Notice2024-01863
Self-Regulatory Organizations; National Securities Clearing Corporation; Notice of Filing of Amendment No. 2 to Proposed Rule Change To Modify the Amended and Restated Stock Options and Futures Settlement Agreement and Make Certain Revisions to the NSCC Rules
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 31, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 21 (Wednesday, January 31, 2024)</title>
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[Federal Register Volume 89, Number 21 (Wednesday, January 31, 2024)]
[Notices]
[Pages 6140-6153]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-01863]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99432; File No. SR-NSCC-2023-007]
Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing of Amendment No. 2 to Proposed Rule
Change To Modify the Amended and Restated Stock Options and Futures
Settlement Agreement and Make Certain Revisions to the NSCC Rules
January 25, 2024.
On August 10, 2023, National Securities Clearing Corporation
(``NSCC'') filed with the Securities and Exchange Commission
(``Commission'') proposed rule change SR-NSCC-2023-007 (``Filing'')
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder.\2\ The
Filing was published for comment in the Federal Register on August 30,
2023. On November 8, 2023, NSCC filed Amendment No. 1 to the Filing.
Notice is hereby given that on January 24, 2024, NSCC filed with the
Commission Amendment No. 2 to the Filing (``Amendment No. 2'') as
described in Items I and II below, which Items have been prepared by
NSCC. This Amendment No. 2 supersedes and replaces the Filing in its
entirety. The Commission is publishing this notice to solicit comments
on this Amendment No. 2 from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
Pursuant to the provisions of Section 19(b) of the Exchange Act,\3\
and Rule 19b-4 thereunder,\4\ National Securities Clearing Corporation
(``NSCC'') is filing
[[Page 6141]]
this Amendment No. 2 to proposed rule change SR-NSCC-2023-007 with the
Commission to (1) modify the Stock Options and Futures Settlement
Agreement dated August 5, 2017, between NSCC and The Options Clearing
Corporation (``OCC,'' and together with NSCC, the ``Clearing
Agencies'') (``Existing Accord'') \5\ to permit OCC to elect to make a
cash payment to NSCC following the default of a common clearing
participant that would cause NSCC's central counterparty trade guaranty
to attach to certain obligations of that participant (``Phase 1''); (2)
improve information sharing between the Clearing Agencies to facilitate
the upcoming transition to a T+1 standard securities settlement cycle
and allow OCC, after the compliance date under amended Exchange Act
Rule 15c6-1(a), to provide certain assurances to NSCC prior to the
default of a common clearing participant that would enable NSCC to
begin processing E&A/Delivery Transactions (defined below) before the
central counterparty trade guaranty attaches to certain obligations of
that participant (``Phase 2''); and (3) make certain revisions to the
NSCC Rules & Procedures (``NSCC Rules'') \6\ in connection with the
proposed Phase 1 and Phase 2 modifications to the Existing Accord.\7\
This Amendment No. 2 would amend and replace the Initial Filing and
Amendment No. 1 in their entirety.
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\3\ 15 U.S.C. 78s(b)(1).
\4\ 17 CFR 240.19b-4.
\5\ The Existing Accord was previously approved by the
Commission. See Securities Exchange Act Release Nos. 81266, 81260
(Jul. 31, 2017), 82 FR 36484 (Aug. 4, 2017) (File Nos. SR-NSCC-2017-
007; SR-OCC-2017-013).
\6\ Capitalized terms not defined herein are defined in the NSCC
Rules. The NSCC Rules are available at <a href="http://www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf">www.dtcc.com/-/media/Files/Downloads/legal/rules/nscc_rules.pdf</a>.
\7\ NSCC initially filed a proposed rule change concerning the
proposed Phase 1 changes on August 10, 2023. See Securities Exchange
Act Release No. 98213 (Aug. 24, 2023), 88 FR 59968 (Aug. 30, 2023)
(File No. SR-NSCC-2023-007) (``Initial Filing''). NSCC subsequently
submitted a partial amendment to clarify the proposed implementation
plan for the Initial Filing. See Securities Exchange Act Release No.
98930 (Nov. 14, 2023), 88 FR 80790 (Nov. 20, 2023) (File No. SR-
NSCC-2023-007) (``Amendment No. 1''). OCC also has submitted
proposed rule change and advance notice filings with the Commission
in connection with this proposal. See Securities Exchange Act
Release No. 98215 (Aug. 24, 2023), 88 FR 59976 (Aug. 30, 2023) (File
No. SR-OCC-2023-007) and Securities Exchange Act Release No. 98214
(Aug. 24, 2023), 88 FR 59988 (Aug. 30, 2023) (SR-OCC-2023-801).
(``OCC Filings'').
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The proposed changes to the NSCC Rules and the Existing Accord are
included in Exhibits 5A and 5B of Amendment No. 2 to File No. SR-NSCC-
2023-007. Material proposed to be added is underlined and material
proposed to be deleted is marked in strikethrough text, as described in
greater detail below.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
Executive Summary
NSCC is a clearing agency that provides clearing, settlement, risk
management, and central counterparty services for trades involving
equity securities. OCC is the sole clearing agency for standardized
equity options listed on national securities exchanges registered with
the Commission, including options that contemplate the physical
delivery of equities cleared by NSCC in exchange for cash
(``physically-settled'' options).\8\ OCC also clears certain futures
contracts that, at maturity, require the delivery of equity securities
cleared by NSCC in exchange for cash. As a result, the exercise/
assignment of certain options or maturation of certain futures cleared
by OCC effectively results in stock settlement obligations. NSCC and
OCC maintain a legal agreement, generally referred to by the parties as
the ``Accord'' agreement, that governs the processing of such
physically-settled options and futures cleared by OCC that result in
settlement obligations in underlying equity securities to be cleared by
NSCC (i.e., the Existing Accord).
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\8\ The term ``physically-settled'' as used throughout the OCC
Rules refers to cleared contracts that settle into their underlying
interest (i.e., options or futures contracts that are not cash-
settled). The OCC By-Laws and OCC Rules are available at
<a href="http://www.theocc.com/company-information/documents-and-archives/by-laws-and-rules">www.theocc.com/company-information/documents-and-archives/by-laws-and-rules</a>. When a contract settles into its underlying interest,
shares of stock are sent, i.e., delivered, to contract holders who
have the right to receive the shares from contract holders who are
obligated to deliver the shares at the time of exercise/assignment
in the case of an option and maturity in the case of a future.
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The Existing Accord establishes terms under which NSCC accepts for
clearing certain securities transactions that result from the exercise
and assignment of relevant options contracts and the maturity of
futures contracts that are cleared and settled by OCC.\9\ It also
establishes the time when OCC's settlement guaranty in respect of those
transactions ends and NSCC's settlement guaranty begins.
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\9\ Under the Existing Accord, such options and futures are
defined as ``E&A/Delivery Transactions,'' which refers to ``Exercise
& Assignment Delivery Transactions.''
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The Existing Accord allows for a scenario in which NSCC could
choose not to guarantee the settlement of such securities arising out
of E&A/Delivery Transactions. Specifically, NSCC is not obligated to
guarantee settlement until its member has met its collateral
requirements at NSCC. If NSCC chooses not to guarantee settlement, OCC
would engage in an alternate method of settlement outside of NSCC. This
scenario presents two primary problems. First, the cash required for
OCC and its Clearing Members in certain market conditions to facilitate
settlement outside of NSCC could be significantly more than the amount
required if NSCC were to guarantee the relevant transactions. This is
because settlement of the transactions in the underlying equity
securities outside of NSCC would mean that they would no longer receive
the benefit of netting through the facilities of NSCC. In such a
scenario, the additional collateral required from Clearing Members to
support OCC's continuing settlement guarantee would also have to be
sufficiently liquid to properly manage the risks associated with those
transactions being due on the second business day following the option
exercise or the relevant futures contract maturity date. Based on an
analysis of scenarios using historical data where it was assumed that
OCC could not settle transactions through the facilities of NSCC, the
worst-case outcome resulted in extreme liquidity demands of over $300
billion for OCC to effect settlement via an alternative method, e.g.,
by way of gross broker-to-broker settlement, as discussed in more
detail below. OCC Clearing Members, by way of their contributions to
the OCC Clearing Fund, would bear the brunt of this demand.
Furthermore, there is no guarantee that OCC Clearing Members could fund
the entire amount of any similar real-life scenarios. By contrast,
projected Guaranty Substitution Payments, defined below, identified
during the study ranged from approximately $419 million to over $6
billion, also as discussed in more detail below.
[[Page 6142]]
The second primary problem relates to the significant operational
complexities if settlement occurs outside of NSCC. More specifically,
netting through NSCC reduces the volume and value of settlement
obligations. For example, in 2022 it is estimated that netting through
NSCC's continuous net settlement (``CNS'') accounting system \10\
reduced the value of CNS settlement obligations by approximately 98% or
$510 trillion from $519 trillion to $9 trillion. If settlement occurred
outside of NSCC, on a broker-to-broker basis between OCC Clearing
Members, for example, shares would not be netted, and Clearing Members
would have to coordinate directly with each other to settle the
relevant transactions. The operational complexities and uncertainty
associated with alternate means of settlement would impact every market
participant involved in a settlement of OCC-related transactions.
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\10\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting
Operation) of the NSCC Rules, supra note 6.
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To address these problems, the Clearing Agencies are proposing
certain changes as part of Phase 1 to amend and restate the Existing
Accord and make related changes to their respective rules that would
allow OCC to elect to make a cash payment (the ``Guaranty Substitution
Payment'' or ``GSP'') to NSCC following the default of a Common Member
\11\ that would cause NSCC to guarantee settlement of that Common
Member's transactions and, therefore, cause those transactions to be
settled through processing by NSCC. In connection with this proposal,
OCC also would enhance its daily liquidity stress testing processes and
procedures to account for the possibility of OCC making such a payment
to NSCC in the event of a Common Member default. By making these
enhancements to its stress testing, OCC could include the liquid
resources necessary to make the payment in its resource planning. The
Clearing Agencies believe that by NSCC accepting such a payment from
OCC, the operational efficiencies and reduced costs related to the
settlement of transactions through NSCC would limit market disruption
following a Common Member default because settlement through NSCC
following such a default would be less operationally complex and would
be expected to require less liquidity and other collateral from market
participants than the processes available to OCC for closing out
positions. Additionally, proposed enhancements by OCC to its liquidity
stress testing would add assurances that OCC could make such a payment
in the event of a Common Member default. The Clearing Agencies believe
that their respective clearing members and all other participants in
the markets for which OCC provides clearance and settlement would
benefit from OCC's ability to choose to make a cash payment to effect
settlement through the facilities of NSCC. This change would provide
more certainty around certain default scenarios and would blunt the
financial and operational burdens market participants could experience
in the case of most clearing member defaults.\12\
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\11\ A firm that is both an OCC Clearing Member and an NSCC
Member or is an OCC Clearing Member that has designated an NSCC
Member to act on its behalf is referred to herein as a ``Common
Member.'' The term ``Clearing Member'' as used herein has the
meaning provided in OCC's By-Laws. See OCC By-Laws, supra, note 6.
The term ``Member'' as used herein has the meaning provided in the
NSCC Rules. See NSCC Rules, supra note 6.
\12\ OCC provided its analysis of the financial impact of
alternate means of settlement as an exhibit to the OCC Filings.
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Finally, the Clearing Agencies are also proposing certain changes
as part of Phase 2 that, if approved, would not be implemented until
after the Commission shortens the standardized settlement cycle under
Exchange Act Rule 15c6-1(a) from two days after the traded date
(``T+2'') to one day after the trade date (``T+1''), which currently is
set for May 28, 2024. The Phase 2 changes would address the operational
realities concerning the Accord that will result from the Commission's
adoption and implementation of a new standard settlement cycle of T+1
pursuant to Rule 15c6-1(a) under the Act. The Phase 2 changes generally
are designed to allow OCC to provide certain assurances with respect to
OCC's ability to make a GSP in the event of a Common Member default to
NSCC that would permit NSCC to begin processing Common Members' E&A/
Delivery Transactions in a shortened settlement cycle prior to guaranty
substitution occurring by introducing new or amended terms and setting
out the processes associated therewith.
Background
OCC acts as a central counterparty clearing agency for U.S.-listed
options and futures on a number of underlying financial assets
including common stocks, currencies, and stock indices. In connection
with these services, OCC provides the OCC Guaranty pursuant to its By-
Laws and Rules. NSCC acts as a central counterparty clearing agency for
certain equity securities, corporate and municipal debt, exchange
traded funds and unit investment trusts that are eligible for its
services. Eligible trading activity may be processed through NSCC's CNS
system \13\ or through its Balance Order Accounting system,\14\ where
all eligible compared and recorded transactions for a particular
settlement date are netted by issue into one net long (buy), net short
(sell) or flat position. As a result, for each day with activity, each
Member has a single deliver or receive obligation for each issue in
which it has activity at NSCC. In connection with these services, NSCC
also provides the NSCC Guaranty pursuant to Addendum K of the NSCC
Rules.
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\13\ See Rule 11 (CNS System) and Procedure VII (CNS Accounting
Operation) of the NSCC Rules, supra note 6.
\14\ See Rule 8 (Balance Order and Foreign Security Systems) and
Procedure V (Balance Order Accounting Operation) of the NSCC Rules,
supra note 6.
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OCC's Rules provide that delivery of, and payment for, securities
underlying certain exercised stock options and matured single stock
futures that are physically settled are generally effected through the
facilities of NSCC and are not settled through OCC's facilities.\15\
OCC and NSCC executed the Existing Accord to facilitate, via NSCC's
systems, the physical settlement of securities arising out of options
and futures cleared by OCC. OCC Clearing Members that clear and settle
physically-settled options and futures transactions through OCC also
are required under OCC's Rules \16\ to be Members of NSCC or to have
appointed or nominated a Member of NSCC to act on its behalf. As noted
above, these firms are referred to as ``Common Members'' in the
Existing Accord.
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\15\ See Chapter IX of OCC's Rules (Delivery of Underlying
Securities and Payment), supra note 8.
\16\ See OCC Rule 901, supra note 8.
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Summary of the Existing Accord
The Existing Accord governs the transfer between OCC and NSCC of
responsibility for settlement obligations that involve a delivery and
receipt of stock in the settlement of physically-settled options and
futures that are cleared and settled by OCC and for which the
underlying securities are eligible for clearing through the facilities
of NSCC (``E&A/Delivery Transactions''). It also establishes the time
when OCC's settlement guarantee (the ``OCC Guaranty'') ends and NSCC's
settlement guarantee (the ``NSCC Guaranty'') \17\ begins with respect
to E&A/Delivery Transactions. However, in
[[Page 6143]]
the case of a Common Member default \18\ NSCC can reject these
settlement obligations, in which case the settlement guaranty would not
transfer from OCC to NSCC and OCC would not have a right to settle the
transactions through the facilities of NSCC. Instead, OCC would have to
engage in alternative methods of settlement that have the potential to
create significant liquidity and collateral requirements for both OCC
and its non-defaulting Clearing Members.\19\ More specifically, this
could involve broker-to-broker settlement between OCC Clearing
Members.\20\ This settlement method is operationally complex because it
requires bilateral coordination directly between numerous Clearing
Members rather than relying on NSCC to facilitate multilateral netting
to settle the relevant settlement obligations. As described above, it
also potentially could result in significant liquidity and collateral
requirements for both OCC and its non-defaulting Clearing Members
because the transactions would not be netted through the facilities of
NSCC. Alternatively, where NSCC accepts the E&A/Delivery Transactions
from OCC, the OCC Guaranty ends and the NSCC Guaranty takes effect. The
transactions are then netted through NSCC's systems, which allows
settlement obligations for the same settlement date to be netted into a
single deliver or receive obligation. This netting reduces the costs
associated with securities transfers by reducing the number of
securities movements required for settlement and further reduces
operational and market risk. The benefits of such netting by NSCC may
be significant with respect to the large volumes of E&A/Delivery
Transactions processed during monthly options expiry periods.
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\17\ See Addendum K and Procedure III of the NSCC Rules, supra
note 6.
\18\ A Common Member that has been suspended by OCC or for which
NSCC has ceased to act is referred to as a ``Mutually Suspended
Member.''
\19\ For example, OCC evaluated certain Clearing Member default
scenarios in which OCC assumed that NSCC would not accept the
settlement obligations under the Existing Accord, including the
default of a large Clearing Member coinciding with a monthly options
expiration. OCC has estimated that in such a Clearing Member default
scenario, the aggregate liquidity burden on OCC in connection with
obligations having to be settled on a gross broker-to-broker basis
could reach a significantly high level. For example, in January
2022, the largest gross broker-to-broker settlement amount in the
case of a larger Clearing Member default would have resulted in
liquidity needs of approximately $384,635,833,942. OCC provided the
data and analysis as an exhibit to the OCC Filings.
\20\ In broker-to-broker settlement, Clearing Member parties are
responsible for coordinating settlement--delivery and payment--among
themselves on a transaction-by-transaction basis. Once transactions
settle, the parties also have an obligation to affirmatively notify
OCC so that OCC can close out the transactions. If either one of or
both of the parties do not notify OCC, the transaction would remain
open on OCC's books indefinitely until the time both parties have
provided notice of settlement to OCC.
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Pursuant to the Existing Accord, on each trading day NSCC delivers
to OCC a file that identifies the securities, including stocks,
exchange-traded funds and exchange-traded notes, that are eligible (1)
to settle through NSCC and (2) to be delivered in settlement of (i)
exercises and assignments of stock options cleared and settled by OCC
or (ii) delivery obligations from maturing stock futures cleared and
settled by OCC. OCC, in turn, delivers to NSCC a file identifying
securities to be delivered, or received, for physical settlement in
connection with OCC transactions.\21\
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\21\ Each day that both OCC and NSCC are open for accepting
trades for clearing is referred to as an ``Activity Date'' in the
Existing Accord. Securities eligible for settlement at NSCC are
referred to collectively as ``Eligible Securities'' in the Existing
Accord. Eligible securities are settled at NSCC through NSCC's CNS
Accounting Operation or NSCC's Balance Order Accounting Operation.
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After NSCC receives the list of eligible transactions from OCC and
NSCC has received all required deposits to the NSCC Clearing Fund from
all Common Members taking into consideration amounts required to
physically settle the OCC transactions, the OCC Guaranty would end and
the NSCC Guaranty would begin with respect to physical settlement of
the eligible OCC-related transactions.\22\ At this point, NSCC is
solely responsible for settling the transactions.\23\
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\22\ The term ``NSCC Clearing Fund'' as used herein has the same
meaning as the term ``Clearing Fund'' as provided in the NSCC Rules.
Procedure XV of the NSCC Rules provides that all NSCC Clearing Fund
requirements and other deposits must be made within one hour of
demand, unless NSCC determines otherwise, supra note 6.
\23\ This is referred to in the Existing Accord as the
``Guaranty Substitution Time,'' and the process of the substitution
of the NSCC Guaranty for the OCC Guaranty with respect to E&A/
Delivery Transactions is referred to as ``Guaranty Substitution.''
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Each day, NSCC is required to promptly notify OCC at the time the
NSCC Guaranty takes effect. If NSCC rejects OCC's transactions due to
an improper submission \24\ or if NSCC ``ceases to act'' for a Common
Member,\25\ NSCC's Guaranty would not take effect for the affected
transactions pursuant to the NSCC Rules.
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\24\ Guaranty Substitution by NSCC (discussed further below)
does not occur with respect to an E&A/Delivery Transaction that is
not submitted to NSCC in the proper format or that involves a
security that is not identified as an Eligible Security on the then-
current NSCC Eligibility Master File.
\25\ 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 an NSCC Member's failure to make a Required
Fund Deposit in a timely fashion. See NSCC Rule 46 (Restrictions on
Access to Services), supra note 6. An NSCC Member for which it has
ceased to act is referred to in the Existing Accord as a
``Defaulting NSCC Member.'' Transactions associated with a
Defaulting NSCC Member are referred to as ``Defaulted NSCC Member
Transactions'' in the Existing Accord.
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NSCC is required to promptly notify OCC if it ceases to act for a
Common Member. Upon receiving such a notice, OCC would not continue to
submit to NSCC any further unsettled transactions that involve such
Common Member, unless authorized representatives of both OCC and NSCC
otherwise consent. OCC would, however, deliver to NSCC a reversal file
containing a list of all transactions that OCC already submitted to
NSCC and that involve such Common Member. The NSCC Guaranty ordinarily
would not take effect with respect to transactions for a Common Member
for which NSCC has ceased to act, unless both Clearing Agencies agree
otherwise. As such, NSCC does not have any existing contractual
obligation to guarantee such Common Member's transactions. To the
extent the NSCC Guaranty does not take effect, OCC's Guaranty would
continue to apply, and, as described above, OCC would remain
responsible for effecting the settlement of such Common Member's
transactions pursuant to OCC's By-Laws and Rules.
As noted above, the Existing Accord does provide that the Clearing
Agencies may agree to permit additional transactions for a Common
Member default (``Defaulted NSCC Member Transactions'') to be processed
by NSCC while subject to the NSCC Guaranty. This optional feature,
however, creates uncertainty for the Clearing Agencies and market
participants about how Defaulted NSCC Member Transactions may be
processed following a Common Member default, and also does not provide
NSCC with the ability to collect collateral from OCC that it may need
to close out these additional transactions. While the optional feature
would remain in the agreement as part of this proposal, the proposed
changes to the Existing Accord, as described below, could significantly
reduce the likelihood that it would be utilized.
Proposed Phase 1 Changes
The proposed changes to the Existing Accord would permit OCC to
make a cash payment, referred to as the ``Guaranty Substitution
Payment'' or ``GSP,'' to NSCC. This cash payment could occur on either
or both of the day that the Common Member becomes a Mutually Suspended
Member and on the next business day. Upon NSCC's receipt of the
Guaranty Substitution Payment from OCC, the NSCC Guaranty
[[Page 6144]]
would take effect for the Common Member's transactions, and they would
be accepted by NSCC for clearance and settlement.\26\ OCC could use all
Clearing Member contributions to the OCC Clearing Fund \27\ and certain
Margin Assets \28\ of a defaulted Clearing Member to pay the GSP, as
described in more detail below.
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\26\ Acceptance of such transactions by NSCC would be subject to
NSCC's standard validation criteria for incoming trades. See NSCC
Rule 7, supra note 6.
\27\ The term ``OCC Clearing Fund'' as used herein has the same
meaning as the term ``Clearing Fund'' in OCC's By-Laws, supra note
8.
\28\ The term ``Margin Assets'' as used herein has the same
meaning as provided in OCC's By-Laws, supra note 8.
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NSCC would calculate the Guaranty Substitution Payment as the sum
of the Mutually Suspended Member's unpaid required deposit to the NSCC
Clearing Fund (``Required Fund Deposit'') \29\ and the unpaid
Supplemental Liquidity Deposit \30\ obligation that is attributable to
E&A/Delivery Transactions. The proposed changes to the Existing Accord
define how NSCC would calculate the Guaranty Substitution Payment.
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\29\ The Required Fund Deposit is calculated pursuant to Rule 4
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other
Matters) of the NSCC Rules, see supra note 6.
\30\ Under the NSCC Rules, NSCC collects additional cash
deposits from those Members who would generate the largest
settlement debits in stressed market conditions, referred to as
``Supplemental Liquidity Deposits'' or ``SLD.'' See Rule 4A of the
NSCC Rules, supra note 6.
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More specifically, NSCC would first determine how much of the
member's unpaid Clearing Fund requirement would be included in the GSP.
NSCC would look at the day-over-day change in gross market value of the
Mutually Suspended Member's positions as well as day-over-day change in
the member's NSCC Clearing Fund requirements. Based on such changes,
NSCC would identify how much of the change in the Clearing Fund
requirement was attributable to E&A/Delivery Transactions coming from
OCC. If 100 percent of the day-over-day change in the NSCC Clearing
Fund requirement is attributable to activity coming from OCC, then the
GSP would include 100 percent of the member's NSCC Clearing Fund
requirement. If less than 100 percent of the change is attributable to
activity coming from OCC, then the GSP would include that percent of
the member's unpaid NSCC Clearing Fund requirement attributable to
activity coming from OCC. NSCC would then determine the portion of the
member's unpaid SLD obligation that is attributable to E&A/Delivery
Transactions. As noted above, the GSP would be the sum of these two
amounts. A member's NSCC Clearing Fund requirement and SLD obligation
at NSCC are designed to address the credit and liquidity risks that a
member poses to NSCC. The GSP calculation is intended to assess how
much of a member's obligations arise out of activity coming from OCC so
that the amount paid by OCC is commensurate with the risk to NSCC of
guarantying such activity.
To permit OCC to anticipate the potential resources it would need
to pay the GSP for a Mutually Suspended Member, each business day, NSCC
would provide OCC with (1) Required Fund Deposit and Supplemental
Liquidity Deposit obligations, as calculated pursuant to the NSCC
Rules, and (2) the gross market value of the E&A/Delivery Transactions
and the gross market value of total Net Unsettled Positions (as such
term is defined in the NSCC Rules). On options expiry days that fall on
a Friday, NSCC would also provide OCC with information regarding
liquidity needs and resources, and any intraday SLD requirements of
Common Members. Such information would be delivered pursuant to the
ongoing information sharing obligations under the Existing Accord (as
proposed to be amended) and the Service Level Agreement (``SLA'') to
which both NSCC and OCC are a party pursuant to Section 2 of the
Existing Accord.\31\ The SLA addresses specifics regarding the time,
form, and manner of various required notifications and actions
described in the Accord and also includes information applicable under
the Accord.
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\31\ NSCC provided a draft of the revised SLA for Phase 1 to the
Commission as confidential Exhibit 3E to this filing.
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NSCC and OCC believe the proposed calculation of the Required Fund
Deposit portion of the GSP is appropriate because it is designed to
provide a reasonable proxy for the impact of the Mutually Suspended
Member's E&A/Delivery Transactions on its Required Fund Deposit. While
impact study data did show that the proposed calculation could result
in a GSP that overestimates or underestimates the Required Fund Deposit
attributable to the Mutually Suspended Member's E&A/Delivery
Transactions,\32\ current technology constraints prohibit NSCC from
performing a precise calculation of the GSP on a daily basis for every
Common Member.\33\
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\32\ The impact study was conducted at the Commission's request
to cover a three-day period and reviewed the ten Common Members with
the largest Required Fund Deposits attributable to the Mutually
Suspended Member's E&A/Delivery Transactions. Over the 30 instances
in the study, approximately 15 instances resulted in an
underestimate of the Required Fund Deposit by an average of
approximately $112,900,926, four instances where the proxy
calculation was the same as the Required Fund Deposit, and eleven
instances of an overestimate of the Required Fund Deposit by an
average of approximately $59,654,583. NSCC filed additional detail
related to the referenced study in confidential Exhibit 3A of this
filing.
\33\ OCC and NSCC agreed that performing the necessary
technology build during Phase 1 would delay the implementation of
Phase 1 of this proposal. NSCC would incorporate those technology
updates in connection with Phase 2 of this proposal.
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Implementing the ability for OCC to make the GSP and cause the E&A/
Delivery Transactions to be cleared and settled through NSCC would
promote the ability of OCC and NSCC to be efficient and effective in
meeting the requirements of the markets they serve. This is because
data demonstrates that the expected size of the GSP would be smaller
than the amount of cash that would otherwise be needed by OCC and its
Clearing Members to facilitate settlement outside of NSCC. More
specifically, based on a historical study of alternate means of
settlement available to OCC from September 2021 through September 2022,
in the event that NSCC did not accept E&A/Delivery Transactions, the
worst-case scenario peak liquidity need OCC identified was
$384,635,833,942 for settlement to occur on a gross broker-to-broker
basis. OCC estimates that the corresponding GSP in this scenario would
have been $863,619,056. OCC also analyzed several other large liquidity
demand amounts that were identified during the study if OCC effected
settlement on a gross broker-to-broker basis.\34\ These liquidity
demand amounts and the largest liquidity demand amount OCC observed of
$384,635,833,942 substantially exceed the amount of liquid resources
currently available to OCC.\35\ By contrast, projected GSPs identified
during the study ranged from $419,297,734 to $6,281,228,428. For each
of these projected GSP amounts, OCC observed that the Margin Assets and
OCC Clearing Fund contributions that would have been required of
Clearing Members in these scenarios would have been sufficient to
satisfy the amount of the projected GSPs.
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\34\ OCC filed additional detail related to the referenced study
as an exhibit to the OCC Filings.
\35\ As of September 30, 2023, OCC held approximately $12.37
billion in qualifying liquid resources. See OCC Quantitative
Disclosure, July-September 2023, available at <a href="http://www.theocc.com/risk-management/pfmi-disclosures">www.theocc.com/risk-management/pfmi-disclosures</a>.
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To help address the current technology constraint that prohibits
NSCC from performing a precise calculation of the GSP on a daily basis
[[Page 6145]]
for every Common Member, proposed Section 6(b)(i) of the Existing
Accord and related Section 7(d) of the SLA would provide that with
respect to a Mutually Suspended Member, either NSCC or OCC may require
that the Required Fund Deposit portion of the GSP be re-calculated by
calculating the Required Fund Deposit for the Mutually Suspended Member
both before and after the delivery of the E&A/Delivery Transactions and
utilize the precise amount that is attributable to that activity in the
final GSP. If such a recalculation is required, the result would
replace the Required Fund Deposit component of the GSP that was
initially calculated. The SLD component of the GSP would be unchanged
by such recalculation.
As the above demonstrates, the GSP is intended to address the
significant collateral and liquidity requirements that could be
required of OCC Clearing Members in the event of a Common Member
default. Allowing OCC to make a GSP payment also is intended to allow
for settlement processing to take place through the facilities of NSCC
to retain operational efficiencies associated with the settlement
process. Alternative settlement means such as broker-to-broker
settlement add operational burdens because transactions would need to
be settled individually on one-off bases. In contrast, NSCC's netting
reduces the volume and value of settlement obligations that would need
to be closed out in the market.\36\ Because the clearance and
settlement of obligations through NSCC's facilities following a Common
Member default, including netting of E&A/Delivery Transactions with a
Common Member's positions at NSCC, would avoid these potentially
significant operational burdens for OCC and its Clearing Members, OCC
and NSCC believe that the proposed changes would limit market
disruption relating to a Common Member default. NSCC netting
significantly reduces the total number of obligations that require the
exchange of money for settlement. Allowing more activity to be
processed through NSCC's netting systems would minimize risk associated
with the close out of those transactions following the default of a
Common Member.
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\36\ CNS reduces the value of obligations that require financial
settlement by approximately 98%, where, for example $519 trillion in
trades could be netted down to approximately $9 trillion in net
settlements.
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Amending the Existing Accord to define the terms and conditions
under which Guaranty Substitution may occur, at OCC's election, with
respect to Defaulted NSCC Member Transactions after a Common Member
becomes a Mutually Suspended Member would also provide more certainty
to both the Clearing Agencies and market participants generally about
how a Mutually Suspended Member's Defaulted NSCC Member Transactions
may be processed.
NSCC and OCC have agreed it is appropriate to limit the
availability of the proposed provision to the day of the Common Member
default and the next business day because, based on historical
simulations of cease to act events involving Common Members, most
activity of a Mutually Suspended Member is closed out on those
days.\37\ Furthermore, the benefits of netting through NSCC's systems
would be reduced for any activity submitted to NSCC after that time.
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\37\ OCC filed data regarding simulated events as an exhibit to
the OCC Filings.
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To implement the proposed Phase 1 changes to the Existing Accord,
OCC and NSCC propose to make the following changes.
Section 1--Definitions
First, new definitions would be added, and existing definitions
would be amended in Section 1, which is the Definitions section.
The new defined terms would be as follows.
<bullet> The term ``Close Out Transaction'' would be defined to
mean ``the liquidation, termination or acceleration of one or more
exercised or matured Stock Options \38\ or Stock Futures \39\
contracts, securities contracts, commodity contracts, forward
contracts, repurchase agreements, swap agreements, master netting
agreements or similar agreements of a Mutually Suspended Member
pursuant to OCC Rules 901, 1006 and 1101 through 1111 (including but
not limited to Rules 1104 and 1107) and/or NSCC Rule 18.'' This
proposed definition would make it clear that the payment of the
Guaranty Substitution Payment and NSCC's subsequent acceptance of
Defaulted NSCC Member Transactions for clearance and settlement are
intended to fall within the ``safe harbors'' provided in the Bankruptcy
Code,\40\ the Securities Investor Protection Act,\41\ and other similar
laws.
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\38\ The term ``Stock Options'' is defined in the Existing
Accord within the definition of ``Eligible Securities'' and refers
to options issued by OCC.
\39\ The term ``Stock Futures'' is defined in the Existing
Accord within the definition of ``Eligible Securities'' and refers
to stock futures contracts cleared by OCC.
\40\ 11 U.S.C. 101 et seq., including Sec. Sec. 362(b)(6), (7),
(17), (25) and (27) (exceptions to the automatic stay), Sec. Sec.
546(e)-(g) and (j) (limitations on avoiding powers), and Sec. Sec.
555-556 and 559-562 (contractual right to liquidate, terminate or
accelerate certain contracts).
\41\ 15 U.S.C. 78aaa-lll, including Sec. 78eee(b)(2)(C)
(exceptions to the stay).
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<bullet> The term ``Guaranty Substitution Payment'' would be
defined to mean ``an amount calculated by NSCC in accordance with the
calculations set forth in Appendix A [to the Existing Accord (as
proposed to be amended)], to include two components: (i) a portion of
the Mutually Suspended Member's Required Fund Deposit deficit to NSCC
at the time of the cease to act; and (ii) a portion of the Mutually
Suspended Member's unpaid Supplemental Liquidity Deposit obligation at
the time of the cease to act.''
<bullet> The term ``Mutually Suspended Member'' would mean ``any
OCC Participating Member \42\ that has been suspended by OCC that is
also an NSCC Participating Member \43\ for which NSCC has ceased to
act.''
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\42\ The term ``OCC Participating Member'' is defined in the
Existing Accord to mean ``(i) a Common Member; (ii) an OCC Clearing
Member that is an `Appointing Clearing Member' (as defined in
Article I of OCC's By-Laws) and has appointed an Appointed Clearing
Member that is an NSCC Member to effect settlement of E&A/Delivery
Transactions through NSCC on the Appointing Clearing Member's
behalf; (iii) an OCC Clearing Member that is an Appointed Clearing
Member; or (iv) a Canadian Clearing Member.'' No changes are
proposed to this definition.
\43\ The term ``NSCC Participating Member'' is defined in the
Existing Accord to mean ``(i) a Common Member; (ii) an NSCC Member
that is an `Appointed Clearing Member' (as defined in Article I of
OCC's By-Laws); or (iii) [Canadian Depository for Securities Limited
or ``CDS'']. For the avoidance of doubt, the Clearing Agencies agree
that CDS is an NSCC Member for purposes of this Agreement.'' No
changes are proposed to this definition.
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<bullet> The term ``Required Fund Deposit'' would have the meaning
``provided in Rule 4 of NSCC's Rules and Procedures (or any replacement
or substitute rule), the version of which, with respect to any
transaction or obligation incurred that is the subject of this
Agreement, is in effect at the time of such transaction or incurrence
of obligation.''
<bullet> The term ``Supplemental Liquidity Deposit'' would have the
meaning ``provided in Rule 4A of NSCC's Rules and Procedures (or any
replacement or substitute rule), the version of which, with respect to
any transaction or obligation incurred that is the subject of this
Agreement, is in effect at the time of such transaction or incurrence
of obligation.''
The defined terms that would be amended in Section 1 of the
Existing Accord are as follows.
<bullet> The definition for the term ``E&A/Delivery Transaction''
generally contemplates a transaction that involves a delivery and
receipt of stock in the settlement of physically-settled options
[[Page 6146]]
and futures that are cleared and settled by OCC and for which the
underlying securities are eligible for clearing through the facilities
of NSCC. The definition would be amended to make clear that it would
apply in respect of a ``Close Out Transaction'' of a ``Mutually
Suspended Member'' as those terms are proposed to be defined (described
above).
<bullet> The definition for the term ``Eligible Securities''
generally contemplates the securities that are eligible to be used for
physical settlement under the Existing Accord. The term would be
modified to clarify that this may include, for example, equities,
exchange-traded funds and exchange-traded notes that are underlying
securities for options issued by OCC.
Section 6--Default by an NSCC Participating Member or OCC Participating
Member
Section 6 of the Existing Accord provides that NSCC is required to
provide certain notice to OCC in circumstances in which NSCC has ceased
to act for a Common Member. Currently, Section 6(a)(ii) of the Existing
Accord also requires NSCC to notify OCC if a Common Member has failed
to satisfy its Clearing Fund obligations to NSCC, but for which NSCC
has not yet ceased to act. In practice, this provision would trigger a
number of obligations (described below) when a Common Member fails to
satisfy its NSCC Clearing Fund obligations for any reason, including
those due to an operational delay. Therefore, OCC and NSCC are
proposing to remove the notification requirement under Section 6(a)(ii)
from the Existing Accord. Under Section 7(d) of the Existing Accord,
NSCC and OCC are required to provide each other with general
surveillance information regarding Common Members, which includes
information regarding any Common Member that is considered by the other
party to be in distress. Therefore, if a Common Member has failed to
satisfy its NSCC Clearing Fund obligations and NSCC believes this
failure is due to, for example, financial distress and not, for
example, due to a known operational delay, and NSCC has not yet ceased
to act for that Common Member, such notification to OCC would still
occur but would be done pursuant to Section 7(d) of the Existing Accord
(as proposed to be amended), and not Section 6(a)(ii). Notifications
under Section 6 of the Existing Accord (as proposed to be amended)
would be limited to instances when NSCC has actually ceased to act for
a Common Member pursuant to the NSCC Rules.\44\
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\44\ See Rule 46 (Restrictions on Access to Services) of the
NSCC Rules, supra note 6.
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Following notice by NSCC that it has ceased to act for a Common
Member, OCC is obligated in turn to deliver to NSCC a list of all E&A/
Delivery Transactions (excluding certain transactions for which
Guaranty Substitution does not occur) involving the Common Member.\45\
This provision would be amended to clarify that it applies in respect
of such E&A/Delivery Transactions for the Common Member for which the
NSCC Guaranty has not yet attached--meaning that Guaranty Substitution
has not yet occurred.
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\45\ The section of the Existing Accord that addresses
circumstances in which NSCC ceases to act and/or an NSCC Member
defaults is currently part of Section 6(a). It would be re-
designated as Section 6(b) for organizational purposes.
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As described above in the summary of the Existing Accord, where
NSCC has ceased to act for a Common Member, the Existing Accord refers
to the Common Member as the Defaulting NSCC Member and also refers to
the relevant E&A/Delivery Transactions in connection with that
Defaulting NSCC Member for which a Guaranty Substitution has not yet
occurred as Defaulted NSCC Member Transactions.
If the Defaulting NSCC Member is also suspended by OCC, it would be
covered by the proposed definition that is described above for a
Mutually Suspended Member. For such a Mutually Suspended Member, the
proposed changes in Section 6(b) would provide that NSCC, by a time
agreed upon by the parties, would provide OCC with the amount of the
Guaranty Substitution Payment as calculated by NSCC and related
documentation regarding the calculation. The Guaranty Substitution
Payment would be calculated pursuant to NSCC's Rules as that portion of
the unmet Required Fund Deposit \46\ and Supplemental Liquidity Deposit
\47\ obligations of the Mutually Suspended Member attributable to the
Defaulted NSCC Member Transactions. By a time agreed upon by the
parties,\48\ OCC would then be required to either notify NSCC of its
intent to make the full amount of the Guaranty Substitution Payment to
NSCC or notify NSCC that it will not make the Guaranty Substitution
Payment. If OCC makes the full amount of the Guaranty Substitution
Payment, NSCC's guaranty would take effect at the time of NSCC's
receipt of that payment and the OCC Guaranty would end.
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\46\ The Required Fund Deposit is calculated pursuant to Rule 4
(Clearing Fund) and Procedure XV (Clearing Fund Formula and Other
Matters) of the NSCC Rules, see supra note 6.
\47\ The Supplemental Liquidity Deposit is calculated pursuant
to Rule 4A (Supplemental Liquidity Deposits) of the NSCC Rules, see
supra note 6.
\48\ The time by which OCC would be required to notify NSCC of
its intent would be defined in the Service Level Agreement. As of
the time of this filing, the parties intend to set that time as one
hour after OCC's receipt of the calculated Guaranty Substitution
Payment from NSCC.
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The proposed changes would further provide that if OCC does not
suspend the Common Member (such that the Common Member would therefore
not meet the proposed definition of a Mutually Suspended Member) or if
OCC elects to not make the full amount of the Guaranty Substitution
Payment to NSCC, then all of the Defaulted NSCC Member Transactions
would be exited from NSCC's CNS Accounting Operation and/or NSCC's
Balance Order Accounting Operation, as applicable, and Guaranty
Substitution would not occur in respect thereof. Therefore, NSCC would
continue to have no obligation to guarantee or settle the Defaulted
NSCC Member Transactions, and the OCC Guaranty would continue to apply
to them pursuant to OCC's By-Laws and Rules.\49\
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\49\ Under the current and proposed terms of the Existing
Accord, NSCC would be permitted to voluntarily guaranty and settle
the Defaulted NSCC Member Transactions.
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Proposed changes to the Existing Accord would also address the
application of any Guaranty Substitution Payment by NSCC. Specifically,
new Section 6(d) would provide that any Guaranty Substitution Payment
made by OCC may be used by NSCC to satisfy any liability or obligation
of the Mutually Suspended Clearing Member to NSCC on account of
transactions involving the Mutually Suspended Clearing Member for which
the NSCC Guaranty applies and to the extent that any amount of assets
otherwise held by NSCC for the account of the Mutually Suspended Member
(including any Required Fund Deposit or Supplemental Liquidity Deposit)
are insufficient to satisfy its obligations related to transactions for
which the NSCC Guaranty applies. Proposed changes to Section 6(d) would
further provide for the return to OCC of any unused portion of the GSP.
With regard to the portion of the Guaranty Substitution Payment that
corresponds to a member's Supplemental Liquidity Deposit obligation,
NSCC must return any unused amount to OCC within fourteen (14) days
following the conclusion of NSCC's settlement, close-out and/or
liquidation. With regard to the portion of the Guaranty Substitution
Payment that corresponds to a Required
[[Page 6147]]
Fund Deposit, NSCC must return any unused amount to OCC under terms
agreed to by the parties.\50\
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\50\ Such amounts would be returned to OCC as appropriate and in
accordance with a Netting Contract and Limited Cross-Guaranty, by
and among The Depository Trust Company, Fixed Income Clearing
Corporation, NSCC and OCC, dated as of January 1, 2003, as amended.
---------------------------------------------------------------------------
Other Proposed Changes as Part of Phase 1
Certain other technical changes are also proposed to the Existing
Accord to conform it to the proposed changes described above. For
example, the preamble and the ``whereas'' clauses in the Preliminary
Statement would be amended to clarify that the agreement is an amended
and restated agreement and to summarize that the agreement would be
modified to contemplate the Guaranty Substitution Payment structure.
Section 1(c), which addresses the terms in the Existing Accord that are
defined by reference to NSCC's Rules and Procedures and OCC's By-Laws
and Rules would be modified to state that such terms would have the
meaning then in effect at the time of any transaction or obligation
that is covered by the agreement rather than stating that such terms
have the meaning given to them as of the effective date of the
agreement. This change is proposed to help ensure that the meaning of
such terms in the agreement will not become inconsistent with the
meaning in the NSCC Rules and/or OCC By-Laws and Rules, as they may be
modified through proposed rule changes with the Commission.
Technical changes would be made to Sections 3(d) and (e) of the
Existing Accord to provide that those provisions would not apply in the
event new Section 6(b) described above, is triggered. Section 3(d)
generally provides that OCC will no longer submit E&A/Delivery
Transactions to NSCC involving a suspended OCC Participating
Member.\51\ Similarly, Section 3(e) generally provides that OCC will no
longer submit E&A/Delivery Transactions to NSCC involving an NSCC
Participating Member \52\ for which NSCC has ceased to act. A proposed
change would also be made to Section 5 of the Existing Accord to modify
a reference to Section 5 of Article VI of OCC's By-Laws to instead
provide that the updated cross-reference should be to Chapter IV of
OCC's Rules.
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\51\ See supra note 42 defining OCC Participating Member.
\52\ See supra note 43 defining NSCC Participating Member.
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Section 5 would also be amended to clarify that Guaranty
Substitution occurs when NSCC has received both the Required Fund
Deposit and Supplemental Liquidity Deposit, as calculated by NSCC in
its sole discretion, from Common Members. The addition of the
collection of the Supplemental Liquidity Deposit to the definition of
the Guaranty Substitution Time in this Section 5 would reflect OCC and
NSCC's agreement that both amounts are components of the Guaranty
Substitution Payment (as described above) and would make this
definition consistent with that agreement.
In Section 7 of the Existing Accord, proposed changes would be made
to provide that NSCC would provide to OCC information regarding a
Common Member's Required Fund Deposit and Supplemental Liquidity
Deposit obligations, to include the Supplemental Liquidity Deposit
obligation in this notice requirement, and additionally that NSCC would
provide OCC with information regarding the potential Guaranty
Substitution Payment for the Common Member. On an options expiration
date that is a Friday, NSCC would, by close of business on that day,
also provide to OCC information regarding the intra-day liquidity
requirement, intra-day liquidity resources and intra-day calls for a
Common Member that is subject to a Supplemental Liquidity Deposit at
NSCC.
Finally, Section 14 of the Existing Accord would be modernized to
provide that notices between the parties would be provided by email
rather than by hand, overnight delivery service or first-class mail.
Proposed Phase 1 Changes to NSCC Rules
In connection with the proposed changes to the Existing Accord,
NSCC is also proposing changes to its Rules, described below.
First, NSCC would amend Rule 18 (Procedures for When the
Corporation Ceases to Act), which describes the actions NSCC would take
with respect to the transactions of a Member after NSCC has ceased to
act for that Member.\53\ The proposed changes would include a new
Section 9(a) to specify that following a Member default, NSCC may
continue to act and provide the NSCC Guaranty pursuant to a ``Close-Out
Agreement'' such as the Existing Accord (as it is proposed to be
amended); \54\ a new Section 9(b) to specify that any transactions
undertaken pursuant to a Close-Out Agreement would be treated as having
been received, provided or undertaken for the account of the Member for
which NSCC has ceased to act, but that any deposit, payment, financial
assurance or other accommodation provided to NSCC pursuant to a Close-
Out Agreement shall be returned or released as provided for in the
agreement; and a new Section 9(c), to provide that NSCC shall have a
lien upon, and may apply, any property of the defaulting Member in
satisfaction of any obligation, liability or loss that relates to a
transaction undertaken or service provided pursuant to a Close-Out
Agreement.
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\53\ See supra note 6.
\54\ The Existing Accord is currently the only agreement that
would be considered a ``Close-Out Agreement'' under this new Section
9(b).
---------------------------------------------------------------------------
NSCC would also propose clarifications to Sections 4, 6(b)(iii)(B)
and 8 to use more precise references to the legal entity described in
those sections of this Rule.
Second, NSCC would amend Section B of Procedure III and Addendum K
of the NSCC Rules \55\ to provide that the NSCC Guaranty would not
attach to Defaulted NSCC Member Transactions except as provided for in
the Existing Accord (as it is proposed to be amended), and that the
NSCC Guaranty attaches, with respect to obligations arising from the
exercise or assignment of OCC options settled at NSCC or stock futures
contracts cleared by OCC, as provided for in the Existing Accord (as it
is proposed to be amended) or other arrangement with OCC. Finally, the
proposed changes to Procedure III would clarify that Guaranty
Substitution occurs when NSCC has received both the Required Fund
Deposit and Supplemental Liquidity Deposit, consistent with the
proposed revisions to Section 5 of the Current Accord, described above.
As noted above, the proposal to include the collection of the
Supplemental Liquidity Deposit in connection with the Guaranty
Substitution reflect OCC and NSCC's agreement that both amounts are
components of the Guaranty Substitution Payment. NSCC also proposes to
make a number of non-substantive clean up changes to Procedure III,
such as correcting references to NSCC's ``guaranty.''
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\55\ See id.
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Collectively, these proposed changes would establish and clarify
the rights of both NSCC and a Member for which NSCC has ceased to act
with respect to property held by NSCC and the operation and
applicability of any Close-Out Agreement, and would make it clear that
any payments received pursuant to a Close-Out Agreement and NSCC's
acceptance of a Mutually
[[Page 6148]]
Suspended Member's transactions for clearance and settlement pursuant
to a Close-Out Agreement are intended to fall within the Bankruptcy
Code and Securities Investor Protection Act ``safe harbors.''
Proposed Phase 2 Changes
On February 15, 2023, the Commission adopted amendments to Rule
15c6-1(a) under the Act \56\ to shorten the standard settlement cycle
for most broker-dealer transactions in securities from T+2 to T+1. In
doing so, the Commission stated that a shorter settlement cycle ``can
promote investor protection, reduce risk, and increase operational and
capital efficiency.'' \57\ Moreover, the Commission stated that
delaying the move to a shorter settlement cycle would ``allow undue
risk to continue to exist in the U.S. clearance and settlement system''
\58\ and that it ``believes that the May 28, 2024, compliance date will
help ensure that market participants have sufficient time to implement
the changes necessary to reduce risk, such as risks associated with the
potential for increases in settlement fails.'' \59\ The Phase 2 changes
proposed herein serve those risk reduction objectives related to
securities settlements by endeavoring to limit market disruption
following a Common Member default. The proposed changes would allow OCC
to provide certain assurances with respect to its ability to make a GSP
in the event of a Common Member default to NSCC in a shortened
settlement cycle, which would permit NSCC to begin processing E&A/
Delivery Transactions prior to Guaranty Substitution occurring. This,
in turn, would promote settlement through NSCC that is less
operationally complex and would be expected to require less collateral
and liquidity from market participants than if OCC engaged in the
alternative settlement processes discussed above.
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\56\ 17 CFR 240.15c6-1.
\57\ Securities Exchange Act Release No. 96930 (Feb. 15, 2023),
88 FR 13872, 13873 (Mar. 6, 2023).
\58\ Id. at 13881.
\59\ Id. at 13917.
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To address the operational realities concerning the Accord that
will result from the Commission's adoption and implementation of a new
standard settlement cycle of T+1 pursuant to Rule 15c6-1(a) under the
Act, OCC and NSCC are proposing Phase 2 changes to further modify the
Accord after the T+1 settlement cycle becomes effective. As described
in greater detail below, the Phase 2 changes would allow the GSP and
other changes that are part of the Phase 1 changes to continue to
function appropriately and efficiently in the new T+1 settlement
environment. Because of the phased approach, a separate mark-up is
provided in confidential Exhibit 4A of the Phase 2 changes against the
Accord as modified through the Phase 1 changes.
As described in more detail below, shortening the settlement cycle
to T+1 will require NSCC to process stock settlement obligations
arising from E&A/Delivery Transactions one day earlier, i.e., on the
day after the trade date, than is currently the case. Moving processing
times ahead by a full day will require processing to occur before the
guaranty transfers from OCC to NSCC.\60\
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\60\ Given the reduction in the settlement cycle and existing
processes that must be completed for settlement, NSCC would not be
able to safely compress its processing times further to allow
processing to occur after the guaranty transfers from OCC to NSCC.
NSCC provided proposed processing timelines in confidential Exhibit
3D to this filing.
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In this new T+1 processing environment, the Phase 2 changes would
limit market disruption following a Common Member default because the
Phase 2 changes would allow OCC to provide certain assurances with
respect to its ability to make a GSP in the event of a Common Member
default to NSCC that would permit NSCC to begin processing the
defaulting Common Member's E&A/Delivery Transactions prior to Guaranty
Substitution occurring. This, in turn, would promote settlement through
NSCC that is less operationally complex and would be expected to
require less collateral and liquidity from market participants than if
OCC engaged in alternative settlement processes. The specific changes
included in Phase 2 are described below. The changes would facilitate
the continued ability of the GSP to function in an environment with a
shorter settlement cycle. These changes are generally designed to allow
OCC to provide certain assurances with respect to its ability to make a
GSP in the event of a Common Member default to NSCC that would permit
NSCC to begin processing E&A/Delivery Transactions prior to Guaranty
Substitution occurring by introducing new or amended terms and setting
out the processes associated therewith. All of the descriptions below
explain the changes to the Accord as they would be made after the
Accord has already been modified through prior implementation of the
proposed Phase 1 changes.
Section 1--Definitions
First, new definitions would be added, and existing definitions
would be amended or removed in Section 1.
The new defined terms would be as follows.
<bullet> The term ``GSP Monitoring Data'' would be defined to mean
a set of margin and liquidity-related data points provided by NSCC on
each Activity Date prior to the submission of E&A/Delivery Transactions
by OCC to be used for informational purposes at OCC and NSCC.
<bullet> The term ``Final Guaranty Substitution Payment'' would be
defined to mean an amount calculated by NSCC for each Settlement Date
in accordance with Appendix A to the Accord, to include two components:
(i) a portion of the NSCC Participating Member's \61\ Required Fund
Deposit deficit to NSCC calculated as a difference between the Required
Fund Deposit deficit calculated on the NSCC Participating Member's
entire portfolio and the Required Fund Deposit deficit calculated on
the NSCC Participating Member's portfolio prior to submission of the
E&A/Delivery Transactions; and (ii) the portion of the NSCC
Participating Member's unpaid Supplemental Liquidity Deposit obligation
attributable to the additional activity to be guaranteed.
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\61\ See supra note 43.
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<bullet> The term ``Historical Peak Guaranty Substitution Payment''
would be defined to mean the largest Final Guaranty Substitution
Payment for an NSCC Participating Member and its affiliates that are
also NSCC Participating Members over the 12 months immediately
preceding the Activity Date, to include two components: (i) the
Required Fund Deposit deficits associated with E&A/Delivery
Transactions based on peak historical observations of the largest NSCC
Participating Member and its affiliates that are also NSCC
Participating Members; and (ii) the Supplemental Liquidity Deposit
obligations associated with E&A/Delivery Transactions based on peak
historical observations as calculated in accordance with applicable
NSCC or OCC Rules and procedures.
<bullet> The term ``Qualifying Liquid Resources'' would be defined
to have the meaning provided by Rule 17Ad-22(a)(14) of the Exchange
Act, 17 CFR 240.17Ad-22(a)(14), or any successor Rule under the
Exchange Act.
<bullet> The term ``Settlement Date'' would be defined to mean the
date on which an E&A/Delivery Transaction is designated to be settled
through payment for, and delivery of, the Eligible Securities
underlying the
[[Page 6149]]
exercised Stock Option \62\ or matured Stock Future,\63\ as the case
may be.
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\62\ See supra note 38.
\63\ See supra note 39.
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<bullet> The term ``Weekday Expiration'' would be defined to mean
any expiration for which the options expiration date occurs on a date
other than a Friday or for which the Settlement Date is any date other
than the first business date following a weekend.
<bullet> The term ``Weekend Expiration'' would be defined to mean
any expiration for which the options expiration date occurs on a Friday
or for which the Settlement Date is the first business date following a
weekend.
The defined term that would be removed in Section 1 is as follows.
<bullet> ``Guaranty Substitution Payment,'' which would be replaced
by the new defined terms ``Final Guaranty Substitution Payment'' and
``Historical Peak Guaranty Substitution Payment.''
The defined terms that would be amended in Section 1 are as
follows.
<bullet> The definition for the term ``Eligible Securities''
generally contemplates the securities that are eligible to be used for
physical settlement under the Existing Accord. In Phase 2, the term
would be modified to exclude any transactions settled through NSCC's
Balance Order System and any security undergoing a voluntary corporate
action that is being supported by NSCC's CNS system. This is because
the processing of E&A/Delivery Transactions and potential reversals of
such transactions under the Phase 2 changes would not be feasible under
the anticipated operation of NSCC's CNS and Balance Order Accounting
Operations under the shortened T+1 settlement cycle.
Section 3--Historical Peak Guaranty Substitution Payment
A new Section 3 would be added to describe the process by which OCC
would send to NSCC evidence of sufficient funds to cover the Historical
Peak Guaranty Substitution Payment. In particular, Section 3(a) would
provide that on each Activity Date, at or before a time agreed upon by
the Clearing Agencies (which may be modified on any given Activity Date
with the consent of an authorized representative of OCC), NSCC will
communicate to OCC the amount of the Historical Peak Guaranty
Substitution Payment amount and the GSP Monitoring Data, which are to
be used by OCC for informational purposes. The Historical Peak Guaranty
Substitution Payment would reflect the largest GSP of the NSCC
Participating Member and its affiliates over the prior twelve months
and would be calculated based on the sum of the Required Fund Deposit
deficits and Supplemental Liquidity Deposit associated with E&A/
Delivery Transactions. Section 3(b) would provide that OCC would then
submit to NSCC an acknowledgement of the Historical Peak Guaranty
Substitution Payment amount and evidence that OCC has sufficient cash
resources in the OCC Clearing Fund to cover the Historical Peak
Guaranty Substitution Payment. Section 3(c) would provide that if OCC
does not provide NSCC with evidence within the designated time period
that it has sufficient cash resources in the OCC Clearing Fund to cover
the Historical Peak Guaranty Substitution Payment on the Activity Date,
OCC will immediately contact NSCC to escalate discussions to discuss
potential exposures and determine, among other things, whether OCC has
other qualifying liquidity resources available to satisfy such amount.
As described above, the Historical Peak Guaranty Substitution
Payment is designed to serve as a reasonable proxy for the largest
potential Final Guaranty Substitution Payment. Its purpose is to allow
OCC to provide evidence that it likely will be able to satisfy the
Final Guaranty Substitution Payment in the event of a Common Member
default, which will provide NSCC with reasonable assurances such that
NSCC can begin processing E&A/Delivery Transactions upon receipt and
prior to the Guaranty Substitution occurring, which will minimize the
probability of reversals in a default event in light of the shortened
settlement cycle. The Historical Peak Guaranty Substitution Payment
amount also will provide OCC with information that will allow OCC to
include the amount of a potential GSP in its liquidity resource
planning.
Section 6--Final Guaranty Substitution Payment; OCC's Commitment
A new Section 6 would be added to provide the process by which NSCC
would communicate the amount of, and OCC would commit to pay, the Final
Guaranty Substitution Payment. In particular, Section 6(a) would
provide that on each Settlement Date (or each Saturday for Weekend
Expirations), by no later than the time(s) agreed upon by NSCC and OCC,
NSCC will communicate to OCC the Final Guaranty Substitution Payment
for each Common Member calculated by NSCC. NSCC would make such
calculation according to a calculation methodology described in a new
Appendix A to the Accord. This calculation would represent the sum of
the Required Fund Deposit \64\ and the Supplemental Liquidity Deposit
\65\ for the Common Member. As with the Phase 1 Accord, payment of the
Final Guaranty Substitution Payment would be contingent on the mutual
suspension of the Common Member and payment of the Final Guaranty
Substitution Payment would continue to be the means by which Guaranty
Substitution may occur.
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\64\ The Required Fund Deposit is the portion of the defaulted
Common Member's Required Fund Deposit deficit to NSCC, calculated as
a difference between the Required Fund Deposit deficit calculated on
the entire portfolio and the Required Fund Deposit deficit
calculated on the Common Member's portfolio prior to the submission
of E&A/Delivery Transactions. The Phase 2 changes would refine the
existing calculation methodology for the Required Fund Deposit in
order to provide for a more accurate amount.
\65\ If NSCC calculates a liquidity shortfall with respect to a
defaulted Common Member, the Supplemental Liquidity Deposit is the
portion of that shortfall that is attributable to the additional
activity to be guaranteed.
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Section 6(b) would provide that, following NSCC's communication of
the Final Guaranty Substitution Payment for each Common Member to OCC,
and by no later than the agreed upon time, OCC must either (i) commit
to NSCC that it will pay the Final Guaranty Substitution Payment in the
event of a mutual suspension of a Common Member,\66\ or (ii) notify
NSCC that it will not have sufficient cash resources to pay the largest
Final Guaranty Substitution Payment calculated for every Common Member.
Section 6(b)(i) would further provide that for Weekday Expirations,
OCC's submission of E&A/Delivery Transactions to NSCC would constitute
OCC's commitment to pay the Final Guaranty Substitution Payment on the
Settlement Date in the event of a mutual suspension of a Common Member.
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\66\ If OCC does not have sufficient cash to pay the Final GSP,
then it must confirm for NSCC the availability of other qualifying
liquid resources and the expecting timeline for converting such
resources to cash.
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Section 6(c) would provide that if OCC notifies NSCC that it will
not have sufficient cash resources to pay the Final Guaranty
Substitution Payment, NSCC may, in its sole discretion (i) reject or
reverse all E&A/Delivery Transactions, or (ii) voluntarily accept E&A/
Delivery Transactions subject to certain terms and conditions mutually
agreed upon by NSCC and OCC.\67\
[[Page 6150]]
Section 6(c) would also provide that any necessary reversals of E&A/
Delivery Transactions shall be delivered by NSCC to OCC at such time
and in such form as the Clearing Agencies agree.
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\67\ Such terms and conditions may include, but would not be
limited to, OCC's agreement to (i) pay NSCC available cash resources
in partial satisfaction of the Final Guaranty Substitution Payment;
(ii) collect or otherwise source additional resources that would
constitute NSCC Qualifying Liquid Resources to pay the full Final
Guaranty Substitution Payment amount; and/or (iii) reimburse NSCC
for any losses associated with closing out such E&A/Delivery
Transactions.
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Section 6(d) would provide that if, at any time after OCC has
acknowledged the Historical Peak Guaranty Substitution Payment in
accordance with proposed Section 3(b) of the Accord or committed to pay
the Final Guaranty Substitution Payment in accordance with proposed
Section 6(b) of the Accord, OCC has a reasonable basis to believe it
will be unable to pay the Final Guaranty Substitution Payment, OCC will
immediately notify NSCC.
Section 8--Default by an NSCC Participating Member or OCC Participating
Member
Section 6(b)(i), which would be renumbered as Section 8(b)(i),
would be amended to reflect the modified use of the Final Guaranty
Substitution Payment in the event of a mutual suspension of a Common
Member. Section 8(b)(i) would also be revised to remove the ability for
OCC or NSCC to require that the Guaranty Substitution Payment be re-
calculated in accordance with an alternative methodology. This would
not be necessary under the calculation methodology used in the Phase 2
changes because the proposed methodology would result in a more
accurate calculation. Section 8(b)(i) would further amend the Accord by
providing NSCC with discretion to voluntarily accept Defaulted NSCC
Member Transactions and assume the guaranty for such transactions,
subject to certain terms and conditions mutually agreed upon by NSCC
and OCC. The only remaining change to the Guaranty Substitution process
from its operation under the Accord would be the shortened time
duration under which OCC would elect (by way of its commitment) to make
the Final Guaranty Substitution Payment and the timing under which the
Guaranty Substitution would be processed in order to function in a T+1
environment.
In particular, Section 8(b)(i) would provide that, with respect to
a Mutually Suspended Member, if OCC has committed to make the Final
Guaranty Substitution Payment, it will make such cash payment in full
by no later than the agreed upon time(s). Upon NSCC's receipt of the
full amount of the Final Guaranty Substitution Payment, NSCC's Guaranty
would attach (and OCC's Guaranty will no longer apply) to the Defaulted
NSCC Member Transactions. NSCC would have no obligation to accept a
Final Guaranty Substitution Payment and attach the NSCC Guaranty to any
Defaulted NSCC Member Transactions for more than the Activity Date on
which it has ceased to act for that Mutually Suspended Member and one
subsequent Activity Date. If NSCC does not receive the full amount of
the Final Guaranty Substitution Payment in cash by the agreed upon
time, the Guaranty Substitution Time would not occur with respect to
the Defaulted NSCC Member Transactions and Section 8(b)(ii), described
below, would apply. NSCC would, however, have discretion to voluntarily
accept Defaulted NSCC Member Transactions and assume the guaranty for
such transactions, subject to certain terms and conditions mutually
agreed upon by NSCC and OCC.
Section 6(b)(ii), which would be renumbered as Section 8(b)(ii),
would also be amended to reflect the modified use of the Final Guaranty
Substitution Payment in the event OCC continues to perform or does not
make the Final Guaranty Substitution Payment. In particular, Section
8(b)(ii) would add an additional criterion of OCC not satisfying any
alternative agreed upon terms for Guaranty Substitution to reflect this
as an additional option under the Phase 2 changes. As amended, Section
8(b)(ii) would provide that if OCC does not suspend an OCC
Participating Member for which NSCC has ceased to act, OCC does not
commit to make the Final Guaranty Substitution Payment, NSCC does not
receive the full amount of the Final Guaranty Substitution Payment in
cash by the agreed upon time, or OCC does not satisfy any alternative
agreed upon terms for Guaranty Substitution, Guaranty Substitution with
respect to all Defaulted NSCC Member Transactions for that Activity
Date will not occur, all Defaulted NSCC Member Transactions for that
Activity Date will be reversed and exited from NSCC's CNS accounting
system, and NSCC will have no obligation to guaranty or settle such
Defaulted NSCC Member Transactions. NSCC may, however, exercise its
discretion to voluntarily accept the Defaulted NSCC Member
Transactions, and assume the guaranty for such transactions, subject to
certain agreed upon terms and conditions.
Section 8(b) would also be modified to provide for escalated
discussion between the Clearing Agencies in the event of an intraday
NSCC Cease to Act and/or NSCC Participating Member Default,
particularly to confirm that OCC has sufficient qualifying liquid
resources to pay the projected Final Guaranty Substitution Payment for
the Defaulting NSCC Member's projected E&A/Delivery Transactions based
on information provided in GSP Monitoring Data for such Defaulting NSCC
Member.
Conforming changes would also be made to Section 8(d) to reflect
the use of the new defined term ``Final Guaranty Substitution
Payment.''
Other Proposed Changes as Part of Phase 2
Certain other technical changes are also proposed as part of the
Phase 2 changes, including to conform the Accord to the proposed
changes described above. For example, Section 9(c) would be revised
regarding information sharing to reflect the introduction of the
Historical Peak and Final Guaranty Substitution Payments and the GSP
Monitoring Data; Section 4(c)(ix) would be conformed to reflect the
addition of ``Settlement Date'' as a defined term in Section 1; various
sections would be renumbered and internal cross-references would be
adjusted to reflect the addition of new sections proposed herein;
correct current references throughout the Accord to ``NSCC Rules and
Procedures'' would be changed to simply read ``the NSCC Rules;'' and
various non-substantive textual changes would be made to increase
clarity.
Section 4(a) would also be modified to reflect that the Eligibility
Master Files referenced in that paragraph, which identify Eligible
Securities to OCC, are described in the SLA between OCC and NSCC.
Section 9(b) would be modified to include OCC's available liquidity
resources, including Clearing Fund cash balances in the information OCC
provides to NSCC and to specify that information will be provided on
each Activity Date at an agreed upon time and in an agreed upon form by
the Clearing Agencies. Finally, Section 16(b) would be modified to
provide the correct current delivery address information for NSCC.
The Phase 2 changes would also include an Appendix A that would
describe in detail the calculation methodology for the Guaranty
Substitution Payment. This would provide the detailed technical
calculation to determine each of the Mutually Suspended Member's
Required Fund Deposit deficit and liquidity shortfall to NSCC. The full
text of Appendix A is filed confidentially with the Commission in
Exhibit 5B to this filing.
Phase 2 Guaranty Substitution Process Changes
As described above, the Phase 2 changes would modify the Guaranty
[[Page 6151]]
Substitution process to reflect the shortened time duration under which
the Guaranty Substitution will be processed in order to function in a
T+1 environment. Below is a description of how that process would
operate. The actual process would be implemented pursuant to a modified
SLA between the Clearing Agencies.\68\ All times provided below are in
Eastern Time and represent the latest time by which the specified
action must occur unless otherwise agreed by the Clearing Agencies.
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\68\ NSCC provided a draft of the revised Phase 2 SLA
illustrating such changes to the Commission in confidential Exhibit
3F to this filing.
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Weekend Expirations: On Friday (the Activity Date), NSCC would
provide OCC with the Historical Peak GSP amount by 8:00 a.m. By 5:00
p.m. on Friday, OCC must acknowledge the Historical Peak GSP and
provide evidence of OCC's Clearing Fund cash resources sufficient to
cover that amount, following which NSCC would provide the Eligibility
Master File by 5:45 p.m. By 1:00 a.m. on Saturday, OCC would then
provide NSCC with the E&A/Delivery Transactions file and by 8:00 a.m.
NSCC would provide OCC with the Final GSP, which OCC must commit to pay
by 9:00 a.m. in the event of a mutual suspension of a Common
Member.\69\ By 8:00 a.m. Monday (the Settlement Date) if a cease to act
is declared over the weekend (or the later of 10:00 a.m. or one hour
after the cease to act is declared if declared on Monday), OCC must pay
the Final GSP if there has been a mutual suspension of a Common Member.
Finally, by 1:00 p.m. on Monday, OCC must provide reversals for the
defaulted member's E&A/Delivery Transactions if OCC has not satisfied
(or will not satisfy) the Final GSP.
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\69\ If OCC does not have sufficient cash resources to pay the
Final GSP and the Clearing Agencies are unable to reach an agreement
on additional terms for NSCC to accept E&A/Delivery Transactions,
OCC must submit a reversal file by 12:30 a.m. on Monday so that NSCC
can remove the E&A/Delivery Transactions from CNS prior to the start
of NSCC's overnight processing. NSCC has included additional details
on action deadlines and processing times in confidential Exhibit 3D
of this filing.
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Weekday Expirations: On the Activity Date, NSCC would provide OCC
with the Historical Peak GSP amount by 8:00 a.m. By 5:00 p.m. on the
Activity Date, OCC must acknowledge the Historical Peak GSP and provide
evidence of its cash resources in the OCC Clearing Fund sufficient to
cover that amount, following which NSCC would provide the Eligibility
Master File by 5:45 p.m. By 1:00 a.m. on the Settlement Date (the day
after the Activity Date in the T+1 environment), OCC would then provide
NSCC with the E&A/Delivery Transactions file, which also constitutes
OCC's commitment to pay the Final GSP. By 8:00 a.m. NSCC would provide
OCC with the Final GSP. By the later of 10:00 a.m. on the Settlement
Date or one hour after a cease to act is declared, OCC must pay the
Final GSP if there has been a mutual suspension of a Common Member.
Finally, by 1:00 p.m. on the Settlement Date, OCC must provide
reversals for the defaulted member's E&A/Delivery Transactions if OCC
has not satisfied (or will not satisfy) the Final GSP.
For both Weekend Expirations and Weekday Expirations, Guaranty
Substitution will take place only after the Common Members meet their
start of day margin funding requirements at NSCC, if any. In a Common
Member default event, the Guaranty Substitution will take place when
OCC pays the Final GSP to NSCC.
The Clearing Agencies note that the Phase 2 changes described above
are designed to change the process by which the GSP is implemented such
that the use of the GSP as a mechanism to facilitate the acceptance of
settlement obligations by NSCC can continue to operate within the
condensed timing for clearance and settlement in a T+1 environment.
However, the ultimate use of the GSP, its purpose, and its substantive
import would remain consistent with the Phase 1 changes.
Phase 2 Changes to NSCC Rules
In connection with the proposed changes to the Accord, NSCC is also
proposing changes to its Rules, described below.
First, NSCC would amend Section B of Procedure III of the NSCC
Rules to make conforming changes to align with the Phase 2 Accord. NSCC
proposes to remove references to Balance Order Securities and the
Balance Order Accounting Operation in Procedure III to align with the
removal of Balance Order transactions from the types of Eligible
Securities under the Phase 2 Accord. NSCC would also update a reference
to the Settlement Date for OCC E&A/Delivery Transactions to reflect
that it would be one business day (rather than two business days) after
exercise/assignment under the forthcoming T+1 settlement cycle. In
addition, NSCC would add new language to Procedure III to clarify that
E&A/Delivery Transactions that are indicated in a report or
Consolidated Trade Summary shall have no force and effect with respect
to the NSCC's guaranty or a Member's ultimate obligation to deliver or
pay for the receipt of such securities unless and until such
transactions have satisfied all requirements for the NSCC's guaranty
under Addendum K and the new Accord (unless NSCC notifies Members to
the contrary). NSCC would also clarify that E&A/Delivery Transactions
indicated in a report or Consolidated Trade Summary for which the
NSCC's guaranty does become effective shall be canceled and thereafter
shall be null and void and such cancelation shall be reflected in the
next available report or Consolidated Trade Summary. The proposed rule
change is intended to reflect the timing of the receipt and processing
of E&A/Delivery Transactions under the T+1 settlement cycle and the
ultimate Guaranty Substitution and Guaranty Substitution Time under the
Phase 2 Accord.
Implementation Timeframe
The proposed Phase 1 and Phase 2 changes will be implemented as
follows:
<bullet> Phase 1: Within 120 days after the date OCC and NSCC
receive all necessary regulatory approvals for these proposed changes
to the Accord, NSCC will implement all Phase 1 changes. NSCC would
announce the implementation date by an Important Notice posted to its
public website at least seven days prior to implementation.
<bullet> Phase 2: On the compliance date with respect to the final
T+1 amendments to Exchange Act Rule 15c6-1(a) established by the
Commission, NSCC will implement all Phase 2 changes, keep in place any
applicable Phase 1 changes that carry over to Phase 2, and decommission
all Phase 1 changes that do not apply to Phase 2.\70\
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\70\ If, due to the timing of regulatory approval, the
implementation dates for Phase 1 and Phase 2 overlap, NSCC would
implement only the Phase 2 changes and Phase 1 changes that carry
over to Phase 2.
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2. Statutory Basis
NSCC believes the proposed changes to the Existing Accord and the
NSCC Rules are consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to a registered
clearing agency. In particular, NSCC believes the proposed change is
consistent with Section 17A(b)(3)(F) of the Act \71\ and Rules 17Ad-
22(e)(7) and (20), each promulgated under the Act,\72\ for the reasons
described below.
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\71\ 15 U.S.C. 78q-1(b)(3)(F).
\72\ 17 CFR 240.17Ad-22(e)(7), (20).
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Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that the rules of a clearing agency be designed to promote the
prompt and
[[Page 6152]]
accurate clearance and settlement of securities transactions, and in
general, protect investors and the public interest.\73\ In addition,
Rule 17Ad-22(e)(7) requires NSCC, in relevant part, to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to effectively measure, monitor and manage the
liquidity risk that arises in or is borne by NSCC and to, among other
things, address foreseeable liquidity shortfalls that would not be
covered by NSCC's liquid resources.\74\ Rule 17Ad-22(e)(20) further
requires NSCC to establish, implement, maintain and enforce written
policies and procedures reasonably designed to identify, monitor and
manage risks related to any link that NSCC establishes with one or more
other clearing agencies, financial market utilities, or trading
markets.\75\
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\73\ 15 U.S.C. 78q-1(b)(3)(F).
\74\ 17 CFR 240.17Ad-22(e)(7).
\75\ 17 CFR 240.17Ad-22(e)(20).
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Proposed Phase 1 Changes
As described above, NSCC believes that providing OCC with the
ability to make a Guaranty Substitution Payment to it with respect to
any unmet obligations of a Mutually Suspended Member would promote
prompt and accurate clearance and settlement because it would allow
relevant securities settlement obligations to be accepted by NSCC for
clearance and settlement, which would reduce the size of the related
settlement obligations for both the Mutually Suspended Member and its
assigned delivery counterparties through netting through NSCC's CNS
Accounting Operation and/or NSCC's Balance Order Accounting Operation.
Further, this proposal would reduce the circumstances in which OCC's
Guaranty would continue to apply to these settlement obligations, to be
settled on a broker-to-broker basis between OCC Clearing Members, which
could result in substantial collateral and liquidity requirements for
OCC Clearing Members and that, in turn, could also increase a risk of
default by the affected OCC Clearing Members at a time when a Common
Member has already been suspended. For these reasons, NSCC believes
that the proposed changes would be beneficial to and protective of OCC,
NSCC, their participants, and the markets that they serve. NSCC
believes the proposed Phase 1 changes are therefore designed to promote
the prompt and accurate clearance and settlement of securities
transactions and, in general, protect investors and the public
interest.
NSCC also believes the proposal is consistent the requirements of
Rule 17Ad-22(e)(7) because any increase to NSCC's liquidity needs that
may be created by applying the NSCC Guaranty to Defaulted Member
Transactions would occur with a simultaneous increase to its liquidity
resources in the form of the Guaranty Substitution Payment. Therefore,
NSCC believes it would continue to adhere to the requirements of Rule
17Ad-22(e)(7) under the proposal.
The Existing Accord between OCC and NSCC is a clearing agency link
as contemplated by Rule 17Ad-22(e)(20). As described above, NSCC
believes that implementation of the proposal would help manage the
risks presented by the settlement link because, when the proposed
provision is triggered by OCC, NSCC would receive the Guaranty
Substitution Payment with respect to the relevant securities settlement
obligations thereby ensuring that NSCC accepts those obligations for
clearance and settlement and thereby reducing the size of the related
settlement obligations for both the Mutually Suspended Member and its
assigned delivery counterparties.
Proposed Phase 2 Changes
As described above, the Phase 2 changes to the Existing Accord
would enable OCC to provide certain assurances that would permit NSCC
to begin processing E&A/Delivery Transactions prior to Guaranty
Substitution occurring--thereby promoting the continued effectiveness
of the Guaranty Substitution process contemplated by the Existing
Accord and the Phase 1 changes discussed above. By effecting these
changes, the Phase 2 Accord would facilitate the continued ability of
the GSP model to function in an environment with a shorter settlement
cycle. For these reasons, NSCC believes the proposed rule change would
promote the prompt and accurate clearance and settlement of securities
transactions and protect investors and the public interest. The
proposed changes would facilitate implementation of the new settlement
cycle and support the Commission's stated goal of implementing
necessary risk reducing changes in connection with the move to a T+1
settlement by the May 28, 2024, compliance date designated by the
Commission. NSCC therefore believes that the proposed changes would be
beneficial to and protective of NSCC, OCC, their participants, and the
markets that they serve. As a result, NSCC believes the proposed rule
change is consistent with Section 17A(b)(3)(F) of the Act.
NSCC believes the Phase 2 changes are also consistent the
requirements of Rule 17Ad-22(e)(7) because any increase to NSCC's
liquidity needs that may be created by applying the NSCC Guaranty to
Defaulted Member Transactions would continue to occur with a
simultaneous increase to NSCC's liquidity resources in the form of the
Guaranty Substitution Payment. Therefore, NSCC believes it would
continue to adhere to the requirements of Rule 17Ad-22(e)(7) under the
proposal.
Finally, NSCC believe the proposed Phase 2 changes are consistent
with the requirements of Rule 17Ad-22(e)(20). NSCC believes that the
continued ability in the T+1 environment for OCC to make a Guaranty
Substitution Payment to NSCC in the relevant circumstances involving a
Mutually Suspended Member would help manage the risks presented to OCC,
NSCC and their collective clearing members because the Guaranty
Substitution Payment would ensure that the relevant securities
settlement obligations would be accepted by NSCC, and therefore, the
size of the related settlement obligations could be decreased from
netting through NSCC's CNS Accounting Operation. Furthermore, the Phase
2 changes would require OCC to provide certain assurances to NSCC that
would permit NSCC to begin processing E&A/Delivery Transactions prior
to Guaranty Substitution occurring--particularly, OCC's acknowledgement
of the Historical Peak GSP, demonstration of sufficient cash resources
in its Clearing Fund to cover the Historical Peak GSP prior to
submitting E&A/Delivery Transactions to NSCC, and OCC's commitment to
pay the Final GSP prior to NSCC processing such E&A/Delivery
Transactions, further mitigating the risks presented by this link.
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \76\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. NSCC does not
believe that the proposal would impose any burden on competition. As
described above, the proposed Phase 1 changes would amend the Existing
Accord to permit OCC in certain circumstances to make a Guaranty
Substitution Payment to NSCC so that the NSCC Guaranty would take
effect for the Defaulted NSCC Member Transactions, and the OCC Guaranty
[[Page 6153]]
would end. The proposed Phase 2 changes would further allow OCC to
provide certain assurances to NSCC prior to the default of a Common
Member that would enable NSCC to begin processing E&A/Delivery
Transactions before the NSCC central counterparty trade guaranty
attaches. The proposed changes would not inhibit access to NSCC's
services in any way, apply to all Members and do not disadvantage or
favor any particular user in relationship to another user. Accordingly,
NSCC does not believe that the proposed rule change would have any
impact or impose a burden on competition.
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\76\ 15 U.S.C. 78q-1(b)(3)(I).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
NSCC has not received or solicited any written comments relating to
this proposal. If any written comments are received, they will be
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at <a href="http://www.sec.gov/regulatory-actions/how-to-submit-comments">www.sec.gov/regulatory-actions/how-to-submit-comments</a>. General questions regarding
the rule filing process or logistical questions regarding this filing
should be directed to the Main Office of the Commission's Division of
Trading and Markets at <a href="/cdn-cgi/l/email-protection#a0d4d2c1c4c9cec7c1cec4cdc1d2cbc5d4d3e0d3c5c38ec7cfd6"><span class="__cf_email__" data-cfemail="62161003060b0c05030c060f031009071611221107014c050d14">[email protected]</span></a> or 202-551-5777.
NSCC reserves the right to not respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of the notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#afdddac3ca82ccc0c2c2cac1dbdcefdccacc81c8c0d9"><span class="__cf_email__" data-cfemail="6012150c054d030f0d0d050e1413201305034e070f16">[email protected]</span></a>. Please include
file number SR-NSCC-2023-007 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to file number SR-NSCC-2023-007. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549 on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of NSCC and on DTCC's
website (<a href="https://dtcc.com/legal/sec-rule-filings.aspx">https://dtcc.com/legal/sec-rule-filings.aspx</a>). Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to file number SR-NSCC-2023-007 and should be submitted on
or before February 15, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\77\
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\77\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-01863 Filed 1-30-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on January 31, 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.