Notice2023-02509
Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change, as Modified by Amendment Nos. 1, 2, and 3, To Revise the Excess Capital Premium Charge
Primary source
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Published
February 7, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 25 (Tuesday, February 7, 2023)</title>
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[Federal Register Volume 88, Number 25 (Tuesday, February 7, 2023)]
[Notices]
[Pages 8013-8018]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-02509]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96786; File No. SR-NSCC-2022-005]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change, as Modified by
Amendment Nos. 1, 2, and 3, To Revise the Excess Capital Premium Charge
February 1, 2023.
I. Introduction
On May 20, 2022, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2022-005 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder.\2\ The proposed rule change was published
for comment in the Federal Register on June 8, 2022,\3\ and the
Commission has received comments regarding the proposed rule change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 95026 (June 2, 2022), 87
FR 34913 (June 8, 2022) (``Notice''). The Notice referred to an
incorrect filing date of May 30, 2022; however, the proposal was
filed on May 20, 2022, as indicated here. Moreover, the Notice
reflected the filing of Amendment No. 1, which made a correction to
Exhibit 5 of the filing, specifically, to insert an additional
cross-reference into a proposed definition that had been omitted.
\4\ Comments are available at <a href="https://www.sec.gov/comments/sr-nscc-2022-005/srnscc2022005.htm">https://www.sec.gov/comments/sr-nscc-2022-005/srnscc2022005.htm</a>.
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On July 11, 2022, pursuant to Section 19(b)(2) of the Act,\5\ the
Commission designated a longer period within which to approve,
disapprove, or institute proceedings to determine whether to disapprove
the proposed rule change.\6\ On September 1, 2022, the Commission
instituted proceedings, pursuant to Section 19(b)(2)(B) of the Act,\7\
to determine whether to approve or disapprove the proposed rule
change.\8\
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\5\ 15 U.S.C. 78s(b)(2).
\6\ Securities Exchange Act Release No. 95245 (July 11, 2022),
87 FR 42523 (July 15, 2022).
\7\ 15 U.S.C. 78s(b)(2)(B).
\8\ Securities Exchange Act Release No. 95656 (Sept. 1, 2022),
87 FR 55058 (Sept. 8, 2022).
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On July 6, 2022, NSCC filed a partial amendment (``Amendment No.
2'') to modify the proposed rule change.\9\ On November 28, 2022, NSCC
filed another amendment (``Amendment No. 3'') to modify the proposed
rule change.\10\ On December 1, 2022, the Commission published notice
of filing of Amendment Nos. 2 and 3 and of an extension to the action
date for the proposed rule change.\11\
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\9\ Amendment No. 2 partially amended the proposed rule change
to update the description of the impact of the proposal. In
Amendment No. 2, NSCC also provided a revised version of the
confidential impact study that it included as Exhibit 3a to the
proposed rule change.
\10\ Amendment No. 3 amended and replaced the proposed rule
change in its entirety. Specifically, it clarified the particular
circumstances in which NSCC would retain the ability to waive the
excess capital premium charge, rather than remove NSCC's discretion
to waive or reduce the charge as was initially proposed in the
proposed rule change.
\11\ Securities Exchange Act Release No. 96426 (Dec. 1, 2022),
87 FR 75105 (Dec. 7, 2022) (``Amended Notice'').
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For the reasons discussed below, the Commission is approving the
proposed rule change, as modified by Amendment Nos. 1, 2 and 3
(hereinafter, ``proposed rule change'').
II. Description of the Proposed Rule Change <SUP>12</SUP>
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\12\ Capitalized terms not defined herein are defined in NSCC's
Rules and Procedures (``Rules''), available at http://dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
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NSCC provides clearing, settlement, risk management, central
counterparty services, and a guarantee of completion for virtually all
broker-to-broker trades involving equity securities, corporate and
municipal debt securities, and unit investment trust transactions in
the U.S. markets. A key tool that NSCC uses to manage its credit
exposure to its members is collecting an appropriate Required Fund
Deposit (i.e., margin) from each member.\13\ A member's margin is
designed to mitigate potential losses to NSCC associated with
liquidation of the member's portfolio in the event of that member's
default.\14\ The aggregate of all NSCC members' margin deposits
(together with certain other deposits required under the Rules)
constitutes NSCC's Clearing Fund, which NSCC would access should a
member default and that member's margin, upon liquidation, be
insufficient to satisfy NSCC's losses.\15\
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\13\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules, supra note 12.
\14\ Under NSCC's Rules, a default would generally be referred
to as a ``cease to act'' and could encompass a number of
circumstances, such as a member's failure to make a margin deposit
in a timely fashion. See Rule 46 (Restrictions on Access to
Services), supra note 12.
\15\ See id.
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A member's margin consists of a number of applicable components,
each of which addresses specific risks faced by NSCC.\16\ Many of those
components are designed to measure risks presented by the net unsettled
positions a member submits to NSCC to be cleared and settled; however,
certain components, often referred to as margin ``add-ons,'' measure
and mitigate other risks that NSCC may face, such as credit risks.
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\16\ See Procedure XV, supra note 12.
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NSCC's excess capital premium (``ECP'') is one such add-on that
makes up part of the margin that a member must pay to NSCC. The purpose
of this charge is to mitigate the heightened default risk a member
could pose to NSCC if it operates with lower capital levels relative to
its margin requirements.\17\ Put another way, the ECP charge operates
to collect additional margin if a member's exposure to NSCC based on
its clearing activity is out of proportion to its capital.
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\17\ See Securities Exchange Act Release No. 54457 (Sept. 15,
2006), 71 FR 55239 (Sept. 21, 2006) (SR-FICC-2006-03 and SR-NSCC-
2006-03) (approving the ECP charge as a new component of the margin
methodology).
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As described in more detail below, the ECP charge applies when a
specified portion of a member's required margin exceeds its capital by
a ratio of more than 1.0 (defined in the Rules as the ``Excess Capital
Ratio'').\18\ When the charge applies, NSCC determines its amount by
multiplying the member's capital by this ratio, with the resulting
amount serving as the add-on charge.
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\18\ See Section I(B)(2) of Procedure XV, supra note 12.
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NSCC's proposal would change both the calculation methodology and
governance of the ECP charge in its Rules. With respect to the
calculation of the charge, NSCC proposes to: (1) use the volatility
charge of a member's margin requirement to compare a member's
applicable capital amounts, as opposed to the current methodology which
uses a specific ``calculated amount'' identified in the Rules; (2) when
calculating the ECP charge, for members that are broker-dealers, use
net capital amounts rather than excess net capital, 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. With respect to governance, NSCC
proposes to: (1) identify the particular circumstances in which NSCC
has the ability to waive the charge, including the information that
NSCC would review in deciding whether to waive the ECP charge as well
as the governance around the application of such waiver; and (2)
provide that NSCC may calculate the charge based on updated capital
information.
NSCC has estimated the potential impacts of the proposal during the
period of June 1, 2020 through December 31, 2021. The study showed that
the proposal would have had no impact to NSCC's overall or member-level
margin coverage, that is, that
[[Page 8014]]
NSCC would continue to collect margin that would cover its credit
exposures to its members under the proposal. Further, the study showed
that the proposal would have reduced the number of ECP charges that
would have been triggered by the calculation by 65 percent, from 347
ECP charges triggered for 19 members to 122 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 $51.31 billion (the actual total
amount of ECP charges triggered by the current calculation during that
period) to approximately $17.44 billion (the total amount of ECP
charges that would have been triggered during that time by the proposed
calculation), with the average amount per member reducing from $147.9
million to approximately $143.0 million.\19\
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\19\ See Amended Notice, supra note 11, 87 FR 75111. NSCC also
submitted more detailed results of the impact study as confidential
Exhibit 3 to the proposed rule change. NSCC requested confidential
treatment of Exhibit 3 pursuant to 17 CFR 240.24b-2.
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A. Current Calculation and Governance of the ECP Charge
NSCC's current methodology for determining applicability of the ECP
charge is as follows. First, NSCC determines the member's ``Calculated
Amount,'' pursuant to the Rules. The Calculated Amount is designed to
represent the member's margin requirements to NSCC resulting from its
unsettled positions, and it is made up of a number of the components of
a member's margin.\20\ 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.\21\
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\20\ Specifically, the Rules define the Calculated Amount as a
member's Required Fund Deposit excluding any applicable special
charge, margin requirement differential charge, coverage component
charge or margin liquidity adjustment charge, plus any additional
amounts the member is required to deposit to the Clearing Fund
either due to being placed on the Watch List or as an assurance of
financial responsibility or operational capability. These various
margin components and other concepts are described in the NSCC
Rules. See Procedure XV, Sections I(A)(1)(c) and (2)(c) (special
charge), I(A)(1)(e) and (2)(d) (margin requirement differential),
I(A)(1)(f) and (2)(e) (coverage component), and I(A)(1)(g) and
(2)(f) (margin liquidity adjustment charge), supra note 12; see also
Rule 15, Section 2b(iv), supra note 12 (setting forth NSCC's
authority to require adequate assurances of a member's financial
responsibility).
\21\ Members that are broker-dealers are required to maintain a
certain level of excess net capital, and bank members are required
to maintain a certain level of equity capital as a requirement for
continued membership with NSCC. See Addendum B, supra note 12.
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. See Rule 2B, Section 2, supra note
12.
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Next, if the member's Calculated Amount divided by the applicable
capital amount (referred to as the member's Excess Capital Ratio) is
greater than 1.0, NSCC may require that member to make an ECP
charge.\22\ The applicable ECP charge is 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. However,
NSCC has the authority to collect a lower ECP charge than the amount
calculated pursuant to the Rules or to determine not to collect the ECP
charge from a member at all, and it 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.\23\
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\22\ Section I(B)(2) of Procedure XV, supra note 12.
\23\ Id.
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The Rules describe 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.\24\ The discretion to adjust, waive or return an ECP charge
was designed to allow NSCC to determine when a calculated ECP charge
may not be necessary or appropriate to mitigate the risks it was
designed to address.\25\
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\24\ See footnote 7 of Procedure XV, supra note 12.
\25\ See note 17 supra.
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B. Amendments to the Calculation of the ECP Charge
Use Members' Volatility Component Instead of the Calculated Amount.
NSCC proposes to replace the Calculated Amount with the amount
collected as that member's volatility component of its margin for
purposes of determining the applicability of the ECP charge. The
volatility component measures the market price volatility of a member's
portfolio,\26\ and it usually comprises the largest portion of a
member's margin.
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\26\ See Sections I(A)(1)(a)(i)-(iii) and (2)(a)(i)-(iii) of
Procedure XV of the Rules, supra note 12. 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.
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Currently, determining a member's Calculated Amount requires a more
complicated calculation, as it uses a member's margin, but excludes
certain components and includes other deposits. The proposal would
simplify this calculation by using only the volatility component. NSCC
states that one of the tools it provides to its members is a calculator
that allows them to determine their potential volatility charge based
on trading activity, and that, therefore, this proposed change would
make the calculation of the ECP charge both clearer and more
predictable for members.\27\
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\27\ Amended Notice, supra note 11, 87 FR at 75108.
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Use Net Capital for Broker-Dealer Members and Equity Capital for
All Other Members in the Calculation of the ECP Charge.\28\ NSCC is
proposing to use net capital, rather than excess net capital, for
broker-dealer members when calculating the ECP charge. NSCC states that
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.\29\
NSCC also states that using net capital rather than excess net capital
would provide NSCC with a better measure of the increased default risks
presented when a broker-dealer member operates at low net capital
levels relative to its margin requirements.\30\
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\28\ To effectuate these changes, NSCC proposes to adopt revised
and new defined terms. Specifically, NSCC would include a new
defined term for ``Equity Capital'' and revise a defined term for
``Net Capital.'' The proposal would also revise the Rules describing
the calculation of the ECP charge and identifying membership
qualifications, to use the new and/or revised defined terms, as
appropriate. In addition, NSCC would identify the reporting
requirements that NSCC relies on to obtain the capital information
for members.
\29\ Amended Notice, supra note 11, 87 FR at 75108.
\30\ See id. NSCC states that this approach would be consistent
with the rationale for the Commission's amendments to Rule 15c3-1
under the Act, 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. Id. (citing 17 CFR
240.15c3-1; Securities Exchange Act Release No. 70072 (July 30,
2013), 78 FR 51823 (Aug. 21, 2013) (File No. S7-08-07)). NSCC
believes that Rule 15c3-1 provides 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. Id.
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In addition, NSCC is proposing to provide that, for all members
that are not broker-dealers, it would use equity capital in calculating
the ECP charge, rather than the capital amount set forth in NSCC's
membership standards.\31\
[[Page 8015]]
Currently, 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 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.\32\ NSCC states that the proposal would simplify the
calculation of the ECP charge for members that are not broker-dealers
by providing that NSCC would use equity capital rather than use
different measures that are based on other membership requirements, and
that it would also create consistency across members.\33\
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\31\ NSCC's Rules identify the applicable capital measures as
follows: for bank members, equity capital; for members that are
trust companies and not banks, consolidated capital; and for other
legal entities that are members, an amount determined by NSCC. See
Section 1.B of Addendum B, supra note 12.
\32\ Amended Notice, supra note 11, 87 FR at 75108.
\33\ Id. at 75109.
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Establish a Cap for the Excess Capital Ratio. NSCC is proposing to
set a maximum amount of the Excess Capital Ratio that is used in
calculating members' ECP charge of 2.0. Specifically, the Excess
Capital Ratio is the multiplier that is applied to the difference
between a member's volatility charge and its applicable capital
measure. Currently, the Rules do not include any cap on the Excess
Capital Ratio.
NSCC states that capping the multiplier would allow it to address
the risks it faces without imposing an overly burdensome ECP
charge.\34\ NSCC further states that, 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, which was appropriate 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.\35\ NSCC also states that this proposed change
would provide members with more clarity and transparency, by allowing
them to predict and estimate the maximum amount of their potential ECP
charge.\36\
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\34\ Id.
\35\ Id.
\36\ Id.
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C. Changes Regarding Governance of the ECP Charge
NSCC's Ability to Waive the ECP Charge. NSCC would also revise its
Rules to specify particular circumstances in which NSCC retains the
ability to waive the ECP charge. NSCC states that the proposed changes
to the calculation of the ECP charge would, taken together, eliminate
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 (as described below), both address the most
common circumstances when NSCC has either waived or reduced the ECP
charge in the past.\37\
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\37\ Id. at 75109-10.
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However, NSCC believes that there may still be circumstances when
it may not be necessary or appropriate to collect an ECP charge from a
member, for example, in certain exigent circumstances when NSCC
observes unexpected changes in market volatility or trading
volumes.\38\ Therefore, NSCC is proposing to retain discretion to waive
an ECP charge in certain defined circumstances and to specify the
approval required to apply such discretion.
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\38\ Id.
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As proposed, NSCC's Rules would describe the exigent circumstances
in which NSCC would retain the ability to waive an ECP charge as those
when NSCC, in its sole discretion, observes extreme market conditions
or other unexpected changes in factors such as market volatility,
trading volumes or other similar factors. As noted above, NSCC states
that, based on a review of past data, the proposed changes to the
calculation of the ECP charge would otherwise eliminate most prior
instances when an ECP charge was waived.\39\
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\39\ Specifically, over the impact study period, NSCC waived and
adjusted calculated ECP charges by $38.80 billion. NSCC waived a
total of 33 ECP charges that totaled approximately $26.12 billion.
Under the proposal, however, 14 of these charges would have been
collected from members (although the amount would have been
reduced), totaling $6.46 billion, 14 charges would not have been
triggered as the calculated ECP ratio was below 1.0, and NSCC would
have waived 5 of the ECP charges, mainly following receipt of
updated financial information. NSCC adjusted the amount of 16 ECP
charges by a total of approximately $12.69 billion. Under the
proposal, 7 of these charges would have been still collected,
totaling $6.48 billion, and 9 charges would not have been triggered
as the calculated ECP ratio was below 1.0. See id. at 75111. See
also supra note 17.
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NSCC also states that there have been instances, particularly in
recent years, when NSCC has waived the ECP charge in circumstances that
would fall within the proposed identification of exigent circumstances,
and that the ECP charge would have been triggered in such
circumstances, even as amended by this proposed rule change. Such
instances occurred multiple times in recent years, including, for
example, during the extreme market volatility experienced in early 2020
related to the global outbreak of the COVID-19 coronavirus and the meme
stock market event in early 2021.\40\ Further, NSCC believes there
remains some ongoing possibility that an unexpected increase in market
volatility, for example, could cause a relative increase in a member's
volatility charge, which may, in turn, trigger an ECP charge, even
under the proposal.\41\
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\40\ Amended Notice, supra note 11, 87 FR at 75109-10.
\41\ Id. at 75110.
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In such circumstances, under the proposal, NSCC would determine if
the ECP charge being triggered at that time is not primarily caused by
the risk presented by a member's capital levels and whether NSCC can
effectively address the risk exposure presented by that member without
the collection of the ECP charge. Alternatively, NSCC may determine,
based on its review of the information available to it, that the ECP
charge was appropriately triggered by a member's capital position or
trading activity and was not driven primarily by the prevailing market
conditions or other exigent circumstances. Therefore, NSCC believes it
is appropriate to retain a certain amount of discretion to review an
ECP charge that is triggered in such circumstances to determine whether
a waiver of the ECP charge may be appropriate.\42\
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\42\ Id.
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In addition to defining the circumstances in which NSCC may waive
the ECP charge, the proposed changes would also describe the review
NSCC would conduct in deciding to waive the charge in the exigent
circumstances, the information NSCC would consider in such review, and
the approval required to waive the ECP charge. More specifically, the
proposed rule change provides that NSCC would review all relevant facts
and other information available to it at the time of its decision,
including the degree to which a member's capital position and trading
activity compare or correlate to the prevailing exigent circumstances
and whether NSCC can effectively address the risk exposure presented by
a member without the collection of the ECP charge from that member. For
example, as noted above, if NSCC believes, based on its review of the
relevant circumstances, that the risk exposure presented by a member is
driven by the unexpected increase in
[[Page 8016]]
market volatility and not by a member's capital levels, NSCC may
determine that it is appropriate to address such risk through the
collection of a special charge from that member rather than an ECP
charge.\43\
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\43\ See Section I(A)(1)(c) and (2)(c) of Procedure XV, supra
note 12 (allowing NSCC to collect, as part of margin ``[a]n
additional payment (``special charge'') . . . in view of price
fluctuations in or volatility or lack of liquidity of any
security'').
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Finally, the proposed rule change would specify the governance
around a decision to waive an ECP charge, by identifying the level of
NSCC officer who would be authorized to apply a waiver and by requiring
that the decision be documented in a written report that is made
available upon request to the affected member.\44\
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\44\ NSCC also states that it would update its internal
procedures to include waivers of the ECP charge in its regular
updates to the Commission. Amended Notice, supra note 11, 87 FR at
75110 n.37.
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NSCC's Ability to Consider Updated Capital Information. Under the
proposal, 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.
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 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.\45\
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\45\ Id. at 75110.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \46\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such organization. After carefully considering the
proposed rule change, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to NSCC. In particular, the
Commission finds that the proposed rule change is consistent with
Section 17A(b)(3)(F) \47\ of the Act and Rules 17Ad-22(e)(6)(i) and
(e)(23)(ii) thereunder.\48\
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\46\ 15 U.S.C. 78s(b)(2)(C).
\47\ 15 U.S.C. 78q-1(b)(3)(F).
\48\ 17 CFR 240.17Ad-22(e)(6)(i) and (e)(23)(ii).
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A. Consistency With Section 17(A)(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing agency be designed to, among other things,
promote the prompt and accurate clearance and settlement of securities
transactions, assure the safeguarding of securities and funds which are
in the custody or control of the clearing agency or for which it is
responsible, and protect investors and promote the public interest.\49\
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\49\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission believes that the proposed changes to the
calculation of the ECP charge described in section II.B above should
allow NSCC to ensure that it continues to collect margin sufficient to
address the heightened default risk presented by a member operating
with lower capital levels relative to its margin requirements. Based on
its review of the proposed rule change, including the detailed impact
analysis submitted as a confidential exhibit,\50\ the Commission
understands that NSCC's margin coverage would not be impacted by this
change and that NSCC would continue to collect sufficient margin to
manage its potential exposure to its members.
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\50\ See note 19 supra. The confidential analysis identified, on
a member-by-member basis, the number of backtesting deficiencies
during the impact study period.
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In addition, the Commission believes that the proposed changes to
the calculation of the ECP charge described in section II.B should
result in a simplified and more straight-forward method for calculating
the ECP charge, based on understandable metrics with which NSCC's
members are familiar. For example, using a member's volatility charge,
which is an established aspect of the overall margin requirements
identified in NSCC's Rules, as opposed to the Calculated Amount that
involves both including and excluding various margin components, is
clearer and more predictable while still consistent with the purpose of
the ECP charge. Similarly, using net capital and equity capital for
broker-dealer members and all other members, respectively, in the
calculation of the ECP charge would result in a more consistent
calculation across different types of members.\51\ Moreover, capping
the Excess Capital Ratio at 2.0 would be an appropriate balance between
addressing the heightened default risk without imposing overly
burdensome ECP charges.
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\51\ One commenter asserted that NSCC should also consider the
member's ability to pay for customer trades by settlement. Letter
from John S. Markle, VP and Deputy General Counsel, Robinhood Inc.,
at 3-4 (Aug. 3, 2022), available at <a href="https://www.sec.gov/comments/sr-nscc-2022-005/srnscc2022005-20135431-306323.pdf">https://www.sec.gov/comments/sr-nscc-2022-005/srnscc2022005-20135431-306323.pdf</a> (``Robinhood
Letter''). However, NSCC does not have access to that information as
part of its normal course. The Commission therefore does not believe
that it would be appropriate for NSCC to include that as part of the
ECP charge calculation. However, this would not prohibit NSCC from
considering that fact as part of its consideration of whether to
waive an ECP charge. Similarly, the commenter asserted that NSCC
should include a member's committed lines of credit in its
determination of the member's capital. Id. at 4. However, the
Commission believes that NSCC's stated desire to align the capital
used for purposes of determining the ECP charge with the existing
capital standards required for members is reasonable because it
allows for consistency between different aspects of the Rules. In
addition, the Commission believes that NSCC could, as part of its
consideration whether to waive an ECP charge, consider such
additional sources of funding if appropriate.
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Together, by improving the consistency and predictability of the
ECP charge, the proposed enhancements would also improve NSCC's ability
to collect margin 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 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 NSCC or for
which it is responsible, consistent with Section 17A(b)(3)(F) of the
Act.\52\
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\52\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission believes that the proposed changes set forth in both
[[Page 8017]]
sections II.B and II.C should improve transparency and understanding of
the NSCC's governance and application of the ECP charge. For example,
NSCC's proposal would describe the exigent circumstances in which NSCC
may waive the ECP charge, describe what information NSCC would consider
when determining whether to waive the charge, and specify the approval
necessary to waive the charge.\53\ Moreover, using commonly understood
inputs as the determinants of the ECP charge (i.e., using the
volatility charge instead of the Calculated Amount and using net
capital and equity capital instead of the current standards) and
capping the Excess Capital Ratio at 2.0 should help members better
anticipate and plan for a potential ECP charge. Through its client
portal, NSCC provides regularly updated information to members about
their volatility charges, such that a member should be able to better
calculate and understand its potential ECP charge by using that
information in conjunction with their capital, while also considering
how the proposed cap on the Excess Capital Ratio would affect any
eventual charge.\54\
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\53\ The Commission received comments on this aspect of the
proposal as it was initially filed, before Amendment No. 3, which
are no longer relevant in light of the changes set forth in
Amendment No. 3. See Robinhood Letter at 1-3; Letter from William
Capuzzi, Chief Executive Officer, Apex Clearing Corporation, at 2
(Aug. 24, 2022), available at <a href="https://www.sec.gov/comments/sr-nscc-2022-005/srnscc2022005-20137445-307938.pdf">https://www.sec.gov/comments/sr-nscc-2022-005/srnscc2022005-20137445-307938.pdf</a> (``Apex Letter'').
Specifically, the commenters asserted that NSCC did not explain what
would happen to members incurring an ECP charge if NSCC no longer
had the discretion to waive the charge, as NSCC had proposed in the
initial filing before Amendment No. 3. Because Amendment No. 3
reintroduced the ability to waive the ECP charge in specified
exigent circumstances, the Commission believes that these comments
are addressed by the amendment.
\54\ Commenters also asserted that NSCC should provide a
curative period for members to address any potential application of
the ECP charge, for example, by increasing the available capital or
taking other measures. See Robinhood Letter at 4-5; Apex Letter at
2. However, the Commission disagrees that such a curative period
would be appropriate. The ECP charge is a part of a member's
financial obligation to NSCC, payment of which is governed by NSCC's
Rules, see Procedure XV, Section II(B), supra note 12, and is
directly related to the exposure that the member poses to NSCC.
Therefore, consistency in the timeframes for payment for the overall
margin amount makes sense and helps NSCC to manage its exposure to
its members. The Commission does not believe that the ECP charge
necessitates a specific additional cure period, given that NSCC
would still be obligated to guarantee the transactions of a
defaulting member during the purported curative period.
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Taken together, these proposed changes should help NSCC's members
better anticipate their required margin because of the use of
simplified inputs to the calculation of the ECP charge and the
imposition of a cap on the applicable Excess Capital Ratio. This
improved understanding of the potential margin requirements should, in
turn, facilitate prompt and accurate clearance and settlement by
removing potential ambiguity or confusion about a member's obligations
to NSCC. Similarly, the Commission believes that the improved
transparency provided by this proposed rule change both with respect to
a member's margin obligations and the process by which NSCC would
consider waiver of an ECP charge should provide members and the public
with more clarity about the nature and application of the ECP charge
and resolve potential ambiguity about when the ECP charge would or
would not apply, which is consistent with promoting the public
interest.
For these reasons, the Commission therefore believes that the
proposed changes are consistent with Section 17A(b)(3)(F) of the
Act.\55\
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\55\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(6)(i)
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.\56\
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\56\ 17 CFR 240.17Ad-22(e)(6)(i).
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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 reduce the circumstances in which NSCC
may waive the charge, resulting in a more transparent margining
methodology.\57\ Finally, the proposed rule change would clarify the
exigent circumstances when NSCC may determine that it is appropriate to
waive the ECP charge. 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.
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\57\ One commenter asserted that NSCC should provide further
support for capping the Excess Capital Ratio at 2.0, as opposed to a
different figure such as 1.5. Robinhood Letter at 5. The commenter
referenced statements that NSCC made in the proposed rule change, to
argue that the ratio was not supported and that further analysis
would be appropriate. Id. However, the Commission also reviewed the
underlying impact analysis, submitted confidentially as part of the
proposed rule change, see note 19 supra, which allows for a more
detailed understanding of what the Excess Capital Ratio would have
been under the proposal in each instance in which the ECP charge
applied over the impact study period and, therefore, an
understanding of how often the ratio would be, for example, between
1.5 and 2.0. Based on the confidential data submitted, there is very
limited incidence of members having an Excess Capital Ratio between
1.5 and 2.0; using a ratio of 1.5 as suggested by the commenter,
therefore, generally would not have a significant effect on the
costs presented to members. The Commission therefore believes that
the determination to use 2.0 is reasonable and represents an
appropriate balance of addressing the risk presented and not being
overly burdensome.
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Taken together, 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, the
Commission believes that the proposed rule change is consistent with
Rule 17Ad-22(e)(6)(i) under the Act.\58\
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\58\ Id.
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C. Consistency With Rule 17Ad-22(e)(23)(ii)
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.\59\
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\59\ 17 CFR 240.17Ad-22(e)(23)(ii).
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As discussed above in section III.A, the Commission believes that
the proposed changes set forth in both sections II.B and II.C should
improve NSCC's members' ability to understand and estimate the
potential magnitude of any ECP charge and to better anticipate when
such a charge would apply and in what exigent circumstances NSCC would
be able to waive the charge. The proposal would do this in several
ways, including by simplifying and clarifying the inputs to the
calculation of the ECP
[[Page 8018]]
charge, capping the Excess Capital Ratio at 2.0, and by providing
additional information regarding NSCC's ability to waive the charge.
Therefore, the Commission believes that these changes are
consistent with Rule 17Ad-22(e)(23)(ii) under the Act.\60\
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\60\ Id.
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change, as modified by Amendment Nos. 1, 2, and 3, is
consistent with the requirements of the Act, and in particular, the
requirements of Section 17A of the Act \61\ and the rules and
regulations thereunder.
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\61\ 15 U.S.C. 78q-1(b)(3)(F).
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It is therefore ordered, pursuant to Section 19(b)(2) \62\ of the
Act, that the proposed rule change (SR-NSCC-2022-005), as modified by
Amendment Nos. 1, 2, and 3, be, and hereby is, approved.
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\62\ 15 U.S.C. 78s(b)(2)(C).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\63\
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\63\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-02509 Filed 2-6-23; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on February 7, 2023.
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