC's
continuous net settlement (``CNS'') system.\7\ The ID Net Service was
designed to provide Members with the operational benefit of efficiency
by allowing them to net their affirmed ID transactions with their CNS
transactions.\8\ Although ID transactions processed through the ID Net
Service (``ID Net Transactions'') are netted with transactions that
have been processed through NSCC's CNS system, these transactions are
not subject to NSCC's trade guarantee, meaning in the event of a
default, ID Net Transactions will not be completed by NSCC.\9\
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\6\ Capitalized terms not defined herein are defined in the
Rules, available at http://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
\7\ DTC is a clearing agency and affiliate of NSCC that serves
as a central securities depository providing settlement services for
NSCC. ITP is a DTC affiliate that offers buy-side, sell-side and
custodian firms an end-to-end straight-through-processing solution
for trading activity, which is then settled at DTC.
\8\ See Securities Exchange Act Release No. 57573 (March 27,
2008), 73 FR 18019, 18019 (April 2, 2008).
\9\ See Procedure XVI (ID Net Service), supra note 6. As
explained in the Notice, transactions processed through the ID Net
Service have never been subject to NSCC's trade guarantee. See
Notice, 86 FR at 44101.
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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.
A. 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.\10\ The
Required Fund Deposit serves as each Member's margin. The objective of
a Member's margin 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'').\11\ 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 margin be insufficient to satisfy losses to
NSCC caused by the liquidation of that Member's portfolio.\12\
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\10\ See generally Rule 4 (Clearing Fund) and Procedure XV
(Clearing Fund Formula and Other Matters). NSCC states that its
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). See Notice, 86 FR at
44102.
\11\ 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 6.
\12\ See Rule 4, section 4, supra note 6. See also Notice, 86 FR
at 44101.
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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. 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 (i) the
volatility component, (ii) the mark-to-market component, which includes
both (a) a Regular Mark-to-Market charge and (b) an ID Net Mark-to-
Market charge, (iii) the Margin Requirement Differential component, and
(iv) a margin liquidity adjustment charge (``MLA charge''). Each
component is calculated by a different methodology as identified by
NSCC in the Rules.\13\
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\13\ See generally Procedure XV, supra note 6.
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B. Proposed Enhancement to NSCC's Margining Methodology
NSCC proposes to revise its margining methodology to remove ID Net
Transactions from the calculation of Members' Required Fund Deposits.
As noted above, NSCC does not guarantee the completion of these ID Net
Transactions, and, in the event of a Member default, these transactions
are excluded from NSCC's operations to be settled away from NSCC.\14\
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\14\ See note 9 supra and accompanying text.
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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.\15\ NSCC states that
it could more accurately measure the risks it faces following a Member
default by removing these non-guaranteed positions from its margining
methodology.\16\
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\15\ See Notice, 86 FR at 44102. 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.
\16\ See Notice, 86 FR at 44102. NSCC states it does not expect
the proposed change to have a material impact on the size of its
Clearing Fund. See id.
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To implement this proposed rule change, NSCC proposes to remove ID
Net Transactions from Members' Net Unsettled Positions for purposes of
calculating the volatility charge and the MLA charge. NSCC also
proposes to (1) eliminate the ID Net Mark-to-Market charge from the
Required Fund Deposit, and (2) amend the Rules to make clear that ID
Net Transactions are not included in the calculation of the Regular
Mark-to-Market charge. NSCC does not propose any other changes to the
calculation of margin charges and is not proposing any changes to the
operation of the ID Net Service.
C. Proposed Changes To Clarify the Non-Guaranteed Status of ID Net
Service
NSCC also proposes to amend the Rules to provide greater
transparency and clarity into how ID Net Transactions are processed in
the event of a Member default. Currently, the Rules describe 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.\17\ Additionally, the Rules describe NSCC's ability to exit
ID Net Transactions from its operations.\18\ NSCC has stated that
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.\19\ Specifically, if NSCC ceased to act for
a Member that is an ID Net Subscriber, that firm would no longer be
eligible to use the service, 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.\20\
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\17\ See Rule 65, Section 5, supra note 6.
\18\ See Procedure XVI (ID Net Service), supra note 6.
\19\ See id.
\20\ See id.
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NSCC proposes to amend the Rules to expressly identify ID Net as a
non-guaranteed service and to provide further clarity on how ID Net
Transactions will be processed in the event of a Member default.
D. Other Proposed Changes to the NSCC Rules To Implement the Proposed
Rule Change
NSCC proposes additional changes to the Rules in order to implement
the
[[Page 53127]]
proposed changes described above. These changes generally are minor
modifications relating to relevant definitions and renumbering margin
components.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \21\ 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 rules and regulations thereunder applicable
to such organization. After carefully considered the proposed rule
change, the Commission finds that the proposed changes are consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to NSCC. In particular, the Commission finds the
proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act,\22\ and Rules 17Ad-22(e)(4)(i) and (e)(6)(i), each promulgated
under the Act,\23\ for the reasons described below.
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\21\ See id. at 44103.
\22\ 15 U.S.C. 78q-1(b)(3)(F).
\23\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
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A. Consistency With Section 17A(b)(3)(F)
Section 17A(b)(3)(F) of the Act \24\ requires that the rules of
NSCC be designed to, among other things, 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.
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\24\ 15 U.S.C. 78q-1(b)(3)(F).
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As described in Section II.B above, the proposed rule change would
revise NSCC's margining methodology to remove ID Net Transactions from
the calculation of Members' Required Fund Deposits. The Commission
believes that this increased change in the determination of Members'
Required Fund Deposits should allow both NSCC and Members to more
effectively manage and understand the risks related to ID Net
Transactions. Therefore, the Commission believes that the proposed rule
change is designed to promote the prompt and accurate clearance and
settlement of ID Net Transactions and assure the safeguarding of
securities and funds which are in the custody or control of NSCC,
consistent with Section 17A(b)(3)(F) of the Act.\25\
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\25\ Id.
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In addition, as described in Sections II.C and D above, the
proposed rule change would amend the Rules to improve the transparency
in describing ID Net Transactions as non-guaranteed and to provide
clarity on how these transactions will be processed in the event of a
Member default. The proposed rule would also make technical changes to
implement the proposed changes described above. The Commission believes
that by clearly stating the nature of ID Net Transactions, further
clarifying the default procedure involving ID Net Transactions, and
making technical changes to implement the changes, the proposed rule
change should help ensure that the Rules are accurate and clear to
Members, thus promoting prompt and accurate clearance and settlement.
B. Consistency With Rule 17Ad-22(e)(4)(i)
Rule 17Ad-22(e)(4)(i) under the Act \26\ 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.
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\26\ 17 CFR 240.17Ad-22(e)(4)(i).
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As described above, NSCC proposes to remove ID Net Transactions
from the calculation of Required Fund Deposits of Members that are ID
Net Subscribers because ID Net Transactions are not guaranteed
transactions and NSCC would not incur losses from ID Net Transactions.
The proposed rule change would enable NSCC to more accurately and
effectively measure the risks presented by Members by calculating
margin only on the positions that NSCC may be required to complete in
the event of a Member default. Therefore, the Commission believes the
proposed rule change 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, the Commission believes the
proposed rule change is consistent with Rule 17Ad-22(e)(4)(i) under the
Act.\27\
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\27\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(i)
Rule 17Ad-22(e)(6)(i) under the Act \28\ 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.
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\28\ 17 CFR 24017Ad-22(e)(6)(i).
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A Member's margin (in the form of its Required Fund Deposit) is
made up of risk-based components that are calculated and assessed daily
to limit NSCC's credit exposures to its members. The Commission
believes the proposed rule change, which would remove ID Net
Transactions from the calculation of Members' margin, should enable
NSCC to more effectively measure the risks presented by its Members'
guaranteed positions and, therefore, determine a more precise level of
margin commensurate with the risks and particular attributes of
Members' portfolios. As stated above, Required Fund Deposits are
designed to mitigate any potential losses to NSCC associated with
liquidating a defaulting Member's portfolio in the event NSCC ceases to
act for that Member. ID Net Transactions are not subject to NSCC's
trade guarantee. Consequently, in the event of a Member default related
to ID Net Transactions, NSCC is not required to complete such
transactions, would not have any losses, and would not need to use
Required Fund Deposits since there is no losses. As a result, the funds
required to cover Members' transactions would not be impacted by the ID
Net Service. Accordingly, the Commission believes that by removing non-
guaranteed positions from the margin calculation, the proposed rule
change would enable NSCC to collect margin more precisely tailored to
the nature of the risk presented to NSCC.
As a result, the Commission believes the proposed rule change would
enhance NSCC's ability 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. Therefore, the Commission believes the proposed change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\29\
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\29\ Id.
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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
Exchange 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#2c5e594049014f4341414942585f6c5f494f024b435a"><span class="__cf_email__" data-cfemail="1361667f763e707c7e7e767d6760536076703d747c65">[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 such 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 October 15, 2021.
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 Exchange Act,\30\ 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 above, in Partial Amendment No. 1, NSCC
updates its proposed rule text to include a legend to indicate a
delayed implementation date, specifically that the rule change would be
implemented no later than 10 Business Days after Commission approval of
the proposed rule change. Partial Amendment No. 1 improves the
efficiency of the filing process by obviating the need for NSCC to
propose another change to its rules to resolve the omitted legend in
the future, while not changing the purpose of or basis for the Proposed
Rule Change.
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\30\ 15 U.S.C. 78s(b)(2).
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For similar reasons as discussed above, the Commission finds that
Partial Amendment No. 1 is consistent with the requirement that NSCC's
rules be designed, in part, 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 under Section 17A(b)(3)(F) of the Exchange
Act.\31\ 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 Exchange
Act.\32\
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\31\ 15 U.S.C. 78q-1(b)(3)(F).
\32\ 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 changes are consistent with the requirements of the Act
and in particular with the requirements of Section 17A of the Act and
the rules and regulations promulgated thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\33\ that the proposed rule change SR-NSCC-2021-011 be, and hereby is,
approved.\34\
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\33\ Id.
\34\ In approving the proposed rule change, the Commission
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\35\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-20659 Filed 9-23-21; 8:45 am]
BILLING CODE 8011-01-P
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