Notice2024-00630
Self-Regulatory Organizations; National Securities Clearing Corporation; Order Granting Approval of a Proposed Rule Change To Refine the Margin Liquidity Adjustment (“MLA”) Charge Calculation and the Description of the MLA Charge
Primary source
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Published
January 16, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 10 (Tuesday, January 16, 2024)</title>
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[Federal Register Volume 89, Number 10 (Tuesday, January 16, 2024)]
[Notices]
[Pages 2702-2707]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-00630]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99303; File No. SR-NSCC-2023-011]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Order Granting Approval of a Proposed Rule Change To
Refine the Margin Liquidity Adjustment (``MLA'') Charge Calculation and
the Description of the MLA Charge
January 9, 2024.
I. Introduction
On November 17, 2023, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\
proposed rule change SR-NSCC-2023-011 (``Proposed Rule Change'') to
modify NSCC's Rules & Procedures (``Rules'') \3\ to refine the Margin
Liquidity Adjustment (``MLA'') charge calculation and the description
of the MLA Charge, as described in greater detail below. The Proposed
Rule Change was published for public comment in the Federal Register on
December 1, 2023.\4\ The Commission has received no comments on the
Proposed Rule Change. For the reasons discussed below, the Commission
is approving the Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Terms not defined herein are defined in the NSCC Rules, as
applicable, available at http://dtcc.com/~/media/Files/Downloads/
legal/rules/nscc_rules.pdf.
\4\ See Securities Exchange Act Release No. 99022 (Nov. 27,
2023), 88 FR 83993 (Dec. 1, 2023) (File No. SR-NSCC-2023-011)
(``Notice of Filing'').
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II. Background
A. Overview of NSCC's Margin Methodology
NSCC provides central counterparty (``CCP'') services, including
clearing, settlement, risk management, and a guarantee of completion
for virtually all broker-to-broker trades involving equity securities,
corporate and municipal debt securities, and certain other securities.
As a CCP, NSCC 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 exposure to its
members is determining and collecting an appropriate Required Fund
Deposit (i.e., margin) for each member.\5\ The objective of a Member's
margin is to mitigate potential losses to NSCC associated with
liquidating a Member's portfolio in the event NSCC ceases to act for
that Member (hereinafter referred to as a ``default'').\6\ The
aggregated amount of all members' margin constitutes the NSCC Clearing
Fund. NSCC would access its Clearing Fund should a defaulting Member's
own margin be insufficient to satisfy losses to NSCC caused by the
liquidation of that Member's portfolio.\7\ Each member's margin
consists of several components, each of which is designed to address
specific risks faced by NSCC arising out of its members' trading
activity.
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\5\ See Rule 4 (Clearing Fund) and Procedure XV (Clearing Fund
Formula and Other Matters) of the Rules, supra note 3.
\6\ The Rules identify when NSCC may cease to act for a Member
and the types of actions NSCC may take. For example, NSCC may
suspend a firm's membership with NSCC or prohibit or limit a
Member's access to NSCC's services in the event that Member defaults
on a financial or other obligation to NSCC. See Rule 46
(Restrictions on Access to Services) of the Rules, supra note 3.
\7\ See Rule 4 (Clearing Fund), supra note 3.
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B. NSCC's MLA Charge
The MLA Charge \8\ is a margin component designed to address the
market impact costs of liquidating a defaulted Member's portfolio that
may increase when that portfolio includes large Net Unsettled Positions
in a particular group of securities with a similar risk profile or in a
particular asset type (referred to as ``asset groups''), thereby
causing those costs to be higher than the amount collected for the
Member's volatility charge.\9\ A portfolio with large Net Unsettled
Positions in a particular group of securities with a similar risk
profile or in a particular asset type may be more difficult to
liquidate in the market in the event the Member defaults because a
concentration in that group of securities or in an asset type could
reduce the marketability of those large positions. Therefore, such
portfolios create a risk that NSCC may face increased market impact
cost to liquidate that portfolio in the assumed margin period of risk
of three business days at market prices.
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\8\ See Securities Exchange Act Release Nos. 90181 (Oct. 14,
2020), 85 FR 66646 (Oct. 20, 2020) (File No. SR-NSCC-2020-016) and
90034 (Sep. 28, 2020), 85 FR 62342 (Oct. 2, 2020) (File No. SR-NSCC-
2020-804) (introduced the MLA Charge).
\9\ The volatility charge is designed to capture the market
price risk associated with liquidating each Member's portfolio at a
99th percentile level of confidence. See Notice of Filing, supra
note 4, at 83994.
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The MLA Charge is calculated to address this increased market
impact cost by determining an amount of margin to mitigate this risk.
The MLA Charge is calculated for different asset groups. Essentially,
the calculation is designed to compare the total market value of a Net
Unsettled Position in a particular asset group, which NSCC would be
required to liquidate in the event of a Member default, to the
available trading volume of that asset group or equities subgroup in
the market.\10\
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\10\ See id.
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Specifically, when calculating the MLA Charge, NSCC currently
categorizes securities into separate asset groups that have similar
risk profiles--(1) equities \11\ (excluding equities
[[Page 2703]]
defined as Illiquid Securities pursuant to the Rules),\12\ (2) Illiquid
Securities, (3) unit investment trusts, or UITs, (4) municipal bonds
(including municipal bond ETPs), and (5) corporate bonds (including
corporate bond ETPs).\13\ NSCC then further segments the equities asset
group into the following subgroups: (i) micro-capitalization equities,
(ii) small capitalization equities, (iii) medium capitalization
equities, (iv) large capitalization equities, (v) treasury ETPs, and
(vi) all other ETPs.\14\ NSCC then calculates a measurement of market
impact cost for each asset group and equities asset subgroup for which
a Member has Net Unsettled Positions in its portfolio.\15\
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\11\ NSCC excludes long positions in Family-Issued Securities,
as defined in Rule 1 (Definitions) of the Rules, from the MLA
Charge. NSCC believes the margin charge applicable to long Net
Unsettled Positions in Family-Issued Securities pursuant to Sections
I(A)(1)(a)(iv) and (2)(a)(iv) of Procedure XV of the Rules provides
adequate mitigation of the risks presented by those Net Unsettled
Positions, such that an MLA Charge would not be triggered. See id.
at n.14. See also supra note 3.
\12\ See Rule 1 (Definitions), supra note 3.
\13\ See Sections I(A)(1)(g) and I(A)(2)(f) of Procedure XV of
the Rules, supra note 3. Additional details regarding the
calculation of the MLA Charge are set forth in the NSCC's
Methodology Documentation for Quantitative Margin Risk Models
(``Methodology Documentation''). NSCC would revise the Methodology
Documentation to incorporate the changes in the Proposed Rule Change
and included copies of changes to the Methodology Documentation in
Exhibit 3b to the Proposed Rule Change. Pursuant to 17 CFR 240.24b-
2, NSCC requested confidential treatment of Exhibit 3b.
\14\ Id. The market capitalization categorizations currently are
as follows: (i) micro-capitalization equities have a capitalization
of less than $300 million, (ii) small capitalization equities have a
capitalization of equal to or greater than $300 million and less
than $2 billion, (iii) medium capitalization equities have a
capitalization of equal to or greater than $2 billion and less than
$10 billion, and (iv) large capitalization equities have a
capitalization of equal to or greater than $10 billion. NSCC reviews
these categories annually, and any changes that NSCC deems
appropriate are subject to NSCC's model risk management governance
procedures set forth in the Clearing Agency Model Risk Management
Framework (``Model Risk Management Framework''). See Securities
Exchange Act Release Nos. 81485 (Aug. 25, 2017), 82 FR 41433 (Aug.
31, 2017) (File No. SR-NSCC-2017-008); 84458 (Oct. 19, 2018), 83 FR
53925 (Oct. 25, 2018) (File No. SR-NSCC-2018-009); 88911 (May 20,
2020), 85 FR 31828 (May 27, 2020) (File No. SR-NSCC-2020-008); 92381
(July 13, 2021), 86 FR 38163 (July 19, 2021) (SR-NSCC-2021-008); and
94272 (Feb. 17, 2022), 87 FR 10419 (Feb., 24 2022) (SR-NSCC-2022-
001).
\15\ See Sections I(A)(1)(g) and I(A)(2)(f) of Procedure XV of
the Rules, supra note 3.
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III. Description of the Proposed Rule Change
NSCC proposes to refine the MLA Charge calculation to more
accurately calculate the impact costs of liquidating a security/
portfolio by (i) moving all exchange traded products (``ETPs'') (other
than those deemed to be Illiquid Securities) into the equities asset
group and calculating impact cost at the security level rather than at
the subgroup level for the equities asset subgroups, and (ii) improving
the calculations relating to exchange traded funds (``ETFs'') by adding
a calculation for latent liquidity for equity ETFs with in-kind
baskets. In addition, NSCC proposes to amend the description of the MLA
Charge to clarify the description of the calculation with respect to
SFT Positions in connection with Securities Financing Transactions.
A. Moving Liquid ETPs Into Equities Asset Group and Providing Security
Level Market Impact Cost Calculations
NSCC proposes to move all ETPs, including corporate bond ETPs and
municipal bond ETPs, other than ETPs that are deemed to be Illiquid
Securities, into the equities asset group. Currently, corporate bond
ETPs and municipal bond ETPs are included as corporate bonds and
municipal bonds, respectively, for purposes of the MLA Charge
calculation. ETPs are traded on an exchange giving them equity-like
properties, such as trading volume data at the security level apart
from their underlying assets which may not be actively traded.
Therefore, the impact costs of liquidating ETPs can be estimated in the
same manner as other items in the equities asset subgroups, at the
security level, as discussed below. ETPs that are deemed to be Illiquid
Securities would be included in the Illiquid Securities category.\16\
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\16\ See definition of ``Illiquid Security'' in Rule 1, supra
note 3. For instance, if an ETP is not listed on a specified
securities exchange or has a limited trading history, as defined in
the definition, it would be treated as an Illiquid Security for
purposes of the MLA Charge calculations.
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NSCC also proposes to revise the market impact cost calculation for
the equities asset group and subgroups to calculate the impact cost at
the security level. Based on a review of its margin methodologies (and
the ETF Study discussed below), NSCC has determined that equities and
liquid ETPs display a wide disparity of trading volumes (as measured by
average daily volumes) even within subgroups, and the market impact
costs are more dependent on specific securities than the subgroup.\17\
As a result, NSCC is proposing to calculate the market impact costs for
securities in the equities asset group, including liquid ETPs, at the
security level rather than at the subgroup level, which NSCC states has
shown to be a more accurate calculation of market impact costs for
these securities.\18\
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\17\ See Notice of Filing, supra note 4, at 83996.
\18\ Id.
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Currently, the MLA Charge calculation for the equity asset
subgroups includes a measurement of the concentration of the Net
Unsettled Position in the subgroup.\19\ Since the market impact cost
would be calculated at the security level for the equities asset group,
rather than the subgroup level, this measurement would no longer be
necessary and would be removed.
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\19\ See id. at 83995.
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In addition, for each asset group or subgroup, NSCC currently
compares the calculated market impact cost to a portion of the
volatility charge that is allocated to Net Unsettled Positions in that
asset group or subgroup and compares that ratio to a threshold to
determine if an MLA Charge is applicable to that asset group or
subgroup.\20\ Since the market impact cost would be calculated at the
security level for all assets in the equity asset group, rather than
the subgroup level, this comparison would be at the asset group level
for all asset groups, including the equities asset group, and would no
longer be made at the subgroup level for subgroups within the equities
asset group.
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\20\ Supra note 3. NSCC's margining methodology uses a three-day
assumed period of risk. For purposes of this calculation, NSCC uses
a portion of the applicable volatility charge that is based on one-
day assumed period of risk and calculated by applying a simple
square-root of time scaling, referred to in this proposed rule
change as ``1-day volatility charge.'' Any changes that NSCC deems
appropriate to this assumed period of risk would be subject to
NSCC's model risk management governance procedures set forth in the
Model Risk Management Framework. See supra note 14. See also
Sections I(A)(1)(g) and I(A)(2)(f) of Procedure XV of the Rules,
supra note 3.
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To reflect these changes in the Rules, NSCC would amend Sections
I(A)(1)(g) and I(A)(2)(f) of Procedure XV of the Rules \21\ to move all
ETP categories as subgroups in the equities asset group other than ETPs
that are deemed to be Illiquid Securities, which would be categorized
as Illiquid Securities. A footnote in each of these sections would be
added to the ``all other ETPs'' category to clarify that ETPs with
underlying securities separately categorized in an equities asset
subgroup would be categorized by the asset types and capitalizations of
their underlying securities, and that ETPs that are deemed Illiquid
Securities would be categorized in the Illiquid Securities asset group.
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\21\ See Sections I(A)(1)(g) and I(A)(2)(f) of Procedure XV of
the Rules, supra note 3.
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Sections I(A)(1)(g) and I(A)(2)(f) of Procedure XV would be
restructured to reflect that the market impact calculation for
securities in the equities asset group would be calculated at the
security level rather than the subgroup
[[Page 2704]]
level, as discussed above. As a result of this change, the current
component that measures the concentration of each Net Unsettled
Position in a subgroup would be removed from Sections I(A)(1)(g)(i)(4)
and I(A)(2)(f)(i)(4) of Procedure XV. References to subgroup
calculations would also be removed in applicable provisions, including
the provisions relating to comparing the calculated market impact cost
at the subgroup level to the volatility charge applicable to the Net
Unsettled Positions and an applicable MLA Charge at the subgroup level
and a sentence that states that all MLA Charges for each of the
equities subgroups shall be added together to result in one MLA Charge
for the equities subgroup. In addition, references to subgroups with
respect to calculations relating to asset groups other than the
equities asset group currently in Sections I(A)(1)(g)(ii) and
I(A)(2)(f)(ii) (i.e., references to the treasury ETP and other ETP
subgroups) would be removed since those would be calculated as part of
the equities asset group, as discussed above.
NSCC would add language to clarify that for each Member, all MLA
Charges for each of the asset groups shall be added together to result
in a total MLA Charge.
B. Changes to ETF Calculations
NSCC proposes to amend the impact cost calculations for ETFs to
more accurately account for the market impact of these securities and
in response to regulatory feedback on NSCC's margin methodologies, by
incorporating ``latent'' liquidity to more accurately reflect the
market liquidity of ETFs.\22\ ETFs are securities that are traded on an
exchange and that track underlying securities, indexes or other
financial instruments, including equities, corporate and municipal
bonds and treasury instruments. Unlike mutual funds, ETFs are created
with the assistance of certain financial institutions called authorized
participants (``APs''), often banks, that are given the ability to
create and redeem ETF shares directly from the ETF issuer. To create
ETF shares, an AP can either deliver a pre-specified bundle of
securities underlying the ETFs (i.e., an ``in-kind basket'') in
exchange for ETF shares, or provide cash equal to the value of the cost
of purchasing underlying securities for the ETF shares. To redeem ETF
shares, an AP would do the opposite--deliver ETF shares to the ETF
issuer in exchange for an in-kind basket of underlying securities or
cash equal to the value of the underlying securities.
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\22\ See Notice of Filing, supra note 4, at 83996.
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Throughout the life of an ETF, APs create and redeem shares
depending on the market and arbitrage opportunities. As a result, ETFs,
particularly those with in-kind creation/redemption mechanisms, tend to
trade close to the value of the underlying securities. For instance, if
the market price of the ETF on the secondary market (discussed below)
is above the value of the securities underlying the ETF, the AP can
purchase underlying securities (at the lower price) and exchange those
securities to create new ETFs. Likewise, if the market price of the ETF
falls below the value of the securities underlying the ETFs, an AP can
buy ETF shares on the secondary market and redeem them with the ETF
issuer in exchange for the underlying securities.
As a result of this structure, ETF market liquidity can be divided
into two markets: the primary market and the secondary market. The
primary market consists of APs creating and redeeming ETF shares
directly with the ETF issuer. The secondary market consists of
investors buying and selling ETFs through exchanges. Often the stocks
underlying an ETF basket have much larger trading volumes than the
trading volume of the ETF itself. Upon the liquidation of a portfolio
with ETFs, the ability of APs to create and redeem ETF shares provides
additional liquidity, also called ``latent liquidity,'' which changes
the market risk profile of ETFs with in-kind basket creation/redemption
processes.
The current impact cost calculation for the MLA Charge does not
include calculations measuring the impact relating to latent liquidity.
NSCC recently commissioned a review of ETFs (``ETF Study'') that
included an ETF market review, risk characteristics, and an independent
simulation of market impact costs associated with sample clearing
portfolios.\23\ Based on the ETF Study, it was observed that most
equity ETFs with an in-kind creation/redemption process trade with very
tight premium/discount to net asset value (``NAV''), or close to the
value of the underlying securities.\24\ Often, however, the stocks
underlying the equity ETF baskets have a much larger trading volume
than the equity ETF itself, which creates latent liquidity.
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\23\ NSCC included the ETF Study in Exhibit 3c to the Proposed
Rule Change. Pursuant to 17 CFR 240.24b-2, NSCC requested
confidential treatment of Exhibit 3c.
\24\ Id. When an ETF's market price is higher than its NAV, it's
trading at a premium, when it's lower, it's trading at a discount.
The spread between the premium or discount to the NAV represents a
potential cost to close out the paired ETF and its in-kind basket.
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As a result, NSCC is proposing to include, as part of its impact
calculation, a measure of the latent liquidity for equity ETFs with in-
kind basket creation/redemption processes and a measure of the costs
associated with primary market activity to more accurately assess the
impact costs relating to liquidating portfolios containing equity ETFs.
The proposed calculation would take into account liquidity in the
primary and secondary market for liquid equity ETFs with in-kind
creation/redemption processes, by comparing the market impact cost of
such equity ETFs based on a hypothetical liquidation in the primary
market and in the secondary market.
To determine the impact costs of a liquidation of equity ETFs with
in-kind baskets, NSCC would run the proposed MLA Charge calculations
described above in two scenarios for portfolios that contain such ETFs
and compare the two calculations to determine the impact cost. NSCC
would run a baseline calculation (``Baseline Calculation'') to simulate
all the ETF positions being liquidated in the secondary market and the
impact cost calculation would be at the security level (i.e., the ETF
shares) as liquid equities (as discussed above). NSCC would also run an
alternative calculation (``Create/Redeem Calculation'') to simulate the
ETF positions being liquidated in the primary market using the
creation/redemption process.
The Create/Redeem Calculation would be calculated as follows:
<bullet> First, the liquid equity ETFs eligible for in-kind create/
redeem process would be fully decomposed into (a) the corresponding
underlying baskets of the liquid equity ETFs and (b) pairs of such ETFs
and their corresponding underlying baskets;
<bullet> Second, the decomposed underlying baskets and the residual
securities in the portfolio (i.e., the securities in the original
portfolio that are not ETFs eligible for in-kind create/redeem process)
would be netted at the security level;
<bullet> Third, the impact cost on the portfolio from the second
step would be calculated assuming all the securities would be
liquidated in the secondary market, and the impact costs would be
calculated as described above as if such securities are liquid
equities;
<bullet> Fourth, the impact cost calculated in the third step would
be adjusted by an amount to account for the portfolio
[[Page 2705]]
risk difference \25\ from the netted securities resulting from the
second step, as compared to the original portfolio;
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\25\ The original portfolio used in the Baseline Calculation and
the decomposed portfolio from step two would have different
portfolio risks. As a result, because such portfolios would contain
different positions, they would have different VaR Charges if
calculated separately. The VaR Charge of the original portfolio is a
component of the MLA Charge calculation for the portfolio from step
two. Step four would adjust for those differences as part of the
impact cost.
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<bullet> Fifth, the impact cost for paired ETFs and their
corresponding underlying baskets would be calculated by multiplying the
gross market amount of the ETFs by a haircut representing the premium/
discount; \26\ and
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\26\ The haircut is calculated as an estimate of the cost of
closing out the ETFs and underlying pairs using the create/redeem
process. The haircut is a model parameter and will be reviewed at
least monthly in accordance with the model risk management
governance procedures set forth in the model Risk Management
Framework. See supra note 14.
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<bullet> Lastly, the impact costs from step four and step five
would be added together.
NSCC would then use the smaller calculated impact costs of either
the Baseline Calculation or the Create/Redeem Calculation for purposes
of calculating the MLA Charge.
To reflect these changes in the Rules, NSCC would add language in
Sections I(A)(1)(g) and I(A)(2)(f) of Procedure XV stating that the
impact cost for ETFs with in-kind baskets would include calculations
comparing impact costs in the secondary market and the primary market
for such equity ETFs, as discussed above. NSCC would indicate that it
would calculate impact costs in two scenarios: (1) a baseline
calculation to simulate such ETFs being liquidated in the secondary
market where the impact costs would be calculated at the security level
(i.e., the ETF shares) utilizing the equities asset subgroup security
level and (2) a create/redeem calculation to simulate an authorized
participant using the primary market to liquidate such ETFs using the
creation/redemption process. The proposed language would include a
description of the how the impact costs for the create/redeem
calculation would be calculated by decomposing the ETFs into their
underlying securities and calculating impact costs of such underlying
securities utilizing the equity asset subgroup calculations (as
discussed above). The proposed language would also state that an
adjustment would be made in the create/redeem calculation to reflect
the different portfolio risks of the original portfolio used in the
baseline calculation and the decomposed portfolio used in the create/
redeem calculation. The proposed language would provide that NSCC would
then use the smaller calculated impact costs of the scenarios for
purposes of the MLA Charge for such ETFs.
C. Changes Concerning SFT Positions
Rule 56 describes the SFT Clearing Service and contains a
description of how the Clearing Fund formula is calculated with respect
to SFT Positions, including how such positions are calculated with
respect to the MLA Charge.\27\ The Proposed Rule Change would update
the language in Rule 56 relating to the MLA Charge to clarify how NSCC
would calculate the MLA Charge with respect to SFT Positions for
transparency and to reflect the proposed MLA Charge refinements, but it
would not change how NSCC would calculate the MLA Charge with respect
to SFT positions. NSCC would clarify how SFT Positions would be
categorized for purposes of the MLA Charge by replacing language
stating that SFT Positions are ``aggregated with'' Net Unsettled
Positions in the same asset group or subgroup with language that
clarifies that SFT Positions would be categorized in the same asset
groups or subgroups as the underlying SFT Securities in such SFT
Positions. NSCC would also clarify language discussing an added
calculation relating to the MLA Charge in the event a Member's
portfolio contains both (i) SFT Positions and (ii) Net Unsettled
Positions or Net Balance Order Unsettled Positions. The language in
Rule 56 relating to the added calculation for SFT positions does not
reference Net Balance Order Unsettled Positions which are treated in
the same manner as Net Unsettled Positions for purposes of the added
calculation when a portfolio contains both (i) SFT Positions and (ii)
Net Unsettled Positions or Net Balance Order Unsettled Positions. The
proposed language would add a reference to Net Balance Order Unsettled
Positions.
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\27\ See Rule 56 (Securities Financing Transaction Clearing
Service) of the Rules, supra note 3.
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NSCC is also proposing to add a sentence in Sections I(A)(1)(g) and
I(A)(2)(f) of Procedure XV of the Rules clarifying that if a Member's
portfolio contains both (i) SFT Positions and (ii) Net Unsettled
Positions or Net Balance Order Unsettled Positions, the MLA Charge
shall be calculated as set forth in Rule 56.
IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \28\ 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) \29\ of the Act and Rules 17Ad-22(e)(4)(i), and
(e)(6)(i) thereunder.\30\
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\28\ 15 U.S.C. 78s(b)(2)(C).
\29\ 15 U.S.C. 78q-1(b)(3)(F).
\30\ 17 CFR 240.17Ad-22(e)(4)(i) and(e)(6)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act
1. Prompt and Accurate Clearance and Settlement
Section 17A(b)(3)(F) of the Act \31\ 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.\32\ 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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\31\ 15 U.S.C. 78q-1(b)(3)(F).
\32\ Id.
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As described above in Sections III.A and B, NSCC proposes to refine
the MLA Charge calculation to more accurately calculate the impact
costs of liquidating a security/portfolio by moving all ETPs (except
for Illiquid Securities) into the equities asset group and calculating
impact cost at the security level rather than at the subgroup level for
the equities asset subgroups, and by adding a calculation for latent
liquidity for equity ETFs. As a result, the proposal would better align
the MLA Charge with the risks arising from position concentrations in
portfolios containing ETPs and ETFs. The Commission believes that a
closer alignment between the MLA Charge and the risks presented by the
concentration of securities Member portfolios would help facilitate
NSCC's ability to set margins that more accurately reflect the risks
posed by such portfolios. Setting
[[Page 2706]]
margins that accurately reflect the risks posed by its members'
portfolios could reduce the likelihood that NSCC would not have
collected sufficient margin to address losses arising out of a member
default. Reducing the likelihood that NSCC holds insufficient margin to
address default losses would, in turn, further assure that NSCC's
operation of its critical clearance and settlement services would not
be disrupted because of insufficient financial resources.
As part of the Proposed Rule Change, NSCC filed Exhibit 3a--Summary
of Impact Study (``Impact Study''), which provided the actual MLA
Charges at the member-level, account-level, and CCP-level, from January
3, 2022 through June 30, 2023, as compared to the MLA Charges that NSCC
would have assessed if the proposed amendments had been in place during
that time period.\33\ The Commission reviewed and analyzed the Impact
Study, which showed, among other things, that had the proposed
amendments been in place during that period, it would have resulted in
an average daily increase of $62 million in the aggregate MLA Charge.
Therefore, the Commission believes that the Impact Study demonstrates
that the proposed MLA Charge calculation would enable NSCC to set more
precise margin coverage levels than those using the current
calculation, providing further assurance that NSCC's operation of its
critical clearance and settlement services would not be disrupted
because of insufficient financial resources.
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\33\ NSCC has requested confidential treatment of Exhibit 3a,
pursuant to 17 CFR 240.24b-2.
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As described above in Section III.C, NSCC proposes to provide
transparency to the Rules by updating the language relating to how the
MLA Charge is calculated with respect to SFT Positions. Enhancing the
clarity of the NSCC Rules would enable members to more efficiently and
effectively understand and conduct their business in accordance with
the NSCC Rules.
Accordingly, for the reasons above, the Commission finds that 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.\34\
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\34\ 15 U.S.C. 78q-1(b)(3)(F).
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2. Safeguarding Securities and Funds
In the event that a defaulted member's own margin be insufficient
to satisfy losses to NSCC caused by the liquidation of that member's
portfolio, NSCC would access the mutualized Clearing Fund. As discussed
above in Section IV.A.1, NSCC's proposed enhancements to the MLA Charge
calculation discussed in Sections III.A and B should help facilitate
NSCC's ability to promptly respond to changing risk profiles of its
members' portfolios, and thereby set margins that more accurately
reflect the risks posed by such portfolios. As a result, the proposal
would better align the MLA Charge with the risks arising from position
concentrations in portfolios containing ETPs and ETFs should help
ensure that NSCC collects sufficient margin from its members.
Accordingly, the Proposed Rule Change should help minimize the
likelihood that NSCC would have to access the Clearing Fund, thereby
limiting non-defaulting members' exposure to mutualized losses.
The Commission believes that by helping to limit the exposure of
NSCC's non-defaulting members to mutualized losses, the Proposed Rule
Change would 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.\35\
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\35\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(i) Under the Act
Rule 17Ad-22(e)(4)(i) under the Act requires that each covered
clearing agency that provides central counterparty services, such as
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.\36\ The Commission believes that the proposal is consistent
with Rule 17Ad-22(e)(4)(i) under the Act for the reasons stated below.
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\36\ 17 CFR 240.17Ad-22(e)(4)(i).
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As discussed above in Section IV.A, NSCC's proposed enhancements to
the MLA Charge calculation would apportion a higher MLA Charge to those
members' accounts that present greater potential risk to NSCC due to
large Net Unsettled Positions in a particular group of securities with
a similar risk profile or asset types that may be more difficult to
liquidate in the market in the event the member defaults. As a result,
the proposal would better align the MLA Charge with the risks arising
from position concentration in such portfolios. The Commission has
reviewed and analyzed the filing materials, including the Impact
Study,\37\ and agrees that the proposed enhancements to the MLA Charge
calculation should better enable NSCC to collect margin amounts that
are sufficient to mitigate NSCC's credit exposures to its members'
portfolios, as compared to the current methodology.
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\37\ See supra note 33.
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Accordingly, the Commission finds the Proposed Rule Change is
consistent with Rule 17Ad-22(e)(4)(i) under the Act because it is
designed to assist NSCC in managing its credit exposures to its members
by maintaining sufficient financial resources to cover its credit
exposure to the portfolios of members with ETP and equity ETF positions
in their respective portfolios.\38\
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\38\ 17 CFR 240.17Ad-22(e)(4)(i).
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C. Consistency With Rule 17Ad-22(e)(6)(i) Under the Act
Rule 17Ad-22(e)(6)(i) under the Act requires that each covered
clearing agency that provides central counterparty services, such as
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.\39\ The Commission believes that the proposal is consistent
with Rule 17Ad-22(e)(6)(i) under the Act for the reasons stated below.
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\39\ 17 CFR 240.17Ad-22(e)(6)(i).
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As discussed above in Section IV.A, NSCC's proposed enhancements to
the MLA Charge calculation would apportion a higher MLA Charge to those
member accounts that present greater potential risk to NSCC due to
large Net Unsettled Positions in a particular group of securities with
a similar risk profile or asset types that may be more difficult to
liquidate in the market in the event the member defaults. As a result,
the proposal would better align the MLA Charge with the risks arising
from position concentration in such member portfolios. The Commission
has reviewed and analyzed the filing materials, including the Impact
Study,\40\ and agrees that the proposed enhancements to the MLA Charge
calculation would enable NSCC to set margins that more accurately
reflect the risks posed by such portfolios than the current
methodology. As a result, implementing the Proposed Rule Change would
better enable NSCC to set and collect margin at levels
[[Page 2707]]
commensurate with the risks associated with the portfolios of its
members.
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\40\ See supra note 33.
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Accordingly, the Commission finds the Proposed Rule Change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act because it is
designed to assist NSCC in maintaining a risk-based margin system that
considers, and produces margin levels commensurate with, the risks and
particular attributes of members' portfolios.\41\
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\41\ 17 CFR 240.17Ad-22(e)(6)(i).
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VII. 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 \42\ and
the rules and regulations promulgated thereunder.
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\42\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\43\ that Proposed Rule Change SR-NSCC-2023-011, be, and hereby is,
approved.\44\
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\43\ 15 U.S.C. 78s(b)(2).
\44\ 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.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-00630 Filed 1-12-24; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on January 16, 2024.
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.