Notice2023-25104
Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving Proposed Rule Change Relating to the Schedule of Haircuts for Eligible Clearing Fund Securities
Primary source
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Published
November 15, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 219 (Wednesday, November 15, 2023)</title>
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[Federal Register Volume 88, Number 219 (Wednesday, November 15, 2023)]
[Notices]
[Pages 78425-78428]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-25104]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98881; File No. SR-NSCC-2023-009]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Approving Proposed Rule Change Relating to the
Schedule of Haircuts for Eligible Clearing Fund Securities
November 8, 2023.
I. Introduction
On September 22, 2023, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2023-009 to modify the
schedule of haircuts for Eligible Clearing Fund Securities, and to
remove it and the related concentration limits from Procedure XV of the
NSCC Rules (``Procedure XV''), and make other clarifying changes
(``Proposed Rule Change''), 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 October 4, 2023.\3\ The Commission has received
no comments on the Proposed Rule Change. For the reasons discussed
below, the Commission is approving the Proposed Rule Change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 98589 (Sept. 28,
2023), 88 FR 68777 (Oct. 4, 2023) (File No. SR-NSCC-2023-009)
(``Notice of Filing'').
\4\ Capitalized terms not defined herein are defined in the NSCC
Rulebook (``NSCC Rules''), available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf.
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II. Background
NSCC is a central counterparty (``CCP''), which means it interposes
itself as the buyer to every seller and seller to every buyer for the
financial transactions it clears. As such, NSCC is exposed to the risk
that one or more of its members may fail to make a payment or to
deliver securities.
A key tool that NSCC uses to manage its credit exposures to its
members is the daily collection of margin (referred to as ``Required
Fund Deposit'' in the NSCC Rules) from each member.\5\ The aggregated
amount of all NSCC members' margin constitutes the Clearing Fund. The
objective of the Clearing Fund 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'').\6\ NSCC would be able to access the Clearing Fund should
a defaulting member's own margin be insufficient to satisfy losses to
NSCC caused by the liquidation of that member's portfolio.
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\5\ See NSCC Rule 4, supra note 4 (requiring members to make
Required Fund Deposits to the Clearing Fund with the amount of each
member's deposit being determined by NSCC in accordance with these
rules).
\6\ The NSCC 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 NSCC Rule 46
(Restrictions on Access to Services), supra note 4.
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A member may provide its required margin in the form of cash or an
open account indebtedness secured by Eligible Clearing Fund
Securities.\7\ Eligible Clearing Fund Securities are defined to include
certain agency, mortgage-backed, and Treasury securities.\8\ These
securities are valued based on the prior Business Day's closing market
price, less a haircut, and may be subject to a concentration limit.\9\
NSCC states that haircuts are used to protect NSCC and its members from
price fluctuations, i.e., if NSCC is required to liquidate collateral
of an insolvent member and such collateral is worth less at the time of
liquidation than when it is pledged to NSCC.\10\ NSCC also states that
concentration limits are intended to reduce NSCC's risk by limiting the
percentage of certain types of Eligible Clearing Fund Securities
pledged by members to secure the Clearing Fund deposits, because when a
member's portfolio contains large net unsettled positions in a
particular group of securities with a similar risk profile or in a
particular asset type, such securities could present additional risk to
NSCC.\11\
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\7\ See NSCC Rule 4, Section 1 (Required Fund Deposits), supra
note 4.
\8\ See NSCC Rule 1 (defining what constitutes Eligible Clearing
Fund Securities and the components thereof, which are Eligible
Clearing Fund Agency Securities, Eligible Clearing Fund Mortgage-
Backed Securities, and Eligible Clearing Fund Treasury Securities),
supra note 4.
\9\ See Section II.(A)1. of Procedure XV, supra note 4.
\10\ Notice of Filing, supra note 3, 88 FR at 68777.
\11\ Id.
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Currently, collateral haircuts applicable to relevant security
types and remaining maturity terms are specified as fixed percentages
in Section III.(A) of Procedure XV (``Section III.(A)'').\12\ According
to NSCC and set forth in its internal risk management procedures, the
sufficiency of collateral haircuts is evaluated through use of back-
tests, stress-tests and market observations.\13\ Specifically, NSCC
conducts daily backtesting analysis by comparing the collateral haircut
for each member in simulated liquidations with the member's actual
collateral held on deposit at NSCC.\14\ NSCC escalates any exceptions
that it observes to assess the root cause and determine whether further
analysis and/or review would be appropriate, taking into account
whether a particular security may present inherent volatility and/or
liquidity risks that could likely result in an erosion in the value of
the security exceeding the applicable collateral haircut.\15\ On a
quarterly basis, NSCC reviews the composition of the Eligible Clearing
Fund Securities that members have pledged to secure their Required Fund
Deposits in order to assess the sufficiency of the collateral haircuts
applied and whether any haircut changes would be needed, taking into
account backtesting results, any
[[Page 78426]]
instances where the simulated losses from available historical stress
testing scenario dates have exceeded the collateral haircut values, and
market conditions.\16\
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\12\ See Section III.(A) of Procedure XV, supra note 4. Section
III.(A) was last modified in 2011 in order to conform the haircuts
to requirements of NSCC's lenders under its credit facilities. See
Securities Exchange Act Release No. 64487 (May 13, 2011), 76 FR
29019 (May 19, 2011) (SR-NSCC-2011-02).
\13\ Notice of Filing, supra note 3, 88 FR at 68777. NSCC also
filed excerpts from its internal market risk management procedures
as Confidential Exhibit 3b to its filing.
\14\ Id.
\15\ Id.
\16\ Id. at 68778.
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In addition to collateral haircuts, NSCC applies concentration
limits to certain Eligible Clearing Fund Securities set forth in the
NSCC Rules. Under these limits, no more than 20 percent of a member's
Required Fund Deposit may be in the form of Eligible Clearing Fund
Agency Securities that are of a single issuer and no member may post as
eligible collateral Eligible Clearing Fund Agency Securities of which
it is the issuer.\17\ In addition, any deposits of Eligible Clearing
Fund Agency Securities or Eligible Clearing Fund Mortgage-Backed
Securities in excess of 25 percent of a member's Required Fund Deposit
will be subject to a haircut that is twice the amount of the percentage
noted in Section III.(A), and a member may deposit Eligible Clearing
Fund Mortgage-Backed Securities of which it is the issuer, however such
securities will be subject to a premium haircut, with the initial
haircut being 14 percent, and if a member also exceeds the 25 percent
concentration limit, the haircut shall be 21 percent.\18\
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\17\ See Section II.(A)1. of Procedure XV, supra note 4.
\18\ Id.
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Changes to the collateral haircuts and concentration limits are
subject to NSCC's internal governance process.\19\ According to NSCC
and based on its internal risk management procedures, if NSCC
determines that, based on the analyses that it performs, there is
insufficient/excessive collateral haircut/concentration due to an
identifiable cause that affected multiple members and such cause would
likely persist based on NSCC's assessment of market conditions, such
outcome or result could cause NSCC to amend the haircuts/concentration
limits in the haircut schedule.\20\ If NSCC determines that a change to
the haircut schedule is warranted, it would document the recommendation
and rationale for the change at the time of such determination and
obtain approval from an executive director or above with a notice to
the risk management committee.\21\ Before making adjustments to the
haircut schedule, NSCC measures the potential impact of such
adjustments to ensure any impact is both necessary and appropriate.\22\
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\19\ Notice of Filing, supra note 3, 88 FR at 68778; see also
note 13 supra.
\20\ Id.
\21\ Id.
\22\ Id.
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III. Description of the Proposed Rule Change
In the Notice of Filing, NSCC states that it has observed that
under volatile market conditions with elevated frequency and magnitude
of securities price movements, the collateral value of Eligible
Clearing Fund Securities may shift in a relatively short period of time
and the current haircuts may not sufficiently account for the change in
value.\23\ When the erosion in the value of the Eligible Clearing Fund
Securities exceeds the relevant haircuts, NSCC is exposed to increased
risk of potential losses associated with liquidating a member's
portfolio in the event of a member default when the defaulting member's
own margin is insufficient to satisfy losses to NSCC caused by the
liquidation of that member's portfolio.\24\ Similarly, when a member's
portfolio contains large net unsettled positions in a particular group
of securities with a similar risk profile or in a particular asset
type, such securities could present additional risk to NSCC.\25\ The
additional risk exposures associated with liquidating a member's
portfolio in the event of a member default could lead to an increase in
the likelihood that NSCC would need to mutualize losses among non-
defaulting members during the liquidation process.\26\ However, any
changes to the haircuts and/or concentration limits currently requires
a proposed rule change to be filed with the Commission.
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\23\ Id.
\24\ Id.
\25\ Id.
\26\ Id.
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Therefore, to provide NSCC with more flexibility in adjusting the
haircuts and concentration limits so NSCC can respond to changing
market conditions more promptly in order to mitigate the additional
risk exposure, NSCC is proposing to remove Section III.(A) and
concentration limits from the Rules, and to publish the haircuts and
concentration limits in a haircut schedule on NSCC's website.\27\
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\27\ Specifically, NSCC is proposing to delete subsections (a)
and (b) of Section II.(A)1. of Procedure XV (Special Provisions
Related to Eligible Clearing Fund Securities), and delete Section
III of Procedure XV (Collateral Value of Eligible Clearing Fund
Securities) to remove all haircuts and concentration limits from the
Rules. NSCC is also proposing to (i) remove references to Section
III of Procedure XV in two places in Rule 4, and replace them with a
reference to Section II.(A) of Procedure XV; (ii) remove references
to subsections 1(a) and (b) of Section II.(A) of Procedure XV and
references to Section III of Procedure XV in Rule 56; and (iii)
remove a reference to Section III of Procedure XV in Section II.(A)
of Procedure XV, and replace it with a reference to the proposed
haircut schedule, to reflect the proposed changes described above.
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In addition, NSCC is proposing to add language in Section II.(A)1.
that makes it clear that all Eligible Clearing Fund Securities pledged
to secure Clearing Fund deposits shall, for collateral valuation
purposes, be subject to a haircut and may be subject to a concentration
limit. The proposed language would provide that NSCC shall determine
the applicable haircuts and any concentration limits from time to time
in accordance with its internal policy and governance process, based on
factors determined to be relevant by NSCC, which may include, for
example, backtesting results and NSCC's assessment of market
conditions, in order to set appropriately conservative haircuts and/or
concentration limits for the Eligible Clearing Fund Securities and
minimize backtesting deficiency occurrences. The proposed language
would also provide that the haircuts and any concentration limits
prescribed by NSCC shall be set forth in a haircut schedule that is
published on NSCC's website. The proposed language would also state
that it shall be the member's responsibility to retrieve the haircut
schedule, and that NSCC would provide members with at a minimum one
Business Day's advance notice of any change in the haircut schedule.
NSCC states that the proposed change to move the haircuts and
concentration limits from the Rules to the website would enable NSCC to
adjust the haircuts and concentration limits without undergoing a rule
filing process (although it could still necessitate an advance notice
under Title VIII of the Dodd-Frank Act, if a change materially affects
the nature or level of risks presented by NSCC).\28\ NSCC states that
by being able to make appropriate and timely adjustments to the
haircuts and concentration limits, it would have the flexibility to
respond to changing market conditions more promptly.\29\ Having the
flexibility to respond to changing market conditions more promptly
would in turn help better ensure that NSCC collects sufficient margin
from members as well as risk manages its credit exposures to its
members.\30\
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\28\ Notice of Filing, supra note 3, 88 FR at 68779 and n. 11
(citing 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i)).
\29\ Id.
\30\ Id.
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In its Notice of Filing, NSCC also provides an overview regarding
its changes to the categories relating to Treasury Inflation-Protected
Securities (``TIPS'').\31\ NSCC states that, as part of
[[Page 78427]]
its daily backtesting regarding the adequacy of collateral haircuts,
NSCC has determined that in periods where the inflation rate
fluctuates, the current haircut levels for TIPS have been inadequate to
address the fluctuations from time to time.\32\ This is because TIPS
are indexed to the inflation rate, and prices on TIPS move inversely to
their yields, e.g., when the inflation rate increases, prices on TIPS
decrease. When the decline in market value of TIPS exceeds the haircut
for TIPS, NSCC would be exposed to potential liquidation losses.\33\
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\31\ TIPS are a type of Treasury security issued by the U.S.
government that are indexed to inflation such that the principal
value of the security rises as inflation rises.
\32\ Notice of Filing, supra note 3, 88 FR at 68779.
\33\ Id.
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Accordingly, NSCC is planning to address haircuts for TIPS in a
separate category, as opposed to as part of a category also including
Treasury Bills, Notes, and Bonds, and to increase the haircut levels
for TIPS to ensure that the haircut levels would be commensurate with
the particular risk attributes of TIPS.\34\ NSCC describes the new TIPS
haircut categories as follows:\35\
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\34\ Id. NSCC also stated that its review of TIPS haircuts at
other registered clearing agencies demonstrate that NSCC's current
haircut levels for TIPS are generally lower than the TIPS haircuts
required by other clearing agencies and foreign CCPs, particularly
with respect to maturity ranges of 10 years or longer. Id.
(summarizing and citing various other clearing agency rules).
\35\ Id. NSCC also reflected the changes with respect to
haircuts for TIPS on the haircut schedule filed as Exhibit 3c to the
Notice of Filing, which would be posted to its website if the
Proposed Rule Change were approved.
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Maturity Current (%) Proposed (%)
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TIPS....................................... Zero to 1 year............... 2.0 2.0
1 year to 2 years............ 2.0 3.0
2 years to 5 years........... 3.0 5.0
5 years to 10 years.......... 4.0 7.0
10 years to 15 years......... 6.0 7.0
15 years or greater.......... 6.0 10.0
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NSCC conducted an impact study for the period from September 1,
2021 through August 31, 2022 (``Impact Study'').\36\ The results of the
Impact Study indicate that, if the haircut changes for TIPS had been in
place, it would have resulted in an average daily increase of $197,000
in the Clearing Fund assuming TIPS were deposited.\37\
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\36\ NSCC filed this Impact Study as confidential Exhibit 3a to
the Notice of Filing.
\37\ Notice of Filing, supra note 3, 88 FR at 68780 (also
providing a more detailed summary of the Impact Study).
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Finally, NSCC is proposing to clarify language in Sections
I.(B)(1), II.(A), II.(B), II.(C) and II.(D) of Procedure XV to reflect
that Mutual Fund/Insurance Services Members and other Limited Members
are no longer required to make deposits into the Clearing Fund. In
2022, NSCC removed the requirement that any Limited Members, including
Mutual Fund/Insurance Services Members, make any deposits to the
Clearing Fund.\38\ Sections I.(B)(1), II.(A), II.(B), II.(C) and II.(D)
of Procedure XV still contain references to Mutual Fund/Insurance
Service Members and/or Limited Members making deposits into the
Clearing Fund, and NSCC states that it would remove those references
for clarity.\39\
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\38\ See Securities Exchange Act Release No. 93722 (Dec. 6,
2021), 86 FR 70548 (Dec. 10, 2021) (SR-NSCC-2021-015).
\39\ Notice of Filing, supra note 3, 88 FR at 68779.
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IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \40\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After carefully 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) \41\ of the Act and Rules 17Ad-22(e)(5) and
(e)(23), each promulgated under the Act.\42\
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\40\ 15 U.S.C. 78s(b)(2)(C).
\41\ 15 U.S.C. 78q-1(b)(3)(F).
\42\ 17 CFR 240.17Ad-22(e)(5) and (e)(23).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act \43\ requires that the rules of a
clearing agency, such as NSCC, be designed to, among other things,
promote the prompt and accurate clearance and settlement of securities
transactions and assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible.\44\ The Commission believes that the Proposed Rule Change
is consistent with section 17A(b)(3)(F) of the Act for the reasons
stated below.
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\43\ 15 U.S.C. 78q-1(b)(3)(F).
\44\ Id.
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As stated in Part II supra, a key tool that NSCC uses to manage its
credit exposures to its members is the daily collection of margin from
each member described above, and NSCC applies haircuts to securities
collected as margin to protect NSCC and its members from price
fluctuations, i.e., if NSCC is required to liquidate collateral of an
insolvent member and such collateral is worth less at the time of
liquidation than when it is pledged to NSCC.
By moving the location where collateral haircuts and concentration
limits are published from NSCC's Rules to its website, the Proposed
Rule change would add flexibility for NSCC to make timely adjustments
to collateral haircuts and concentration limits during a time of
potentially deteriorating market or other conditions, while preserving
notice requirements to ensure that members are aware of risk management
changes. This added flexibility should allow NSCC to continue to ensure
that it can address changing market conditions rapidly and ensure that
it is collecting sufficient margin to cover its credit exposures to
members and minimizing exposures from members with large collateral
positions in a particular group of securities with a similar risk
profile or in a particular asset type.\45\
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\45\ In addition, the Commission believes that the changes
relating to the haircuts for TIPS would allow NSCC to ensure that
the haircut levels would be commensurate with the particular risk
attributes of TIPS, and thereby assure the safeguarding of
securities and funds that are in its custody or control.
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By helping NSCC to collect sufficient margin, the Proposed Rule
Change would better ensure that, in the event of a member default,
NSCC's operation of its critical clearance and settlement services
would not be disrupted because of insufficient financial resources.
[[Page 78428]]
Accordingly, the Proposed Rule Change should help NSCC to continue
providing prompt and accurate clearance and settlement of securities
transactions, consistent with section 17A(b)(3)(F) of the Act.\46\
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\46\ 15 U.S.C. 78q-1(b)(3)(F).
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Moreover, because the Proposed Rule Change would continue to ensure
that NSCC collects sufficient margin from members, it should also help
minimize the likelihood that NSCC would have to access the Clearing
Fund, thereby limiting non-defaulting members' exposure to mutualized
losses. By helping to limit the exposure of NSCC's non-defaulting
members to mutualized losses, the Proposed Rule Change should help NSCC
assure the safeguarding of securities and funds which are in its
custody or control, consistent with section 17A(b)(3)(F) of the
Act.\47\
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\47\ Id.
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Finally, the proposed clarifying changes should help to ensure that
NSCC's Rules are clear to members. When members better understand their
rights and obligations regarding the Rules, members are more likely to
act in accordance with the Rules, which should promote the prompt and
accurate clearance and settlement of securities transactions. As such,
the proposed clarifying changes are consistent with section
17A(b)(3)(F) of the Act.\48\
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\48\ Id.
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B. Consistency With Rule 17Ad-22(e)(5)
Rule 17Ad-22(e)(5) under the Act \49\ requires, in part, a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to set and enforce
appropriately conservative haircuts and concentration limits if the
covered clearing agency requires collateral to manage its or its
participants' credit exposure. As described in Part II supra, the
proposed changes to move the collateral haircuts and concentration
limits from NSCC's Rules should provide NSCC with more flexibility to
respond to changing market conditions because adjustments to the
haircuts and concentration limits would no longer require a rule
change. By being able to make appropriate and timely adjustments to the
haircuts and concentration limits, NSCC would have the flexibility to
respond to changing market conditions more promptly. Specifically, NSCC
would have the ability to promptly set and enforce conservative
collateral haircuts and concentration limits that are reflective of the
current market conditions. In this way, the proposed changes to move
the collateral haircuts and concentration limits from the Rules to the
website should help NSCC set and enforce appropriately conservative
collateral haircuts and concentration limits, consistent with the
requirements of Rule 17Ad-22(e)(5) under the Act.\50\
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\49\ 17 CFR 240.17Ad-22(e)(5).
\50\ Id.
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C. Consistency With Rule 17Ad-22(e)(23)
Rule 17Ad-22(e)(23)(i) and (ii) \51\ under the Act requires each
covered clearing agency to establish, implement, maintain, and enforce
written policies and procedures reasonably designed to, among other
things, publicly disclose all relevant rules and material procedures;
and provide sufficient information to enable participants to identify
and evaluate the risks, fees, and other material costs they incur by
participating in the covered clearing agency. Based on its review of
the record, and for the reasons described below, the Commission finds
that the proposed changes, taken together, are consistent with the
requirements of Rule 17Ad-22(e)(23)(i) and (ii).\52\
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\51\ 17 CFR 240.17Ad-22(e)(23)(i) and (ii).
\52\ Id.
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By adopting rules that require NSCC to provide prior notice through
public disclosures on its website relating to information on collateral
haircuts and concentration limits, NSCC's Rules would support the
communication of information that its members may use to identify and
evaluate the haircuts and concentration limits resulting from NSCC's
processes. As such, the Proposed Rule Change is consistent with
publicly disclosing all relevant rules and material procedures; and
providing sufficient information to enable participants to identify and
evaluate the risks, fees, and other material costs incurred with
participation in the covered clearing agency. The Commission finds,
therefore, that the Proposed Rule Change is consistent with the
requirements of Rule 17Ad-22(e)(23)(i) and (ii) under the Act.\53\
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\53\ Id.
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
in particular with the requirements of section 17A of the Act \54\ and
the rules and regulations promulgated thereunder.
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\54\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to section 19(b)(2) of the Act
\55\ that proposed rule change SR-NSCC-2023-009, be, and hereby is,
approved.\56\
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\55\ 15 U.S.C. 78s(b)(2).
\56\ In approving the Proposed Rule Change, the Commission
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\57\
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\57\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-25104 Filed 11-14-23; 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.