Notice2022-12289
Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, To Revise the Excess Capital Premium Charge
Primary source
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Published
June 8, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 110 (Wednesday, June 8, 2022)</title>
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[Federal Register Volume 87, Number 110 (Wednesday, June 8, 2022)]
[Notices]
[Pages 34913-34919]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-12289]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95026; File No. SR-NSCC-2022-005]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Proposed Rule Change, as Modified by
Amendment No. 1, To Revise the Excess Capital Premium Charge
June 2, 2022.
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 May 30, 2022, 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. On June 1, 2022, NSCC
filed Amendment No. 1 to the proposed rule change, to make a correction
to the proposed rule change.\3\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as modified by
Amendment No. 1, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 made a correction to the Exhibit 5 of the
filing, specifically, to insert an additional cross-reference into a
proposed definition that had been omitted.
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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 Procedure XV
(Clearing Fund Formula and Other Matters) of NSCC's Rules & Procedures
(``Rules'') \4\ to revise the Excess Capital Premium (``ECP'') charge
by enhancing the methodology for calculating the charge to (1) compare
a Member's applicable capital amounts with the amount it contributes to
the Clearing Fund that represents its volatility charge, (2) for
Members that are broker-dealers, use net capital amounts rather than
excess net capital amounts in the calculation of the ECP charge; and
for all other Members, use equity capital in the calculation of the ECP
charge, and (3) establish a cap of 2.0 for the Excess Capital Ratio (as
defined below) that is used in calculating a Member's ECP charge.
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\4\ 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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The proposed changes would also improve the transparency of the
Rules regarding the ECP charge by (1) clarifying the capital amounts
that are used in the calculation of the charge by introducing new
defined terms, (2) removing NSCC's discretion to waive or reduce the
charge, and (3) providing that NSCC may calculate the charge based on
updated capital information, as described in greater detail below.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
NSCC is proposing to modify the ECP charge, which is a component of
its Clearing Fund that NSCC may impose on a Member when a portion of
that Member's Required Fund Deposit (defined in the Rules as the
``Calculated Amount'') exceeds its applicable capital amounts by 1.0
(defined in the Rules as the ``Excess Capital Ratio''), as described in
greater detail below.\5\ The proposed changes would revise the ECP
charge by enhancing the methodology for calculating the charge to (1)
compare a Member's applicable capital amounts with the amount it
contributes to the Clearing Fund that represents its volatility charge,
(2) for Members that are broker-dealers, use net capital amounts rather
than excess net capital amounts in the calculation of the ECP charge;
and for all other Members, use equity capital in the calculation of the
ECP charge, and (3) establish a cap of 2.0 for the Excess Capital Ratio
that is used in calculating a Member's ECP charge.
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\5\ See Section I(B)(2) of Procedure XV, id.
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The proposed changes would also improve the transparency of the
Rules regarding the ECP charge by (1) clarifying the capital amounts
that are used in the calculation of the charge by introducing new
defined terms, (2) removing NSCC's discretion to waive or reduce the
charge, and (3) providing that NSCC may calculate the charge based on
updated capital information, as described in greater detail below.
(i) Overview of the Required Fund Deposit and NSCC's Clearing Fund
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.\6\ The Required Fund Deposit serves as each
Member's margin.
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\6\ See Rule 4 and Procedure XV, supra note 3. NSCC's market
risk management strategy is designed to comply with Rule 17Ad-
22(e)(4) under the Act, where these risks are referred to as
``credit risks.'' 17 CFR 240.17Ad-22(e)(4).
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The objective of a Member's Required Fund Deposit is to mitigate
potential losses to NSCC associated with liquidating a Member's
portfolio in the event NSCC ceases to act for that Member (hereinafter
referred to as a ``default'').\7\ 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. Pursuant to the Rules,
each Member's Required Fund Deposit consists of a number of applicable
components, each of which is calculated to address specific risks faced
by NSCC, as identified within Procedure XV of the Rules.\8\
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\7\ 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, supra note
3.
\8\ Supra note 3.
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While many components of the Clearing Fund are designed to measure
risks presented by the net unsettled positions a Member submits to NSCC
to be cleared and settled, some components measure and mitigate other
risks that NSCC may face, such as credit risks. For example, a Member
may be required to make an additional deposit to the Clearing Fund
pursuant to Section I(B)(1) of Procedure XV of the Rules if it is
placed on the Watch List, which is defined in Rule 1 (Definitions and
Descriptions) of the Rules as a list of Members who NSCC deems to pose
heightened risk to it and its other
[[Page 34914]]
Members based on consideration of relevant factors.\9\
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\9\ See Section 4 of Rule 2B, which describes NSCC's ongoing
monitoring and review of Members and the factors NSCC considers in
assigning Members a credit rating that could result in a Member
being placed on the Watch List, supra note 3.
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Similarly, the ECP charge is a component of the Clearing Fund that
is designed to mitigate the heightened default risk a Member could pose
to NSCC if it operates with lower capital levels relative to its margin
requirements. Each Business Day, NSCC determines if a Member may be
subject to the ECP charge by first determining its Calculated Amount.
The Calculated Amount is a portion of a Member's Required Fund Deposit
designed to represent its margin requirements to NSCC. A Member's
Calculated Amount is calculated as its Required Fund Deposit excluding
any applicable special charge, margin requirement differential charge,
coverage component charge or margin liquidity adjustment charge,\10\
plus any additional amounts the Member is required to deposit to the
Clearing Fund either due to being placed on the Watch List \11\ or
pursuant to Rule 15 (Assurances of Financial Responsibility and
Operational Capability) of the Rules.\12\
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\10\ The special charge is described in Section I(A)(1)(c) and
(2)(c) of Procedure XV, the MRD charge is described in Section
I(A)(1)(e) and (2)(d) of Procedure XV, the coverage component charge
is described in Section I(A)(1)(f) and (2)(e) of Procedure XV, and
the MLA charge is described in Section I(A)(1)(g) and (2)(f) of
Procedure XV, supra note 3.
\11\ Supra note 8.
\12\ Pursuant to Section 2(b)(iv) of Rule 15, NSCC may require a
Member to provide NSCC with adequate assurances of that Member's
financial responsibility in the form of increased Clearing Fund
deposits. Supra note 3.
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NSCC then divides the Member's Calculated Amount by its current
capital amount, which is the amount reported to NSCC pursuant to its
ongoing membership standards, as set out in Rule 2B (Ongoing Membership
Requirements and Monitoring) and Addendum B (Qualifications and
Standards of Financial Responsibility, Operational Capability and
Business History) of the Rules.\13\ Pursuant to the current membership
standards in Addendum B of the Rules, Members that are broker-dealers
are required to maintain a certain level of excess net capital, and
Members that are banks are required to maintain a certain level of
equity capital as a requirement for continued membership with NSCC.\14\
Pursuant to Section 2 of Rule 2B of the Rules, Members are required to
provide NSCC with financial information, including information
regarding Members' current capital amounts, on a regular basis and NSCC
uses these reported capital amounts in the calculation of the ECP
charge.\15\
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\13\ Supra note 3.
\14\ See Section 1. B.1. of Addendum B, supra note 3. NSCC has
proposed changes to the membership standards set forth in Addendum B
that would modify the capital requirements for Members. See
Securities Exchange Act Release No. 94068 (January 26, 2022), 21 FR
5544 (February 1, 2022) (SR-NSCC-2021-016).
\15\ See Section 2(A) of Rule 2B, supra note 3.
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Pursuant to Section I(B)(2) of Procedure XV, if a Member's
Calculated Amount, when divided by its applicable capital amount, is
greater than the Excess Capital Ratio of 1.0, NSCC may require that
Member to deposit an ECP charge.\16\ The applicable ECP charge may be
equal to the product of (1) the amount by which a Member's Calculated
Amount exceeds its applicable capital amount, multiplied by (2) the
Member's Excess Capital Ratio. Members are able to access and view
reports regarding their Clearing Fund and, through these reports,
Members may be alerted when their Calculated Amount divided by the
applicable capital amount is greater than 0.5, as an early warning
regarding their capital levels.
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\16\ Supra note 3.
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Under Section I(B)(2) of Procedure XV, NSCC may collect a lower ECP
charge than the amount calculated pursuant to the Rules, may determine
not to collect the ECP charge from a Member at all, and may return all
or a portion of a collected ECP charge if it believes the imposition or
maintenance of the ECP charge is not necessary or appropriate.\17\
Section I(B)(2) of Procedure XV describes some circumstances when NSCC
may determine not to collect an ECP charge from a Member, which
includes, for example, when an ECP charge results from trading activity
for which the Member submits later offsetting activity that lowers its
Required Fund Deposit.\18\ The discretion to adjust, waive or return an
ECP charge was designed to provide NSCC with the ability to determine
when a calculated ECP charge may not be necessary or appropriate to
mitigate the risks it was designed to address.\19\
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\17\ When NSCC determines to collect a lower amount than that
amount calculated pursuant to the Rules, as provided for under
Procedure XV, NSCC may, for example, calculate that lower amount by
reducing the Excess Capital Ratio used in the calculation to 2.0.
Supra note 3.
\18\ See footnote 7 of Procedure XV, supra note 3.
\19\ See Securities Exchange Act Release No. 54457 (September
15, 2006), 71 FR 55239 (September 21, 2006) (SR-FICC-2006-03 and SR-
NSCC-2006-03).
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Since the ECP charge was adopted, NSCC has calculated and assessed
the ECP charge consistent with the Rules, and NSCC has exercised its
discretion to both reduce and waive the ECP charge when NSCC has deemed
it necessary or appropriate. NSCC recently reviewed the effectiveness
of the ECP charge to identify ways NSCC could enhance both the
calculation of the charge and the disclosures regarding the charge in
the Rules. In connection with this review, NSCC discussed the ECP
charge and its proposed enhancements with Members, NSCC management, and
NSCC's supervisors at the Commission. As a result of this review, NSCC
is proposing to make several enhancements to the ECP charge, as
described in greater detail below.
These enhancements are designed to improve NSCC's ability to
measure the increased default risks that are presented by Members who
operate with lower capital. The proposed changes would simplify the
calculation of the charge and the description of the charge in the
Rules, making it more predictable to Members. The proposed changes are
designed to improve the transparency of the ECP charge to Members by
removing NSCC's discretion to waive or reduce the charge and providing
that NSCC may calculate the charge based on updated capital
information. The proposed improvements to the transparency of the ECP
charge also include clarifying the descriptions of the capital amounts
that would be used in the calculation of the charge through new defined
terms. Collectively, the proposal would make the ECP charge more
consistent, transparent, and predictable to Members, while maintaining
the effectiveness of NSCC's risk-based margining methodology as it
relates to the ECP charge.
(ii) Use Members' Volatility Component as the Calculated Amount
NSCC is proposing to replace the Calculated Amount with the amount
collected as that Member's volatility component as determined pursuant
to Sections I(A)(1)(a)(i)-(iii) and (2)(a)(i)-(iii) of Procedure XV of
the Rules.\20\
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\20\ The volatility component is designed to capture 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--a model-based volatility-at-
risk, or VaR, charge and a haircut-based calculation, for certain
positions that are excluded from the VaR charge calculation. The
charge that is applied to a Member's Required Fund Deposit with
respect to the volatility component is referred to as the volatility
charge and is the sum of the applicable VaR charge and the haircut-
based calculation. Amounts calculated pursuant to Sections
I(A)(1)(a)(iv) and (2)(a)(iv) of Procedure XV with respect to long
positions in Net Unsettled Positions in Family-Issued Securities are
designed to address wrong-way risk presented by these positions, not
volatility risks, and, as such, are not a part of a Member's
volatility charge. See Sections I(A)(1)(a) and (2)(a) of Procedure
XV, supra note 3.
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[[Page 34915]]
In both determining if an ECP charge is applicable and in
calculating an ECP charge, NSCC currently compares a Member's
Calculated Amount to its reported capital levels. As described above,
the Calculated Amount is defined in Section I(B)(2) of Procedure XV as
a Member's Required Fund Deposit, excluding certain components and
including other additional deposits to the Clearing Fund.\21\ Because a
goal of the ECP charge is to identify and mitigate risks presented when
a Member's capital levels may not be adequate to meet its margin
requirements to NSCC, the Calculated Amount is designed to represent a
material portion of those margin requirements.
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\21\ See supra note 9.
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As described above, because each component of the Clearing Fund is
calculated to address specific risks faced by NSCC, some components are
applied only to certain positions in a Member's portfolio. For example,
the CNS fails charge, which is included in the Calculated Amount, is
based on the market value of only a Member's CNS Fails Positions (as
defined in the Rules) of the Member.\22\ The volatility component of
the Clearing Fund measures the market price volatility of all of a
Member's Net Unsettled Positions and Net Balance Order Unsettled
Positions (as defined in the Rules). Therefore, the volatility
component is often considered a comprehensive measurement of the risks
presented by a Member's clearing activity and usually comprises the
largest portion of a Member's Required Fund Deposit.\23\ NSCC believes
that replacing the Calculated Amount with a Member's volatility charge
would provide an appropriate measure for purposes of the ECP charge.
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\22\ See definition of ``CNS Fails Position'' in Rule 1, and see
also Section I(A)(1)(e) of Procedure XV, supra note 3.
\23\ See definitions of ``Net Unsettled Position'' and ``Net
Unsettled Balance Order Position'' in Rule 1, supra note 3.
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Currently, determining a Member's Calculated Amount requires a more
complicated calculation, as it uses a Member's Required Fund Deposit,
excludes certain components, and includes other deposits. The proposal
would simplify this calculation significantly by using only the
volatility component. One of the tools NSCC provides to its Members is
a calculator that allows them to determine their potential volatility
charge based on trading activity. Therefore, this proposed change would
make the calculation of the ECP charge both clearer and more
predictable for Members.
NSCC does not expect that any impact of this proposed change on the
number of ECP charges or the size of the calculated ECP charges would
materially impact NSCC's ability to manage the risks the ECP charge is
designed to address. NSCC believes the benefits of using a simpler,
clearer, and more predictable calculation that is based on the most
comprehensive component of the Clearing Fund outweigh any risk related
to the reduction in the ECP charges NSCC would collect.
(iii) Use Net Capital for Broker-Dealer Members and Equity Capital for
All Other Members in the Calculation of the ECP Charge
In the calculation of the ECP charge, NSCC is proposing to use net
capital rather than excess net capital for Members that are broker-
dealers, and equity capital for all other Members. As described in
greater detail below, in connection with these proposed changes, NSCC
would also improve the transparency of the Rules by adopting
definitions of ``Net Capital'' and ``Equity Capital.''
As described above, NSCC's ongoing membership requirements, set
forth in Rule 2B of the Rules, require Members to provide NSCC with
regular information regarding their financial positions, including
capital levels.\24\ This information is provided, in part, to confirm
that Members continue to maintain the minimum financial requirements of
membership set forth in Addendum B of the Rules.\25\ Currently, NSCC
also uses these reported capital amounts in the calculation of the ECP
charge.
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\24\ See Section 2.A of Rule 2B, which requires Members to
provide NSCC with a copy of their Form X-17-A-5 (Financial and
Operational Combined Uniform Single (``FOCUS'') Report),
Consolidated Report of Condition and Income (``Call Report''), or an
equivalent, supra note 3.
\25\ Supra note 3.
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First, NSCC believes it would be appropriate to revise the capital
measure used to calculate the ECP charge for broker-dealer Members to
replace excess net capital with net capital. This revision would align
the capital measures used for broker-dealer Members and other Members,
which would result in more consistent calculations of the ECP charge
across different types of Members.
In addition to creating consistency in the calculations for
different Members, NSCC believes that using net capital rather than
excess net capital would also provide NSCC with a better measure of the
increased default risks presented when a Member operates at low net
capital levels relative to its margin requirements. This approach would
be consistent with the rationale for the Commission's amendments to
Rule 15c3-1 under the Act (the ``Net Capital Rule''), which were
designed to promote a broker-dealer's capital quality and require the
maintenance of ``net capital'' (i.e., capital in excess of liabilities)
in specified amounts as determined by the type of business
conducted.\26\ The Net Capital Rule was designed to ensure the
availability of funds and assets (including securities) in the event
that a broker-dealer's liquidation becomes necessary. The Net Capital
Rule represented a net worth perspective, which is adjusted by
unrealized profit or loss, deferred tax provisions, and certain
liabilities as detailed in the rule. It also included deductions and
offsets and required that a broker-dealer demonstrate compliance with
the Net Capital Rule, including maintaining sufficient net capital at
all times (including intraday).
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\26\ 17 CFR 240.15c3-1. See Securities Exchange Act Release No.
70072 (July 30, 2013), 78 FR 51823 (August 21, 2013) (File No. S7-
08-07).
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Similarly, NSCC believes that the Net Capital Rule is an effective
process of separating liquid and illiquid assets and computing a
broker-dealer's regulatory net capital that should replace NSCC's
existing practice of using excess net capital in the calculation of the
ECP charge.
Second, NSCC is proposing to revise the Rules to provide that, for
all Members that are not broker-dealers, it would use equity capital in
calculating the ECP charge. Currently, the Rules state that NSCC would
use a Member's capital amount set forth in the membership standards in
Addendum B of the Rules.\27\ Section 1.B of Addendum B describes the
membership standards of Members, and currently states that the
applicable capital measure for Members that are banks is equity
capital, for Members that are trust companies and not banks the
applicable capital measure is consolidated capital, and for other legal
entities that are Members the applicable capital measure is determined
by NSCC. Currently, and historically, NSCC has had very few Members
that are trusts and not banks. For all Members that are not banks, non-
bank trusts or broker-dealers (which generally include, for example,
exchanges and registered clearing agencies), NSCC uses those
[[Page 34916]]
Members' reported equity capital in the calculation of the ECP charge.
Therefore, in practice, the ECP charge is calculated for the majority
of Members that are not broker-dealers using their equity capital, and
this proposed change is not expected to have a material impact on the
collection of ECP charges. The proposal would simplify the calculation
of the ECP charge for Members that are not broker-dealers by stating in
Section I(B)(2) of Procedure XV that NSCC would use equity capital
rather than use different measures that are based on other membership
requirements. This proposed change would also create consistency in the
calculations across Members.
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\27\ Supra note 3.
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(iv) Establish a Cap for the Excess Capital Ratio
NSCC is proposing to set a maximum amount of Excess Capital Ratio
that is used in calculating Members' ECP charge to 2.0. NSCC believes
capping the multiplier that is used in this calculation would allow
NSCC to appropriately address the risks it faces without imposing an
overly burdensome ECP charge. Historically, the Excess Capital Ratio
has rarely exceeded 2.0 in the calculation of Members' ECP charges, and
in cases when 2.0 was exceeded NSCC typically exercised the discretion
provided to it in the Rules to reduce the applicable charge. NSCC's
discretion was appropriate in these circumstances because NSCC believes
it is able to mitigate the risks presented to it by a Member's lower
capital levels by collecting an ECP charge calculated with an Excess
Capital Ratio that is at or below 2.0.
Therefore, given that NSCC is now proposing to remove its
discretion to waive the ECP charge, as described below, NSCC believes
capping the Excess Capital Ratio at 2.0 would continue to provide NSCC
with an appropriate measure of the risks presented to it relative to
Members' capital levels. This proposed change would also provide
Members with more clarity and transparency into the ECP charge, by
allowing them to predict and estimate the maximum amount of their
potential ECP charge.
(v) Improve Transparency Regarding the ECP Charge
NSCC is proposing changes to Section I(B)(2) of Procedure XV to
improve transparency regarding the ECP charge by (a) clarifying the
description of the capital amounts that NSCC uses in the calculation of
the ECP charge by adopting new defined terms, (b) removing NSCC's
discretion to waive or reduce the charge, and (c) providing that NSCC
may calculate the charge based on updated capital information.
First, NSCC is proposing to clarify the description of the capital
amounts that it uses to calculate the ECP charge by introducing defined
terms and specifying the reporting requirements that NSCC relies on to
obtain that capital information for Members. As described above, for
Members that are broker-dealers, NSCC is proposing to use a Member's
net capital amount, and for all other Members, NSCC would use a
Member's equity capital in the calculation of the ECP charge. In order
to improve the clarity of the Rules, NSCC is proposing to introduce a
defined term for ``Equity Capital'' in Rule 1 and to revise a proposed
defined term for ``Net Capital'' in order to align the two defined
terms. The proposal would also revise Section I(B)(2) of Procedure XV
in describing the calculation of the ECP charge to use these defined
terms where appropriate. Finally, the proposal would amend Addendum B
to include the new defined term for Equity Capital.
The definition of Equity Capital would be, as of a particular date,
the amount equal to the equity capital as reported on the Member's or
Limited Member's most recent Call Report, or, if the Member or Limited
Member is not required to file a Call Report, then as reported on its
most recent financial statements or equivalent reporting. NSCC would
also align a proposed definition of Net Capital to be, as of a
particular date, the amount equal to the net capital as reported on the
Member's or Limited Member's most recent FOCUS Report, or, if the
Member or Limited Member is not required to file a FOCUS Report, then
as reported on its most recent financial statements or equivalent
reporting.
In addition to using these new defined terms, NSCC would also add a
statement to Section I(B)(2) of Procedure XV to clarify to Members that
the amounts used in the calculation of the ECP charge would be the
amounts included in their regular reporting that is provided to NSCC
pursuant to the ongoing membership reporting requirements, specifically
in their FOCUS Report or Call Report, as applicable, or in an
equivalent financial statement or report that is delivered to NSCC
pursuant to the same requirement. Collectively, these proposed changes
would provide Members with improved clarity and certainty regarding the
amounts that would be used in calculating the ECP charge.
Second, the proposed changes would eliminate NSCC's discretion to
waive or reduce the ECP charge. NSCC believes that the proposed changes
to the ECP charge described in this filing would have the collective
impact of eliminating most circumstances in which NSCC would have
exercised this discretion. For example, the proposal to cap the Excess
Capital Ratio at 2.0 and the proposal to specify that NSCC may
calculate an ECP charge based on updated capital amounts, both address
the most common circumstances when NSCC has either waived or reduced
the ECP charge in the past. By eliminating this discretion, the
proposal would provide Members with more certainty in predicting when
an ECP charge may be applied and how any such charge would be
calculated. Therefore, NSCC has determined that it is no longer
necessary to retain discretion to waive or reduce the ECP charge under
the proposed methodology.
Third, NSCC would provide that it may calculate the ECP charge
based on updated capital information. As described above, NSCC would
use the net capital or equity capital amounts that are reported on
Members' most recent financial reporting or financial statements
delivered to NSCC in connection with the ongoing membership reporting
requirements. Under the proposal, if a Member's capital amounts change
between the dates when it submits these financial reports, it may
provide NSCC with updated capital information for purposes of
calculating the ECP charge. Today, when NSCC exercises its discretion
to waive or reduce the amount of an applicable ECP charge, NSCC
occasionally does so by applying updated capital information in its
calculation. Therefore, in connection with eliminating this discretion,
NSCC would disclose in the Rules that it may use updated capital
information in the calculation of an ECP charge rather than require
Members to wait until the issuances of their next financial reporting
or financial statements for changes in their capital positions to be
reflected in an ECP charge calculation.
NSCC is proposing to retain some discretion in when it would accept
updated capital information for this purpose. For example, NSCC may
require a Member to provide documentation of the circumstances that
caused a change in capital information, and if adequate evidence is not
available or NSCC does not believe the evidence sufficiently verifies
that the Member's capital position has changed, NSCC would continue to
calculate the ECP charge for that Member based on the prior capital
information available to NSCC until the
[[Page 34917]]
next financial reporting or financial statements are delivered. NSCC
believes it is appropriate to retain some discretion to allow NSCC to
determine if updated capital information is adequately verified before
it agrees to rely on that information for this calculation. NSCC
believes the proposal to disclose that Members would have the
opportunity to provide updated capital information to NSCC to be used
in an ECP charge calculation would improve the transparency of the
Rules despite NSCC's proposal to retain a certain level of discretion.
(vi) Proposed Changes to Procedure XV of the Rules
The proposal would also amend Section I(B)(2) of Procedure XV of
the Rules. This section would describe the calculation used to
determine if an ECP charge may be applicable to a Member. The revised
description of this calculation would (i) replace the definition of
Calculated Amount with Members' volatility charge, (ii) replace
references to the capital amounts used in the calculation with the new
defined terms for Net Capital and Equity Capital, and (iii) state that
the Excess Capital Ratio used in calculating an ECP charge is set at a
maximum of 2.0. The proposed change also includes a statement that the
applicable capital amounts used in the calculation would be the amounts
most recently reported to NSCC on Members' FOCUS Reports or Call
Reports, as applicable, or other equivalent financial reporting
submitted to NSCC pursuant to Section 2 of Rule 2B. Finally, the
proposal would state that NSCC may, in its sole discretion, accept
updated capital amounts in calculating an ECP charge.
(vii) Impact Study Results
NSCC has provided the Commission with the results of an impact
study that reviewed the potential impacts of the proposal during the
period of June 1, 2020 through December 31, 2021. The study showed that
the proposed enhancement would have reduced the number of ECP charges
that would have been triggered by the calculation by 65 percent, from
327 ECP charges triggered for 17 Members to 114 ECP charges triggered
for 14 Members. The total aggregate amount that would have been
triggered by the proposed calculation if the proposal was effective
during that time would have been reduced from $50.95 billion (the
actual total amount of ECP charges triggered by the current calculation
during that period) to approximately $17.22 billion (the total amount
of ECP charges that would have been triggered during that time by the
proposed calculation). The average amount that would have been
calculated for each Member would have been reduced from $155.8 million
to approximately $151.1 million. The study showed that the proposal
would have had no impact to NSCC's overall, or Member-level, end-of-day
Clearing Fund Requirement backtesting coverage.
Over the impact study period, NSCC waived and reduced calculated
ECP charges by $38.46 billion. NSCC waived a total of 20 ECP charges,
that totaled approximately $25.77 billion. If the proposal had been in
place at that time, 15 of these charges would have been collected from
Members (although the amount would have been reduced), totaling $6.43
billion, 2 charges would not have been triggered as the calculated ECP
ratio was below 1.0, and NSCC would have waived 3 of the ECP charges
following receipt of updated financial information. NSCC reduced the
amount of 16 ECP charges by a total of approximately $12.69 billion. If
the proposal had been in place at that time, 6 of these charges would
have been still collected, totaling $6.35 billion, and 10 charges would
not have been triggered as the calculated ECP ratio was below 1.0.
(viii) Implementation Timeframe
NSCC would implement the proposed changes no later than 30 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 the proposed rule change is 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 rule change is consistent with Section
17A(b)(3)(F) of the Act,\28\ and Rules 17Ad-22(e)(4)(i), (e)(6)(i) and
(e)(23)(ii), 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) and (e)(23)(ii).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act requires that the rules of NSCC be
designed to, among other things, 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.\30\
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
NSCC believes the proposed changes are consistent with the
requirements of Section 17A(b)(3)(F) of the Act because such changes
enhance the effectiveness of the ECP charge by (1) replacing the
Calculated Amount with a Member's volatility component, (2) replacing
excess net capital with net capital for broker-dealer Members and using
equity capital for all other Members, and (3) establishing a cap for
the Excess Capital Ratio. As described above, NSCC believes these
proposed changes would create a simpler, clearer calculation of the ECP
charge that is based on more consistent metrics, while allowing NSCC to
continue to effectively address the heightened default risks presented
by Members that operate at lower capital levels.
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. Each of the proposed
enhancements described above are designed to collectively improve
NSCC's ability to collect amounts that reflect the risks posed by its
Members. The proposal to enhance the calculation of the ECP charge by
replacing the Calculated Amounts with Members' volatility charges would
make the calculation clearer and more predictable to Members. The
proposal to use net capital for broker-dealer Members and equity
capital for all other Members in the calculation of the ECP charge
would result in a more consistent calculation across different types of
Members. The proposal to cap the Excess Capital Ratio at 2.0 would
allow NSCC to appropriately address the risks it faces without imposing
an overly burdensome ECP charge, and would allow NSCC to eliminate its
discretion to waive or reduce the charge, resulting in a more
transparent margining methodology.
Together, by improving the consistency and predictability of the
ECP charge, the proposed enhancements would also improve NSCC's ability
to collect amounts that reflect the risks posed by its Members such
that, in the event of Member default, NSCC's operations would not be
disrupted, and non-defaulting Members would not be exposed to losses
they cannot anticipate or control. In this way, the proposed rule
change is 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\
---------------------------------------------------------------------------
\31\ Id.
---------------------------------------------------------------------------
The proposed changes are also designed to improve the transparency
of
[[Page 34918]]
the Rules regarding the ECP charge, for example, by removing NSCC's
discretion to recalculate, reduce or waive the charge, as described
above, and by introducing new defined terms regarding the capital
amounts used in the charge. By enhancing the clarity and transparency
of the Rules, the proposed changes would allow Members to better
anticipate their margin charges, which would allow them to more
efficiently and effectively conduct their business in accordance with
the Rules. In this way, NSCC believes the proposed changes would
promote the prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\32\
---------------------------------------------------------------------------
\32\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(i) under the Act requires 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.\33\
---------------------------------------------------------------------------
\33\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
As described above, NSCC believes the proposed rule change would
enable NSCC to better identify, measure, monitor, and, through the
collection of Members' Required Fund Deposits, manage its credit
exposures to Members by maintaining sufficient resources to cover those
credit exposures fully with a high degree of confidence. Specifically,
NSCC believes that the proposed enhancements to the calculation of the
ECP charge to use the volatility charge rather than the Calculated
Amount, and to use net capital and equity capital, as appropriate,
would collectively make the calculation clearer and more predictable to
Members. The proposal to use net capital rather than excess net capital
for broker-dealer Members, and equity capital for all other Members,
would also result in a more consistent calculation across different
types of Members. Finally, the proposal to cap the Excess Capital Ratio
at 2.0 would allow NSCC to appropriately address the risks it faces
without imposing an overly burdensome ECP charge, and would allow NSCC
to eliminate its discretion to waive or reduce the charge, resulting in
a more transparent margining methodology.
Overall, NSCC believes the proposal would improve the clarity and
predictability of the ECP charge and, in this way, would enhance NSCC's
ability to effectively identify, measure and monitor its credit
exposures, and would enhance NSCC's ability to maintain sufficient
financial resources to cover NSCC's credit exposure to each participant
fully with a high degree of confidence. As such, NSCC believes the
proposed rule change is consistent with Rule 17Ad-22(e)(4)(i) under the
Act.\34\
---------------------------------------------------------------------------
\34\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(i) under the Act requires 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.\35\
---------------------------------------------------------------------------
\35\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
The Required Fund Deposits are made up of risk-based components (as
margin) that are calculated and assessed daily to limit NSCC's
exposures to Members. NSCC's proposed changes to use the volatility
charge rather than the Calculated Amount, and to use net capital and
equity capital, as appropriate, in the calculation of the ECP charge
would collectively make the calculation clearer and more predictable to
Members, while continuing to apply an appropriate risk-based charge
designed to mitigate the risks presented to NSCC. Similarly, the
proposal to cap the Excess Capital Ratio at 2.0 would allow NSCC to
appropriately address the risks it faces without imposing an overly
burdensome ECP charge, and would allow NSCC to eliminate its discretion
to waive or reduce the charge, resulting in a more transparent
margining methodology. Overall, these proposed changes would improve
the effectiveness of the calculation of the ECP charge and, therefore,
allow NSCC to more effectively address the increased default risks
presented by Members that operate with lower capital levels relative to
their margin requirements. In this way, the proposed changes enhance
the ability of the ECP charge to produce margin levels commensurate
with the risks NSCC faces related to its Members' operating capital
levels. Therefore, NSCC believes the proposed rule change is consistent
with Rule 17Ad-22(e)(6)(i) under the Act.\36\
---------------------------------------------------------------------------
\36\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(23)(ii) under the Act requires that NSCC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for providing sufficient information to
enable participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in NSCC.\37\ NSCC is
proposing to improve the clarity and transparency of the Rules related
to its calculation of the ECP charge in a number of ways described in
this filing. The proposed changes would clarify the description of the
capital amounts that NSCC uses in the calculation of the ECP charge by
adopting new defined terms, remove NSCC's discretion to waive or reduce
the charge, and provide that NSCC may calculate the charge based on
updated capital information. Additionally, as described above, the
proposed changes to use the volatility charge rather than the
Calculated Amount, and to use net capital and equity capital, as
appropriate, in the calculation of the ECP charge, would collectively
make the calculation clearer and more predictable to Members. Through
these proposed amendments to the Rules, the proposal would assist NSCC
in providing its Members with sufficient information to identify and
evaluate the risks and costs, in the form of Required Fund Deposits to
the Clearing Fund, that they incur by participating in NSCC. In this
way, NSCC believes the proposed changes are consistent with Rule 17Ad-
22(e)(23)(ii) under the Act.\38\
---------------------------------------------------------------------------
\37\ 17 CFR 240.17Ad-22(e)(23)(ii).
\38\ Id.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
NSCC does not believe the proposed rule change to enhance the
calculation of the ECP charge would impact competition because the
proposed changes are designed to create a clearer and simpler
calculation that is based on more consistent metrics, and is likely to
result in lower and less frequent ECP charges than are applied under
the current methodology. More specifically, the replacement of the
Calculated Amount with the volatility charge, which is currently a
portion of the Calculated Amount, when used in the calculation to
determine if an ECP charge is applicable, is likely to result in fewer
triggered ECP charges, as evidenced by the impact study referenced
above. Additionally, the replacement of excess net capital with net
capital for broker-dealer Members, and using equity capital for all
other Members, would create more consistent calculations of the ECP
charge across types of Members, reducing any burden on competition that
the existing
[[Page 34919]]
calculation could have presented. Finally, the proposal to cap the
Excess Capital Ratio to 2.0 in the calculation of the ECP charge would
limit the total amount a Member could be charged, and would provide all
Members with more certainty and transparency into their potential
margin requirements.
Therefore, by creating a simpler and clearer calculation that uses
more consistent metrics, the proposals would improve NSCC's ability to
apply the ECP charge more consistently across its Members, and reduce
the impact this charge could have on competition. As noted above, in
the impact study results, the proposed changes are also expected to
result in fewer and lower ECP charges.
Further, NSCC does not believe the proposed rule change to improve
the clarity and predictability of the calculation of the ECP charge
would impact competition because this proposed change would not impact
the calculation of Members' Required Fund Deposits. Therefore, this
proposed change would not affect NSCC's operations or the rights and
obligations of membership. As such, NSCC believes the proposed rule
change to improve the transparency of the Rules 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 (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#2d595f4c4944434a4c4349404c5f4648595e6d5e484e034a425b"><span class="__cf_email__" data-cfemail="1e6a6c7f7a7770797f707a737f6c757b6a6d5e6d7b7d30797168">[email protected]</span></a> or 202-551-5777.
NSCC reserves the right to not respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which 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#1361667f763e707c7e7e767d6760536076703d747c65"><span class="__cf_email__" data-cfemail="0270776e672f616d6f6f676c7671427167612c656d74">[email protected]</span></a>. Please include
File Number SR-NSCC-2022-005 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-2022-005. 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-2022-005 and should be submitted on
or before June 29, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
---------------------------------------------------------------------------
\39\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-12289 Filed 6-7-22; 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.